10/4/15:Ruble's Mysterious Rise: Some Thoughts

There is an interesting debate starting up around the Ruble: in recent weeks, Ruble appreciation against the USD has pushed it out of its traditional long term alignment with oil prices, as noted in the chart below:

Source: @Schuldensuehner 

There are several possible factor that can account for this.

1. Oil price expectations - if the markets expect oil prices to rise further, Ruble buyers can bid the currency up ahead of the oil price changes. This is unlikely in my view, as we are not seeing oil price firming significantly in both spot and futures markets.
2. Oil price revelation - if the markets priced in severe forecasts uncertainty linked to oil price dynamics to the Russian economy back in October-December 2014, then the new information about Russian economy's performance in Q1 2015 should lead to re-pricing of risks. In my opinion, Ruble was heavily oversold in December (not in october-November) and there is some upside potential, given that the Q1 2015 data coming out of the Russian economy is not as apocalyptic as some currency markets analysts expected. Notably, there has been a significant cut in USD long positions vis-a-vis Ruble in recent days, which signals speculative re-alignment toward long-Ruble.
3. Demand Factor 1 - March is the end of Q1, so it is the month of rising demand for Ruble to cover corporate tax liabilities (Russian corporates pay taxes in Rubles). VAT receipts are also coming due. And estimated forward taxes and charges. In my opinion, this helps to temporarily boost Ruble valuations.
4. Demand Factor 2 - March is the last month before major companies in Russia are due to reverse their forex holdings to October 2014 levels (per December agreement hammered out by President Putin). This means increased supply of USD and other currencies, and increased demand for Rubles. Again, a temporary factor, in my opinion.
5. Supply Factor - March and April are also large months for corporates to book in energy-related exports earnings. Note that Russian Central Bank is recording a small rise in reserves in late March, followed by a decline in April.
6. Demand Factor 3 - March also was the month of largest (for 2015) external debt redemptions by Russian banks and corporates. Repayment of these debts involves buying dollars and selling Rubles, but timing-wise, companies have been pre-building their forex reserves for some time, so it is most likely that in recent 3 weeks there has been less demand for dollars (and other forex) than in previous 2 months. Note, I covered this here: http://trueeconomics.blogspot.ie/2015/04/8415-rubles-gains-are-convincing-but.html
7. Demand factor 4 - since the start of 2014, Russia actively pursued reduction of the degree of dollarisation in its economy. The first stage of this process involved increasing trade settlements in other currencies (most recent one - announced this week - with Indonesia). This, alongside with imports collapse, reduced external trade-linked demand for dollars. The second phase of de-dollarisation started in February, when Russian retail deposits started exiting dollars and shifting back into Ruble on improved confidence in the banks and high deposit rates. Again - a temporary support for the Ruble.
8. Demand factor 5 - as Russian CDS show, probability of default declines for Russia sustained in recent weeks implies improved demand for Russian Government (and local) bonds, issued in Ruble markets. The result is improved demand for OFZs and, thus, for Ruble. 
9. Real vs Nominal exchange Rates - inflation dynamics in Russia are most likely drawing a gap between real and nominal exchange rates, so nominal rate firming up is not imposing equivalent increase in the real rates. 

In other words, we have many, many moving parts to one equation. One can't tell the dominant one, or which are likely to last longer, but my sense is that majority of these forces are temporary and the long-run link between Ruble and oil price will be regained.

Now, assuming oil price dynamics remain where they are today (weak upside), Ruble is likely to devalue again, back to USD/RUB 55-57 range. If inflation does not fall toward 10% in Q2 2015 (and I do not think it will), we are likely to see Ruble move into USD/RUB 60-65 range over this quarter. On the other hand, improved outlook for the economy (signalling, say annual contraction closer to 3.5-4 percent) can see Ruble staying within the USD/RUB 50-53 range.

One thing is for sure: so far, the Central Bank of Russia has managed damn well its dance in a very tight monetary policy corner between runaway inflation, prohibitively high interest rates and a massive squeeze on forex valuations. How long this 'smart game' in multidimensional and highly dynamic chess can go on is everyone's guess.

10/4/15: Irish Construction Sector Performance: a European Perspective

Irish Construction Sector has been a positive contributor to GDP over the second half of 2014, prompting some - in fact many - media outlets to herald the return of the Men in Hard Hats. You can be excused for wondering, as to how many men (and women) in hard hats are out there working today, given there is little visible activity on the ground, but the numbers do not lie. Or so they say.

Here is the latest data from the Eurostat giving construction sector activity in terms comparable across the EU states.

Actual activity for all building and construction sectors in Ireland over Q4 2014 was running some 53.2% below the average activity levels recorded in 2000-2002. Over the course of 2014, average activity in the sector in Ireland was 53.2% below the same activity over 2000-2002. Both metrics ranked Ireland as the third worst-performing construction sector in the group of euro area 15 economies.

Having risen to 111.20 in Q4 2010, the index of overall construction activity in Ireland was at the highest level since Q4 2009, but below any quarter for the period of Q1 2000-Q4 2009.

Things are even worse in the case of building activity (ex-civil engineering), where Ireland ranks second worst, on par with Portugal in the EU28. Here, Q4 2014 reading is 63.5% below 2000-2002 average and full year 2014 average reading is 69% lower than 2000-2002 average. Once again, the index is currently reading at the highest level since Q4 2009, but as above, this reading is well below any quarterly reading between Q1 2000 and Q4 2009.

Here is a chart showing relative performance to EU and EA:

Two things to note in the above:

1. EU and EA uplift in Q4 2014 has been more pronounced than that for Ireland. 
2. The trends are now not exactly converging, with EU and EA both pushing up, while Ireland's upward momentum appearing to be weakening once again from H1 2014 on.

One aside question is: with the above evidence at hand, can anyone explain a huge rise in the reported 'investment' in commercial property in 2014? Other than buy-to-flip strategies of the vulture funds, where is all this 'investment' going?

10/4/15: Shared Economy of the Future: It's All About the Bandwidth Access

A very interesting chart plotting evolution of the auto markets in the current technological environment from the Morgan Stanley:

The point of convergence is the 'Shared Economy'. But the real insight here is not about the auto market. Instead it is about technologically-enabled breakdown of the barriers between:

• Producers and consumers: as technology allows for greater and greater customisation, product offer becomes consumer/user driven in services and increasingly in physical goods;
• Owners and users: one model of 'own-to-use' is now increasingly being replaced by a dual option: 'own-to-use' or 'contract-to-use'. Goods conversion to services (e.g. ability to extract service from the physical goods without the need for ownership) adds another dimension to this.

This is happening in auto industry, but it also happens increasingly in smaller ticket goods and services markets. And it is going to change dramatically the retail sector. Here is an interesting article on Amazon vision of the present (not even the future) in terms of purchasing (note: the issue here is to what extent can brand standardisation consolidate product offers): 

http://qz.com/378310/amazons-vision-of-the-future-is-less-than-dashing/.

All of this, ultimately, is about the ability to create a 'shared bandwidth' around a quasi-commoditised service with some heterogeneity and customisation around it, and efficiently allocate consumer access to it. Which really means that the 'shared economy' is like a shared pipeline: someone will, in the end, have to arbitrage access to it, just as today someone has to arbitrage access to shared services (tolls, grids, etc). For now, we do so very inefficiently even crudely (very little demand-linked variability in toll pricing, long-term contracts nature of access to grids etc), but as the number of users-producers rises and their share in the overall economy grows, this arbitraging will have to become more refined, more dynamic, real time responsive.

I will be speaking about these and other longer-term trends in retail sector at an international retail sector conference in June so stay tuned.

9/4/15: Irish Bilateral Trade with the UK

With the UK heading in for the elections, someone asked me recently for the stats on Ireland' bilateral trade with the UK. Here are the numbers:

9/4/15: Expresso on IMF's WEO Update: Secular Stagnation is Here

Portugal's Expresso on IMF's 'secular stagnation' evidence via April 2015 WEO Update (Chapter 3): http://expresso.sapo.pt/a-receita-do-fmi-mais-infraestruturas-mais-inovacao-mais-produtividade=f918917. With my comments...

My view in full:

IMF findings on potential and long-term growth trends in the advanced economies published as a part of the April 2015 WEO update confirm what we have already known for some time: the ongoing economic growth slowdown is not only structural in natural, but is permanent, in economic terms.

More importantly, however, the IMF study shows that the structural slowdown in growth has started prior to the onset of the Global Financial Crisis and has been concentrated, in terms of drivers, in demographics of ageing, leading to decline in investment, and a fall off in the growth of the total factor productivity as advanced economies continued to exhaust growth along the technological frontier.

In simple terms, this confirms the thesis of the secular stagnation, especially as formulated by Robert J. Gordon (see http://trueeconomics.blogspot.ie/2012/08/2882012-challenging-constant-growth.html).

From my point of view, the study documents one key trend: the trend of increasingly lower contribution of the human capital to growth over the period of 2001-2007 in the presence of slower, but still, relatively sustained growth contribution from employment.

This shows that during the pre-crisis boom, much of economic growth was derived not from intensive margin (technological progress and linking of technology to greater labour productivity) but from extensive margin (increased supply of physical capital and asset bubbles).

In the future, this imbalance in growth will require significant policy corrections in order to restore human capital growth to 2001-2003 levels. Absent these highly disruptive policy reforms (covering taxation systems, provision and distribution of key public services, restructuring of enterprise management systems etc), the world will find itself at the tail end of technological growth frontier, with low rates of return to technology and innovation and, as the result, permanently lower growth in the advanced economies.

9/4/15: IMHO Proposals Concerning Home Repossessions

IMHO proposals to the Department of Finance on the Risk of Significant Home Repossessions is now available here: https://www.evernote.com/shard/s442/sh/e8e02a47-30c0-49c5-9846-d09f1ab9c18f/20f2d8894a0ab47c9fde09b245120436. 

9/4/15: Expresso on Putin-Tsipras Meeting

Portuguese Expresso coverage of yesterday's meeting between President Putin and Prime Minister Tsipras, with a comment of my own http://expresso.sapo.pt/grecia-inicia-primavera-com-a-russia=f918953.

8/4/15: Three Strikes of the New Financial Regulation: Part 3 – The Capital Markets Union

My new blogpost for @LearnSignal blog covering the Capital Markets Union regulations is now available on line: http://blog.learnsignal.com/?p=172

8/4/15: Ruble's Gains Are Convincing, But Risks Remain

Three charts:

Russian car sales

Source: @moved_average 

Down 42.5% y/y in March (estimated 43% decline).

Ruble v Dollar is going up and up:

Source: @Schuldensuehner 

Ruble v Euro is also up and up...

Source: @Schuldensuehner 


Linking all three? The myth of Ruble liquidity squeeze (e.g. here and here). Reality: sharp drop in imports, slight improvement in oil prices (and more importantly stabilisation of the trend to the upside) and improving conditions in the domestic banking sector are all driving ruble value up.

Another strong contributing factor is timing of external debt redemptions:

Source: https://www.tradingfloor.com/posts/pop-goes-the-rouble-4296859

These are now past their 2015 peaks.

All positive, but uncertainty remains and is still extremely high, so I would not be surprised if ruble starts posting some losses in and around the end of Q2.

8/4/15: Irish Quarterly PMIs: Services, Manufacturing & Construction

Given we now have data for PMIs for Ireland (via Markit and Investec) through March (see analysis of Manufacturing PMI here and Services PMI here), let's update quarterly PMI averages and compute my own 'composite' indicator based on 3 core sectors: Manufacturing, Construction and Services. Note: Construction sector PMIs are computed on the basis of january-February data as there are lags of 2 weeks in reporting these by Markit.

Manufacturing PMI for Q1 2015 stood at 56.5, down from 56.6 in Q4 2014. Thus, Q/Q the PMI is down 0.18%. In Q4 2014 Manufacturing PMI was up 0.77% Q/Q. So we have a slowdown in growth, but growth nonetheless.  The same holds for yearly comparatives. Q1 2015 was up 5.1% y/y, after posting 5.5% growth in Q4 2014 and 8.2% growth in Q3 2014. The series are trending above 50.0 for the 7th quarter in a row.

Services PMI fell from 61.9 in Q4 2014 to 61.6 in Q1 2015, down 0.5% Q/Q, having posted a decline of 0.3% q/q in Q4 2014. Yearly growth rates also slowed down: in Q3 2014 y/y growth in Services PMI was 5.8%, this fell to 3.7% in Q4 2014 and to 2.8% in Q1 2015. Still, we now have 17 consecutive quarters of growth in Services as recorded by PMIs in excess of 50.0.

Construction PMI (based on 2 months of data for 2015) is currently standing at 54.6, down from 63.8 in Q4 2014. This is a marked reversal in the q/q growth rates from 3.2% in Q4 2014 to -14.5% in Q1 2015, though we need to see March data to make any conclusions on this. Yearly growth rates are falling off the cliff too: in Q3 2014 Construction PMI rose 21.3% y/y, which declined to 8.5% growth in Q4 2014 and to estimated -5.3% contraction in Q1 2015. Again, as with Manufacturing, we do have continued 7 quarters of above 50 readings in the series, so the slowdown is in the rate of growth, not an outright contraction in activity.

As the chart above shows, Composite Index (computed by myself based on sectoral weights in the National Accounts) has posted a relatively sharp decline, driven primarily by the Construction PMI reading. As of today (absent March data for Construction PMI) the composite indicator is reading at 59.0, down from 60.7 in Q4 2014. This is the lowest reading in four quarters, so y/y the index is still up 1.4%, although the rate of growth in the index has fallen from 4.2% recorded in a year through Q4 2014 and 6.7% growth posted in Q3 2014. Nonetheless, the index continues to trend above 50 for the 17th quarter in a row.

7/4/15: IMF: Ninth Time is Gonna be Lucky in Ukraine

It is perhaps revealing that the IMF is being forced to defend its Ukraine package 2.0 only a month after it was unveiled. And even do so without providing any explicit risk assessments. Here is the latest on the Fund efforts on this front. Lipton's full speech is here: http://www.imf.org/external/np/speeches/2015/040715.htm

Of note two things:

1. This is an 9th lending programme by the Fund to Ukraine, with 8 previous ones being... err... not exactly successful.
2. The current programme is based on (see details here: http://www.imf.org/external/pubs/ft/scr/2015/cr1569.pdf) assumed 2015 real GDP contraction of 5.5%, growth of 2% in 2016, 3.5% in 2017 and 4% every year thereafter through 2020.  And below is the table of forecasts from the Central Bank of Ukraine (NBU) showing 2015 forecast for -7.5% growth and 2016 forecast for 3% growth. It also shows that NBU estimates y/y growth in Q4 2014 to have been -14.8% and Q1 2015 growth to be -15%. And that -7.5% growth in 2015 will require positive growth in Q4 2015 and a relatively modest contraction in Q3 2015.

All of which suggests that the Fund leading 'assumption' on growth might be a touch optimistic. And that makes its leading 'target' for debt/GDP ratio of 94% at year end 2015 to be a touch unrealistic. Just as the Funds' all previous leading assumptions and targets that the IMF set in all previous lending arrangements with Ukraine.

But, as the Good Director might say, this time it is different...

7/4/15: IMF WEO on Global Investment Slump: Part 2: It's Demand, Not Supply ..

IMF released Chapter 4 of the April 2015 World Economic Outlook update. The chapter covers the issue of lagging growth in private investment (http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/c4.pdf).

IMF findings focus on 5 questions:

1. "Is there a global slump in private investment?"
2. "Is the sharp slump in advanced economy private investment due just to weakness in housing, or is it broader?"
3. "How much of the slump in business investment reflects weakness in economic activity?"
4. "Which businesses have cut back more on investment? What does this imply about which channels—beyond output—have been relevant in explaining weak investment?"
5. "Is there a disconnect between financial markets and firms’ investment decisions?"

I covered chapter’s main findings for questions 1-2 in the earlier post here: http://trueeconomics.blogspot.ie/2015/04/7415-imf-weo-on-global-investment-slump.html

Now, onto the remaining questions and the core conclusions:

Q3: "The overall weakness in economic activity since the crisis appears to be the primary restraint on business investment in the advanced economies. In surveys, businesses often cite low demand as the dominant factor. Historical precedent indicates that business investment has deviated little, if at all, from what could be expected given the weakness in economic activity in recent years. …Although the proximate cause of lower firm investment appears to be weak economic activity, this itself is due to many factors. And it is worth acknowledging that, as explained in Chapter 3 [of the WEO], a large share of the output loss compared with pre-crisis trends can now be seen as permanent."

Here's a handy chart showing as much:

Figure 4.6. Real Business Investment and Output Relative to Forecasts: Historical Recessions versus Global Financial Crisis (Percent deviation from forecasts in the year of recession, unless noted otherwise; years on x-axis, unless noted otherwise)

Q4: "Beyond weak economic activity, there is some evidence that financial constraints and policy uncertainty play an independent role in retarding investment in some economies, including euro area economies with high borrowing spreads during the 2010–11 sovereign debt crisis. …In particular, firms in sectors that rely more on external funds, such as pharmaceuticals, have seen a larger fall in investment than other firms since the crisis. This finding is consistent with the view that a weak financial system and weak firm balance sheets have constrained investment. Regarding the effect of uncertainty, firms whose stock prices typically respond more to measures of aggregate uncertainty have cut back more on investment in recent years, even after the role of weak sales is accounted for."

Here is an interesting set of charts documenting that financial and policy factors played more significant role in depressing investment in the euro area 'peripheral' states:

Figure 4.10. Selected Euro Area Economies: Accelerator Model—Role of Financial Constraints and Policy Uncertainty (Log index).

Note: in Ireland's case, financial constraints (quality of firms' balance sheets) is the only explanatory factor beyond demand side of the economy for investment collapse in 2013-present, as uncertainty (blue line) strongly diverged from the actual investment dynamics.


Q5: "Finally, regarding the apparent disconnect between buoyant stock market performance and relatively restrained investment growth in some economies, the chapter finds that this too is not unusual. In line with much existing research, it finds that the relationship between market valuations and business investment is positive but weak. Nevertheless, there is some evidence that stock market performance is a leading indicator of future investment, implying that if stock markets remain buoyant, business investment could pick up."

Conclusions

• So IMF finds no need for any systemic the supply-side adjustments on capital/credit side.
• It finds no imbalances in the capital markets and finds that demand is the main driver for collapse in investment. 

Where is the need for more 'integration' of the capital markets that the EU is pushing forward as the main tool for addressing low investment levels? Where is the need for more bank credit to support investment? Ah, right, nowhere to be seen…

Meanwhile, the IMF does note the role of debt overhang (legacy debts) in corporate sector as one of the drivers for the current investment slump. "Although this chapter does not further investigate the separate roles of weak firm balance sheets and impaired credit supply, a growing number of studies do so and suggest that both channels have been relevant." In particular, "For example, Kalemli-Ozcan, Laeven, and Moreno (forthcoming) investigate the separate roles of weak corporate balance sheets, corporate debt overhang, and weak bank balance sheets in hindering investment in Europe in recent years using a firm-level data set on small and medium-sized enterprises in which each firm is matched to its bank. They find that all three of these factors have inhibited investment in small firms but that corporate debt overhang (defined by the long-term debt-to-earnings ratio) has been the most
important."

Thus, once again, how likely is it that low cost and abundant credit supply unleashed onto SMEs - as our policymakers in Ireland and the EU are dreaming day after day - will be able to repair investment collapse? Err… not likely.