24/4/15: Migration and Economic Development: CFR Q2 2015

My column for the Cayman Financial Review this quarter covers the issues of economic development and migration: http://caymanianfinancialreview.cay.newsmemory.com/ go to page B20-21.

Alternative link, here: http://www.compasscayman.com/cfr/2015/04/22/Migration-trends-and-economic-development/

23/4/15: Why is Investment Weak?

Despite all the QE and accommodative monetary policies, despite all the state funding directed toward new lending supports, and despite unorthodox measures aimed at inducing the banks to lend into the economy, the following took place in the advanced economies over the course of the Great Recession:
1) financing conditions globally have first tightened (during the Global Financial Crisis) and then eased, in majority of the advanced economies reaching the levels of stringency comparable to pr-crisis peak;
2) cost of borrowing fell on pre-crisis levels across all advanced economies with exception of a handful of countries; and
3) investment remains weak.

Want to see the problem illustrated?

Banerjee, Ryan and Kearns, Jonathan and Lombardi, Marco J., (Why) is Investment Weak? (March 2015, BIS Quarterly Review March 2015: http://ssrn.com/abstract=2580278) ask: What explains this apparent disconnect?

Per authors, "The evidence suggests that, historically, uncertainty about the future state of the economy and expected profits play a key role in driving investment, and financing conditions less so. As a result,
investment after the Great Recession appears to have been broadly in line with what could have been expected based on past relationships. A stronger recovery of investment would seem to depend on a reduction in economic uncertainty and expectations of stronger future growth."

As I argued in the paper on the European Capital Markets Union (CMU) proposal here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2592918 - you might think that lack of investment is because markets for credit supply are dysfunctional. But you can also think of the demand side: if there is no growth prospect ahead, why invest in new capacity? And taking the second view, the prescription for solving the problem is: growth. Which requires improved prospects for investors, entrepreneurs, SMEs and, above all else - households.

23/4/15: Ireland 'Crazy Jumping' Stats: Producer Prices March 2015

In the world of 'Crazy Jumping' stats, Ireland is in the league of its own. Reach no further than out to the Irish Producer Prices. In annual terms, factory prices are up 9.5% in March 2015 y/y, almost double the 5.2% rise in the year to February 2015.

What is going on? Oh, currency valuations (prices are up in euros while exports markets are priced in all sorts of stuff) plus MNCs that can freely adjust prices they charge to Irish operations. Thus, "In the year there was an increase of 11.9% in the price index for export sales …and a decrease of 3.3% in respect of the price index for home sales." Basic pharmaceuticals prices (largest contributor to y/y price change) are up 14.5% y/y, Printing and Reproduction of Recorded Media - aka ICT software etc - jumped up 19.5%, Computer, electronic and optical products (second largest contributor to y/y price change) prices up 19%.

And in m/m terms, "the most significant changes were increases in Computer, electronic and optical products (+5.2%), Basic pharmaceutical products and pharmaceutical preparations (+4.6%) and Other food products including bread and confectionery (+2.9%), while there were decreases in Dairy products (-1.0%) and Other Manufacturing including Medical and Dental Instruments and Supplies (-0.2%)."

Now, resurgent Building and Construction industry. Based on factory gate prices things are not exactly surging yet. "All materials prices [for Building and Construction industry] increased by 1.4% in the year since March 2014. The most notable yearly changes were increases in Stone (+14.7%), Hardwood (+12.3%) and Glass (+6.4%), while there were decreases in Other Structural steel (-4.0%), Concrete blocks and bricks (-3.3%) and Ready mixed mortar and concrete (-2.6%)."

So things are booming up in MNCs - predominantly on foot of accounting… err… forex valuations side. And they are slogging up in Building & Construction, and in capital goods side (prices up 1.2% y/y). Domestic economy producers, overall, are deflating, still. 

Meanwhile, "The price of Energy products decreased by 11.3% in the year since March 2014, while Petroleum fuels decreased by 10.7%." Did you notice any of these decreases in your electricity and gas bills? No, me neither.

But all looks rather pretty hyperbolic in growth terms when one uses 'one-closed-eye-on-reality' trick:

23/4/15: Skills and Employment: 1950-2010 Data

A very interesting study, titled "Labor Market Polarization Over the Business Cycle" by
Christopher L. Foote and Richard W. Ryan (http://www.bostonfed.org/economic/wp/wp2014/wp1416.pdf) from the Boston Fed postulates that "Job losses during the Great Recession were concentrated among middle-skill workers, the same group that over the long run has suffered the most from automation and international trade." This is what is known as occupational polarisation - the disappearance of mid-range skills and low-end skills jobs and growth in higher skilled occupations.

The study finds "that middle-skill occupations have traditionally been more cyclical than
other occupations, in part because of the volatile industries that tend to employ middle-skill workers. Unemployed middle-skill workers also appear to have few attractive or feasible employment alternatives outside of their skill class, and the drop in male participation rates during the past several decades can be explained in part by an erosion of middle-skill job opportunities."

One hell of a chart illustrating the above across longer time horizon:

Shares of Employment for Four Occupational Groups:

23/4/15: Where the Bad of Deflation Looks Good...

You know the theory of the 'Bad of Deflation' - I wrote about it before... the story goes as follows: if prices fall, and consumers expect them to continue to fall, then rational consumers will withhold their demand, delaying their purchases in anticipation of lower price in the future. The result will be: reduced demand today, lower investment by the firms in future production, lower investment in innovation, stagnation, layoffs, recession... locust... fire balls falling from the skies and pestilence of the kind that only Central Bankers can save us from.

You also know my response to this, especially in the current macroeconomic conditions: falling prices support household real incomes and increase households' ability to finance debt and debt deleveraging, while sustaining at least some semblance of civilised demand.

But don't take my word for this. Here is a handy chart plotting... deflation in the price of hard drives:

It's source is here: https://www.thatdatadude.com/interactive-chart-hard-drive-prices-1950-2010

Do let me know if you know of any evidence that demand for hard drives has been 'delayed' by consumers or that innovation has 'stopped' in fear of lower prices/returns by companies, or if you have seen locust swarming around...

23/4/15: Two links to read on Greece today

Two articles worth reading today on Greece:

• Via @zerohedge : Grimbo or Greek Limbo http://www.zerohedge.com/news/2015-04-23/forget-grexit-grimbo-has-arrived relating to indeterminacy of the Greek short term path through the Summer and the option of 'printing' IOUs; and
• Related, (h/t to @WhelanKarl) via @dsquareddigest post: https://medium.com/bull-market/greece-the-next-steps-and-scenarios-576aedb408d4

Meanwhile, here is a reminder, via OpenEurope, of the mountains of debt and liabilities coming due:

22/4/15: Rosatom back at play in Hungary and Finland

Just about a month a go I wrote about the Euratom rejection of the Russo-Hungarian Paks nuclear reactor deal (http://trueeconomics.blogspot.ie/2015/03/13315-south-stream-redux-rejecting.html). The latest news, however, appear to indicate that someone somewhere in the basement of some Brussels building woke up and smelled the roses.

It looks like Paks deal is back on, though no idea as of yet what is happening with its modalities: http://www.world-nuclear-news.org/UF-Euratom-approves-Paks-II-fuel-supply-contract-21041501.html

Which means the next step is Finland's Fennovoima: http://www.eurasiareview.com/17042015-russias-rosatom-seeks-to-woo-eu-with-guaranteed-low-electricity-price/ where Russia already put aside USD1 billion for construction of the Hanhikivi NPP (stage 1): http://sputniknews.com/business/20150402/1020365295.html

22/4/15: Europe is Japanified

Europe has been Japanified, already, for some years now, including in terms of expectations forward...

Source: Author own calculations based on data from the IMF WEO database, April 2015

End of arguments...

22/4/15: Some morning links on Greek crisis

Greek crisis is accelerating once again, predictably, given the deadlines and debt redemptions looming. So what's worth reading on the subject this am?

Start with @FT's Martin Wolf and his "Mythology that blocks progress in Greece". It is good… as a summary of key myths surrounding Grexit. But...

Myth 1: "A Greek exit would help the eurozone" and Wolf view is that it is not so because with Grexit "euro membership would cease to be irrevocable. Each crisis could trigger destabilising speculation." Now, sort of yes, Martin. But by the same token, is irrevocable - no matter what - euro a good thing? Is it stabilising to know that euro is purely political currency with membership irrespective of economic and financial realities? Is it better for a city to keep town walls shut for doctors in a plague?

Myth 2: "A Greek exit would help Greece". Here Wolf is on the money… again, sort of. "Stable money counts for something, particularly in a mismanaged country." Really? Stable money in a mismanaged economy? Is that possible? Ever heard of real effective exchange rates and internal devaluations? So much for 'stable', then. Would it not be more helpful to devalue both across real and nominal margins, rather than force all pain into internal devaluation channel?

Myth 3: "It is Greece’s fault. Nobody was forced to lend to Greece." Yeah, true… sort-ish… No one was forced, but many were incentivised to lend to Greece, including by idiotic EU (and international) risk-weighting rules on sovereign debt. Wolf is right that in 2010, "Rather than agree to the write-off that was needed, governments (and the International Monetary Fund) decided to bail out the private creditors by refinancing Greece. Thus, began the game of “extend and pretend”. Stupid lenders lose money. That has always been the case. It is still the case today." Which is an argument in favour of a default. Perhaps managed default or as I call it - assisted. But default alone won't do much to correct for internal mispricing of risk and real mispricing in the economy. That requires devaluation, so back to Myth 2 above.

Myth 4: "Greece has done nothing." Agree with Wolf here. Greece has done quite a bit. But I am a bit puzzled: "Indeed, one of the tragedies of the impasse over the conditions for support is that the adjustment has happened. Greece does not need additional resources." Really? Oh, ok, then - if Greece does not need additional resources, soldier on, what's the fuss?

Myth 5: "The Greeks will repay" - Agree with Wolf - this is a sunk cost fallacy. "What is open is whether the Greeks will devote the next few decades to repaying a mountain of loans that should never have been made." This is on the money.

Myth 6: "Default entails a Greek exit." Ok, agree again. But I must add here that if we do have default and no exit, then by Myth 1 analysis by Wolf, the euro will be a currency where "Each crisis could trigger destabilising speculation". You can't have a cake and eat it, Martin.


Now, EUObserver on the European salad dressing - sorry, the meetings schedule for resolving Greek crisis. First there was Friday 24th of April as the deadline, now its May 11th summit that is going to be decisive…  Read and laugh - THIS is Europe. ""What are the 70 percent [of the programme] Greece said were acceptable and the 30 percent acceptable? When we have a firm picture of that, we’ll discuss that. But preconditions for having discussions are not there”." All sounding like a dysfunctional family attempting to deal with an unpayable credit card bill amassed by the live-at-home 'prodigal' son… One note, though - this is about meetings to shore up Greece until June. This is NOT about meetings to shore up Greece for 2016-on. In other words, the entire circus is for bridging things through 2015. Thereafter... ah, well, pass the Kool-aid jug, Roger...


Talking of dysfunctional families, one can't avoid the topic of dead-beat parents… And here rolls in the ECB. "ECB to fund Greek banks as long as they stay solvent - Coeure". Coeure is priceless. Apprently, "The European Central Bank will continue to provide liquidity to Greece's banks as long as they remain solvent and have sufficient collateral, ECB Executive Board Member Benoit Coeure" said. Wait, you mean as long as Greek banks continue to have that which they don't have enough of?

"imposing capital controls was "not a working assumption" for the ECB, while speculation about Greece leaving the euro was "out of the question."" But capital controls already ARE a "working" solution, not just an assumption and the ECB is already looking at cutting back Greek banks access to liquidity supports and Constancio did already say that capital controls can be introduced, which is sort of saying that look, Cyprus does exist.

The best bit of Coeure's statement is this: ""In recent days, there has been tangible progress in the quality of the discussions with the three institutions - the ECB, the European Commission and the IMF - which can be built upon," Coeure said." Tangible metrics of quality… only at ECB.

Meanwhile, more news about ECB considering doing what Coeure says they won't do.

May Greek Gods be with Greece today, for the whole Euro area beehive is buzzing with funny stuff… qualitatively and quantitatively "tangibly"...


Meanwhile, some factuals: Greek debt exposures by countries: http://trueeconomics.blogspot.ie/2015/04/19415-greece-in-or-out-ifo-aint-caring.html and across the official sector: http://trueeconomics.blogspot.ie/2015/04/15415-official-sector-exposures-to.html.

22/4/15: Three Strikes of the New Financial Regulation – Part 5: European Banking Union

My latest post on Financial Regulations innovations courtesy of the European Union is now available on @learnsignal blog: http://blog.learnsignal.com/?p=175. This one starts coverage of the European Banking Union.

21/4/15: Greece Heading for the Bust?

With capital controls starting to creep in and with a big peak in debt redemptions looming,  as per chart below, Greece is now entering the last stage of pre-default financial acrobatics.

Source: FT.com

The country bonds yields are now re-tracing previous peaks (more on this here):

Source: @Schuldensuehner 

And as cash transfers from the local governments to the Central Bank (see link above), plus continued depositors flight are blowing an ever widening hole in Greek balance sheets, the ECB is seriously considering to cut substantially Greek banks access to liquidity.  The cut will have to be along the ELA lines (ELA governing rules are available here). Meanwhile, Greek banks' shares are tanking, down some 50% in month and a half.

Here is the end-of-day chart for Greek banks shares index, showing historical low set today

Source: @Schuldensuehner 

and the opening levels for the same:

Source: @ReutersJamie 

All of which has, as a backdrop, pretty ominous (though entirely correct) ECB talk about the options for Greek default.

This is going to be an eventful day or two, folks.

Update 2: Meanwhile in the mondo bizzaro, the ECB is reportedly looking into dual currency regime for Greece. Which sort of makes sense as a transition out of euro area membership, but makes little sense as a tool for retaining Greece in the Euro. Which, in turn, may or may not be an indicator of ECB going the Ifo way. Go figure...

Update 1: A handy chart summing up ECB's 'headache'

Source: @Schuldensuehner 

And as @Schuldensuehner notes: "Grexit costs rise by the minute" as country Target2 liabilities have reached EUR110.4 billion, "mainly driven by ELA for banks".

Source: @Schuldensuehner 

Greek debt exposures by countries: http://trueeconomics.blogspot.ie/2015/04/19415-greece-in-or-out-ifo-aint-caring.html and across the official sector: http://trueeconomics.blogspot.ie/2015/04/15415-official-sector-exposures-to.html.

20/4/15: Greece moves in with public sector capital [cash] controls

And... we have first round of [long-expected] capital controls in Greece: http://www.ft.com/intl/fastft/310542/athens-forces-local-governments-send-cash-central-banks. Per Bloomberg report, this covers term deposits: http://www.bloomberg.com/news/articles/2015-04-20/greece-moves-to-seize-local-government-cash-as-imf-payment-looms.

Which means... capital controls and an impact [of unknown magnitude so far] on capital spending and multi-annual spending lines, let alone on current spending.

Update: in response to some questions on the above, here is my view of risks arising from the above move by the Greek Government:

1. This points to a rather desperate situation in terms of cashflow in Greece. With three payments of maturing debt looming, Greek Government is now clearly and openly signaling lack of cash. As such, this move is a potential precondition to a default, although it is not necessarily a signla of such.
2. Transfer of cash into CB accounts means that the central authorities can have a more direct control over expenditure by the local authorities, which can have a negative impact on payments of current liabilities (e.g. wages, salaries, bonuses, pensions etc) and on some contracts, including capital expenditure and procurement contracts. Non-payments and payments delays to contractors are likely to rise as well.
3. Over longer term, such procedures can have adverse impact on local authorities investment plans.
4. Finally, transfer of cash implies reduction in deposits in the commercial banks which are currently experiencing significant private deposits withdrawals. The net impact is to further destabilise banking sector balance sheets.