6/4/2013: Part-time & Casual Employment Supports in Ireland

Let's do some more numbers crunching on Irish Live Register for Q1 2013.

In Q1 2012 official Live Register declined 9,902 on Q1 2012 (-2.26%) and down 14,936 on Q1 2011 (-3.37%). Sounds like some achievement. 

Alas, of the above numbers:

• Of the 9,902 decline on Q1 2012, the decline was just 7,154 when we take into the account state training programmes (-1.38%) and there was a rise of 1,181 (+1.34%) in the numbers who claim Live Register supports while being in casual and part-time employment (more on this below). Thus, the numbers of those fully dependent on Live Register have fallen only 8,335 (-1.94%) on Q1 2012.
• Of 14,936 decline on Q1 2011 (-3.37%), there was actually an increase in those claiming supports of 3,217 (+0.63%) when we take into the account state training programmes, and there was a rise of 4,352 (+5.13%) in the numbers who claim Live Register supports while being in casual and part-time employment (more on this below). Thus, the numbers of those fully dependent on Live Register have fallen only 1,135 (-0.27%) on Q1 2012.

Now, some would remark that it is better when people are part-time or casually employed, then when they are fully dependent on Live Register supports. I shall, of course, agree with such a statement. However, let's look at what has been happening with casual and part-time employment numbers over time.

• In 2002-2007 monthly volatility(measured by standard deviation) in the numbers on Live Register who were in casual and part-time employment stood at 1,031. This has risen to 3,979 for the period of 2010-present. In other words, overall casual and part-time employment might have declined significantly in terms of stability of income it offers and, thus reliance on Live Register. This can be due to different quality of skills and occupations for people singing onto Live Register with casual and part-time employment, or it might be due to changes in Live Register supports' eligibility, or both.
• Of all categories of Live Register signees, volatility of numbers on Live Register has risen only  for part-time and casual workers over 2010-present compared to 2002-2007.2
• For the Live Register inclusive of the state training programmes participants, volatility has actually fallen over the above periods, driven by declines in volatility for the numbers of signees who are fully reliant on Live Register supports.

To see the deterioration in the quality of casual and part-time employment linked to Live Register participation, consider the chart below:

The chart clearly shows dramatic increase in seasonality of the numbers of those on Live Register in casual and part-time employment for the end of Q2-beginning of Q3 periods since January 2010 as compared to previous years (2002-2007). You can see that the same effect does not appear in the numbers of signees fully dependent on Live Register supports:

6/4/2013: 80 years to deflate unemployment crisis in Ireland?

Continuing with the Live Register data theme: in the first post I covered broader long-term trends in the LR, with the second post looking at some sub-trends relating to nationality of Live Register signees. Here: a quick note on the size of the problem overall.

Total number of persons (officially) on the Live Register declined 2.07% y/y in March, following a steeper decline of 2.40% in February. Compared to March 2011, current reading is down 3.65%.

Thus, March 2013 reading was 165.8% ahead of the 2004-2007 average, 36.1% ahead of 2008-2009 average and is 3.38% below 2010-present average. Taking Q1 2013 average, the Live Register (again, this is official count, excluding those on State training programmes) was up 1.76% on Q4 2012, down 2.26% on Q1 2012 and down 3.37% on Q1 2011.

For the adjusted Live Register (accounting for state training programmes participation), Q1 2013 q/q rate of increase in the Live Register was 1.53% and y/y rate of decrease was -1.38%.

Let me remind you the size of the problem overall:

At the above annual rates of decline (based on Q1 2013 data), it will take 

• 12.5 years from now to reach 2008-2009 average Live Register levels (which would be consistent with unemployment supports at the levels well above those observed in the 1980s and 1990s) and 
• 40.5 years to reach 2004-2007 average or 37 years to reach 2000-2007 average.

If you want a really scary number, using y/y change in Q1 2013 in Adjusted Live Register numbers, it will take us 81 years from today to reduce Adjusted Live Register counts to 2000-2007 average level. As a robustness check, the number will be 79 years were we to use Q4 2012 annual rate of decline.

Clearly, the 'turnaround' being signaled by the Live Register is simply not enough to deal with the current problem of unemployment and equally clearly, at current rates of economic 'growth' we either need to raise the speed of economic activity expansion by a factor of 10 or carry out some drastic measures on reforming our unemployment supports in order to see significant reductions in Live Register any time soon.

6/4/2013: Irish Live Register by Nationality: Some Trends

Yesterday, I blogged about Live Register data on overall levels of unemployment supports in Ireland. Today - few charts summing up Live Register trends by nationality.

Total number of persons (officially) on the Live Register declined 2.07% y/y in March, following a steeper decline of 2.40% in February. Compared to March 2011, current reading is down 3.65%.

Meanwhile, the number of Irish Nationals on Live Register fell 1.89% y/y in March, following a decline of 2.39% in February. Current reading stands 3.68% below March 2011 and is down 10.68% on the crisis-period peak. Q1 2013 posted an increase of 1.43% on Q4 2012 and is down 2.21% on Q1 2012 and down 3.45% on Q1 2011.

The number of Non-Irish Nationals on Live Register declined at stronger 2.86% y/y in March than for Irish Nationals. larger decline of 2.45% was recorded for Non-Nationals in February 2013 as well. However, compared to March 2011, current reading is down 3.50% against the comparable period decline of 3.68% for the nationals. Q1 2013 reading for non-Nationals was 3.31% ahead of Q4 2012 - a sharper increase than for Nationals. Q1 2013 reading was down 2.50% for non-Nationals compared to Q1 2012, which represents a sharper decline than for Nationals. Compared to Q1 2011, however, Q1 2013 reading is down 3.03% for non-Nationals against 3.45% for Nationals.

In relative terms, Irish Nationals accounted for 82.16% of the Live Register in March 2013 against 82.01% in march 2012, while for non-Nationals the same ratios were 17.84% in Q1 2013 against 17.99% in Q1 2012. Chart below illustrates:

With small scale changes, there is no to-date reversal in the flat trend in relative shares of two groups in total Live Register numbers that was established around mid-2009 and that corresponds to higher share of Live Register captured by non-Nationals and lower share captured by Nationals. You can clearly see the overall flat trend.

In dynamic terms, chart below illustrates time trends in Live Register presence of three core groups: EU15 (ex-Ireland), EU12 (Accession States) and non-EU migrants.

Share of the EU15 (ex-Ireland) migrants of the total Live Register count fell to 4.8% in March 2013 from 4.87% in March 2012. Over the same time, share of EU12 (Accession States) migrants rose from 9.91% to 9.94%, while share of non-EU migrants declined from 3.21% to 3.10%.

Again, quite interesting dynamics in the above chart. For EU12 Accession States, strong seasonality (and these are already seasonally adjusted stats) shows rises and falls in temporary employment in agriculture and retail sectors, but overall trend since mid-2010 is flat. In contrast, EU15 ex-Ireland trend is that of a decline in Live Register presence. Live Register numbers for non-EU nationals is basically flat since late 2007 and shows no elevation due to crisis. In other words, EU12 nationals number on the Live Register were a strongest driver of Live Register participation increases amongst non-nationals during the crisis and now are changing roughly in line with Live Register changes overall. EU15 ex-Ireland numbers have declined relative to overall Live Register, and non-EU nationals numbers have fallen over the period 2006-2008 and then remained steady in line with overall Live Register trend.

5/4/2013: Live Register March 2013

In light of the recent statement by the IMF about Ireland's broader measure of unemployment, let's ask two other simple questions:

1. How many people in Ireland receive unemployment supports? 
2. What percentage of the workforce in Ireland receives unemployment supports?

Answer in two charts based on latest CSO data:

Q1:

A1: In March 2013, there were 425,088 individuals on Live Register and in February 2013 (the latest for which this data is available) 83,421 individuals engaged in state-sponsored training programmes that receive Live Register supports, but are not counted officially as being on Live Register. Thus total number of those in receipt of unemployment supports in Ireland is 508,509 individuals.

This means that while Live Register official numbers have declined 2.065% y/y in March, total number of Live Register supports recipients has declined only 1.355% on March 2012.

To be exactly precise on this, take February 2013 figures alone: in February 2013, total number of those in receipt of Live Register supports was 512,297 which was a decrease in y/y terms of 1.45%, against the official Live Register decrease reported of 2.40%.


Q2:

A2: Using Q4 2012 data for labour force participation (reported via QNHS with a lag compared to Live Register), 27.29% of Irish labour force were in receipt of Live Register assistance in March 2013. 

Again, the data is reported with different lags, so for exact comparative we have to go to December 2012 when 24.23% of Irish labour force were in receipt of Live Register assistance.

Oh, as a bonus, here's a historical chart showing Live Register supports numbers for Ireland since 1967:

4/4/2013: IMF Analysis of Recent Personal Insolvency Reforms in Europe

In the previous post, I covered in 4 charts (via IMF research paper) the extent of the European debt crisis (link: http://trueeconomics.blogspot.com/2013/04/442013-real-debt-european-crisis-in-4.html?spref=tw ). Here, based on the same source, proposed solutions for dealing with the household debt crisis.


Per IMF:

"A number of European countries have introduced or refined personal insolvency regimes to achieve orderly resolution of the debt overhang over time." Note that here, "personal insolvency law may also cover natural persons who are engaged in business activities (traders or merchants)", which is of course something unaddressed explicitly in Irish reforms despite the fact that current system of insolvency effectively spells an end to the careers of many professionals and businessmen and businesswomen.

"For example, Estonia, Iceland, Italy, Latvia, Lithuania, and Poland adopted or amended the personal insolvency law. The Irish Parliament recently adopted an entirely new personal insolvency law to, inter alia; shorten the discharge period from 12 years to 3 years subject to certain conditions. [The bill also allows the court to require repayments for up to five years in the bankruptcy process.]

Here's a very interesting bit: "The German government is also considering a reform of the personal insolvency regime that includes a shortening of the
discharge period. [The proposal envisages to reduce the discharge period from six years to three years provided that at least 25 percent of all debt must be repaid by an individual debtor]." Now, again, interestingly, Irish reforms provide for no set bounds for repayment, thus implying that there is no set limit resolution to the post-bankruptcy liability.

"In designing such regimes, these countries have faced a number of challenges. First, unlike corporate insolvency, there is no established international best practice at all in this area, especially with regard to the treatment of residential mortgages in insolvency proceedings. Second, as individuals are involved, the design of the law is inevitably driven by social policy considerations; these include the goal to reinvigorate individual productive potential in the mainstream economy and to reduce the social costs of leaving debtors in a state of perpetual debt distress. [Note: this is obviously not a core objective for the Irish reform, as it provides virtually no protection to the borrower during the voluntary arrangements period prior to bankruptcy.] Third, the law needs to keep an appropriate balance between maintaining credit discipline and affording financially responsible debtors a fresh start. Finally, the design of the law needs to take into account institutional infrastructure that is critical to the predictable and transparent implementation of the law, including the availability and quality of judges and trustees, administrative capacity, accounting, and valuation systems. [Note: in the Irish reforms case, none of these objectives are met and in fact some are directly violated by the reforms.]"

"A number of basic design features for an economically efficient personal insolvency law have emerged from the early cross-country experience:

• Allocate risks among parties in a fair and equitable manner; [Not delivered in the Irish case at all]
• Provide a fresh start through discharge of financially responsible individuals from the liabilities at the end of insolvency proceedings (typically after 3-5 years); [Provided in the Irish reforms]
• Establish appropriate filing criteria to make insolvency procedures accessible to individual debtors while minimizing abuse; [Irish reforms maximise potential for abuse in pre-insolvency processes of so-called voluntary arrangements by ensuring the banks have asymmetric veto power over arrangements, the banks have sole power of determination of terms and conditions for voluntary arrangements workout period, the banks control and own arbitration process, the banks are not compelled to transparently disclose their solutions and conditions for accessing these solutions, etc].
• Impose automatic and temporary stay on enforcement actions with adequate safeguards of creditor interests; [This is contradicted by the stated Government intention to speed up forced foreclosures as a part of restructuring of the banks mortgages books]
• Set repayment terms that accurately reflect the debtor’s capacity to repay to ensure an effective fresh start; and [Note: it is hard to imagine how this can be achieved in the environment of Irish reforms as outlined in the bullet point 3 above]
• Recognize foreign proceedings and enable cross-border cooperation to avoid bankruptcy tourism. [It is unclear how Irish reforms can reduce incentives to avail of the UK system given the conditions for insolvency in Ireland involve up to 6 years of voluntary work-out plus insolvency process, against 12 months in the UK].

What's happening beyond the above menu?

"The unprecedented challenge of excessive mortgage debt has prompted some European countries to introduce special legislation. [Norway, when facing its own banking crisis and recession in the early 1990s, adopted the Debt Reorganization Act in 1993 to provide debt relief to debtors who are unable to meet their obligations for a period of time. The law provides for voluntary debt settlement and compulsory debt settlement (e.g., reduction of principal of a residential mortgage to 110 percent of the market value of the residence). Now, wait, we were told that such measures (also deployed in Iceland) have never been tried and would lead to a wholesale collapse of the economy...] "

"Faced with wide-scale household mortgage distress in the aftermath of the recent crisis and the bursting of the real estate bubble, Greece, Spain and Portugal have introduced special legislation to address unsustainable residential mortgage debt burdens on households while limiting adverse effects on banks’ balance sheets and minimizing moral hazard."

All of these regimes differ in several respects:

1. "...While the Spanish regime allows financing institutions to opt into the scheme [Once a financial institution opts in, it must implement for at least two years a Code of Good Practices which provides for measures aimed at achieving a viable mortgage restructuring for debtors covered by the regime., banks’ participation is mandatory for Greece and Portugal]. 
2. ... Spain and Portugal allow mortgage debtors, subject to certain conditions and as a last resort, to transfer the mortgaged property title to the bank (or a government agency in Portugal) and obtain cancellation of the mortgage debt (up to the assessed value of the residence in Portugal). [Under the Spanish regime, the transfer of the property title and the cancellation of the debt can only happen after it has been proven that neither restructuring of the debt nor application of a partial release is viable.] Greece, on the other hand, allows the court to grant a full discharge of the mortgage debt if the debtor repays up to 85 percent of the commercial value of the principal residence determined by the court over up to 20 years. It is yet too early to assess the effectiveness of the Spain and Portugal regimes, but the Greek authorities are revisiting their framework due to its low rate of successful restructuring to date."

"A number of countries have adopted measures to facilitate out of court settlement for distressed mortgages. For example, Iceland, Ireland, and Latvia adopted voluntary guidelines or codes of conduct that provide guidance on mortgage restructurings for borrowers in financial distress. In 2012, Portugal introduced voluntary out of court guidelines for banks to restructure household debt including residential mortgages more generally with the assistance of debt mediation facilities. Estonia adopted a law effective in April 2011 aimed at supporting the out of court restructuring of debt obligation, including mortgages, of natural persons facing financial difficulties — although the procedure relies heavily on court input. To reduce the burden on the court system, the personal insolvency law recently adopted by the Irish Parliament introduces three non-judicial debt settlement procedures for household debt including a personal insolvency arrangement for settlement of secured debt up to €3 million and unsecured debt (no limit) over six to seven years. The effectiveness of these approaches in tackling mortgage distress remains to be seen."

4/4/2013: Real Debt: European Crisis in 4 charts

Some interesting charts from Liu, Yan and Rosenberg, Christoph B., World Economic Outlook, April 2013. IMF Working Paper No. 13/44. Available at SSRN: http://ssrn.com/abstract=2229653

Chart 1 below details the extent of the debt overhang in a number of countries:

Charts 2 and 3 outline the problem relative to financial assets available to offset the debt (theoretical offset, obviously):

Non-performing loans problem...

Quite telling, with no commentary needed, imo.

4/4/2013: Irish Planning Permissions 2012 data

Per data released on March 22 by CSO, Irish Planning Permissions for Construction have continued to collapse in 2012. Full year data shows that:

• In 2012 total number of all types of planning permissions issued in the state stood at 14,407 - an all-time record low (with records starting in 1992), down 9.91% on 2011. 2010-2011 rate of contraction was 15.11% and 2009-2010 rate of decline was 27.64%, so naturally for such steep drops in previous years, the rate of annual declines is moderating. 
• From the pre-crisis peak, number of planning permissions is now down 76.90%
• Planning permissions for dwellings fell to 3,643 in 2012, down 23.58%, having fallen 24.89% in 2010-2011 and 38.85% in 2009-2010. Compared to peak, the permissions are down 86.76% to a new historical low.
• Planning permissions for other new construction rose in 2012 to 3,407 from 2,964 in 2011, a rate of increase of 14.95% y/y that follows declines of 7.52% in 2010-2011 and 29.01% in 2009-2010. Relative to peak, 2012 level of permissions for other new construction are down 82.4% against absolute minimum reached in 2011 when these were down 84.72% relative to peak.

In square footage terms, planning permissions issued

• Fell 21.56% y/y for all types of new construction (these are now down 86.67% on peak, hitting a new historical low);
• Fell 39.48% y/y for dwellings (these are now down 90.89% on peak, hitting a new historical low);
• Fell 7.44% y/y for other types of new construction (these are now down 86.78% on peak, hitting new historical low);
• Rose 0.52% for extensions (these are now down 68.87% on peak, having hit the bottom at -73.41% on the peak in 2011).

At certain point in time (soon, one assumes given the rates of decline on peak already delivered), a broom shed construction somewhere in West Meath will qualify as an uplift in the market....

3/4/2013: Irish Manufacturing PMI: March 2013

Manufacturing PMI data from NCB and Markit released yesterday was a bit of a disaster, mitigated only by the fact that Ireland's performance was in line with the abysmal reading for the entire euro area.

Headline seasonally adjusted Manufacturing PMI fell from 51.5 in February (indicative of a reasonably marked expansion, albeit still not statistically significant) to 48.6 in March (statistically not significant contraction). The swing of 2.9 points was the largest since July-August 2012. This was the first sub-50 reading in PMI since February 2012.

12mo MA is now at 51.4 against 6mo average of 51.1. 3mo MA is running at 50.1 and is substantially down on 3mo average through December 2012 (52.0). This compares favourably to 49.8 3mo average through March 2012, but is well below 56.1 average for 3mo period through March 2011 and marginally ahead of 3mo average through March 2010 (49.9).

Index volatility is running well above historical levels at 2008-present stdev at 5.33 against historical stdev of 4.40.

Output sub-index fell from 51.3 in February 2013 to 48.1 in March 2013, marking the lowest reading since January 2012 and the first sub-50 reading since April 2012. 12mo MA and 6mo MA are both at 51.7, with 3mo MA at 50.3 against previous 3mo MA at 53.1.

New orders sub-index also fell below 50 line with February 50.8 weak expansion slipping into contraction territory at 49.1 in March. Once again, this was the weakest reading since January 2012.

New Export Orders came in at 47.6 - a sharp contraction and a massive fall on 50.1 in February, signalling the worst performance since August 2009. 12mo MA is now at 51.9, with 6mo MA at 51.0 and 3mo MA at 49.5 (previous 3mo MA was at 52.5, implying a 3.0 point swing down). Current reading is statistically significant sub-50 reading.

As you know, I compute current and forward-looking composite indices of activity.

Current Composite PMI reading is at 48.3 in March, down from 51.4 in February and marks the lowest reading since January 2010. Forward Composite PMI reading is at 48.4 - the worst performance since December 2011 and down on 50.5 reading in February.

Output prices fell at 48.2 in March, same as in January and down from expansion at 51.2 in February 2013. Meanwhile, input prices inflation moderated, but remained robust at 54.8 in March, down from 57.1 in January and February. Thus, overall profitability fell. In last 24 months, profitability rose in the sector in only one month.

Employment fell sharply to 47.2 in March against expansion of 52.7 in February. March reading was the lowest since October 2011.

Overall, the PMI for manufacturing sector was a disaster!

2/4/2013: Talkin of Gettin Things Really Wrong...

When Washington Post gets things badly wrong...

"Ireland doesn’t look likely to cause problems anytime soon. It’s been paying back the 2010 bailout from the E.U. faster than it had too [sic], which has pushed bond rates way down."
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03/30/cyprus-luxembourg-italy-or-malta-which-country-will-unravel-the-euro-zone/

Sorry, what?! Ahem... no... WHAT?!

2/4/2013: Confused or spun? Property prices in Ireland

So foreign investors are allegedly flocking in thousands to Irish commercial real estate markets, snapping anything they can get their hands on... right
http://www.independent.ie/business/world/number-of-empty-office-buildings-soars-by-67pc-29167687.html

Meanwhile, of course, residential property is on a 'recovery path' (aka flat-line dead) per latest CSO figures for the Residential Property Price Index.


In February 2013, RPPI for all properties fell from 65.4 in January to 64.4 (a decline of 1.53% - the steepest rate of m/m drop since February 2012 and worse than the year-to-date average m/m decline of 1.07%). The index is now down 2.57% y/y.

Looking at slightly smoother 3mo figures: 3mo cumulative change on previous 3 months was -2.57% which signals acceleration in decline compared to 6mo change on previous 6 mo at -1.23%. Thus, relative to peak, RPPI hit absolute bottom at -50.65% with previous record drop of -50.34% recorded in June 2012.

The Government needs some serious spin to paint house prices dynamics in anything but bleak terms. Per RPPI, House prices are deteriorating, slipping to 67 in February 2013 from 68.1 in January 2013 and setting an all-time record low. House prices are down 1.62% m/m and 2.90% y/y. 3mo cumulated change is -3.04% and 6mo cumulated change is -1.47% so things are getting worse, not better, over time once again.

RPPI overall, however, was supported to the upside by the price changes in sub-index covering Apartments. Apartments prices sub-index rose to 51.5 in February from 48.1 in January (+7.07% m/m) which suggests that a single outlier transaction might have distorted the cumulative figures. Nonetheless, in terms of 3mo MA this only brings sub-index to the levels of May-June 2012.

Lastly, Dublin sub-index showed once again that flat-line can actually be associated with both down and up volatility. In February 2013 Dublin sub-index slipped to 59.3 from 59.5 in January, which means that the index is now up 2.95% y/y. Happy times? Somewhat. But note that 6mo cumulated change through February 2013 was at +3.49% while 3mo cumulated change through February is -1.17%, so dynamically things are worrisome, rather than encouraging.

Funny thing this recovery, folks... Government & Green Jerseys say one thing, their own data says another... confused.com? or maybe spin.ie?

2/4/2013: US Mint Gold Coins vs Gold Prices

In the previous post I covered some Q1 2013 trends in US Mint gold coins sales and mentioned correlations between spot price of gold and volume of coinage gold sold. Here's a bit more beef on the latter.

As charts above clearly show, there is not much of a statistically significant relationship between price of gold and volumes of coinage gold demanded, neither in levels terms, nor growth terms. Which, of course, strongly suggests that the demand for coinage gold is based on longer-term considerations than those underpinned by simple price reactions.

Looking at H1 data over the same time horizon confirms the main observation:

There is zero relationship in smoother data (H1 cumulated) between demand for coinage and price of gold, while there is a relatively weak positive correlation between demand for gold content per coin purchased and the price of gold.

Key point here is that there is absolutely no hard evidence that gold coins demand is bubble-prone or bubble-driven.

2/4/2013: US Mint gold sales: Q1 2013

Q1 2013 data for gold coins sales by US Mint is out and is worth a look. Here are some top trends:

Per chart above, number of US Mint coins sold in March 2013 declined to 103,000 compared to 155,000 in February. Controlling somewhat for seasonal changes, y/y number of coins sold rose 3.52% from 99,500 in sales in March 2012. Looking at Q1 totals, Q1 2013 sales added to 533,500 coins, up 39.3% on Q1 2012, 10.57% on Q1 2011 and 96.86% on Q1 2010. Healthy uplifts against generally flat-trend prices. And, crucially, coins sales do not appear to be tracking 'risk-on' and 'risk-off' signals from equity markets. As I always maintained, coins sales have much more to do with steady risk-averse savers than with speculative buyers.

Chart below details relationship between volumes of gold sold via US Mint coins and price of gold (monthly final). In terms of volumes sold, March 2013 clocked sales of 62,000 oz, down from 80,500 in February 2013, and down 0.8% on March 2012 (62,500 oz). In quarterly totals, Q1 2013 came in at 292,500 oz and this was up 38.95% on Q1 2012, down 2.34% on Q1 2011 and up 7.93% on Q1 2010. In other words, much steadier demand growth in volumes of sales was also broken in 2013.

Meanwhile, price of gold rose 1.21% m/m in March and slipped 3.29% y/y. (More on correlations below).

The following chart details trend in average gold content per coin sold (oz/coin): in March 2013, average gold content stood at 0.602 oz/coin, up on 0.519 oz/coin in February 2013 and not far off from the 0.628 oz/coin in March 2012. However, overall trend remains relatively flat at around 0.65 oz/coin since mid-2006. Longer term trend is gently upward, indicating that over time, investors and savers started to allocated slightly more of their investable savings into coinage gold.

 Chart below shows correlation between volumes of coinage gold sold and gold price:

Two things worth noting in the above:

1. Since approximately Q2 2012 we are experiencing steady upward momentum in 12 months rolling correlations, and these are rising toward +0.5. This trend was confirmed in March 2013 and it is consistent with 24mo rolling correlations, but is still far off on 36mo or 50mo rolling basis.
2. Linear long-term trend is also upward and is now in the positive correlation territory. This can potentially suggest that gradual financialisation of the gold markets in general is having a long term impact on gold's shorter-range hedging properties, since positive correlation is consistent with higher propensity of 'buy-on-dips' and 'book profit' behaviour. However, as 60mo chart shows below, we are still in solid hedging territory for now when it comes to longer investment horizons. Furthermore, correlations trends are negligible in size. So something to watch in the future and to blog on next... stay tuned.

Chart with 60mo rolling correlations

31/3/2013: Structural Reforms in Ireland: Far From Best-in-Class

Some interesting charts from the ECON review of the peripheral countries' structural reforms implementation during the crisis (full report is available here):

Note that by both measures, Ireland is not the 'best pupil in the class':

• By unadjusted metric, we are second in the 'class' in terms of responsiveness rate, but
• Once adjusting for the difference in reforms implemented and underlying conditions, we are only in the fifth (note: ECON chart is taken from the chart produced by the OECD, reproduced below which clearly shows our position to be worse than that of Italy)

In part, the above is driven by the fact that we have started our reforms earlier than other countries, hence, for example, in terms of labour market changes, we have most of the gains in the Gross Value Added per hour worked peaking in 2009-2010. Also, notice that our performance relative to other peripherals has deteriorated in 2011-2012 and is expected to remain there in 2013.

In part, however, the adjusted score is driven by structural differences in reforms adopted. And this implies that per OECD we are still ranked only fifth in the peripheral economies group when it comes to the adjusted scores over the broader period of 2009-2010 to 2011-2012:

31/3/2013: Are European Brahmins Cypriot crisis-free?

In an Orwelian Universe that is the EU, the rules are different for different castes... the Brahmins are, obviously, the top of the pile. Not surprisingly, amidst deposits outflows from Cyprus immediately prior to the EU sanctioned expropriations, there are strands of Cypriot Brahmins rushing out of their banks. Here's the report by Rossija 24 - Russian news agency on the topic:

 via a tweet:

Let's translate verbatim the above:

"Greek press has found compromising material on Cypriot President. According to the Greek media sources, few days before the Eurogroup decision to bail-in deposits, relatives of President Nicos Anastasiades took emergency steps to save their funds. The issue concerns the amount of EUR21 million in funds. A company, which belongs to the relatives of the President, transfered these funds from Laiki bank to London, as reported by the Rossija 24 TV channel. The Laiki Bank is currently undergoing restructuring, and haircuts on clients' funds can reach up to 80 percent."

We should note, of course, that this is just one report, albeit here is a Cypriot press report from just 30 minutes ago covering the same: http://www.incyprus.com.cy/en-gb/Top-Stories-News/4342/33996/money-movements-questioned and Greek reports: http://www.imerisia.gr/article.asp?catid=26517&subid=2&pubid=113018547 and http://www.nooz.gr/economy/suggeneis-anastasiadi-evgalan-kata8eseis-apo-ti-laiki31313 and http://www.zougla.gr/kosmos/article/ligo-prin-to-eurogroup-melos-tis-ikogenias-tou-anstasiadi-figadefse-xrimata .

31/3/2013: Unique Ireland? Why not... per IMF working paper...

Here's an interesting case of Ireland's uniqueness:

Eyraud, Luc and Moreno Badia, Marialuz, "Too Small to Fail? Subnational Spending Pressures in Europe" [(February 2013). IMF Working Paper No. 13/46] paper looks at the re-distribution of spending between national and sub-national governments within the EU over time, covering the period of the crisis. Due to the size of the banking sector measures and their impact on the Government budgets in Ireland, the paper excludes Ireland from the dataset when running analysis.

In other words, we are so out of line with the rest of Europe in terms of resources we threw at the banks during the crisis, that our data is no longer meaningfully comprable to the rest of EU.

Here are two charts illustrating this 'uniqueness':

31/3/2013: Bank Leverage, Systemic Crises and Debt v Equity Funding: Tax Asymmetry

As the readers of this blog would know, I have been advocating more symmetric tax treatment of equity and debt, both in terms of public and private bonds and lending taxation. Here's a recent IMF paper on the topic that provides evidence that asymmetric taxation of debt and equity, with preferential treatment of debt over equity, generated internal instability in the system, making it more prone to crises.

Mooij, Ruud A., Keen, Michael and Orihara, Masanori paper "Taxation, Bank Leverage, and Financial Crises" (February 2013). IMF Working Paper No. 13/48 argues that "that most corporate tax systems favor debt over equity finance is now widely recognized as, potentially, amplifying risks to financial stability. This paper makes a first attempt to explore, empirically, the link between this tax bias and the probability of financial crisis."

The study "…finds that greater tax bias is associated with significantly higher aggregate bank leverage, and that this in turn is associated with a significantly greater chance of crisis. The implication is that tax bias makes crises much more likely, and, conversely, that the welfare gains from policies to alleviate it can be substantial far greater than previous studies, which have ignored financial stability considerations, suggest."

The paper "aims to provide a first attempt to establish and quantify an empirical link between the tax incentives that encourage financial institutions (more precisely, banks, the group for which we have data) to finance themselves by debt rather than equity and the likelihood of financial crises erupting; and then to try to quantify the welfare gains that policies to address this bias might consequently yield."

The paper combines two elements in a causal chain:

"The first is that between the statutory corporate tax rate and banks’ leverage. This has received substantial attention in relation to non-financial firms, but very little in relation to the financial sector. Keen and De Mooij (2011), however, show that for banks too a higher corporate tax rate, amplifying the tax advantage of debt over equity finance, should in principle lead to higher levels of leverage; the presence of capital regulations does not affect the usual tax bias applying, so long as it is privately optimal for banks to hold some buffer over regulatory requirements (as they generally do).

[In other words, capital requirements regulations are not sufficient to address the problem created by skewed incentives. The authors state that "Regulation, of course, has historically had the dominant role in addressing such problems of excess leverage in the financial sector, and the higher and tighter capital requirements of Basel III should to some degree reduce the welfare costs of debt bias."]

Empirically too, Keen and de Mooij (2012) find that, for a large cross-country panel of banks, tax effects on leverage are significant—and, on average, about as large as for non-financial institutions. These effects are very much smaller, they also find, for the largest banks, which generally account for the vast bulk of all bank assets. …Importantly, the finding that tax distortions to leverage are small for the larger banks, which are massively larger than the rest, does not mean that the welfare impact of tax distortions is in aggregate negligible: even small changes in the leverage of very large banks could have a large impact on the likelihood of their distress or failure, and hence on the likelihood of financial crisis."

The second link in the causal chain is the link "between the aggregate leverage of the financial sector and the probability of financial crisis. We estimate such a relationship for OECD countries, …capturing data on the recent financial crisis… The results suggest sizeable and highly nonlinear effects of aggregate bank leverage on the probability of financial crisis."

"… we consider three tax reforms that would reduce the tax incentive to debt finance:

• a cut in the corporate tax rate; 
• adoption of an Allowance for Corporate Equity form of corporate tax (which would in principle eliminate debt bias); and 
• a ‘bank levy’ of broadly the kind that a dozen or so countries have introduced since the crisis."

"The implications of these reforms for aggregate leverage are readily estimated using the results above.

1. We suppose, as before, that a 1 percentage point reduction in the CIT rate reduces banks’ aggregate leverage by somewhere between 0.04 and 0.15. 
2. This means, for instance, that the bank levy of 10 bp would reduce financial leverage by between 0.1 and 0.4 percentage points, for example from 93 percent to 92.9 or 92.6. 
3. Eliminating debt bias altogether with an ACE would reduce leverage by 2.2 percentage points under what we shall take to be the central estimate of 0.08: say, from 93 to 90.8; with the upper bound estimate of 0.15, leverage would fall by 4.2 percentage points."

The above clearly suggests that ACE approach, basically removing disincentive to equity funding compared to other policy alternatives. It also shows that in impact terms, lower corporate tax rates are not sufficient to eliminate or reduce the adverse effects of the asymmetric treatment of debt against equity.

31/3/2013: German Hartz IV reforms - evidence

Another interesting paper, worth a read: Krebs, Tom and Scheffel, Martin, "Macroeconomic Evaluation of Labor Market Reform in Germany" (February 2013). IMF Working Paper No. 13/42.

Back in 2005 Germany undertook a massive reform of social welfare systems, known as Hartz IV reform. This "amounted to a complete overhaul of the German unemployment insurance system and resulted in a significant reduction in unemployment benefits for the long-term unemployed".

The IMF paper used "an incomplete-market model with search unemployment to evaluate the macroeconomic and welfare effects of the Hartz IV reform". The model was calibrated to German data before the reform followed by simulation of the calibrated model to identify the effects of Hartz IV.

"In our baseline calibration, we find that the reform has reduced the long-run (non-cyclical) unemployment rate in Germany by 1.4 percentage points. We also find that the welfare of employed households increases, but the welfare of unemployed households decreases even with moderate degree of risk aversion."

For all the debate about the merits of such reforms, it is pretty darn clear that Hartz IV-styled reforms - currently being advocated by the IMF and the EU for the peripheral states - cannot take place in the environment of protracted and structural Euro area-wide and national recessions and especially in the presence of other exacerbating factors, such as debt overhangs,  insolvency regime breaks, dysfunctional banking sector, monetary policy mismatch, etc.

Put simply, in 2005, German economy was into its second year of (anaemic at 0.7% in 2004 and 0.84% in 2005) growth with unemployment at an uncomfortable 11.2% still leagues below the current rates in the peripheral state. German government deficit in 2005 was at relatively benign 3.42% compared to the deficits in the peripheral states, with structural deficit at even lighter load of -2.6% of p-GDP and primary deficit at 1.0%. German debt/GDP ratio on Government side was at 68.5% of GDP. All of these parameters clearly indicate that Germany was in a much better starting position for consolidating social insurance systems than the peripheral states find themselves today.

31/3/2013: Draghi calling President Napolitano: a nasty precedent

Here's one of the best examples of the total departure of the EU institutions from the normal democratic constraints on their mandate vis-a-vis national affairs:

The story link is: http://www.reuters.com/article/2013/03/31/us-italy-vote-draghi-idUSBRE92U01W20130331?feedType=RSS&feedName=businessNews

For a reply:

That is correct (assuming the reported call did take place): the ECB represents a sub-section of the executive pillar of power in the EU (and via the national central banks - in the member states), just as the US Fed. Neither the Fed nor the ECB have any business in influencing or restricting the legislative pillar (in the case of the above incident - the electoral process) or the entire executive pillar (in the above case - pertaining to the Presidency to which monetary policy institutions are accountable or co-accountable whenever oversight over monetary policy institutions co-rests with legislature) or the judiciary (presumably, Mr Draghi might call on European or national judges too, should their workings approach the issues related to OMT or other aspects of the monetary policy).

To see this, simply replace ECB's Draghi with, say, General X of the Common Security & Defence Policy calling President Napolitano to express concerns about Italian elections. How fast will 'military interference in political affairs' rise to media headlines?

Europe is now clearly on a dangerous path that can lead to subversion or manipulation of democratic institutions and processes. 

31/3/2013: Entrepreneurship and the Great Recession

Staying on the theme of 'catching up with my reading' today - a very interesting paper by Fairlie, Robert W., "Entrepreneurship, Economic Conditions, and the Great Recession" (February 28, 2013). CESifo Working Paper Series No. 4140.

From the abstract:

"The “Great Recession” resulted in many business closings and foreclosures, but what effect did it have on business formation?

On the one hand, recessions decrease potential business income and wealth, but on the other hand they restrict opportunities in the wage/salary sector leaving the net effect on entrepreneurship ambiguous.

The most up-to-date microdata available -- the 1996 to 2009 Current Population Survey (CPS) -- are used to conduct a detailed analysis of the determinants of entrepreneurship at the individual level to shed light on this question.

• Regression estimates indicate that local labor market conditions are a major determinant of entrepreneurship. 
• Higher local unemployment rates are found to increase the probability that individuals start businesses. [Note: authors do not control for quality of entrepreneurship, e.g. survivorship rates for entrepreneurial ventures founded by 'forced' entrepreneurs out of unemployment spells]
• Home ownership and local home values for home owners are also found to have positive effects on business creation, but these effects are noticeably smaller. 
• Additional regression estimates indicate that individuals who are initially not employed respond more to high local unemployment rates by starting businesses than wage/salary workers. The results point to a consistent picture – the positive influences of slack labor markets outweigh the negative influences resulting in higher levels of business creation. Using the regression estimates for the local unemployment rate effects, I find that the predicted trend in entrepreneurship rates tracks the actual upward trend in entrepreneurship extremely well in the Great Recession."

Wait, what was that about 'home ownership' and 'local home values'? Sure this is not suggesting that negative equity might have an effect on entrepreneurship? Irish Government & our 'Green Jerseys' say that it only matters when one decides to move...

See three posts from 2010 that I wrote on the topic of Negative Equity effects in Ireland: Post 1, Post 2 and Post 3) and another link from 2010 on the topic of Negative Equity and entrepreneurship (here).

31/3/2013: R&D and tax policy: income tax or targeted tax credits?

And while we are on innovation vs policy topic, here's another interesting study, looking into policy drivers for R&D. Ernst, Christof, Richter, Katharina and Riedel, Nadine, "Corporate Taxation and the Quality of Research and Development". CESifo Working Paper Series No. 4139, February 2013.

The paper "examines the impact of tax incentives on corporate research and development (R&D) activity. Traditionally, R&D tax incentives have been provided in the form of special tax allowances and tax credits. In recent years, several countries moreover reduced their income tax rates on R&D output.

Previous papers have shown that all three tax instruments are effective in raising the quantity of R&D related activity. We provide evidence that, beyond this quantity effect, corporate taxation also distorts the quality of R&D projects, i.e. their innovativeness and revenue potential.

Using rich data on corporate patent applications to the European patent office, we find that a low tax rate on patent income is instrumental in attracting innovative projects with a high earnings potential and innovation level. The effect is statistically significant and economically relevant and prevails in a number of sensitivity checks. R&D tax credits and tax allowances are in turn not found to exert a statistically significant impact on project quality."

All is fine, folks, but what does one do when the two countries compete for R&D projects allocations in the environment where both have already set zero tax on patent income?

31/3/2013: World Trade Drivers: policy or simple innovation?

A very important issue of logistics and transport innovation effect on trade flows is tackled in the study by Bernhofen, Daniel M., El-Sahli, Zouheir and Kneller, Richard, titled "Estimating the Effects of the Container Revolution on World Trade" CESifo Working Paper Series No. 4136, February 2013.

[Note: Italics are mine]

From the abstract: "The introduction of containerization triggered complementary technological and organizational changes that revolutionized global freight transport. Despite numerous claims about the importance of containerization in stimulating international trade, econometric estimates on the effects of containerization on trade appear to be missing. Our paper fills this gap in the literature. Our key idea is to exploit time and cross-sectional variation in countries’ adoption of port or railway container facilities to construct a time-varying bilateral technology variable and estimate its effect on explaining variations in bilateral product level trade flows in a large panel for the period 1962-1990."

Per findings: "Our estimates suggest that containerization did not only stimulate trade in containerizable products (like auto parts) but also had complementary effects on non-containerizables (like automobiles). As expected, we find larger effects on North-North trade than on North-South or South-South trade and much smaller effects when ignoring railway containerization. Regarding North-North trade, the cumulative average treatment effects of containerization over a 20 year time period amount to about 700%, can be interpreted as causal, and are much larger than the effects of free trade agreements or the GATT. In a nutshell, we provide the first econometric evidence for containerization to be a driver of 20th century economic globalization."

Now, 700% over 20 years is a massive uplift in what was already a much-advanced trade system (North-North). With South-South and North-South trade flows now rapidly converging in terms of volumes and type of goods traded to those of North-North, I would suspect we will see an equally massive positive impact on these trade flows as well, and as a result on global trade.

The evidence presented in the study is of huge importance. It shows just how impactful can a simple, non-formal-R&D driven innovation can be and it also puts into the context the scope for policy intervention vs organic business-led innovation intervention in delivering market outcomes.

30/3/2013: A simple, yet revealing, exercise in house prices

Based on the latest reading for the Irish Residential Property Price Index, I computed three scenarios for recovery, based on 3 basic assumptions of:

1. Steady state growth of 5% per annum in nominal terms (roughly inflation + 3% pa)
2. Steady state growth at the average rate of annual growth clocked during 2005-2007 period, and
3. Steady state growth at inflation + 1% pa

Note, Scenario 3 is the closest scenario consistent with the general evidence from around the world that over the long run, property returns are at or below inflation rates.

Table below summarises the dates by which we can expect to regain 2007 peak in nominal terms:

Yep, turning the corner (whenever we might do that) won't even be close to getting back into the 'game'...

30/3/2013: Retail Sales in February: Deadman Still Walking

With all the Cypriot Meltdown excitement as the newsflow, Irish data releases slipped into 'noise background' this week, so time to fix that.

March 28th we saw the release of the retail sales data for Ireland for February 2013. The headline from CSO read: "Retail Sales Volume increased 0.3% in February 2013" which obviously is the good news. Except, in reality, reading below headline we discover that:

"The volume of retail sales (i.e. excluding price effects) increased by 0.3% in February 2013 when compared with January 2013 while there was no change in the annual figure.  If Motor Trades are excluded, the volume of retail sales decreased by 0.2% in February 2013 when compared with January 2013 and there was an annual increase of 1.0%."

Wait a second, ex-motors, retail sales fell 0.2% in volume in m/m terms, but were still up 1.0% y/y. Oh, and durable goods (e.g. Electrical Goods) sales were down again.

And in value terms? The stuff that makes retail businesses actually hire or fire workers and pay or not pay taxes?.. Much the same:

"The volume of retail sales (i.e. excluding price effects) increased by 0.3% in February 2013 when compared with January 2013 while there was no change in the annual figure.  If Motor Trades are excluded, the volume of retail sales decreased by 0.2% in February 2013 when compared with January 2013 and there was an annual increase of 1.0%."

Let's see some dynamics:

• Value of sales ex-motors averaged 96.6 in 3mo through February 2013 against 97.0 in previous 3mo period. 6mo average through February 2013 was 96.8 (virtually identical to 3mo average), implying effectively zero growth over 6 months period, although previous 6mo period average was 95.5.
• Over longer horizons: 2006-2007 average of the index stands at 112.1, which was down to 2010-2011 average of 96.6 and 2012 full year average of 96.0, and January-February 2013 average of 96.5. You can tell the that whole volume 'activity' is just a flat trend since January 2011 with some volatility around it.
• Volume of activity slipped on 3mo average through February 2013 to 100.1 from 100.6 in 3 months through November 2012. The rate of decline on 3mo averages basis in volume was more pronounced than for value index, which is a story consistent with pretty much the entire crisis - retailers are only able to shift volumes at the expense of revenues they get. Consumers are getting better deals, but this also means employment in the sector is unlikely to increase.
• 2012 average of 99.6 is pretty much matched by january-February 2013 average of 99.7 - again, flat line growth trend. And as before that one runs from January 2011.

I keep tracking Consumer Confidence here, to show that the whole idea of 'confidence' when not underpinned by supportive fundamentals is not a reasonable concept for anchoring one's expectations about real economic performance.

Here, per usual, updated charts linking (or rather showing the lack of links) confidence to retail sales indices:

Lastly, recall that I run my own index of Retail Sector Activity (RSAI) that is a much stronger correlative for retail sector indices:

Two things jump out from the chart above:

1. The overall flat-line trend in activity in the retail sector over January 2009-present period, showing that, in principle, there is no recovery and there is no sustained signal of one coming so far in the short term future.
2. Forward-looking RSAI has slipped (on 3mo average basis) from 107.9 in 3 months through November 2012 to 106.0 in 3 months through February 2013. M/m RSAI is down 1.83% and y/y it is up 1.84%, tracking correctly the overall dynamics in the CSO indices.

Hence, my expectation is for more of the same in the next 3 months, with retail sales slipping slightly in volume and value, posting closer to zero growth in y/y terms over Q2 2013. The deadman is still walking, for now... and the 'turning point' is still some corridors away...

30/3/2013: Irish Debt Deleveraging 2012: Not much happening

Over the recent years we have been told ad nausea that all the economic suffering and pain inflicted upon us was about 'deleveraging' our debt overhang, 'paying down our debts', 'repairing balancesheet of the economy' and so on. Well, surely, that should mean reduction in our total economic debt levels, right?

Wrong! Our debt levels, vis-a-vis the rest of the world are up on the crisis trough and on pre-crisis peak (EUR580bn in 2007 to EUR651.2bn in 2012), and our net position (foreign assets less foreign liabilities) is down from EUR119.4bn deficit in 2007 to EUR153.7bn deficit in 2012:

 The above exclude IFSC.

Meanwhile, IFSC continues to grow in size, both in absolute and relative terms:

• Foreign assets up from EUR1,810bn in 2007 to EUR2,319bn in 2012
• Foreign liabilities up from EUR1,727bn in 2007 to EUR2,322bn in 2012
• Proportionally to our total foreign assets and liabilities the IFSC has grown from 79.7% in 2007 to 82.3% in 2012 on assets side and from 74.9% in 2007 to 78.1% in 2012 on liabilities side.

Back to non-IFSC balancesheet (as our policy makers and civil servants love treating ISFC as some sort of a pariah when it comes to counting its liabilities, and as some sort of a hero when it comes to referencing it in terms of employment, tax generation etc):

Chart above shows frightening trends in terms of our foreign liabilities as a share of GDP and GNP. Put simply, in 2007, non-IFSC foreign liabilities stood at a massive 357.5% of our GNP. Last year, they reached a n even more dizzying 488.1%.

You might be tempted to start shouting - as common with our officials and 'green jerseys' - that the above are gross figures and that indeed we have vast assets that are worth just so much... Setting aside the delirium of actually thinking someone can sell these 'assets' to their full accounting / book value etc, err... things are not looking too bright on the net investment position (assets less liabilities) side:

In 2007, Irish net investment position vis-a-vis the rest of the world was a deficit of 63.3% of GDP and 73.6% of GNP. In 2012 the net position was in deficit of 93.9% of GDP and 115.2% of GNP. Put differently, even were the Irish state to expropriate all corporate, financial and household assets held abroad and sell them at their book value, Ireland would still be in a deficit in excess of 115% of our real economy.

But back to that question about 'deleveraging' our debt overhang, 'paying down our debts', 'repairing balancesheet of the economy' and so on... the answer to that one is that Ireland continues to increase the levels of its indebtedness. The composition of the debt might be changing, but that, folks, is irrelevant from the point of view that all debts - government, banking, household, corporate, etc - will have to be repaid and/or serviced out of our real economic activity, aka you & me working...

30/3/2013: Euro area sovereign risk rises in March 2013

Here's an interesting bit of data (pertaining to analysts' survey): per Euromoney Country Risk survey:

"As of late March 2013, the survey indicates that 13 of the 17 single currency nations have succumbed to increased transfer risk [risk of government non-payment or non-repatriation of funds] since... two-and-a-half years ago." And the worst offenders are?.. Take a look at two charts (lower scores, higher risk):

Per definition of the transfer risk: "The risk of government non-payment/non-repatriation – a measure of the risk government policies and actions pose to financial transfers – is one of 15 indicators economists and other country risk experts are asked to evaluate each quarter. It is used to compile the country’s overall sovereign risk score, in combination with data concerning access to capital, credit ratings and debt indicators."