29/6/2014: London Property Markets: A Safe Haven After All

A fascinatingly interesting study looking into London property markets from the point of view of safe haven properties. Badarinza, Cristian and Ramadorai, Tarun, "Preferred Habitats and Safe-Haven Effects: Evidence from the London Housing Market" (April 17, 2014, http://ssrn.com/abstract=2353124) uses "a new cross-sectional approach, motivated by the insight that investors may have different "preferred habitats" within a broad asset class."

The study deploys this strategy "on large databases of historical housing transactions in London, finding that economic and political risk in Southern Europe, China, the Middle East, Russia, and South Asia helps explain price and volume dynamics in the London housing market over the past two decades. Safe-haven effects on the London housing market are long-lasting and significant, but temporary. The method also uncovers intriguing insights about cross-country variation in preferred habitats within London."

28/6/2014: Who are the Joneses?

Dahlin, Maria Björnsdotter and Kapteyn, Arie and Tassot, Caroline paper "Who are the Joneses?" (June 2014. CESR-Schaeffer Working Paper No. 2014-004. http://ssrn.com/abstract=2450266) attempts to answer a very important question in economics of individual perceptions and referencing of own well-being relative to well-being of others. The study tackles an issue that forms the core of a number of macroeconomic models, but also of relevance to the active debate about relative poverty and relative incomes.

"A burgeoning literature investigates the extent to which self-reported well-being (or happiness) or satisfaction with income is negatively related to the income of others" or the Joneses. "In many of the empirical studies, the assumption is that the incomes that matter are those of other individuals or households in the same geographical area." In other words - physical proximity is of the matter.

"In an experiment conducted in the American Life Panel, we elicit the strength of comparison with different groups, including neighbors, individuals of similar age and coworkers."

Fascinating findings emerged:

1. "Individuals are much more likely to compare their income to the incomes of their family and friends, their coworkers and people their age than to people living in the same street, town, in the US, or in the world." In other words, we reference our own well-being against well-being of those close to us socially and family-wise, not those who physically live near us, but are strangers to us. A relatively rich uncle may be inducing greater dissatisfaction onto us, than a filthy rich neighbour. In which case, were relative poverty be a concern, taxing family members on higher incomes is better than taxing everyone on higher incomes. Which, of course, would be an absurd policy.
2. "…we find both at the zip code and at the PUMA geographic level that own income or rank in the local income distribution matter for happiness and satisfaction with income, but incomes in the same geographic region do not influence own happiness when controlling for own income."  
3. "When asking respondents directly for how they rate the position of own and others’ income we find that higher estimates of neighbors’ income are negatively related with satisfaction with own income. Additionally, respondents who compare more intensively with their neighbors perceive the difference between their own income and that of their neighbors to be larger." So we do rate strangers' income relative to our own. Just not as much as we rate relatives' and friends' income relative to our own.
4. "Using age-based reference groups instead of geography-based reference groups, we find a consistent negative effect of the log median income and the perceived income in an individuals’ age group". In other words, the Joneses that we 'benchmark' ourselves against are more likely to be those from similar/shared cohort, in this case - cohort by age. The old do not begrudge, as much, the young, but they do begrudge other old.

"Overall, these results indicate that comparisons with neighbors may not be the most important channel through which perception of others’ income impacts one’s own well-being."

In other words, relative benchmarking matters, but it strength varies with familial and social ties, and matters less in terms of proximity. As I noted, half-jokingly, above: a richer uncle induces more negative referencing even if he lives in a distant community, than a richer neighbour who flaunts her/his wealth in our face. 

28/6/2014: Public Debt: It Really Is the Case of Beggar Thy Children…

In a new paper, researchers from Germany use "controlled laboratory experiment with and without overlapping generations to study the emergence of public debt."

The set up of the experiment is simple: "Public debt is chosen by popular vote, pays for public goods, and is repaid with general taxes."

The end result is asymmetric:

• "With a single generation, public debt is accumulated prudently, never leading to over-indebtedness." In other words, if your generation is the one responsible for repaying debt, spending is prudent and debt accumulation is ex ante bounded by expected income.
• However, "with multiple generations, public debt is accumulated rapidly as soon as the burden of debt and the risk of over-indebtedness can be shifted to future generations."

Crucially, "debt ceiling mechanisms do not mitigate the debt problem. With overlapping generations, political debt cycles emerge, oscillating with the age of the majority of voters." In other words, the idea that debt can be controlled by explicit limits is useless. So much is clear from the US debt ceiling system performance, as well as from the EU SGP experiences. And as much will be confirmed by the Fiscal Compact rules application in due time. Worse, absent levels constraints we are left with the Keynesian proviso that simply says: Be nice. Save when you can, send when you need. Oops... if the stick does not work, any hope the carrot will? I don't think so...

The paper was written by Fochmann, Martin and Sadrieh, Abdolkarim and Weimann, Joachim, and is titled "Understanding the Emergence of Public Debt" (May 24, 2014, CESifo Working Paper Series No. 4820. http://ssrn.com/abstract=2458325).

28/6/2014: Exports and Pollution Intensity: Swedish Evidence

A new paper published by CESIfo attempts to understand what mechanisms lead to the empirically-observed negative relationship between harmful CO2 emissions by firms and firm's exports.

Forslid, Rikard and Okubo, Toshihiro and Ulltveit-Moe, Karen Helene paper titled "Why are Firms that Export Cleaner? International Trade and CO2 Emissions" (May 24, 2014, CESifo Working Paper Series No. 4817. http://ssrn.com/abstract=2458293 "…develops a model of trade and CO2 emissions with heterogenous firms, where firms make abatement investments and thereby have an impact on their level of emissions."

Theoretical model "shows that investments in abatements are positively related to firm productivity and firm exports. Emission intensity is, however, negatively related to firms' productivity and exports. The basic reason for these results is that a larger production scale supports more investments in abatement and, in turn, lower emissions per output."

The authors then show that "the overall effect of trade is to reduce emissions. Trade weeds out some of the least productive and dirtiest firms thereby shifting production away from relatively dirty low productive local firms to more productive and cleaner exporters. The overall effect of trade is therefore to reduce emissions."

Lastly, the authors "test empirical implications of the model using unique Swedish firm-level data. The empirical results support our model."

28/6/2014: WLASze: Weekend Links on Arts, Sciences & zero economics

It has been some time since I did my WLASze (Weekend Links on Arts, Sciences and zero economics) last. The reason being somewhat strange state of mind as of late: less calm, less retrospection, more rushed work… the usual.

Here are couple interesting links that I cam across this week.

Via @PandaPolitics  : http://www.brainpickings.org/index.php/2013/11/29/accurat-modern-library/ a complicated, but deadly cool info graphic mapping "a visual taxonomy of lives and literary greatness" of 20th Century 75 big-name writers. It is complex, it is poorly organised (not searchable, non-alphabetic ordering, etc) and it is academist, rather than visual, but it is wonderfully rich and worth exploring.

Another link is courtesy of the RedOrbit.com:
http://www.redorbit.com/news/space/1113179065/distant-galaxy-trio-supermassive-black-holes-062614/ covering the story of a trio of Supermassive Black Holes discovered in a distant Galaxy.

And from the world of art: my favourite installation artists, duo of Ilya and Emilia Kabakov installation "The Strange City" at The Monumenta, Grand Palais, Paris. Review via http://www.aestheticamagazine.com/blog/review-of-the-strange-city-ilya-and-emilia-kabakov-at-the-monumenta-grand-palais-paris/

The site for the project is here: http://www.grandpalais.fr/en/event/monumenta-2014-ilya-emilia-kabakov

A shot from the recent WLASze past:  http://trueeconomics.blogspot.ie/2013/07/2772013-wlasze-part-2-weekend-links-on.html is a new installation Transarquitetonica by Henrique Oliveira an ambitious-beyond-ambition installation in Oliveira's traditional key

You can see a more comprehensive gallery here: http://wordlesstech.com/2014/06/03/transarquitetonica-henrique-oliveira/


Finally, Manifesta 10 Biennial is opening up today in St. Petersburg and is worth following for any reports: http://manifesta.org/biennials/manifesta10/

28/6/2014: Ukraine's Costly European Dream: BloombergView

In light of the celebrations in Ukraine and Brussels over the signing of the EU-Ukraine Association Agreement, here is an excellent op-ed from BloombergView on the topic: http://www.bloombergview.com/articles/2014-06-27/ukraine-s-costly-european-dream

28/6/2014: Irish Retail Sales: Q2 data to-date confirms fragile recovery

In the previous post I covered detailed analysis of Core Retail Sales data for May 2014: here. Now, a quick look at Q2 averages (for 2014 we have average over April and May) for the period from 2005 through latest.

Take a look at the chart plotting declines (as of April-May average) in retail sales activity compared to peak for Q2 data:

This data shows the following:

1. The only two sub-categories of goods and services where retail sales indices in Value terms are in shallower decline than in Volume terms (in other words inflation is positive and feeding through to consumers) are: Automotive Fuel and Bars - in other words two sectors where prices for inputs are largely controlled/set by the state.
2. No category has recovered pre-crisis levels of retail sales by both value and volume, while only one category (Food) recovered sales in volume, relative to pre-crisis activity.

This puts into perspective the extent to which the recovery we are experiencing so far is fragile. 

28/6/2014: Is S&P Behind the Curve on Portugal and Spain?

Euromoney Country Risk report is profiling S&P ratings on Portugal and Spain, with a comment from myself: here.

If you can't access the article, here is the article (click on each image to enlarge):

28/6/2014: Irish Retail Sales Activity: May 2014

There is a lot of hoopla about Irish retail sales stats released today by CSO. Irish and foreign media and even some analysts are quick to point to the headline numbers showing high rates of growth and some are going as far as describing Ireland's miraculous recovery. So what, really, is going on?

First of all, let's consider top level numbers: removing motor trades and fuel, Core Retail Sales:

• In Value Index terms, things have improved, which is a positive - so far in the crisis, value of sales trended well flatter than volume of sales primarily due to deflation in the sector. This was good for consumers, but bad for businesses as profit margins shrunk and with them, employment declined too. In May 2014, value of retail sales index rose to 94.6, up 1.39% y/y. Good news for retailers. Even better news: 3mo MA through April 2014 is up 1.7% y/y and 6mo MA is up 1.4% y/y. All in, we are seeing some fragile gains here.
• Also in Value index terms, this time around based on seasonally-adjusted data: month on month things are not so good: index is down 0.31% on April. So short-term, things are not better this time around. Not to panic, of course, as they are volatile and as trend remains up, albeit gently and unconvincingly so far (see first chart). We are bang-on on the trend now.

• In Volume index terms, the index is under performing recent trend, but is still pointing up on average. Although m/m index is down 0.48%, year-on-year volume of sales is up 3.33%.
• 3mo MA through May 2014 compared to 3mo MA through February 2014 is up 3.7%, stronger than Value index, implying potentially lower margins. Year on year 3mo MA is up 3.33% a notch slower than 3.36% 6mo MA on previous 6mo MA.

My Retail Sector Activity Index (RSAI) capturing simultaneously Value and Volume Indices, plus Consumer Confidence, reported by the ESRI has moderated from 111.0 in April 2014 to 110.6 in May 2014. Year on year, the RSAI is up strongly, from 101.4 back in May 2013, but on shorter-run horizon, the index is just about at the levels set in February-March 2014.

Top conclusions: All of the above are good readings, suggesting that while deflationary pressures remain a challenge, core retail sales have been improving. In previous months' posts, I noted that in my view, we are now on an upward trend in terms of Volume and at the start of a more cautious upward trend in Value terms. May data confirms this, as does the chart below showing current y/y growth compared to pre-crisis historical averages.

April 2014 reading for Volume touched just above the pre-crisis average growth rate (not the levels), this moderated back in May. Value index growth rates remain disappointingly below those recorded before the Great Recession.

In terms of levels, Value index (3mo average through May 2014) is currently 41% lower than historical peak levels and 13.8% below pre-crisis average. Volume index is 37.5% below its historical peak and 8.6% down on pre-crisis average.

27/6/2014: Eurocoin: Euro Area Growth in Q2 ahead of Q1

CEPR and Banca d'Italia released their latest Eurocoin forecast for the euro area economy today. Here are the details:

• In May 2014, Eurocoin posted its first decline in 11 months, falling from 0.39 in April to 0.31. Still April-May 2014 forecast for GDP growth based on Eurocoin stood at 0.35% q/q, faster than any quarter since Q1 2011. 
• The Eurocoin remained unchanged in June 2014, implying the overall average rate of growth of around 0.34%, a moderation on April-May forecast.
• Error-adjusted forecast range for growth is between 0.17% and 0.5%.

Per Banca d'Italia: "The deterioration in business confidence was counterbalanced by the positive contribution from the improved conditions in the financial markets and the pick-up in industrial activity."

Couple of charts to illustrate:

26/6/2014: Explaining the Gender Gap in Entrepreneurship

A new paper by Caliendo, Marco and Fossen, Frank M. and Kritikos, Alexander and Wetter, Miriam, titled "The Gender Gap in Entrepreneurship: Not Just a Matter of Personality" (May 23, 2014: CESifo Working Paper Series No. 4803 http://ssrn.com/abstract=2457841) tackles a very important and highly sensitive issue of gender gap in entrepreneurship.

The authors ask "Why do entrepreneurship rates differ so markedly by gender?"

The paper uses data from a large, representative German household panel, covering 2000-2009 period, to "investigate to what extent personality traits, human capital, and the employment history influence the start-up decision and can explain the gender gap in entrepreneurship."

"In contrast to previous research the main advantage of our data set is that it contains not only information on the socio-demographic background of the respondents, but also on a broad set of personality constructs that elicit the Big Five traits and several specific personality characteristics."

Note: Big Five Factor Model of personality (McCrae and Costa, 2008) "describes the personality by the factors openness to experience, conscientiousness, extraversion, agreeableness, and neuroticism (or, reversely, emotional stability)."

Per authors, "To the best of our knowledge information on the Big Five approach has not been used to assess the gender gap in entrepreneurship. We are the first to simultaneously analyse the effects of the Big Five factors, risk aversion, locus of control, and the ability to trust others ..., as well as of a variety of variables controlling for human capital, employment status, and other socio-demographic factors on the gender specific decision to enter self-employment."

The findings are very far-reaching and substantially in dispute with commonly held views:

1. "Applying a decomposition analysis, we observe that the higher risk aversion among women explains a large share of the entrepreneurial gender gap."
2. "We also find an education effect contributing to the gender difference." More specifically: "On average, working aged women in Germany are still less educated than men and are, therefore, less inclined to start a business."
3. "Thirdly, the current employment state has a strong effect into the opposite direction: If the share of women in wage employment were as high as the male share, holding everything else constant, their entry rate into self-employment would be much smaller."
4. "…we show that personality traits help explain the gender gap in nuanced ways. While specific characteristics, in particular risk attitudes, are able to explain a substantial amount of the gender gap, the overall influence of the Big Five personality constructs point to the opposite direction. This means that if women were endowed with the same scores in the Big Five as men, the gap would be even larger."

Overall: "the explained gap is therefore negative meaning that if women exhibited in all observable variables the same parameter values as men, the entry rate of women would be even smaller than actually observed."

26/6/2014: You Might Need a Hubble to Spot That Bubble

In my analysis yesterday (here) I argued that Dublin residential property prices are simply showing signs of reversion to trend, not 'bubble' dynamics. Since then, numerous reports in the media produced opposite conclusions, with headlines forcibly putting forward an argument for 'bubble' formation in Dublin property markets.

Over long run, sustainable property prices appreciation should track closely inflation in the economy. So far is pretty much clear. While arbitrary, starting points for trend estimation for Dublin property should start from pre-bubble period of 1999-2001. This is also pretty clear.

So let us apply Consumer Price Index-measured inflation to Dublin residential property price indices and see where the trend is against current reading. The following chart, based on annual series 2000-2013 and May 2014 for current reading illustrates this exercise:

Here's a pesky problem for 'bubble'-maniacs out there:

1. If property prices expanded at the rate of inflation from 2000 on, current Dublin property prices index should read around 91.2.
2. If property prices expanded at the ECB policy-consistent inflation target of 2%, the index should read around 89.4
3. Current CSO index reading is 72.2

So we are somewhere 25-26% below 'sustainable' levels of house prices, if these are measured by inflation-linked price appreciation, or 24% below ECB-targeted rate of inflation.

You do need quite a powerful telescope to spot the bubble in Dublin markets from here. Which, of course, should not be read as 'there is no bubble', just as 'we can't yet tell anything about bubble being formed'.