12/5/15: European Bonds are Set to Continue their Decline

Things are getting ugly in the bond markets. Bund 10 year is already up ca 7bps, while Italy is up 9bps.

Here's yesterday close for the 'peripherals':

Source:  @tradeweb

And Italy, Spain, Portugal on a longer view:

Source: @Schuldensuehner 

Meanwhile, Germany...

Source: @Schuldensuehner 

Meanwhile, the theme of investment flows (ETFs) rotation is may be starting, although European ETFs are seeing record inflows, breaking USD500 billion mark in April:

11/5/15: Frightening: Only 10.3% of Board Seats in Ireland are Held by Women

Just came across a startling or [better descriptor] - frightening - statistic:

Source: http://www.catalyst.org/knowledge/2014-catalyst-census-women-board-directors

Yes, the issue of causes for each country performance in this metric is complex.

But there is no excuse for Ireland's corporate culture in this: it goes without saying that women residing in Ireland (be they of Irish or foreign nationalities) are educated, trained and have comparable experience, aptitude to work, career aspirations and human capital to be exactly on par with men, even after we adjust for maternity leave and family formation.

10.3% women share on Irish boards is simply out of any tangible relation to the modern, competitive enterprise culture we want to continue building here.

9/5/15: Politico and 'Spice Me Up, Scotty' Headlines for Grexit

Europe's latest media arrival, Politco.eu is an outfit made to thrill... or to add thrill to the banal, boring, grey, stodgy (you name it) world of Brussels. And it is off with a flying start: http://www.politico.eu/article/a-crazy-european-storm/ The headline reads "A Carzy European Storm" and promises the risks of Grexit, Greefault, with some pepper garnish of Brexit too. It is as if someone at a gas station in Washington DC picked an old newspaper and gave it a 'Look wha's up in old crazy Europe!' yelp.

The premise is that Greece is about to face EUR774 mln payment to the IMF. No, we did not know this until the Politico.eu told us.

The thesis is that Greece might not repay it. No, we did not know that this was a possibility and we had no idea that the Greek Government officially said they will repay it.

The theorem is that if it is not repaid, there can be forced (by other member states) exit of Greece from the Euro.

Quote: "On May 12, after several weeks of barrel-scraping, Greece will pay back a €774 million loan to the IMF. Or maybe not. Which would then trigger the dreaded debt-default spiral that could push Greece out of the monetary union."

Proof [Politico.eu styled]: "“In 30 years here I’ve never seen such a crazy climate,” says a former merger-and-acquisition banker and hedge fund manager now running a corporate-finance advisory boutique." Which begs a question, was this lad asleep in 2008, 2009, 2010, 2011, 2012, 2013, 2014... to have missed an even 'crazier' 'climate'. Or were his measures of 'crazy' somewhat at odds with normal financial markets and public opinion polling indicators?

Never mind that Politico's only data-focused source, the Grant Thornton survey says that... err... no, there is not quite panic yet about Grexit, though concerns are rather high.

Of course, no one would dispute the risk of Grexit is serious. But Politico.eu might want to actually consult direct sources on whether it is feasible and whether it can be linked (over 'next 2 months' as one source alleges) to a reasonable likelihood of Greece leaving the Euro. And, finally, they might want to rethink as to whether it is possible at all to 'push Greece out of the monetary union'.

Here are two links worth considering:

• ECB position on potential mechanics for member state exit from the Euro: see second link in this post: http://trueeconomics.blogspot.ie/2015/01/412015-greek-crisis-40-politics-1.html. For the impatient media spicers: summary is that per ECB view, "a Member State’s exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable; and that, while perhaps feasible through indirect means, a Member State’s expulsion from the EU or EMU, would be legally next to impossible."
• And here is the IMF official procedures for dealing with arrears: http://trueeconomics.blogspot.ie/2015/04/1415-greek-crisis-gaining-rhetorical.html. Again, for trigger happy journos a summary: first 3 months after arrears arising will be taken up by 'strongly worded' letters. It takes up to 15 months before a declaration on non-cooperation can be issued. Which is (1) hell of a lot longer than 2 months and (2) gives plenty of time to 'sort something out'.

Yep. An already crazy European storm that has been blowing over Greece and the euro area since mid-2008, uninterrupted, is pretty... well... crazy. But do we need another 'Spice Me Up, Scotty' media headline about it out on the web? Neah... not really...

8/5/15: BIS on Build Up of Financial Imbalances

There is a scary, fully frightening presentation out there. Titled "The international monetary and financial system: Its Achilles heel and what to do about it" and authored by Claudio Borio of the Bank for International Settlements, it was delivered at the Institute for New Economic Thinking (INET) “2015 Annual Conference: Liberté, Égalité, Fragilité” Paris, on 8-11 April 2015.

Per Borio, the Achilles heel of the global economy is the fact that international monetary and financial system (IMFS) "amplifies weakness of domestic monetary and financial regimes" via:

• "Excess (financial) elasticity”: inability to prevent the build-up of financial imbalances (FIs)
• FIs= unsustainable credit and asset price booms that overstretch balance sheets leading to serious financial crises and macroeconomic dislocations
• Failure to tame the procyclicality of the financial system
• Failure to tame the financial cycle (FC)

The manifestations of this are:

• Simultaneous build-up of FIs across countries, often financed across borders... watch out below - this is still happening... and
• Overly accommodative aggregate monetary conditions for global economy. Easing bias: expansionary in short term, contractionary longer-term. Now, what can possibly suggest that this might be the case today... other than all the massive QE programmes and unconventional 'lending' supports deployed everywhere with abandon...

So Borio's view (and I agree with him 100%) is that policymakers' "focus should be more on FIs than current account imbalances". Problem is, European policymakers and analysts have a strong penchant for ignoring the former and focusing exclusively on the latter.

Wonder why Borio is right? Because real imbalances (actual recessions) are much shallower than financial crises. And the latter are getting worse. Here's the US evidence:

Now, some think this is the proverbial Scary Chart because it shows how things got worse. But surely, the Real Scary Chart must reference the problem today and posit it into tomorrow, right? Well, hold on, for the imbalances responsible for the last blue line swing up in the chart above are not going away. In fact, the financial imbalance are getting stronger. Take a look at the following chart:

Note: Bank loans include cross-border and locally extended loans to non-banks outside the United States.

Get the point? Take 2008 crisis peak when USD swap lines were feeding all foreign banks operations in the U.S. and USD credit was around USD6 trillion. Since 'repairs' were completed across the European and other Western banking and financial systems, the pile of debt denominated in the USD has… increased. By mid-2014 it reached above USD9 trillion. That is 50% growth in under 6 years.

However, the above is USD stuff... the Really Really Scary Chart should up the ante on the one above and show the same happening broader, outside just the USD loans.

So behold the real Dracula popping his head from the darkness of the Monetary Stability graveyards:

Yep.  Now we have it: debt (already in an overhang) is rising, systemically, unhindered, as cost of debt falls. Like a drug addict faced with a flood of cheap crack on the market, the global economy continues to go back to the needle. Over and over and over again.

Anyone up for a reversal of the yields? Jump straight to the first chart… and hold onto your seats, for the next upswing in the blue line is already well underway. And this time it will be again different... to the upside...

8/5/15: Euro Area Growth Indicator for April: Weak, but Improving

The €-coin index of growth indicators for Euro area published by Banca d'Italia and CEPR posted another rise in April, marking the fifth consecutive month of increases. Eurocoin printed 0.33 in April, up from 0.26 in March. Per Banca d'Italia, "the indicator was mainly buoyed by the increase in industrial production and rising share prices." In other words, welcome to the marvels of QE.

Forecast 3mo on 3mo growth rate is now at 0.3-0.35%, the highest since April 2014. However, April 2015 reading of 0.33 is still below April 2014 reading of 0.39.

The monetary policy remains firmly lodged in a low-growth, low-inflation corner, while rates are at their zero bound:

Growth conditions signalled by Eurocoin (not actual growth data, yet) signal 12mo growth returning to close to long-term average:

This is hardly impressive, since historical growth records for the Euro area are exceptionally anaemic and current major monetary policy push for growth should be expected to drive rates of growth much higher. This is not happening so far.

Euro area business confidence surveys indicate either weak (EU Commission) or falling (PMIs)

But actual PMIs are a more upbeat:

While Consumers continue to stay away from the shops:

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.