8/5/15: Three Strikes of the New Financial Regulation – Part 7: Fundamentals Matter

My latest blog post on European Union innovations in financial regulation, continuing coverage of the European Banking Union is now available here: http://blog.learnsignal.com/?p=178

8/5/15: Irish Residential Property Prices: Q1 2015

Updating residential property price indices for Ireland for 1Q 2015:

• National property prices index ended 1Q 2015 at 80.7, up 16.79% y/y - the highest rate of growth in series history (since January 2005), but down on 4Q 2014 reading of 81.4. Latest reading we have puts prices at the level of October 2014. Compared to peak, prices were down 38.2% at the end of 1Q 2015. National property prices were up 25.9% on crisis trough in 1Q 2015.

• National house prices ended 1Q 2015 at index reading of 83.8, which is down on 84.6 reading at the end of 4Q 2014, but up 16.55% y/y - the highest rate of growth in the series since September 2006. Relative to peak, national house prices were still down 36.5%.At the end of 1Q 2015, house prices nationally were up 25.5% on crisis period trough.
• National apartments prices index finished 1Q 2015 at 66.4, up on 4Q 2014 reading of 64.2 and 25.5% higher than a year ago. Apartment prices are down 46.4% on their peak and up 45.3% on crisis period trough. Y/y growth rates in apartments prices is now running at the highest level in history of the CSO series (from January 2005).

• Ex-Dublin, national residential property price index ended 1Q 2015 at 75.3, marking a marginal decline on 4Q 2014 reading of 75.5, but up 10.74% y/y - the highest rate of growth since May 2007. Compared to peak, prices are down 41.5% and they are up 13.9% on crisis period trough.
• Ex-Dublin house prices finished 1Q 2015 at the index reading of 77.1, which is virtually unchanged on 77.2 reading at the end of 4Q 2014. Year-on-year prices are up 10.78% which is the fastest rate of expansion since May 2007. Compared to peak prices are still 40.6% lower, although they are 14.2% ahead of the crisis period trough.
• Dublin residential property prices were at 82.5 at the end of 1Q 2015, down on 83.8 index reading at the end of 4Q 2014. Annual rate of growth at the end of 1Q 2015 was 22.77%, the highest since October 2014. Dublin residential property prices are down 38.7% compared to peak and up 44% on crisis period trough. Over the last 24 months, Dublin residential property prices grew cumulatively 40.3%.
• Dublin house prices index ended 1Q 2015 at a reading of 86.9, which is below 88.8 index reading at the end of 4Q 2014, but up 22.05% y/y, the highest rate of growth in 3 months from December 2014. Dublin house prices are down 36.9% on pre-crisis peak and are up 42.93% on crisis period trough. Over the last 24 months, cumulative growth in Dublin house prices stands at 39.5%.
• Dublin apartments price index ended 1Q 2015 at a reading of 73.7, up on 70.2 reading attained at the end of 4Q 2014, and up 29.75% y/y - the fastest rate of growth recorded since September 2014. Compared to peak, prices are still down 42.2% and they are up 59.2% on crisis period trough. Over the last 24 month, Dublin apartments prices rose cumulatively by 51.3%.

Longer dated series available below:

And to update the chart on property valuations relative to inflation trend (bubble marker):

As chart above clearly shows, we are getting closer to the point beyond which property prices will no longer be supported by the underlying fundamentals. However, we are not there, yet. Acceleration in inflation and/or deceleration in property prices growth will delay this point significantly. One way or the other, there is still a sizeable gap between where the prices are today and where they should be in the long run that remains to be closed.

7/5/15: The Surreal Industrial Production in Ireland: Q1 2015

Irish Industrial production figures for Q1 2015 are confirming what has become a serious joke for many analysts: Irish growth figures are now so distorted by various multinational tax optimisation tricks, there is little point looking at much of the GDP and GNP growth coming from the official accounts.

Take a look at comparatives for seasonally-adjusted indices of volume of production across 'Modern' and 'Traditional' sectors:

Year-on-year, Q1 2015 volumes of production rose 31.73% across all Industries. In the Traditional sectors, production increased 13.1%, while in Modern sector production rose 48.7%. Guess which sector is dominated by the MNCs?

Now, take a look relative to crisis period trough:

• Across industries, since the bottom was hit in the crisis period (in 1Q 2013), production rose 47.3% - implying quarterly rate of growth of 4.96%. 
• Across Traditional sectors, output rose 20.42%, implying quarterly growth rate of 1.56%; and
• Across Modern sectors output rose 78.613%, implying quarterly rate of growth of 7.52%.

Guess why is one sector growing at a rate that is almost 5 times the rate of growth in another sector? It can't be due to 'most productive labour force' we allegedly have, for both Traditional and Modern sectors have access to the same labour force. It can't be due to our 'pro-business institutions and culture', for both sectors have equal access to these, presumably. It can't be due to our 'Knowledge Economy', for - setting aside the questionable nature of its existence - both sectors can rely on knowledge in the economy equally. Wait… perhaps it is down to the difference between MNCs ability to access tax optimisation schemes which are down to international accounting methods, whilst traditional sectors firms have to pay the going headline rate of tax on their real activities? For that is, pretty much, the only fundamental long term difference between the two sectors.

But let's drill a little deeper. See the following chart:

What the above shows is the source of growth in the Modern Sectors - aka Chemicals and Pharmaceuticals - a sector that has managed to post growth of 109.2% on trough (from 1Q 2013). Yep, year on year the sector has expanded output by 60.76%. You'd have to wonder - what on earth can propel pharma to these rates of growth? The answer is the 'miracle' of contract manufacturing - a scheme whereby something not produced in Ireland, gets booked as if it was produced in Ireland.

This we call growth. To the amazement of the European politicians and the amusement of the more shrewd investment markets analysts who are starting to laugh at our PMIs, our GDP, our GNP... and so on...

7/5/15: Hedgies v Buffett Debate: It's Superficial on Both Ends

A heated, if perhaps somewhat esoteric debate has been launched by Dan Loeb of the Third Point hedge fund and Warren Buffett. The debate as to whether or not hedge funds are capable of outperforming the market and whether or not Warren Buffett is a hypocrite.

You can read on this here: http://www.zerohedge.com/news/2015-05-07/dan-loeb-slams-buffett-being-habitual-hypocrite

But what you won't read in the post above is that the debate is superficial at best. The problem is:

• Warren Buffett's investment style… setting aside his claims about it being Grahamian (aka fundamentals-driven)… is very much hedge fund-like. To see this read my post about what defines Buffett's exceptional returns here: http://trueeconomics.blogspot.ie/2014/10/28102014-buffetts-magic-cheap-leverage.html. Like a hedgie, he takes leverage. Like a hedgie (in very broad sense) he takes activist positions, often outside or beyond the secondary markets and in alternative asset classes, such as PE as well as across undefined time horizons; and like a hedgie, he has 'black box' management style; but unlike a hedgie, he has access to cheap, very cheap funding that is insensitive to time horizon of investments he takes. Finally, like a hedgie of the old, he manages risk well.
• And the concept of a hedge fund return is, shall we say… too complex to be useful for Buffett's bet/comparative. To see this, follow the thread of links from this, back, across four posts on the topic: http://trueeconomics.blogspot.ie/2015/03/hedge-funds-returns-part-4-to-higher.html

7/5/15: Europe's Non-Performing Loans: Still Rising & Getting More Toxic

In the world of scary stats, there's no place like Europe.

Even the perennial optimists at the IMF - that place where any debt is sustainable as long as there are structural reforms underway - agrees. This is why the IMF published this handy chapter as a part of its Global Financial Stability Report for Q1 2015 (http://www.imf.org/External/Pubs/FT/GFSR/2015/01/pdf/c1.pdf).

In this report it said that [italics are mine]: "Asset quality continued to deteriorate in the euro area as a whole in 2014, although at a slowing pace, with total nonperforming loans now standing at more than €900 billion. Furthermore, the stock of nonperforming loans in the euro area is unevenly distributed, with about two-thirds located in six euro area countries. [The stock of nonperforming loans in Cyprus, Greece, Ireland, Italy, Portugal, and Spain in total amounts to more than €600 billion]. In Cyprus, Greece, Ireland, Italy, Portugal, and Slovenia, a majority, if not all, of the banks involved in the ECB’s Asset Quality Review were found to have nonperforming assets of 10 percent or more of total exposure."

Roll in two super scary charts:

So far so bad… But it gets worse. "These bad assets are large relative to the size of the economy, even net of provisions. Euro area banks have lagged the United States and Japan in the early 2000s in their write-offs of these bad assets, suggesting less active bad debt management and more limited improvement in corporate indebtedness."

And another spooky illustration in order here:

Now, let's sum this up: after 6 years of 'reforms', deleveraging, special bad loans vehicles set ups, extraordinary legislative and regulatory measures aimed at dealing with loans arrears, waves of corporate and household bankruptcies, a minestrone worth of alphabet soups of various 'Unions' etc etc etc…

• Bad debts pile in Euro area is rising;
• Bad debts pile in Euro area is not matching dynamics in other countries, specifically the economic wasteland of Japan; and 
• The best performing country in the group - Ireland - has the second worst performing banking balance sheet in the group (even after Nama and IBRC are netted out).

Clearly, successful resolution of the crisis is at hand.

7/5/15: BRIC Services & Composite PMIs: April 2015

In previous post I covered BRIC Manufacturing PMI for April (http://trueeconomics.blogspot.ie/2015/05/5515-bric-manufacturing-pmi-further.html), so now let's take a look at the Services PMIs.

• Brazil Services PMI reading for April came in at 44.6 - marking rapid contraction in the sector that is worse than 47.9 reading in March. Overall, 3mo average through April now stands at 48.3, which marks worse performance than already contractionary 48.7 for the 3 months through January 2015. 3mo average through April 2014 was 50.7. April was the second consecutive month of readings below 50 and over the last 9 months, there were only two months of the PMI reaching above 50.0.
• Russian Services PMI were covered ind entail here: http://trueeconomics.blogspot.ie/2015/05/7515-russian-services-and-composite.html. Dynamically, April reading of 50.7 came in as a surprise, breaking a 6mo-long streak of sub-50 postings. 3mo average through April is at very low 46.0 and 3mo average through January 2015 was even worse - at abysmal 44.7. A year ago, 3mo average through April 2014 stood at 48.4. Despite improved performance in April, it is hard to see Services PMI breaking the sub-50 trend in the medium term.
• Chinese Services PMI came in at a marginally stronger growth, posting a reading of 52.9 in April compared to 52.3 in March. This is the third consecutive month of rising PMI readings and 3mo average through April 2015 currently stands at 52.4, which is marginally lower than 3mo average through January 2015 (52.7), but somewhat above 3mo average through April 2014 (51.4).
• India Services PMI came in at 52.4, marginally lower than 53.0 in March 2015, marking second consecutive month of PMI declines. 3mo average through April 2015 is at 53.1 which is stronger than 52.0 for the 3mo through January 2015 and significantly above 48.3 3mo average through April 2014.

Full summary of Manufacturing and Services PMIs changes here:

As the above indicate, India remains on the upward PMI trend in Services sectors against flat, but above 50.0, trend for Manufacturing sectors. Brazil remains on downward trends in both Services and Manufacturing sectors, while China remains on a relatively weak upward trend in Services and weak downward trend in Manufacturing. Russia is too volatile to call on Services side and weak, but stabilising on Manufacturing side.

Combining the two sectors, overall activity in the BRIC economies suggests temporary (for now) convergence of Russian composite indicator to the upside, against BRIC ex-Russia indicator to the downside.

Once we take into account relive sizes of each BRIC economy in the global economy, BRIC group contribution to global growth appears to continue trending to the downside, as shown below:

7/5/15: Russian Services and Composite PMIs: April 2015

Russian Services and Composite PMIs are out today (Markit) and the results are quite positive.

Remember that Manufacturing PMI for April posted 48.9 compared to 48.1 in March, signalling less pronounced rate of contraction in the sector. Analysis of this is available here: http://trueeconomics.blogspot.ie/2015/05/5515-bric-manufacturing-pmi-further.html

Per Markit release: "The new orders component of the [Manufacturing] PMI was the primary drag on the headline index in April. Total new work fell at the sharpest pace for nearly six years, although the contraction was principally centred on capital goods producers… In contrast, consumer goods companies recorded solid growth… New export orders continued to fall markedly, extending the current period of contraction to twenty months. That said, some manufacturers found that clients were undertaking a degree of import substitution and choosing to purchase where possible from Russian producers rather than those based abroad. …However, there were signs from the latest survey that these …impacts were dissipating."

So key points for Manufacturing were:

• Production rises modestly, but new orders down at a sharper rate
• Price indices fall sharply to signal much slower inflation
• Focus on cost-rationalisation and higher productivity leads to modest job losses

Meanwhile, in Services sectors, per Markit, "seasonally adjusted HSBC Russia Services Business Activity Index… signalled a return to growth in April. The reading of 50.7 (up from 46.1) pointed to a marginal increase in activity at service providers, representing a marked turnaround from the substantial reductions seen in the early part of 2015. …Services companies mainly linked the improvement in activity to higher new orders. New business also returned to growth in April, ending a seven-month sequence of contraction. According to respondents, rising client demand had helped them to secure more new business during the month. …Meanwhile, services companies continued to lower their staffing levels in April, extending the current sequence of job shedding to 14 months. Although remaining solid, the rate of decline in employment eased for the second month in a row and was the slowest since October 2014."

Key points on Services PMI:

• Russian private sector output returns to growth
• Services new business increases
• Further reductions in staffing levels

Overall, m/m, seasonally-adjusted PMIs posted a first monthly rise in Manufacturing sector and second consecutive monthly rise in Services sector. Rate of growth in Services PMIs (m/m) has been extremely robust in March and April.

This resulted in the seasonally adjusted Composite Output Index posting 50.8 in April, up from 46.8 in the previous month and above the 50.0 no-change mark for the first time in seven months. This marks second consecutive month of m/m growth in Composite PMI.

More on near-term dynamics of the indices in the following post that will cover BRIC economies PMIs. But overall, we have some encouraging signs of stabilisation in the economy. The signs are still fragile and manifested through moderating rate of contraction signalled in Manufacturing and a marginal rate of growth in Services, with both manifesting over only one month to-date. In other words, we will need much more positive data to confirm any potentially developing upside trend.

6/5/15: Crunch Time in Greece: Day -t or -t-1

Just as Greece barely made today's payment of EUR200 million to the IMF (there's much more coming up - http://trueeconomics.blogspot.ie/2015/04/24415-greek-debt-maturities-through-2016.html) even if only by not paying its own internal bills (http://businessetc.thejournal.ie/greek-debt-crisis-update-2087392-May2015/), the ECB continued to pretend that all is fine in the solvent world of Greek banks. As there exult, the ECB hiked Greek ELA by another EUR2 billion to EUR78.9 billion, which means that some 60% of Greek deposits are now covered out of ELA.

Per FT report (http://www.ft.com/intl/fastft/319051/ecb-mulls-tougher-greek-lending-rules), the ECB's governing council discussed whether "to impose tougher haircuts on the collateral Greek lenders are using to secure emergency loans from Greece's central bank. The council …voted against raising the haircuts, but is likely to revisit the issue should Monday's Eurogroup meeting of eurozone finance ministers disappoint." Which means that should the Greeks continue to play hard ball with the Eurogroup, the ECB can raise collateral requirements on ELA and force Greek banks into panic search for new collateral eligible to be pawned into the ELA.

And while the Greek savers continue to hold deposits in Greek banks - yes, clear evidence of infinite irrationality of retail investors - currency dealers are cutting credit lines extended to Greek banks for trading in forex markets (http://www.bloomberg.com/news/articles/2015-05-06/greece-s-banks-said-to-face-curbs-to-foreign-exchange-trading-i9d1an9v). That's because the Eurosystem et al can fool some of the people some of the time (depositors for now) but can't fool all of the people all of the time.

The whole shift in markets sentiment is not missing on the Credit Default Swaps traders either:

Meanwhile, do recall that Greece is at a risk of running primary deficit in place of primary surplus for 2015: http://trueeconomics.blogspot.ie/2015/05/5515-imf-greece-europe-more-bickering.html (although this FT piece seems to suggest they are not, yet… http://blogs.ft.com/brusselsblog/2015/05/06/is-this-how-greece-is-avoiding-bankruptcy/) and you have a potent cocktail of explosives wired together and the clock's ticking... EUR200 million 'Tick'… EUR800 million 'Tock'… before June EUR1.5 billion 'Kaboom!'

6/5/15: Thus Spoke 'Not a Dwarf' of Politics...

Does it make you wonder what the U.S. might have looked like if Sarah Palin was elected in 2008? Well, here's a snapshot of a similar experiment currently ongoing in Europe: behold the European Titan of Thought, the (one of the numerous) President of Europe, Jean-Claude Juncker and his latest escapade http://www.telegraph.co.uk/finance/economics/11583755/Anglo-Saxon-world-would-rip-apart-Europe-after-a-Grexit-says-Juncker.html.

This is the best that Europe can do in making high level appointments. And it is out there, on par with Palin.

So here are some choice moments from Mr Juncker-Palin lengthy career as Europparatchik...

• On the 2005 French referendum on the Lisbon Treaty: "If it's a Yes, we will say 'on we go', and if it's a No we will say 'we continue'."
• On the Lisbon Treaty, 23 June 2007: "The constitutional treaty was an easily understandable treaty. This is a simplified treaty which is very complicated."
• On the Lisbon Treaty, 2 July 2007: "Britain is different. Of course there will be transfers of sovereignty. But would I be intelligent to draw the attention of public opinion to this fact?"
• On 20 April 2011: "Monetary policy is a serious issue. We should discuss this in secret, in the Eurogroup [...] I'm ready to be insulted as being insufficiently democratic, but I want to be serious [...] I am for secret, dark debates."
• Referring to his work in the European Council in 2012: "We decide on something, leave it lying around and wait and see what happens. If no one kicks up a fuss, because most people don't understand what has been decided, we continue step by step until there is no turning back."
• On Greek crisis, 2011: "When it becomes serious, you have to lie."
• To George W. Bush, June 20 2005: "I was going to say he's a piece of work, but that might not translate too well. Is that all right, if I call you a 'piece of work'?"
• As PM of Luxleaks: "We do not attract Russian money to Luxembourg with high interest rates."
• Ibid: "The Luxembourg financial centre is based on several pillars, we are characterised by the breadth of our product range, we are an active participant in the international credit business."
• "I am not a dwarf."
• "God understands more about the financial markets than many who write about them."
• "...we must be careful that we do not blow up the global financial system by insisting on regulatory principles."
• Answering the question: :what happens if we're sitting here again next year and conclude that Greece is still not on a stabilization course?", Juncker produced the following: "If the donkey were a cat it could climb a tree. But it is not a cat. Nevertheless, this is a question that worries many people. My answer to it is almost a little theological: I do not believe that this question will ever be asked."
• "We must go back to teach Europeans to love Europe."
• "I believe neither the French nor the Dutch really rejected the constitutional treaty."
• "Now is the time to give a message of hope to the Greek people, not only implement, implement, implement and obligations, obligations, obligations, the message that the European institutions will give help and solidarity with particular rates, in order to over come this very bad situation at the social level."
• "One should stop - especially Britain, which was always for expansion of the European Union - discriminating against countries only because it comes across well in the current context if you beat up on others, i am strictly against that one should - and this is the key point - act as if all Poles, all Romanians, all Bulgarians who are on the European labor market are doing this out of a basically criminal disposition. These are people who are working to get paid." [It is worth remembering that the UK was one of just 3 countries in the EU that opened its labour market to the Accession States]
• On Greek bailout negotiations currently underway: "I am working together with Eurogroup President Jeroen Dijsselbloem to achieve an extension of the existing program, in order to bridge the time until summer."
• "Britain is different. Of course there will be transfers of sovereignty. But would I be intelligent to draw the attention of public opinion to this fact?"

All of which provides a decent comic relief across the Atlantic, and a dose of tears here, in Europe, where taxpayers are paying for this 'leadership' through the nose.

6/5/15: Irish Services & Manufacturing PMI: April 2015

Irish Services PMI (Markit & Investec) for April posted slightly lower rate of growth in the sector compared to March, declining marginally to 60.9 from 60.6 a month ago. Current reading marks the 14th consecutive month of Services PMI above 60.0 and 33rd consecutive above 50.0 reading, so not surprisingly, the sector is running hot.

Irish Manufacturing PMI is covered in more details here: http://trueeconomics.blogspot.ie/2015/05/1515-irish-manufacturing-pmi-april-2015.html


Stripping out some volatility:

• Services sector PMI 3mo average is currently at 62.2, running above 3mo average through January 2015 (61.0) and 3mo average through April 2014 (60.0). 6mo average through April 2015 is just 0.4 points below 6mo average through October 2014.  Historically, current Services PMI 12 mo average of 61.8 compares favourably to the post-crisis period average of 56.0 and pre-crisis average of 57.6. Crisis period average was 50.7.
• Manufacturing sector PMI 3mo average through April 2015 is at 56.1 which is somewhat lower than the 3mo average through January 2015 (56.7) but well ahead of the 3mo average through April 2014 (54.8). 6mo average for the period through April 2015 is 0.5 points above the 6mo average through October 2014. Historically, current Manufacturing PMI 12 mo average of 56.1 compares favourably to the post-crisis period average of 52.7 and pre-crisis average of 51.8. Crisis period average was 51.2.

In April, both Services and Manufacturing PMIs posted some marginal slowdown in activity compared to April 2014. Services PMI slipped from 61.9 to 60.6 and Manufacturing PMI declined from 56.1 to 55.8. Nonetheless, both series have now been jointly trending above 50.0 for 23 months, which is a solid performance.

6/5/15: IMF to European Life Insurers: Japanification Cometh

Life Insurance business is the out-of-sight type of the sector that few notice... until it is too late. So here is an early warning from the IMF (not known for early warnings).

Core point is: we are in a world of Japan - persistently low, extremely low interest rates. Which means that insurance companies with long-dated contracts face the challenge of liabilities exceeding assets at some point in time. The longer the duration of low rates, the greater is the risk of a system-wide insolvency.

So insurance industry took some stress tests recently. And passed. except the stress tested was not enough to match the current reality:

Oops...

5/5/15: Good Bonds, Bad Rules & Russian Deficits

Neat chart via @sobberLook showing Russian 2-year bonds yields out through today:

The blowout is over, but at 10.9% still ahead of anything 'normal' and remains pressured. To me, real test will be around 9.7% levels and then again around 9%.

Meanwhile, on a supportive side of things, Russia is about to decouple its budgetary balance estimates from the 3-year (back) average oil price rule, by switching to RUB denominated oil price benchmark. Which will improve the deficit calculations by bringing some reality to assumptions underlying the budget.

As the result of the switch, Budget for 2015 will see a correction in built-in oil price of RUB2,915, Budget 2106 - of RUB1,938 and Budget 2017 of RUB 760. Thereafter, the effect should be weaker, with Budget 2018 estimated impact is for price decline of RUB60. Current rule implies that Budget 2016 was to be estimated using oil price of USD89 per barrel, against the Economy Ministry forecast of USD60.  In 2015, Budget is computed using base line price of USD94 against the economic forecast (for the Budget) of USD55. Higher budgeted oil price implies higher spending, while revising the benchmark price down as per new proposed rule implies lower spending and, thus, lower deficits. So, in return, budget cuts and balancing of the budget, will be spread over longer horizon and will allow to more conservatively use Russian foreign exchange reserves.

More on this here: http://www.vedomosti.ru/newspaper/articles/2015/05/05/minfin-pridumal-kak-viiti-iz-lovushki-byudzhetnogo-pravila.