29/5/2014: Earnings in Ireland: Something's Fishy in that Murky Water?..

Average weekly hours and earnings were released by CSO this week, covering Q1 2014 data. Remember, these are delivered in the context of reportedly growing employment and accelerating economic activity, right?

Ok, top-line observations: y/y average weekly earnings are down 0.4% or EUR2.66/week (EUR138.32 per annum, assuming paid holidays and not adjusting for working hours etc, but you get the point: in 2013 a person earning average weekly earnings level of salary would have had EUR2,346 per month in disposable after-tax income, in 2014 they have EUR2,341 per month).

Worse than that, the decline in weekly earnings was driven by a drop in average hourly earnings (down 0.5% y/y) against flat hours worked (31.2 hours/week on average). In other words, we are creating jobs in tens of thousands, but seemingly there is no pressure on hours worked and there is downward pressure on hourly earnings.

Were these changes down to cuts in bonuses, perhaps?

Well, no: excluding irregular earnings, average hourly earnings fell 0.6% y/y. So if you work in a job where bonuses are not present, congratulations, the economic recovery is biting into your earnings even more. It is worth noting that this trend is not uniform in the economy: private sector hourly earnings rose 0.6% but public sector earnings fell 2.5% year on year. And steepest increases in earnings took place in enterprises with less than 50 employees (+2.3% y/y), while steepest declines took place in enterprises with 50-250 employees (-2.9% y/y). Large enterprises saw average hourly earnings excluding irregular earnings fall 1.6%.

So short term falls in earnings are down to public sector and larger enterprises...

Of course, earnings can be volatile even y/y, so here is a handy comparative for earnings changes on Q1 2010:

Per CSO: "Across the economic sectors average weekly earnings increased in 7 of the 13 sectors in the year to Q1 2014, with the largest percentage increase in the Construction sector (+10.2%) from €639.35 to €704.41.  The largest percentage sectoral decrease in weekly earnings was recorded in the Education sector (-2.7%) from €814.12 to €792.03. Between Q1 2010 and Q1 2014 average weekly earnings across individual sectors show changes ranging between -6.3% for the Education sector from €845.59 to €792.03 and +13.6% for the Information and communication sector from €915.94 to €1,040.10"

Still, Public Admin & Defence are down just 0.1% on Q1 2010... shrinking Industry is doing swimmingly, as does Finance & Insurance & Real Estate...

On last bit: average working hours were unchanged y/y in private sector, but up 2.3% in public sector. Which is worrisome - rising employment in private sector should lift hours ahead of numbers employed, by all possible logic, since hiring more workers is costlier than letting those employed work longer hours for the same or even higher pay. Still, hours are static y/y, and are up by only 0.1 hour on Q1 2010... Puzzling... Worse: working hours are unchanged y/y and down on Q1 2010 for smaller firms, where wages pressures seem to be highest.

This simply does not gel well with the numbers of tens of thousands of new employees, unless, of course, new employees are working fewer and fewer hours...

24/5/2014: UofL Student Wins Worldwide Alltech Young Scientist Competition

Some excellent news from the Irish knowledge 'economy' (society, really) front:

Gillian Johnson, from the University of Limerick, was the winner of the undergraduate competition run by Alltech Young Scientist Program. Johnson’s research work focused on comparative genomic identification and characterisation of a novel β-defensin gene cluster in the equine genome.

Gillian won in the field of more than 8,500 participants, representing the future generation of animal, human and plant health scientists from around the world.

In the graduate category, winner was Lei Wang, originally from China and currently completing her PhD studies in the United States with the University of West Virginia. Wang’s research work focused on novel functional roles of oocyte-specific nuclear transporter (Kpna7) in relation to developmental competency of rainbow trout oocyte and early embryo.


To participate in the program, students wrote a scientific paper that focused on an aspect of animal health and feed technology. The first phase of the program included a competition within each competing country, followed by a zone competition. The winners of each zone moved on to a regional phase and the regional winners competed in the global phase.

The Alltech Young Scientist Program is currently taking applicants for its 2015 competition. To enter, visit www.alltechyoungscientist.com.

22/5/2014: Labor Mobility within Currency Unions & some Implications for Ireland

A very interesting theoretical paper "Labor Mobility within Currency Unions " by Emmanuel Farhi and Iván Werning, April 2014 (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2436714) looks at "the effects of labor mobility within a currency union suffering from nominal rigidities."

The departing point for the paper is Mundell (1961) famous dictum that labor mobility must be a precondition for optimal currency areas. In support of this dictum, the U.S. "enjoys relatively high mobility and has proven to be a successful currency union. Mobility is arguably much lower within the Eurozone, which sunk into trouble scarcely ten years after its inauguration." Of course, despite the shallower extent of mobility in Europe, EU policymakers repeatedly cite free mobility regime for labour within the EU as a major cornerstone of the EU and, thus, by corollary - to the functioning or the promise of functioning of the euro zone.

Despite all the intuition behind Mundell's proposition, there is little formal research connecting mobility with macroeconomic adjustments in a currency union setting.

Farhi and Werning "set up a currency union model featuring nominal rigidities and incorporate labor mobility across the different regions (or countries) that compose the currency union." The paper tackles "…two related questions. First, does mobility help stabilize macroeconomic conditions across regions in a union? Second, is equilibrium mobility socially optimal?"

The study does not quite confirm Mundell's proposition, but its findings "…are consistent with a potential important role for mobility. Workers migrating away from depressed regions naturally benefit from the option to pick up and go somewhere better. The interesting and less obvious question is whether their exodus also helps those that stay behind. That is, whether it aids in the macroeconomic adjustment of regions. A major insight of our analysis is that the answer to this question is subtle because workers leaving a region depart not only with their labor, but also with their purchasing power."

This leads to a divergent set of outcomes depending on the source of the original shock to the economy. If the demand shock comes from internal (region-specific) shock (like, for example, in the case of Ireland where property crash led to massive disruptions in domestic demand and where domestic demand continued to shrink every year since 2008, uninterrupted), the authors find that "…migration may not help regional macroeconomic adjustment." How so? "…we provide a benchmark case where migration has no effect on the per-capita allocations across regions. For this benchmark, the entire demand shortfall in depressed regions is internal, located within the non-tradable sector [again, think Irish construction, property and retail sectors, and associated banking sector bust]. When workers migrate out of a depressed region local labor supply is reduced, but so is the demand non-traded goods, which, in turn, lowers the demand for labor. The two effects cancel, leaving the situation for stayers unchanged."

In contrast, "…when external demand is also at the root of the problem, migration out of depressed regions may produce a positive spillover for stayers." This, of course, applies to economies like Portugal and Cyprus, where external shocks are the main drivers for the crisis. When depressed regions also suffer from external demand shortfalls, "…migration out of depressed regions may help improve the region’s macroeconomic outcome. For example, at the opposite end of the spectrum, suppose regions only produce traded goods and that there is no home bias in the demand for these goods. The demand for each region’s product is then determined entirely by external demand at the union level, and internal demand plays no special role. In this case, migration out of a depressed region improves the outcome of stayers by increasing their employment, income and consumption."

On a positive side, from Ireland's point of view: "…the degree of economic openness (how much regions trade with one another) turns out to be a key parameter. Openness was proposed by McKinnon (1963) as another precondition for an optimal currency area." Except, of course, as we in Ireland are fully aware, openness can be real (e.g. Swiss exporting indigenous output that is matched by the MNCs exporting out of Switzerland) and accounting (e.g. Irish exports of ICT services or phrama).


Lastly, it is worth noting that the paper does not consider rigidities beyond those present in the pricing mechanisms. Thus, for example, labour laws are not included and neither are hiring practices or promotional practices that can severely skew flows of labour.

23/5/2014: Another 'Big Deal' of the Russian Week

Thought the Russian gas deal with China was a 'biggy'... at USD400-440 billion valuation (over 30 years) it is. And here are some of the details: http://trueeconomics.blogspot.ie/2014/05/2152014-russia-china-gas-deal.html

Welcome to the big numbers week for Russia. Today, Lukoil and Total announced a new deal for developing Bazhnov Shale Oil Field: http://www.lukoil.ru/press_6_5div__id_21_1id_24775_.html

The field (dating to Jurassic deposits) was discovered 45 years ago back in 1968 by an accident, the field is currently being developed by a number of companies, including a partnership between Rosneft and ExxonMobil, and Salym Petroleum - a JV between Shell and Gazprom Neft.

So far, reported recoverable reserves are officially booked at 3.5 billion barrels (500 million metric tonnes). Official estimates are for daily yields of 1-2 million barrels per day by the end of this decade. For comparative, US North Dakota aims to reach production levels of 1.2 million barrels per day by 2015 - this is the largest US shale oil play at this time. Its biggest field - Bakken - is small comapred to Bazhenov (see here one older report: http://www.forbes.com/sites/christopherhelman/2012/06/04/bakken-bazhenov-shale-oil/ and an FT report on same: http://www.ft.com/intl/cms/s/0/17e0e3d0-25c6-11e3-aee8-00144feab7de.html#axzz32YDYxj72).

Overall estimates put Bazhenov reserves at between 20 billion barrels and 950 billion -1 trillion barrels, which runs into recoverable equivalents of up to 160-170 billion barrels. Merill Lynch 2013 assessment estimated reserves at 75 billion barrels (recoverable , EIU estimates from 2013 show Bazhenov recoverable reserves at between 3.7 and 14.8 billion barrels of light crude. At mid-point (excluding outlandishly large 160bn estimate), this implies some 40 billion barrels worth around USD3.3 trillion at past decade averages. Which puts into perspective that USD440 billion gas deal.

At the upper end of this estimate, Bazhnov field pushes to 4 times Saudi Arabia's oil reserves or roughly 30 years of world supply at current demand levels. This is why IEA considers Bazhenov field as the world's largest source of shale. Of course, Russia is already producing more oil than Saudi Arabia with daily production of 10.3 million barrels per day and Russian most productive fields - those of West Siberia, like Salym group, are declining, with production dropping at an average of 2% annually.

Here's the map of Russia's main oil producing regions:

Bazhenov covers roughly 1/3rd of the West Siberian basin (http://en.wikipedia.org/wiki/File:USGS_-_Bazhenov_Formation_Oil_Reservoir.png)

But back to the Russia-China gas deal... there is huge legacy infrastructure network linking Europe with Western Siberian basin, and virtually no networks linking it to the Asia-Pacific. With the gas agreement signed this week, this is about to start changing. Which means that the gas deal will promise to wire shale oil and gas reserves of the entire Siberia into the massive AP markets, providing two key deliverables for Russia:

1. Diversification of demand, linking more closely pricing in the Western European markets (stagnant of economic growth and demographic expansion) to that of dynamic AP. Russia wins in this scenario big time, as it will no longer be held hostage to the declining macroeconomic fortunes of the EU.
2. Head-on competition with North America (where LNG and oil shipments will have to go via sea transport as opposed to pipe in Russian case).

Europe also wins, as the second point above will help contain energy price inflation in the EU as North Sea production declines in decades ahead.

The point that is being missed on the Russia-China deal by many analysts is that, politics aside, Russia will benefit from a massive shifting of economic activity East - to the regions rich in resources and starving of infrastructure to develop them. With this shift, Russian social development also will gain - the sparsely populated expanses of Eastern Siberia can do with the population growth that can happen on foot of large and sustained capex uplift. 

23/5/2014: An Icy Gust from the IBRC's Promo Notes Past...

So Irish Central Bank pre-sold EUR350 million worth of 'Anglo' bonds that were due to be sold under its minimum commitment to sell EUR500 million worth of bonds in 2014. Except it pre-sold them back in 2013... Here is the original Bloomberg report on the matter:  http://www.bloomberg.com/news/print/2014-05-01/irish-central-bank-said-to-mull-faster-2014-bank-aid-bond-sales.html

Why is this important?

Remember, the EUR25 billion worth of 'Anglo' Government bonds held by the Central Bank after the February 2013 'deal' or swap of Promissory Notes for bonds carries with it a commitment to sell minimum required volume of bonds annually to the market.

Here's Minister Noonan on this:

Also, remember, the bonds held on Central Bank balancesheet accrue interest payments from the Government that the Central Bank subsequently 'returns' as divided to the state (having taken its 'cost' margin out to pay for necessary things, like, new HQs building etc).

Once the bonds are sold, however, the interest is paid to their private sector holders.

It is likely that the yield on Government bonds sold was somewhere around 3%, which means that Irish taxpayers just spent EUR10.5 million in interest payments that were, put mildly, unnecessary. We were not required to sell these bonds in 2013 and could have waited until 2014 to do so.

Let's put this into proper perspective: EUR35 million was pledged by the Government this month to help resolve homelessness crisis. Laughably small amount, but still - a necessary gesture from the cash-strapped state. This could have been EUR45 million (or more) should the Central Bank not engage in bonds activism.

So why did Professor Honohan go to the markets to sell the bonds back in 2013? The reason is simple: ECB was never too happy with the 'deal' that pushed Ireland dangerously close to using Central Bank to fund the state (IBRC). Accelerating sales of bonds pro forma accelerates Central Bank exit from such an arrangement.

Alas, happy or not, ECB hardly can do anything about unwinding the 'deal' in practice without doing some serious damage to the euro system. That said, we might see Frankfurt ramping up pressure on CBI to accelerate future sales, once the banks stress tests are fully out of the way - in, say, 2015. That will once again bring to our attention the simple fact that the mess that was IBRC did not go away.

Keep in mind that the Government own estimates of the impact of the promo notes deal on government deficits over the short term was the total 'savings' of EUR2,025 million in 2014-2015. Doubling the rate of disposals from current will see this reduced by EUR30 million in two years.

More problems are ahead relating to the interest rates. The bonds are floating rate notes, with yield tied to  6 months euribor http://www.ntma.ie/news/ntma-issues-eight-new-floating-rate-treasury-bonds-in-exchange-for-promissory-notes/ reset every six months.

The problem is that whilst euribor was running at 0.372% back in February 2013, nowadays it is at 0.410% - a difference of 0.038%, which, over EUR25 billion quantum implies annual interest costs increases of some EUR95 million. Most of this is going to be rebated back to the Government via the Central Bank, but with any acceleration in the sales of bonds, this is also going to get eroded.

All in, we are already running below EUR2 billion 2014-2015 'savings' assessed on the Promo Notes deal, and counting...

22/5/2014: Irish Domestic Energy Prices

As you all know, I have been covering the state of affairs when it comes to the state-sanctioned inflation here in Ireland for some time - including in the pages of my now defunct column at the Sunday Times.

Here is the article from the Irish Independent on energy price inflation in Ireland, comparative to the EU: http://www.independent.ie/irish-news/electricity-prices-fourth-highest-in-eu-after-5pc-rise-30294653.html

And the original EU data: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/8-21052014-AP/EN/8-21052014-AP-EN.PDF

Still believe in the benevolence of the State? Or that Irish Government should be running gas & oil resources of this country? Really?

22/5/2014: Poverty in the US Cities: Regional Comparatives

Bloomberg published a fascinating list of 50 US cities with biggest exposure to poverty amongst their populations. The full list is available here: http://www.bloomberg.com/visual-data/best-and-worst/most-poverty-us-cities

Just to make exercise a little different, I grouped them into four main regions. One would expect the results to show South to have highest poverty exposures, the West showing relatively benign poverty, but due to high ethnic diversity and significant presence of minorities, somewhat higher poverty exposure than, say North-East... alas, here are the numbers in full glory.

Ranking in descending order: West shows lowest poverty exposures, followed by the South excluding Florida (different composition of population by age and ethnicity), and so on, until Mid-West comes out the worst, but only as long as we include the State of Michigan (Detroit and Flit being numbers 1 and 2 worst off cities when it comes to poverty).

22/5/2014: Happy Times Roll: Irish Manufacturing Producer Prices

Deflation keeps hammering Irish Manufacturing sector:

Per CSO: year on year, factory gate prices fell 2.7% in April 2014, compared with a decrease of 3.1% in the year to March 2014, including

• a decrease of 3.1% in the price index for export sales (subject to potential effects of currency fluctuations) and 
• a decrease of 0.6% in respect of the price index for home sales.

Nothing to worry about, folks, this economy is gaining strength and momentum all of the time... PMIs booming and producers confidence is rising (if you ask IBEC).

22/5/2014: Paging Super Mario: Cleanup in the German Isle

Remember the OMT - the ballistic missile Super Mario fired in the direction of the markets to calm the hell out of them and dramatically lower the bond yields for the countries saddled with the likes of the FG/LP/Troika coalitions (known colloquially as 'peripherals')?

Well, those pesky Germans never really liked the idea and as we all know (past history is a good indicator) when Germans don't like something, it is for a long... long... long time...

21/5/2014: Ireland Ranks 14th in Economic Connectedness

McKinsey Global Institute Global Connectedness Index was published in April this year, scoring countries connectedness index and overall flows based on data through 2012.

Rank of participation by flow as measured by flow intensity and share of world total.

Couple of things to notice: Ireland's position is strong at 14th rank, but it is not as strong as one would have expected. And certainly would not be anywhere near the 14th rank were we to consider Ireland's indigenous enterprises, as opposed to MNCs.

Another point: Ireland's strengths are in only one segment: services flows. Which are, of course, skewed very heavily by a handful of MNCs trading out of ICT services and IFSC. In fact, we rank below Russia in Data and Communications flows, despite being a global hub for ICT services MNCs.

Scarier bit: we rank below virtually all our direct competitors in the global markets.

21/5/2014: Few Slides Covering Russian Banks

Few slides from my bigger and newer Russia Deck - these covering Russian banks:

 In the above, note the nonperforming loans... Ugly does not even begin to describe Ukrainian situation. Russia's NPLs, however, are benign by comparative to rest of the FSU...

 Summary as is in both above and below...

21/5/2014: That Medicated Happiness in the Club Med...

"France’s love of anti-depressants, sleeping pills and other prescription medication has reached new heights according to figures showing one in three adults in the country use some form of psychotropic drug. A study by France’s National Drug Safety Agency (ANSM) found that 32 percent of French people used such medications in 2013, either on a regular or occasional basis, French daily Le Parisien reported Tuesday." This was reported in here.

There's more: "Another study released this week, carried out by Ipsos on behalf of the French Hospital Federation, found that 84 percent of patients polled said that doctors often hand out unnecessary prescriptions." And "a study by carried out by the company Celtipharm, also cited by Le Parisien, found that 230,000 French people were risking their health each month by mixing psychotropic drugs with other, non-compatible medication."

A cross-nations comparative shows trends for anti-depressant drug use across Europe for the period 1980-2009: http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0066455

Interestingly, Mediterranean countries fared really poorly in the above study: Greece, Italy and Spain all recorded above average rises in the use of anti-depressants, with big increases from the mid-1990s on.

21/5/2014: Irish Credit Supply to Cash Ratios are Heading South, Still

Irish Central Bank and Government departments have been pushing hard to convert Irish economy into cashless, electronic accounting data storehouse, where everything gets counted and taxed (at least in theory).

Meanwhile, in Ireland's real economy, cash remains the king as the only metric of money supply still expanding in the deleveraging hell gripping the financial system:

To remind you: in Q4 2013, Irish private households' deposits fell to their lowest point since March 2009 (note, this makes them the lowest since around Q3 2005 as current figures reflect addition of the Credit Unions deposits to the dataset (they were not counted in until January 2009).

That's right... let's do away with cash so Irish banks deposits get another superficial (accounting) boost and few million worth of tax euros flows into the state coffers. Happy times all around... we know Irish households are getting richer and richer by day...

21/5/2014: Russia-China Gas Deal

Russia and China signed bilateral gas deal to supply 38bcm of Russian gas per annum, with an option of expanding shipments to 61bcm. The deal covers 30 years of supply. Full valuations and prices are not yet known, but the deal at 38bcm/annum x 30 years was originally valued at USD440 billion.

Here are the best reports on the deal so far (to be updated):

http://www.businessinsider.com/russia-and-china-sign-billion-gas-pipeline-mega-deal-2014-5

Update: zerohedge covers price details here: http://www.zerohedge.com/news/2014-05-21/russia-and-china-finally-sign-400-billion-holy-grail-gas-deal

WSJ on the deal: http://blogs.wsj.com/moneybeat/2014/05/21/russia-strikes-gas-gold-in-china/ pointing to heating up competition in Asia-Pacific energy markets and Russia's play coming ahead of Canadian exports flows. This, in part, explains why Russia agreed on a deal pricing gas at just above USD350 bcm whereas Russia previously looked for a price closer to USD400 bcm. As you can see from the second chart below, over the years while the deal with China was in negotiations stages, gas price inflation fell significantly, reducing room for price upside in the deal.

The deal is of huge importance to Russia.

Russian economy is only weakly-dependent on gas prices, Government deficits are somewhat more closely linked to these. See more here: http://trueeconomics.blogspot.ie/2014/03/2232014-russian-capital-flight-and.html and in the slide below:

The reason for this is that Russian economy is not as dependent on exports (gas accounts for ca 60% of these on goods side):

And in the long run, there is spending and income channel feed through from gas prices (and exports) to domestic demand:

It is worth noting that China-delivery price of Russian gas can be lower than European delivery for two reasons:

1. Internally contained transit costs
2. Lower risk of disruptions (remember that Ukraine routinely pushed Russian gas shipments to the brink by either threatening to or actually syphoning gas designated for Western European deliveries for domestic use) and non-payment (settlements are likely to be in Chinese yuan, rather than in the USD and with this, there is no risk of non-payment, as in the case of Ukraine). See: http://trueeconomics.blogspot.ie/2014/04/1042014-game-of-chicken-ukraine-debts.html for more.

Also, gas for China will be coming from newer fields, which are located closer to the Chinese border and, although more expensive in production, are not competing with Western Europe-focused Western Siberian fields.

Finally, new pipeline holds promise bringing exploration and production further East from existent centres of production.

All across - this should be a very good deal for Russia and China. The core threat here is to the US exports of LNG to Asia-Pacific, where US producers are collecting huge margins, compared to European markets. But this threat is still some years (if not decades) off from becoming a significant pressure point.

20/5/2014: Irish Credit Supply to Non-Financial, Non-Property Sectors

We keep hearing about banks lending to enterprises and the recovery in the banking sector in general. And we keep watching credit supply in the economy shrinking and shrinking and shrinking. The reality, of course, is simple: our banking system continues to deleverage and alongside, our companies continue to deleverage. This means that legacy debts relating to property investments and development are being washed off the books. Which, of course, accounts for property-related credit. But…

Take a look at this chart, plotting credit advanced to Irish private sector enterprises.

The property deleveraging story is in solid orange. And not surprisingly, it is still heading down. With all the fabled foreign and domestic property buyers reportedly killing each other on their hunts for bricks and mortar assets in Ireland, there is less and less and less credit available for the sector. In part, some of this decline is now being replaced by foreign funding (lending and equity, including private equity). But the credit story is still the same: property related lending is down 6% y/y in Q4 2013 (latest for which we have data).

Deleveraging in financial sector is also there - the sector credit lines have shrunk 15% y/y in Q4 2013.

But what on earth is happening in the 'healthy' (allegedly) sectors of the economy - those ex-Property and ex-Financial Intermediation? Here, total credit is down 4% y/y in Q4 2013.

In fact, from Q2 2009 onward, Irish financial system registered not a single quarter of y/y increases in credit supply to non-financial and non-property enterprises in Ireland. That's right: credit did not go up even in a single quarter. Worse, between Q4 2011 and Q4 2013, average annual rate of decline in credit to real economy was -4.0% which is exactly the same as in Q4 2013. In other words, even in terms of growth rates, there is no improvement. 

20/5/2014: Q1 2014 Gold Demand Report

Q1 2014 Gold demand report is out today. Highlights are:

1. Jewellery demand grew 3% year-on-year to reach 571 tonnes, the largest Q1 volume since 2005, as consumers responded positively to lower average gold prices. Geographically, demand was wide-spread; however it was China that posted the largest volume increase, rising by 18 tonnes from Q1 2013.
2. Shifts in the components of investment cancel out: net investment demand little changed, down 2%. Q1 investment demand of 282 tonnes was just 6 tonnes below Q1 2013. Bar and coin demand was down 39% from last year's elevated levels, while outflows from ETFs slowed to a virtual halt compared with outflows of 177 tonnes in Q1 last year.
3. All segments of technology saw a 4% decline in the first quarter, resulting in overall demand for the sector of 99 tonnes. The fall was primarily driven by continuing substitution to cheaper alternatives as manufacturers remained under pressure to reduce costs.
4. First quarter demand from central banks once again topped the 100 tonnes level, reaching 122 tonnes, and marked the 13th consecutive quarter of net purchases. The desire to diversify holdings in an uncertain global environment continues to underpin this source of demand.
5. The supply of gold in Q1 2014 saw a marginal year-on-year increase of 1%. Increased mine production was offset by a fall in recycled gold coming onto the market, leading to a total supply figure of 1,048 tonnes.
6. Total demand was down at 1,074.5 tonnes in Q1 2014 compared to 1,077.2 tonnes in Q1 2013

Summary chart:

Report is here.

Compared to 5 year averages:

• Jewellery demand was up at 570.7 tonnes against 5 year average of 512.0 tonnes
• Technology demand was down at 99.0 tonnes against 5 year average of 108.3 tonnes
• Total Investment demand was down at 282.3 tonnes against 5 year average of 367.6 tonnes. Of this, Bar & Coin demand was down to 282.5 tonnes relative to 5 year average of 338.2 tonnes; ETFs and similar products demand was net -0.2 tonnes compared to 5 year average of +29.5 tonnes
• Central Banks net purchases demand was up at 122.4 tonnes against 5 year average of 72.7 tonnes
• Overall demand was up at 1,074.5 tonnes against 5 year average of 1,060.5 tonnes

Top 10 official reserves:

17/5/2014: Debt, Equity & Global Financial Assets Stocks

An amazing chart via McKinsey and BIS showing the distribution of financial assets by class and overall stocks of financial assets. These are covering the period through Q3 2013.

What we can learn from this?

1. Stock of financial assets might seem absurdly high compared to overall economic activity, but it is not that much out of line with longer term growth trends. Between 2000 and 2014 the world GDP is expected to grow from USD32,731.439 billion to USD76,776.008 billion, a rise of 135%. Over 2000-2013, stock of financial assets rose at least 124%.
2. However, in composition terms, the assets are geared toward debt and especially sovereign debt. Public Debt securities are up in volumes 243% - almost double the rate of economic growth. Financial institutions bonds are up 144% - faster than economic growth. Private non-financial sectors debt is up from USD43 trillion to USD 91 trillion - a rise of 112%. Total debt is up from USD73 trillion to USD178 trillion or 144% so within debt group of assets, public debt is off the charts in growth terms.

There is much deleveraging that took place in the global economy over the recent years. All of it was painful. But there is no way current levels of debt, globally, can be sustained. 

18/5/2014: Global Gambling: Ireland of Saints & Scholars

A chart summarising some interesting stats on global gambling addiction…

Ireland in a 'proud' seventh position... and just like our 'aspirational' brethren in Finland, heavily into online gambling - a form of a-social entertainment that is pure addiction...

17/5/2014: That costly alphabet soup behind the European Banking Union

Two main building blocks of the Single Resolution Mechanism for future banks bailouts in the EU involve Deposit Guarantee Scheme Directive (DGSD) and the Bank
Recovery and Resolution Directive (BRRD). The issue at hand is funding the future bailouts.


The EU Member States are required to establish two types of financing arrangements:

• BRRD sets up the Resolution Fund to cover bank failure resolution. This will be used after 8% of losses gets covered by the bail-in of depositors and some funders.
• DGS covers deposits up to EUR100,000 in the case of a bank failure. 

There are several issues with both funds. For example, DSG funds (national level) will have to run parallel with the EU-wide Eurozone Single Resolution Fund (until the DSG pillar is integrated at a much later date into EBU). This implies serious duplication of costs over time and creation of the 'temporary'  but long-term national bureaucracy / administration which will be hard to unwind later.

By 2016, EA18 euro area members will have national DSG running parallel to EU18-wide single resolution runs (SRM) which cannot be merged together absent (potentially) a treaty revision, not EA-18 EU members will have national DSG and national resolution fund, which can be merged together.

What is worse is that national contributions to DSG cannot count toward national contributions to the resolution fund (SRM or in the case of non-EA18, to national resolution funds). This means that total national banking system-funded contributions to both funds will be 0.8% of covered deposits for DSG, plus 1% for SRM = minimum of 1.8% of covered deposits. Ask yourselves the simple question: given that banking in majority of the EU states is oligopolistic with high (and increasing) concentrated market power, who will pay these costs? Why, of course the real sector - depositors and non-financial, non-government borrowers.

It is worth noting that the 1.0% contribution to the resolution fund will cover not just covered deposits, but actually is a function of liabilities. In other words, it will be much larger proportion of covered deposits than 1%.

That is a hefty cost of the EBU and this cost will be carried by the real economy, not by financialised one. The taxpayers might get off the hook (somewhat - see here: http://trueeconomics.blogspot.ie/2014/04/1742014-toothless-shark-eus-banking.html) but the taxpayers who are also customers of the banks will be hit upfront. And who wins? Bureaucrats and administrators who will get few thousands new jobs across the EU to manage duplicate funds, collections and accounts. The more things change… as Europeans usually say…

17/5/2014: Are Markets Punishing Russia?.. or the Emerging Markets?

An interesting analysis from the BBVA Research on capital flows to EMs… while much can be discussed, one thing is of interest from my point of view (not covered by the BBVA): Russian inflows.

We've heard about alleged markets punishment and investors flight from Russia. And there has been some for sure. Except, the theory that this flight is tied to naughty kremlin behaviour in Ukraine is a little… how shall we put it… a stretch may be?

Ok, let's look at how net capital flows look in the EMs: 

Emerging markets are some 14% below trend - big outflows starting with non-Ukraine Fed tapering:

So Asia is even worse off than the general EMs... And Asia is Ukraine-free and Fed-tied.

Yes, Russia is down… 24% below trend by estimates of the BBVA

And guess what: decline started in the same 'tapering-on' period and well before Ukraine and accelerated similarly to the rest of EMs. 

And worse… look at what happened in Brazil:

Brazil's 'troubles with Ukraine' started earlier on than rest of EMs, but accelerate with Fed tapering.

Heard of Indonesia? It seems also to be in a conflict with Ukraine:

So how about that thesis alleging that Russia is being punished for Ukraine crisis by those investors? 

17/5/2014: Long-term unemployment: Sticky & Alarming

Things are pretty bad on the long-term unemployment front in Ireland. I covered this earlier here: http://trueeconomics.blogspot.ie/2014/05/1552014-innovation-employment-growth.html and here: http://trueeconomics.blogspot.ie/2014/05/1552014-jobs-employment-lot-done-more.html

But another look shows some truly dire comparatives.

Take long-term unemployed as proportion of all unemployed - you get two insights:

1. The proportion is rising. In Q3 2013 it was 58.4% and in Q4 2013 it rose to 61.4%. That's right, more than 6 out of 10 unemployed have been jobless more than a year, continuously. We do not know those who have been jobless more than 6 months (the cut-off point beyond which some research starts showing long-term deterioration in skills and aptitude).
2. The proportion is sticky in the long run - it has been above 50% since Q3 2010 and above 56% since Q4 2010. Un-yielding. 

The second bit relates to the proportion of long-term recipients of LR supports - this too yields two conclusions:

1. It is rising as well: up from 45.4% in Q4 2013 to 45.8% in Q1 2014.
2. And it is on a rising trend over time.

But here's a damning thingy: all this long-term unemployment sustains our 'productivity' gains and competitiveness 'improvements': http://trueeconomics.blogspot.ie/2014/05/1652014-competitive-sports-of.html

17/5/2014: Central Bank Annual Report 2013: Not Much to Report, Much to Promote

This is an unedited version of my Sunday Times article from May 4, 2014.


This week, the Irish Central Bank published its annual report for 2013.

In the opening statement, Governor Patrick Honohan said: "The Bank’s key priorities included the ongoing repair of the banking system and achieving progress in the delivery of sustainable solutions for distressed borrowers. Significant progress was achieved on these fronts, though many tasks still remain to be completed."

This was not a great moment to stake such a claim.

In recent days, the state-controlled Ptsb, announced a substantial hike in variable rate charges on mortgages. Bank of Ireland, faced criticism for using a 'blunt force approach' with distressed borrowers.

Central Bank data, highlighted in the annual report, shows that in 2013 lending to non-financial corporations in Ireland posted its steepest year on year decline since the start of the crisis, down 6 percent. Credit to households fell at the second fastest annual rate, down 4.1 percent on 2012. Mortgages arrears, including the IBRC mortgages sold to the external investment funds, as percentage of all house loans outstanding, were virtually unchanged year on year at the end of 2013.

Reading through the Central Bank own financial accounts also reveals some significant insights into the inner workings of our financial system and its watchdog.

In the last three years, Irish Exchequer reliance on income from the Dame Street has gone up exponentially. In 2009-2013, the Central Bank paid EUR4.73 billion in total dividends to the State. Of this, 50 percent came from its operations in 2012-2013. This makes the CBI the largest net contributor to the State coffers of all public and semi-state organisations.

The bulk of the Central Bank earnings come from interest on assets it holds. Last year marked the second year of declines in this income. Back in 2010, the Central Bank collected EUR3.67 billion worth of interest. As the scope of the emergency lending to Irish banks fell, the interest income also declined, reaching EUR2.6 billion in 2012 and EUR2.02 billion in 2013.

Central Bank’s highest-paying assets today cover Irish Government Floating Rate Notes, NAMA bonds, and a Irish 2025 bond. All in, the money paid by the Government and NAMA to the Central Bank is being recycled back to the Exchequer at a hefty cost margin.

In a sign of continued improvement in the Irish banks funding situation, marginal refinancing operations and long-term refinancing operations (MROs and LTROs), representing lending to credit institutions from the Eurosystem fell to EUR39.1 billion in 2013, down from EUR70.9 billion in 2012. At their peak in 2010, these lines of credit amounted to EUR132 billion.

Central Bank’s staff-related expenses rose from EUR106.3mln in 2012 to over EUR121.4mln in 2013. These increases were down primarily to salaries, allowances and pensions, as staff numbers employed stayed relatively unchanged between 2011 and 2013. Per employee staff expenses are now up 15 percent on 2012 levels.

Other operating expenses were up from EUR57.5 million to EUR70.3 million. The largest hikes incurred were in Professional fees, which rose by a quarter to EUR27.1 million. Only in 2011, at the height of banks’ recapitalisation, did the Central Bank manage to spend more on external consultants. So far, the banking crisis has been a bonanza for the Central Bank advisers who were paid EUR98.3 million in fees since 2009.

In return for the rise in expenses, the Bank marginally expanded some of its enforcement and supervisory functions. There was a rise in prudential supervision activity, but a decline in authorisations and revocations of regulated entities. The number of investigations also fell, from 216 in 2012 to 184 in 2013. However, the Central Bank oversaw 1,004 regulatory actions taken in 2013, up on 2012, but down on 2011.

Overall, the Annual Report paints a picture of the Central Bank continuing to engage in active enforcement and supervision, amidst overall declining need for banking sector supports.

17/5/2014: ESRI on Education & Training in Ireland

ESRI released "Further Education and Training in Ireland: Past, Present and  Future" (http://www.esri.ie/publications/latest_publications/view/index.xml?id=3943)

Lots of sharp and interesting findings, including:

1. Provision within the sector appears to have grown and national policy does not appear to have played any central role in determining the level, distribution or composition of Irish FET provision. In other words it is free-for-all.
 
2. As a result, there is a substantial amount of variation in terms of …the relative emphasis on meeting labour market needs and countering social exclusion across the sector. In other words, the programmes are not really delivering on skills shortages.
 
3. A substantial proportion of provision within the FET sector does not lead to any formal accreditation.  The lack of accreditation is more typical in programmes with a strong community or social inclusion ethos. Which might not be a problem, if real skills are delivered. Alas, this is not the case.
 
4. The distribution of major awards across field of study does not appear to reflect strongly the structure of the vocational labour market. This is evident in the fact that the majority of key stakeholders, interviewed for the study, feel that current FET provision is only aligned ‘to some extent’ with labour market needs.
 
5. From an international perspective, compared to the German, Dutch and Australian systems, Irish FET is much more fragmented and is much less focused around vocational labour market demand.  In terms of its composition and focus, Irish FET sector bears close similarities to provision in Scotland.  
 
6. Data provision on Irish FET is extremely poor by international standards.
7. The reform of provision will require that SOLAS implement a funding model that ensures that poorly performing programmes are no longer financed, with available resources directed towards areas identified as being of significant value on the basis of emerging national or regional information.  

The irony of this is that ESRI report comes out some weeks after I wrote about the deficiencies in our training programmes in the Sunday Times http://trueeconomics.blogspot.ie/2014/05/1552014-jobs-employment-lot-done-more.html and months after the OECD report covering the same.

You can read more on the topic of skills, unemployment and training here: http://trueeconomics.blogspot.ie/2014/05/1552014-innovation-employment-growth.html

17/5/2014: Foreign Affairs on the rise of Ukrainian ultra-nationalism

These days, it is rare to see any seriously argued articles about the role of ultra-nationalism on the Kiev-side of the Ukrainian civil war (that's right - it is now a full-blown civil war). But here is a very good article on the subject published in highly reputable and usually highly critical of Russia Foreign Affairs: http://www.foreignaffairs.com/articles/141405/alina-polyakova/on-the-march?sp_mid=45902074

It is objective, in my view, and it is factual. It does not assert that ultra-nationalism has a broad support in public opinion, but it does show that it is gaining ground and is one of the stronger forces behind the political leadership in modern 'Western' Ukraine.

And further:

Read the whole article!