2/8/2014: BRIC Manufacturing Rebound: July 2014

Summary of BRIC Manufacturing PMIs released yesterday:

Not that you'd notice from the mainstream media, but Russia's manufacturing is back above 50.0 in July after 8 consecutive months of below-50 readings.

A comfortable growth range for Russian Manufacturing PMIs should be around 53-55, so the economy is still miles away from a robust recovery. Further concern is that July 2014 reading might be similar to a spike in October 2013 that was followed by renewed contraction.

2/8/2014: WLASze: Weekend Links to Arts, Sciences and zero economics

A brief WLASze: Weekend Links to Arts, Sciences and zero economics to start a long weekend with. Today's note focuses on a handful of links connected by the single subject: our brains.

NY Times - in a brilliant attempt to review the new Hollywood movie, that brilliantly falls out of the article script. Who cares! There are bigger things to write about and Professor Hickok of UC Irvine delivers. http://www.nytimes.com/2014/08/03/opinion/sunday/three-myths-about-the-brain.html?smid=tw-nytimes&_r=0 lists and briefly squares the main myths about our brains. Do we use just 10% of the brain? Surely the logic would suggest that nothing in our body is being used 10% or 80%, save for a small number of atavistic leftovers from the evolutionary process of attrition. So, no, we use all of our brains. Is brain asymmetric? Well, no - it is rather interconnected. Are mirror neurone really 'mirrored'? No, but sort of. And so on… What emerges is a confirmation of something that we have probably all suspected before upon hearing the factoids about our brains narrated to us by popular snapshots: our brains are complex, interconnected and non-linear. Next, we shall discover that logic is similar… to finally do away with the sheer stupidity of separating it from creativity…

On a more 'lingo-loaded' front, phys.org has a neat feature on how brain retrieves memories: http://phys.org/news/2014-07-brain-memories.html. While the mere idea of implants that record brain activity is fascinating in itself, it is the spectre of technology that can enhance and partially substitute for brain sub-functions, merging tech and living neurones to alter the mind that is fascinating. And here's more on this: http://phys.org/news/2014-03-silicon-based-probe-microstructure-underpin-safer.html#inlRlv. We are moving, rapidly, toward an era where that which we cannot yet understand will be available to technological manipulation. I'll leave it with you to think up all the plausible scenarios of what this may entail.

But while tech does now have a capacity (albeit highly unknown) to affect brain and thus mind, art has been doing the same for millennia. ArtnetNews has this review of a recent study that links act of artistic creation to brain function facilitation: http://news.artnet.com/in-brief/creating-art-improves-brain-function-57197. Which, of course, neatly circles back to where I started from: on the myths, that of separateness of logic and creativity in our brain function.

So just for the visuals - and to formally combine science and figurative art, Can Brain Scans Really Tell Us What Makes Something Beautiful? via the Smithsonian: http://www.smithsonianmag.com/innovation/can-brain-scans-really-tell-us-what-makes-something-beautiful-64840556/?no-ist

Never mind: have you ever seen the similarities between arts profs and maths profs? The two sub-species are virtually identical in outward expressions of their selves, especially judged from an external point of view and based on purely aesthetic semiotics of their dress codes and appearances… Logic is art and art is logic whenever you see them wondering the University compounds…

Here you have it - debunking stereotypes / cliches above, concluding with one below… Enjoy!

31/7/2014: Deflationary Trap: Eurocoin Signals Slowing Euro Area Growth in July

July Eurocoin - higher frequency gauge of economic activity in the euro area published by CEPR and Banca d'Italia - is out. Headline number posted a decline from 0.31 in June to 0.27 in July, consistent with slower growth in the first month of Q3 2014.

As chart above shows, July reading is barely above the statistical significance line, suggesting that the slowdown is quite pronounced. As Eurocoin release indicates: "The negative impact of the fall in industrial production in May and of the weak performance of the stock market in July was partially offset by the flattening of the yield curve." In other words, save for the excessive exuberance in the bonds markets, the economy is showing substantial weaknesses going into Q3.

This means that while Q2 2014 projection is now for stronger growth at around 0.31-0.34% q/q, up on officially estimated Q1 2014 growth of 0.2%, Q3 2014 took off with a growth outlook of around 0.26-0.28%.

Current economic activity is sitting at around the rates compatible with November-December 2013. Barring any significant changes in HICP (although indications are, HICP will fall to 0.65% for July data), the ECB remain in the proverbial 'deflationary risks' corner:

UPDATED

To-date, while growth moved into positive territory over the last 12 months, inflationary dynamics have pretty much collapsed.

UPDATED

If July trend (falling activity) remains into August and September, we are looking at further worsening in the overall activity in the euro area and more pressure on inflation to the downside.

29/7/2014: Pause that hype about Russian reserves draining... for now

There is a lot of media 'noise' around Russia's foreign exchange reserves and the alleged links to sanctions as a causative driver for, what some report as dramatic, declines in Russian reserves.

Here is analysis of the official data.

Two charts first:

Total reserves:

As of the week of July 18, 2014, these stand at 472,500 million USD, down 4.2% on March 1, 2014 (20 days before the first round of sanctions announcements) and down 7.3% on January 1, 2014 (time around which the crisis in Ukraine started to take on sinister character, threatening directly the previous regime and drawing Moscow into it). Year on year the reserves are down 8%, which means that:

1. Only around 1/2 of the entire decline in reserves can be linked to sanctions; and
2. The declines down to sanctions were hardly dramatic.

The above (and below) does not deal with changes in foreign exchange valuations or gold price valuations, which can be significantly more than 4-8% swings in the recorded reserves.

Now, onto composition of reserves:

Table below summarises movements in all reserves (we only have official data through July 1, 2014 so far):

Note that while Russian reserves declined on foreign exchange side, they rose on gold side, so the net (combined) effect is shown in the last column of the table. At very worst, sanctions can account for roughly 3% decline in reserves. Again, hardly 'dramatic'.

I will update the above once August 1 data is out.

Update: Here is a chart plotting evolution of Russia's gold reserves:

29/7/2014: Vera Graziadei Interview: Ukraine, Russia, Maidan...

This is a very insightful, personal-level interview with Vera Graziadei, who is a British TV presenter with Russian and Ukrainian roots, born in Donetsk, raised first in Eastern Ukraine, then in the UK, educated in LSE and so on...

http://www.bne.eu/content/interview-graziadei-anger-towards-euromaidan-passionate-%E2%80%93-no-act

Many personal feeling she narrates in the interview are shared by other people who have personal and familial ties to Ukraine and Russia. I would count numerous instances where reading her interview led me to think: "Me too! I felt the same." As an analyst, I too often hide behind the numbers, stats, expert opinions. But to all of us, there is also a personal connection that Graziadei develops strongly in her interview.

30/7/2014: Some Simple Maths Around Live Register Numbers

There are some positive news on Live Register front today, which you can read about here: http://www.cso.ie/en/releasesandpublications/er/lr/liveregisterjuly2014/#.U9jKTIBdWEI

My friend, Marc Coleman noted in his commentary that:

Progress of sorts, I agree. However, several caveats apply:

1. The above figures quoted by Marc omit outflows from LR due to expiration of benefits (e.g. two-earners household where one earner becomes unemployed, draws unemployment supports, but then runs out of benefits due to high income of the other earner, etc);
2. The above reductions also reflect outflows of working age population out of Ireland;
3. The above reductions reflect exits from LR due to entry into Activation Programmes (e.g. JobBridge) and general tightening of LR access (e.g. people made self-employed before they lost jobs etc).

Let's take a look at the numbers we do know:

• July 2011: Live Reg total = 470,284;  Unem. rate = 14.3% (estimated at the time, not 14.5% - adjusted later); and State Training Programmes Participants = 54,287 (June - these numbers are reported with a lag of one month, so to make them comparable to currently available data, I took June numbers for 2011).
• July 2014: Live Reg total = 404,515; Unem. rate = 11.5%; and STPs = 65,709 (June).
• So STPs difference = 11,422
• Net emigration 2011-2013 (25-64 years old only, so I exclude 15-24 year olds - the largest category - this gives me some comfort on relating these emigrants to unemployment or underemployment) = 28,900

And we have:

• Net emigration 2011-2013 and net change in STPs = 40,322
• Add 2013-2014 emigration at 1/2 rate of 2012-2013 rate for 25-64 year olds = 6,900
• Live Reg total July 2011 relative to July 2014 change: -65,769
• Net emigration and STPs change 2011-2013 (estimated): - 47,222
• Not in the above: exits from LR due to expiration of benefits.

So even without exits from LR, potential improvement in LR for June-July 2014 compared to June-July 2011 is at maximum 18,547, over 3 years or roughly 6,180 per annum.

Reminder, Live Register supported numbers are at 404,515 (LR) +65,709 (STPs) = 470,224. Do the maths as to whether this rate of improvement is really significant enough…

My view is that it is great to see reductions in LR and (not in the current release) there are some good news from the QNHS side that covers new employment. But we need much, much more rapid reductions in unemployment and increases in jobs creation (especially jobs creation at domestic economy levels, not just in MNCs- dominated sectors) to even start talking about any significant 'progress' here.

Good thing, Marc agrees, somewhat:

29/7/2014: Latest Round of EU Sanctions: Mirroring the U.S. and upping the ante...

EU finally agreed on the new round of sanctions against Russia - the full document is available here: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/EN/foraff/144159.pdf

"In order to restrict Russia's access to EU capital markets, EU nationals and companies may no more buy or sell new bonds, equity or similar financial instruments with a maturity exceeding 90 days, issued by state-owned Russian banks, development banks, their subsidiaries and those acting on their behalf. Services related to the issuing of such financial instruments, e.g. brokering, are also prohibited." This is basically symmetric to the previous US sanctions (see: http://trueeconomics.blogspot.ie/2014/07/1772014-more-russia-sanctions-same.html note: updated link to US sanctions here: http://www.treasury.gov/press-center/press-releases/pages/jl2572.aspx) though EU sanctions are covering all "state-owned Russian banks, development banks, their subsidiaries" not just those covered in the US sanctions.

"In addition, an embargo on the import and export of arms and related material from/to Russia was agreed. It covers all items on the EU common military list." These involve military equipment and equipment modified for military use, albeit some Mercedes G-Wagon retrofits, favoured by Russian vintage mafiosi, might qualify as well. Maybachs with protective plating will probably escape, unless someone orders an all-wheel-drive one...

"…prohibition on exports of dual use goods and technology for military use in Russia or to Russian military end-users." These are problematic as the lists are more ambiguous and broader. I am not an expert on this subject, but overall, such blanket prohibitions under what often amounts to relatiist testing procedures can have a much broader impact than intended.

"Finally, exports of certain energy-related equipment and technology to Russia will be subject to prior authorisation by competent authorities of Member States. Export licenses will be denied if products are destined for deep water oil exploration and production, arctic oil exploration or production and shale oil projects in Russia." This is symmetric to the US sanctions. It is interesting to note that the sanctions are designed specifically to hurt Russian energy sector in areas where the sector competes head-on with US and Canada: shale oil and arctic oil. On-shore traditional oil is not impacted.

Materially, and speaking strictly personally, I do not expect the new round of sanctions to have a direct impact on Irish bilateral trade with Russia, relating to goods, but we can see significant impact on transactions via IFSC (http://trueeconomics.blogspot.ie/2014/07/2172014-sources-of-fdi-into-russia-2007.html). You can see breakdown of goods flows with Russia here: http://trueeconomics.blogspot.ie/2014/07/1772014-irish-bilateral-trade-in-goods.html. The impact is intended, as in the case of the US sanctions, to be longer-term, restricting funding opportunities for major Russian companies and reducing their free cash flows (by forcing them to use cash flow to close off maturing debt). Ironically, also in the longer term, this can lead to Russian companies issuing more equity and debt domestically, deepening domestic financial markets, and carrying less debt overall, making their balancesheets stronger. The short-term impact is likely to be reputational and risk-related as some exporters and investors will opt to stay out of the Russian market in fear of future additional sanctions and faced with a prospect of dealing with EU and US bureaucracy (not to mention the prospect of dealing with their Russian counterparts).

On a geopolitical note, the sanctions are now starting to ramp up pressure on Russian leadership. What the reaction might be is anyone's guess, but I suspect we are not likely to see major and rapid de-escalation soon (http://trueeconomics.blogspot.ie/2014/07/2872014-double-up-or-stay-course-in.html). Which is not a good outcome for all parties concerned and especially for the Ukrainian people.

Updated: the US has now matched the broader EU sanctions: http://www.reuters.com/article/2014/07/29/us-ukraine-crisis-sanctions-obama-idUSKBN0FY27Q20140729?utm_source=twitter U.S. sanctions on banks remain in the area of funding, but not in the area of transactions.

29/7/2014: Are Irish Retail Sales Getting Better or Growing by Attrition?

Ah, so apparently Irish Retail sales are booming at historically record levels of increases. My view is - Retail Sales are rising, not booming, in Volume of sales and are posting basically shallow rates of increases in Value of sales.

Ok, spot the trends here:

Err...

• Core retail sales by Volume are running below 2010 levels, below peak levels, below short-term trend, albeit the trend is rising. M/M the volumes are up +0.1% - not blistering, right? June reading is only 1.46% ahead of the crisis period average. 3mo average (Q2 average) is 4.5% up y/y - which is good. June reading is 3.6% up y/y which worse than the earlier part of the quarter. 6mo MA is up 3.4% y/y (so that is H1 2014 on H1 2013) - which is good. But sales volumes are still down 36.2% on pre-crisis peak. You do the maths as to when that recovery will get us back to pre-crisis levels of activity.
• Core retail sales by Value (the stuff that pays wages and hires people in the sector) are running along the relatively shallow up ward trend. M/M there is zero change despite weather effects which should have driven sales up. Relative to crisis period average value of sales is down 1.1% in June 2014. Q2 2014 is up 2.6% on Q2 2013, but June 2014 is up 1.94% y/y so again, slowdown in the rate of growth toward the end of the quarter. H1 2014 is up only 1.5% y/y and Q2 2014 value of sales is down 40% on peak.
• Meanwhile, consumer confidence is continuing to run at slightly more moderate rates than previously, albeit still well ahead of where retail sales are.

Year on year growth rates are next:

Things are healthier in H1 2014 than before, but still well below the rates of growth recorded before the crisis. Anyone claiming dramatically higher rates of growth in H1 2014 must be referencing the freakish jump in sales in April 2014. Stripping this out, we are still better off in H1 2014 than in H1 2013, but the rates of growth in 2014 are not exactly dramatic: ex-April average y/y growth in H1 2014 was 0.9% for Value and 2.75% for Volume, comparable figures for H1 2013 were (stripping out that 6mo most volatile month of April) 0.72% and 0.88%, respectively. 

So again, again and again: accelerating growth is present in Volumes sold, but not in Value of sales. If you think that Volumes of sales are creating jobs, increasing retailers' investments and rising sector contribution to the economy, good luck to you.

However, whatever increases in the retail sales might have been, as the chart below shows, we are still far away from getting back to pre-crisis peak levels of retail sector activity:

Now, when you realise that we are into seven years of the retail sales staying below their peak, you have to start wondering if 'getting better' is the same as 'growing by attrition'?..

28/7/2014: Steady decline in Russian Reserves since Q1 2013

Russia's firepower in financial terms is formidable at USD472 billion, albeit declining since the 'local' maximum at around Q4 2012-Q1 2013:

28/7/2014: Western Banks Exposures to Russia

Last week I posted two charts detailing largest FDI exposures to Russia. Here is a chart, courtesy of Bloomberg, showing banks exposure to Russia by country:

28/7/2014: Double Down or Stay Course in Ukraine: the Only Rational Alternatives for Moscow?

The latest reports from the U.S. strongly suggest that Russia is perceived as an un-yielding adversary in Ukraine and that Moscow is about to 'double-down' on its gambit in Ukraine (see here).

The point is that if so, then why and then what?

Why? Russia has currently no exit strategy from the conflict in Ukraine. Forcing complete and total closure of the separatists operations is

1. Infeasible for Moscow (the separatists are not directly controlled troops that can be withdrawn on orders and indications are, they are not all too well coordinated and organised to be following any orders);
2. Were it even theoretically feasible, will be immediately visible to the external observers. Note that, for Moscow, (1) means political benefits of such an action will not be immediately apparent, while (2) means political costs of such an action will materialise overnight.
3. As sanctions escalate, the marginal returns of domestic political support become more important, since external economic benefits from cooperation vanish, but marginal costs remain (see below).

On marginal external benefits: it is absolutely uncertain what exact conditions Russia must fulfil to completely reverse the sanctions: is it

• (a) compel the rebels to surrender unconditionally to Kiev troops? 
• (b) compel them to surrender to either official troops or pro-Kiev militias, unconditionally? 
• (c) compel them to surrender conditionally - without any conditions set and without any mechanism to enforce these in place? 
• (d) compel them to declare a ceasefire - without any conditions set and without any guarantees of enforcement by the opposite side? 
• (e) compel the separatists to engage in peace talks - not on offer by Kiev? 
• (f) compel the separatists to stand down - in some fashion - and enter into negotiations with Kiev on Crimea? 
• (g) Is Crimea at all on the table? and so on...

On marginal costs: the costs of sanctions are tied to Russia delivering some sort of compliance with Western demands. Can someone, please, point to me a website where these demands are listed in full and the states that imposed sanctions have signed off on a pledge that once these conditions are satisfied, sanctions will be lifted?

Thus, in simple terms, current Western position leaves little room for Moscow not to double down in Ukraine. The only other viable alternative for Moscow currently is not to escalate. De-escalation, as much as I would like to see it take place, is not within rational choice alternatives. The core reason for this is that when one constantly increasing pressure in forcing their opponent into the corner without providing a feasible exit route for de-escalation, the opponent's rationally preferred response, at certain point in time, becomes to strike back and double down.

Update: interestingly, Reuters editorial today (29/7/2014: http://www.reuters.com/article/2014/07/29/us-ukraine-crisis-putin-analysis-idUSKBN0FY1AC20140729?feedType=RSS&feedName=topNews&utm_source=twitter) provides very similar lines of argument on costs and incentives for Moscow to de-escalate the situation in Eastern Ukraine.

28/7/2014: Germany: Independent Views on Russian Sanctions

Two research institutes covering economic policy in Germany on Russia sanctions:

• Detailed analysis by DIW Berlin: https://www.diw.de/de/diw_01.c.469198.de/presse/diw_roundup/are_the_economic_sanctions_against_russia_effective.html
• Brief note from Ifo Institute on sanctions linked to longer term strategy: http://www.cesifo-group.de/ifoHome/presse/Pressemitteilungen/Pressemitteilungen-Archiv/2014/Q3/press_20140725_Russland-Konflikt.html