18/6/2014: Russian Economy & Tech Sector

I just posted few slides from my presentation on Russian economy and tech sector delivered as keynote at Enterprise Ireland Russian Tech Forum on June 4.

Since there are two articles by a reported who attended the Forum forthcoming (based on this presentation) in Russian language European press, I might as well share the full deck here as well. So here it is:

Click on individual slides to expand

18/6/2014: Tech Start Ups in Russia: Some Facts, Some Hearsay

An interesting article on Russian tech start-up scene: http://thenextweb.com/insider/2014/06/17/startups-russia-government/ Some of it is true, some is hearsay...

If you want some added factual insights: few slides from my recent presentation at Enterprise Ireland:

17/6/2014: Gas, Oil, Russia, Ukraine & Europe: couple of links

An interesting report from Bloomberg on Russia's demand for oil exploration and production JVs with Western companies: here.
One core reference is to the new/old Bazhenov superfield which I covered before here.
Meanwhile, I commented before that Ukraine gas supply disruption is a distinct issue from the European gas supplies, as Ukraine has a separate contract relating to gas transit and this contract has always been paid in full and there are no arrears on it. Ukraine legally does not own the gas it transits. In other words, any disruption to supply of gas to Europe via Ukraine can only come from Ukrainian authorities appropriating gas that belongs to other countries. I expect this to be highly unlikely, especially since Ukraine has pumped in gas reserves sufficient to last it through mid-December 2014.
To confirm this, here is the EU Commission position on the issue of security of supply to European customers. 
And Gazprom position on the issue: "Russian gas transit supplies via Ukraine are being delivered in routine mode. The daily gas amount stands at slightly more than 185 million cubic meters. An emergency headquarters started working in Russian energy giant Gazprom, monitoring the situation every day. If Gazprom finds that gas intended for Europe is left in Ukraine, Russia will increase gas supplies via Nord Stream and Yamal-Europe projects, Miller said. The upstream throughput capacity of Ukrainian gas delivery system makes 288 billion cubic meters and the downstream one amounts to 178.5 billion cubic meters. The country’s gas transportation system consists of 72 gas compressor stations, 110 shops and 1,451 gas hubs. The length of gas pipelines makes 38,600 kilometers."

Predictably, Ukraine blames 'terrorists' (aka 'separatists') for today's explosion. Report here. However, not known for its pro-Russian views, Euronews had to acknowledge that "...explosion was far from the violence in east Ukraine..." Never mind, we know Ukraine has no extremists on the other side of the ethnic divide... why, none at all... and none of them would ever want to do any harm to Gazprom lines to Europe... why, never, of course. It is just so slightly inconvenient that Mr Yatsenuk's own backers - Euro Maidan - are on the record saying they are in favour of blowing up pipelines: http://euromaidanpr.wordpress.com/2014/04/13/plan-b-flatten-belgorod/.

Nice touch there ahead of spreading uranium, and shelling Russian cities (the brave folks would obviously expect Russia to not retaliate),

Truth is - we simply do not know who blew up the pipe, and it is unlikely we will ever find out.

17/6/2014: Ireland's Regulatory 'Resource Curse'

My WallStreet Journal op-ed on the European Commission's investigation into Apple tax affairs in Ireland is linked here.

17/6/2014: Some more troublesome facts about European Competitiveness rankings...

Yesterday, I posted briefly on World Economic Forum Competitiveness Rankings for European Union. That post is available here.

Since then, few people came back to me with a request of running the same analysis across all countries covered in the report. So here it is.

First, WEF Rankings:

Supposedly, higher ranking (lower rank number) means better economic competitiveness. Which should imply two things:
1) Negative correlation between rank and economic growth (higher competitiveness --> higher growth in the economy)
2) Negative correlation between rank improvement (improved rankings) and economic growth (improving competitiveness --> higher growth).

Here is a chart plotting average growth rate in the economies covered by WEF over 2010-2013 (same result, qualitatively, holds for 2012-2013 average, to remove some of the volatility in growth rates) and WEF rankings improvements:

No, statistically-speaking there is no relationship of any meaning between WEF Competitiveness performance over 2012-2014 and growth performance over 2010-2013.

What about rank performance in 2014 and 2012-2013 growth rates?

Nope. No relationship at all.

How about rank performance in 2012 against future 2012-2013 growth?

Totally zero relationship.

So what does this WEF Competitiveness indicator measure exactly? Pet projects of WEF members? Intensity of politically correct policies deployment in the European states? I have no idea, but their competitiveness seems to have preciously nada to do with growth performance...

15/6/2014: WEF Misses on Another 'Metric'...

WSJ reported on Finland taking the lead in the EU competitiveness gains:

Link here: http://blogs.wsj.com/brussels/2014/06/10/finland-leapfrogs-sweden-in-competitiveness-new-report-says/?mod=e2tw

And here is my reply...

So Finland is one of the worst performers in the EA18 in terms of actual growth outcomes during the crisis and subsequent recovery. And it was followed by Sweden (stronger performer) and the Netherlands (even worse performer than Finland)...

This just confirms simple fact: World Economic Forum is not a very good indicator of anything other than egos of its participants and 'young leaders'... full stop... 

15/6/2014: Russia-Ukraine Gas Deal: They Are Where They Were...

So yesterday's (almost/nearly)last-ditch efforts to sort out as deal between Russia and Ukraine ended, predictably, in the same stalemate. The meeting was held in Kyiv/Kiev (or whatever we should call it nowadays). European Energy Commissioner Guenther Oettinger attended, seriously phased by the possibility that Ukraine (no, not Russia) will shut off transit of Russian gas to the EU (note: Russia is not threatening to stop supplies to its non-Ukrainian buyers, so let's dispense with this bit of propaganda).

We do not know if talks will resume today. Gazprom said yesterday that no new date for talks has been fixed, but that can change any time.

So here is where we are:

Last week, Gazprom offered Ukraine exactly the same gas contract terms that were extended to Yanukovych, including the discounts. That's official: President Putin confirmed as much in public. Gazprom agreed to delay gas payments until June 16th to sort out new contract.

The discount advanced to Ukraine was $100 per thousand cubic meters (mcm) and the first price offer was $385 mcm net. Again, this was confirmed by Russian President.

Ukrainian response was that they wanted lower price and they wanted that lower price fixed over a long-term contract. We do not know how long of a fix Ukraine expected (may be, Kiev wanted something similar to Chinese deal - which came at around $350-380 mcm but covers larger volumes and options to increase these volumes further), plus involves a counterpart (China) that never failed to pay on contracts. History of Ukraine-Russia dealings on gas has been checkered at best (see this note which only touches on some top level points relating to 2009 gas deal and more here on 3 years of consecutive violation by Ukraine of the gas purchase contract: here, albeit I do find the 2009 contract to be harsh for Ukraine).

So back to the current saga. $385 mcm is lower than price Poland pays for Russian gas, which comes at a price of around $465 mcm, and is slightly above the price paid by Germany or $370 mcm (though Germany has direct access to Russian-controlled, jointly enveloped Nord Stream pipeline).

Relating to Ukraine's demands/concerns with contract duration, President Putin instructed the Government to develop an option to fix contract terms 'for a certain period' - again, we are unclear as to what duration this period refers to or what duration fix Ukraine wants.

Specifically, president Putin said: “I would like to ask the government and the head of the cabinet to think on how it could be possible at the level of the government of the Russian Federation or upon agreement with the government of Ukraine freeze these terms and make them absolutely guaranteed and free from changes for a certain period…" Ukraine's concern that the $100 mcm discount offered can be unilaterally canceled: “We have never done so. We have always demonstrated that our agreements are reliable to the maximum."

Putin's point makes sense: he offered Ukraine exactly the same terms and conditions for gas pricing as Yanukovich faced prior to Kharkiv Accords. But Kiev has some valid points too - Khrakiv Accords have been annulled by Russia on foot of Crimean crisis (see below). So it's a Russian offer of 'Yanukovich deal, pre-2010' vs Kiev counter 'Yanukovich deal post-2010'.

In response, Ukrainian PM Yatsenyuk claimed that "Russia proposed to reduce the gas price. Still, our stance was and now consists in changing the contract, and not agreeing to a decision made by the Russian government regarding the change of gas price… We are holding short: we change the contract and set a market price. We have paid the market price of $286. We are ready to pay all debts according to this price, and other proposals are unacceptable.”

Where that price of $286 mcm came from is anyone's guess. Until the overthrow of Yanukovich's Government, Kiev paid $268.5 mcm which was a special concessionary price set under the agreement in November 2013 that shelved the Ukraine's association agreement with the EU. In Q2 2014, following Russia non-recognition of the Yatsenyuk Government in Kiev, the agreement was voided and Ukraine was switched back to 2009 agreement on pricing at $385.5 mcm. This is quite reasonable: agreement on $268.5 mcm was based on specific deal struck with Yanukovich and there is no ground, in my view, on which it should translate to a government that was not recognised by Russia. Hence, 2009 deal applied, and $385.5 mcm was legit.

Now onto a tricky bit of the deal. In 2010, under the so-called Kharkiv Accords, Ukraine signed a deal with Russia that suspended $100 mcm export duty from shipments of gas to Ukraine (internal consumption, not transit). This was done in exchange for Ukraine extending the duration of Russian lease on Crimean naval facilities from 2017 to 2042. Note: $100 mcm discount did not reduce the cost of lease paid by Russia to Ukraine, but simply underpinned extension of contract duration.

What happened next is dodgy: on April 2, 2014, President Putin signed a law annulling the Kharkiv Accords. Crimea was no longer a 'leased land' and the $100 mcm discount on export duties was gone. The price of Russian gas shot straight up from $385.5 mcm to $485.5 mcm. My view is that this was wrong.

Following Russia: $385.5 mcm offer and Ukraine's initial counter at $268.5 mcm, Kiev said on Friday that it was ready to pay $326 mcm, but only over an interim period of 18 months - a period it claimed will be required to negotiate a long-term price agreement.

Now things get a bit more convoluted. Per June 11 reports, (see here), Ukrainian Minister of Energy and the Coal Industry Yury Prodan said "Ukraine believed the temporary price for Russian gas could be the mean price of $268-$385 per 1,000 cubic meters of gas until the issue is resolved in the Stockholm International Arbitration Court." Which puts pre-negotiations offer at $326.5 mcm - on-the-dot with second round counter-offer from Ukraine. So the second round offer was there before the first round offer. But to confuse things even more, the $326mcm price was not even Kiev's idea, but the EU's idea: see here.


All around - a big mess...

Per latest:  Sunday talks failed to take place...

15/6/2014: Germany's Ifo: Putin and Flickering Power

I was sent an advanced copy of the Ifo Viewpoint Nr. 154 "Putin and Flickering Power" by Hans-Werner Sinn, President of the Ifo Institute which is the official translation of the German source here.

Selective quotes with comments in italics being my own:

"The unresolved conflict in Ukraine …is also endangering Germany’s oil and gas supplies, which in turn threatens its energy turnaround since Germany’s new energy policy cannot be implemented without Russian gas. Why? Because of the inconstancy of wind and solar energy. Both sources of energy require a technology to smooth out the vagaries of their power output. This task can ultimately only be performed by gas-fired power plants co-existing alongside wind and solar energy." [Although not directly referencing the EU's feeble attempts at delivering a cohesive and coherent energy policy, this thesis clearly puts the boot into Brussels well-meaning but economically infeasible push for renewables-driven energy markets.]

"Using the figures for wind and solar energy effectively supplied during all 8,760 hours of 2011, we calculated the storage capacity required to smooth out the output fluctuations. The installed nominal output of both power sources amounted to 54 Gigawatts (GW) in that year. Their combined output reached up to 27 GW at given times, but at others it dropped to 0.5 GW, giving an average power generation of 7.3 GW. The assured output available during 99.5 per cent of hours amounted to only 0.9 GW.

To make the average output reliably available for consumption and to bring up the 0.9-GW assured output as close to the average value as possible, a storage technology is absolutely essential. The most efficient method currently available is pumped hydro storage. Around 3,300 pumped storage facilities would be required to achieve a complete smoothing of the power supply based on 2011 figures, which represents around 100 times the number of facilities currently existing in Germany. New storage facilities, however, are difficult to get built since they tend to provoke angry citizen protests. In Bavaria’s Jochberg area people raised their scythes in protest when only one such power station was to be built." [Ah, that pesky problem of people power… Pragmatically, Ifo takes it into the account. Typically, for Brussels operations, EU neglects it. End game: dysfunctional centralised policy grafted onto the locally democratic institutions of policymaking.]

"So what about smoothing only part of the “fluctuating power” instead of all of it? The results for this model are also sobering. To smooth four-sevenths of the average power output, around 440 pumped storage facilities would still be needed in Germany. This remains beyond the realms of the politically possible."

"Alternatively, power could be stored in batteries. This would require 164 million battery packs of the type used in a BMW i3 – four times the number of cars of all stripes presently in existence in Germany. The one million electric cars that are supposed to be on Germany’s roads by 2020 would deliver a meagre 0.6 per cent of the storage capacity required. And those cars would not be able to drive on windless days of the year, to prevent their batteries from running out of power."

The storage problem can only be solved through the construction of natural gas storage facilities. Such facilities require less space, can be built on flat land and the production costs are much lower. With this technology power peaks are initially used to produce hydrogen. The hydrogen is then transformed back into methane gas, which the gas-fired power stations can use to generate power where necessary. A problem yet to be solved, however, is energy loss along this storage path. Since the efficiency factor in this procedure is only a quarter, the cost of any power sent through the methanisation and gas-fired power plants would quadruple."

[So, unhappy (for Brussels and Eastern Europe) conclusion:] "In short, it is ultimately much cheaper to buy gas from Putin’s gas traders, store it in Germany and then use it to generate power in gas-fired power stations when necessary to fill the gaps left by wind and solar energy. Putin gas costs around 3 cents per kilowatt hour, whereas gas from methane obtained from wind energy conversion would be at least six times as expensive, not including the costs of building the conversion plants. If the power were to be generated offshore it would be at least ten times as expensive." [The brilliant bit of this is that it shows the German way of thinking in terms of efficiencies as opposed to, say, Irish thinking in terms of 'romantic evocations' - remember Irish policy refrain that 'wind is free energy'? Right…]

"The use of Russian gas is therefore the only solution that is halfway viable in economic terms. Under this scenario, the fluctuating power from wind and solar power is blended and smoothed with power from methane storage facilities that are replenished by Putin’s gas traders and then tapped as needed. Overall, this leads to a regular supply of energy – and it is our only option. All other alternatives are mere pipedreams."

15/6/2014: Ifo on Russia: 'Make Trade to Avoid War'...

A very interesting set of points on EU/U.S. policy on Russia from the Ifo's President, Hans-Werner Sinn (Ifo Viewpoint Nr. 155, "Why We Should Give Putin a Chance" link here)

Some quotes, my comments in italics:

“The annexation of Crimea was definitely a violation of international law. …A redrawing of borders decided upon by only one party cannot be accepted in Europe. However, it must be borne in mind that the present crisis was triggered by the West. The overtures made by NATO to Georgia, Moldova and Ukraine in recent years effectively threatened to encircle Russia's Black Sea Fleet in the only ice-free port at its disposal.”

“If U.S. President Barack Obama believes that Russia is just a regional power that will have to put up with this, he is wrong…” [Even if Russia were a regional power, the region in which it co-exists with other powers is immense and directly borders three superpowers – U.S. via Pacific, EU and China. Security considerations, in Russia’s case directly link to the fact that it is literally surrounded by the Nato or Nato-related (via E.U. membership) powers on three sides. It would be exceptionally naïve, or more likely careless and callous, to assume that Nato and aligned states are not a threat to Russian security, no matter how benign the alliance is and no matter how many cooperative councils Nato has with Russia].

“…some hardliners in Washington, Brussels and Moscow obviously have their own agenda. NATO can chafe at the bit once again, and the powers-that-be in the Kremlin are not the only ones to have noticed that international conflicts are an effective way of distracting attention away from domestic problems. It is good that the German federal government is trying to exercise a moderating influence, while exercising care not to endanger the solidarity of the West's alliance.” [A logical conclusion. On both sides. Including the obvious one: Russia, but also the less discussed one: the U.S. where domestic problems for the Administration – relating to a set of policies that have effectively rendered the current Administration ineffective and necessitated ‘toughening’ by the White House of the foreign policies stance to counter rising strengths of the U.S. Republican Party. Ukraine is being de facto caught between three pressure points: (1) Russia’s growing insecurity and concerns about the geopolitical position of the country in its own neighbourhood; (2) White House’s growing weakness in domestic affairs; and (3) EU’s complete loss of raison d’etre during the Global Financial Crisis. Add to this internal collapse of the Ukrainian political and business elites and we have the current situation.]

“… we need to proceed carefully: No reasonable party can be in favour of the economic destabilization of Russia and a trade war.” [However, beyond being undesirable, such destabilisation is actually contrary to the solution needed in order to normalise the region:] “How can the cost of any further annexations be raised for Russia and the chances of finding a peaceful solution be strengthened, without doing any damage to Russia, Ukraine or the EU? The answer lies in the offer of a free trade agreement with Russia and the Ukraine as part of a new international agreement on Ukraine's future.”

[Such an agreement is neither new, nor alien idea. In fact it was proposed by President Putin himself:] “In 2010, Russian President Vladimir Putin proposed a free trade area stretching to Vladivostok from Lisbon. What happened? The EU worked on a free-trade agreement with Georgia, Moldova, Ukraine and Armenia instead. This only increased Moscow's nervousness, because it implicitly posed the threat of customs barriers for Russia.” [Again, European position of raising barriers against external partners in order to secure gains from trade to the members of the Union or the Associate Members is the problem. Russia witnessed this in the cases of 2004 EU Accession].

[Free trade is a win-win for all parties concerned.] “Free trade with a country specialized in commodities, such as Russia, that complements the West's specialization in manufacturing, promises major trade gains that would be much greater than the benefits of trade between similar economies alone. EU politicians are currently negotiating a free-trade deal with the U.S., which would bring benefits to the countries involved. But the inclusion of Russia in a free-trade agreement could turn out to be a real gold mine for all parties.”

“In the event of political stabilization, offering Russia free trade with the West would preserve peace, bring economic advantages to Europe and effectively push forward the policy of “change through rapprochement” first implemented successfully by Willy Brandt with East Germany.”

14/6/2014: Industry vs ICT Services: Employment in Ireland

Changes in Industrial vs ICT services employment have been dramatic over the recent years. In the decade from 2003, Ireland gained 18,250 new jobs in ICT services and lost 63,425 jobs in Industry (excluding construction). This is just based on annual averages.

In Q1 2014 compared to Q1 2003, there were 19,100 new jobs added in ICT Services and 66,800 jobs lost in Industry.

Here's the problem:

1. ICT jobs involve hiring of foreign staff and intra-company transfers from abroad, Industry jobs involve more indigenous workers;
2. Both types of jobs require specialist skills, but transferability of these skills across various employers is much lower in Industry than in ICT Services, so a job lost in Industry is more likely to lead to long-term unemployment than a job lost in ICT
3. Workers in industrial employment are more likely to be older, compared to workers in ICT Services, which means that their retraining for new careers is less likely and their debt and family exposures are more likely to be significantly larger than for ICT Services workers

14/6/2014: Oilprice.com on World Cup Energy Use

A very interesting article on Oilprice.com covering energy consumption during the World Cup 2014

Full article here: http://oilprice.com/Energy/Energy-General/How-Much-Energy-Will-the-2014-World-Cup-Consume.html

14/6/2014: Risk Profile for Russian Economy Shows New Strains

Quick update from my Russia Deck on ECR outlook for Russian economy's risk profile:

Click on the image to enlarge

Worth noting: this performance is not as dramatic as one could have expected given the intensity of the conflict ongoing in Ukraine and the fall-out predicted by many analysts from Crimean crisis and sanctions.

14/6/2014: BlackRock Institute Survey: N. America & W. Europe, June 2014

In the previous post (http://trueeconomics.blogspot.ie/2014/06/1462014-blackrock-institute-survey-emea.html) I covered EMEA results from the BlackRock Investment Institute latest Economic Cycle Survey. Here, a quick snapshot of results for North America and Western Europe

Per BI:

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 67% of 86 economists expecting the world economy will get stronger over the next year, compared to net 84% figure in last month’s report. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy.

Note: Note: Red dot denotes Austria, Canada, Germany, Norway and Switzerland.

At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen with exception of Switzerland which is expected to stay the same.

Eurozone is described to be in an expansionary phase of the cycle and expected to remain so over the next 2 quarters. Within the bloc, most respondents described Greece and Italy to be in a recessionary state, with the even split between contraction or recession for Portugal, Belgium and Ireland.

Over the next 6 months, the consensus shifts toward expansion for Greece and Italy.

Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months."


Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

14/6/2014: BlackRock Institute Survey: EMEA, June 2014

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region.

Per BI: "With caveat on the depth of country-level responses, which can differ widely, this month’s EMEA Economic Cycle Survey presented a mixed outlook for the region.

The consensus of respondents describe Russia, South Africa, Slovenia, Croatia, and the Ukraine to be in a recessionary state, with an even split of economists gauging Kazakhstan to be a in a recessionary or contraction.

Note: Red dot represents Czech Republic, Hungary, Romania, Israel, Egypt, Poland and Slovakia

Over the next two quarters, the consensus shifts toward expansion for only Kazakhstan.

At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Israel, Kazakhstan, Slovenia, South Africa and the Ukraine.

Globally, respondents remain positive on the global growth cycle with a net 71% of 41 respondents expecting a strengthening world economy over the next 12 months – an 7% decrease from the net 78% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."


Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

13/6/2014: January-April Trade in Goods: Ireland

Some quick stats on trade in goods data out today:

First up: aggregates:

Core points:

1. Aggregate exports are down once again in 2014: off 1.8% for the period January-April
2. Much of this is down to pharma and organic chemicals, but declines overall were registered in 4 out of 9 categories, while four categories posted increases in exports.
3. Trade surplus declined again, this time by 11.1%. Trade surplus dropped y/y in 6 out of 9 categories.
4. Trade surplus dropped by a total of EUR1.357 billion, while exports declined by EUR527 million.
5. The summary of sectoral contributions is provided below

Geographic breakdown of changes in exports and trade surplus is provided in the table below:

The above shows geographically wide-ranging declines in exports and trade surplus.

12/6/2014: Chart of the day: Fed vs ECB balance sheets

Today's chart of the day, via Pictet:

Take pre-crisis swing to crisis to the swing to post-crisis (2013-on)... any wonder euro area growth is 0.2% and we call it 'recovery'?.. ECB balance sheet approximately doubled since 2007, Fed's one more than quintupled... pair this with toxic loans deleveraging (the two are obviously linked via funding) and you have the euro system loaded with private sector weaknesses and US system loaded with forward pain of deleveraging the Fed...

10/6/2014: Credit to Irish Households: Q1 2014

Having recently posted miraculous recovery in terms of yet another quarter of declines in lending to Irish private sector enterprise (see: http://trueeconomics.blogspot.ie/2014/06/662014-credit-to-irish-resident.html) repaired/restored/reformed Irish banking system coughed out another set of 'encouraging' data points… today's one coming on the side of credit advanced to Irish private [assuming this excludes Irish public - aka celebrity economists et al] households. And guess what… the aforementioned repaired/restored/reformed Irish banking system is shrinking in terms of household credit too, still…

Chart to start with:

And the above shows:

• Total credit extended to Irish households falling 2.62% in Q1 2014 compared to Q1 2014 and down 0.54% q/q
• Credit advanced for house purchases is down 1.21% y/y and basically flat (-0.03%) q/q.
• SVR mortgages volumes are up (arrears restructuring and new mortgages extended adding to the pile of soon-to-be even more expensive loans, as the banks re-engage in margins rebuilding post-ECB rate cut); Trackers are down; Up to one year fixed rates mortgages are up, Fixed rate mortgages are down;
• Other personal loans are down whooping 9.98% y/y and are down 5.82% q/q (with both Finance for investment and Finance for other purposes sub-categories down by more than 5% q/q).

Meanwhile, deposits (remember our 'gargantuan' savings rates that worry everyone from ESRI to DofF) well… deposits are down 1.78% y/y and down 0.14% q/q.

Remember our Government's talk about repairing the banking system? One of the core metrics for this was loans/deposit ratio. Chart below shows evolution of this:

Observe one interesting regularity: since Q4 2011, loans-deposit ration in terms of Irish households' balance sheets averaged 114.7% and in Q1 2014 this ratio was… err… 114.2%. In other words, things have not been improving when it comes to loans/deposit ratio for some 10 consecutive quarters now…

Since we are onto the topic of 2011, recall that in H1 2011 we have recapitalized Irish banks, which, ever since that time, been on a steady path of recovery. Even Wilbur Ross says as much, let alone our Ministers and Senior Officials. Numbers confirm… the opposite story: compared to H1 2011, q1 2014 levels of households' credit in the economy was down massive 18.2%, credit for house purchase down massive 15.5%, credit for other purposes down gargantuan [truly] 30.9%, while deposits are down 1.82%.

Clearly things have to be looking sunnier some day soon... of Wilbur will have to come back to help us repair the banking system once again...

10/6/2014: In Irish Press: Wilbur and Electricity Taxes

In Irish news today, one dominant story is that of BofI investor, Wilbur Ross moving on off 'Ireland Corp' team and into the not-too-shallow Government's Christmas Cards list. The US billionaire is cashing in his chip at the Irish Banks Casino and there is no end to glowing reviews of his legacy.

Per RTE report: "Mr Ross said he believes the bank is "on the right track". This is "definitely not a negative comment on BoI or Ireland. Both are clearly on the right track," Mr Ross said in an emailed message after Deutsche Bank announced it was to sell his stake." Naively, RTE could not fathom an idea that Mr Ross might be speaking in marketing mode - he is selling the stake in a bank, so hardly can be expected to make any comments adverse to his own interest of talking up the said bank.

But never mind, the really grotesque bit of the story is at the bottom, where our Government and State officials pour praise all over Mr Ross. Now, Mr Ross made a nice profit having taken some risk. No problem there. A slight blemish on his investment strategy in Ireland is the fact that much of this return was down to taxpayers taking on the bank recapitalisation burden. Slightly more of a blemish is the fact that during his tenure as a major shareholder and board member, the Bank became synonymous with playing the hardest ball with those borrowers who fell onto hard times. Still, let us not begrudge him in his success.

But the glowing and even slavish praise being heaped onto him makes one wonder if there is still a gas station somewhere on, say, N3 or N7 left unnamed? Is it time for a 'Wilbur Ross Plaza' replete with convenient Centra and washing facilities?

In a related bit of the story, we have projected valuations of the stake. Updating the above report from RTE, latest information we have is that he is selling the stake for EUR0.26-0.27 per share, a discount of up to 8.5% on yesterday's price. This is an impressively shallow discount (my expectation was closer to 10-12%), but still a discount. Some years ago, when Mr Ross just bought into BofI, I suggested that any exit will require a discount. A couple of Ireland's illustrious Stockbrokers came out of the hedges to bite me, claiming that actually Mr Ross can sell at a premium, as there can be a great demand around the world for BofI shares in a strategic package volume. Ooops...

Never, mind, however, the illustrious Stockbrokers are back at it, now lauding the virtues of 'increased free-float' of BofI shares in the wake of Mr Ross' exit as a major support for the stock. By said logic, BofI should just quadruple numbers of shares in the market, to gain even more 'support'.

On a related side, Reuters reported that "Ireland's Finance Minister Michael Noonan in December said that while the government had no interest in running banks long term, it was under no financial or political pressure to sell." (link here). Of course, this is the same Minister Noonan who's standard answer to virtually all questions about Irish Government involvement in managing strategic or operational aspects of individual banks it owns is: 'We have no control over what they do' and who's voting record as shareholder is about as 'activist' as that of the Anglo shareholders back in 2005.

A far less-dominant story also in the news today is that Irish Government is raising by a whooping 50% tax on domestic electricity. This is covered here. Per report: "Householders will be charged €66.55 a year in the PSO levy, up 47pc. When valued added tax (VAT) is added the annual cost on each household bills will go to €75.42." 

Irish Independent politely calls this a 'sneaky tax'... sneaky, presumably, because it is dressed up as a 'Public Service Obligation' - a levy designed to subsidise renewables energy companies and peat-burning stations. Which makes it more subtle than just bludgeoning taxpayers in dark alleys for their spare change.

At the end of 2013, Ireland had the fourth highest levels of electricity taxes and electricity prices in the EU27 and posted between the fourth and the fifth highest rate of increases in taxes and levies for electricity in EU27 (depending on annual consumption levels for households). Here is some additional background on how Irish Government has been extracting cash out of financially strained households via electricity supply systems.

9/6/2014: Reversal of Human Capital Flows

An interesting post on reversals of old patterns in human capital flows: http://www.project-syndicate.org/commentary/mohammed-bin-rashid-al-maktoum-highlights-the-success-of-some-developing-countries-in-reversing-the-outflow-of-their-most-talented-people

that gels well with my speech on same topic here: http://trueeconomics.blogspot.ie/2013/11/14112013-human-capital-age-of-change.html

9/6/2014: Some Unorthodox Thinking About Europe's & Irish Recessions...

A decade-old classic paper, "Structural Traps, Politics and Monetary Policy", by Robert H. Dugger and Angel Ubide (International Finance 7:1, 2004: pp. 85–116 link here) provides a framework for understanding why in structural crises, monetary easing might be not only ineffective, but actually harmful to the recovery.

Now, recall that we are in a structural recession, in Ireland and across the euro area, and before us, Japan was in the same boat and, by me assessment, still is there.

Dugger and Ubide introduced "the concept of structural trap, where the interplay of long-term economic development incentives, politics, and demographics results in economies being unable to efficiently reallocate capital from low- to high-return uses." From Ireland's point of view, there are three sources of potential trap:

1. The obvious one: construction and property investment sector - where a lot of resources were trapped in the 2000s in a low-return (long-term) activities and these resources, currently idle, cannot be re-allocated to other sectors of economy due to lack of skills, debt anchors, and frankly put, lack of other sectors to which they can be re-allocated; and
2. Less obvious: MNCs-led activities. Sure, these are high-return activities from the aggregate economy point of view. But from indigenous economy vantage point, this conjecture may not be true. Some MNCs (notably in manufacturing) engage in both, tax optimisation and value-adding here. But these are dwindling in numbers and activities here. Many services MNCs add a lot of value elsewhere and book it through Ireland to far-flung tax havens.  The end point is that here too productive resources (human capital) are trapped in low-return (from indigenous economy) activity without being able to flow to other, higher return sectors (problem is, again, where are these sectors in Ireland's indigenous economy), and
3. Less talked about: public sector and semi-state companies.

Per Dugger and Ubide, "the resulting macroeconomic picture looks like a liquidity trap – low GDP growth and deflation despite extreme monetary easing." So far - on the money for euro area and Ireland. The kicker is next: "But the optimal policy responses are very different and mistaking them could lead to perverse results. The key difference between a liquidity trap and a structural one is the role of politics."

Dugger and Ubide show "how, in the Japanese case, longstanding economic incentives and protections and demographic trends have resulted in a political leadership that resists capital reallocation from older protected low-return sectors to higher-return newer ones." Wait, is not the same happening in Ireland? Incentives to boost property of late? Incentives to preserve capital (and employment) in public sectors? Incentives and direct power to protect and increase resources in semi-state sectors? Do you remember the days when Irish media was praising ESB for 'investing' in the economy amidst worsening recession and on foot of higher consumer charges? Do you recall when Irish media was singing 'Nama investment needed' songs?

"If the Japanese case is instructive, in a structural trap, extremely loose monetary policy perpetuates deflation and low GDP growth, because unproductive but politically important firms are allowed to survive and capital reallocation is prevented." Irish Water anyone? Or ESB? Or DAA? Or HSE? Or sprinklings of weaker universities & ITs? Keep going… 

"By preventing the needed reduction in excess capacity, a structural trap condemns reflationary policies to failure by making the creation of credible inflation expectations impossible. Faced with a structural trap, an independent central bank with a price stability mandate should adopt a monetary policy stance consistent with restructuring. If political resistance is high, monetary policy decision makers will need to keep nominal rates high enough to ensure that capital reallocation takes place at an acceptable pace."

Thought provoking, no?

9/6/2014: 2 charts, 2 markets, same nagging sensation...

Two charts worth paying close attention to:

The first one from Deutsche Bank:

The above is showing ratio of S&P500 Price/Earnings ratio to VIX (quarterly) volatility indicator. Recent uplift in the series is down to simultaneously:

• Rising equity price relative to earnings, and
• Falling markets volatility

The second one is via TestosteronePit, showing the first bit: rising equity prices relative to falling earnings, except not for S&P, but for European equities:

Care to draw any conclusions as to rational expectations vs short-term profit chasing?..

9/6/2014: ESRI Consumer Confidence Indicator Moderates in May

Some hopium going out of the market in Ireland: ESRI Consumer confidence for May moderated from sky-high 87.2 in April to 79.4 in May, bringing the series slightly closer to reality mapped by Retail Sales data on the ground:

3mo MA for the series is now at 83.2, virtually flat on 3mo MA through February 2014, and on 6mo MA of 83.3. In other words, the series trending flat over 6 months, and are sitting at still sky-high levels. Meanwhile, volumes of retail trade (core, ex-motors) are rising along a decent trend, but value of retail sales is showing barely perceptible upward momentum.

Note, seasonally, for May, there is no established momentum in the series either up or down.

9/6/2014: ECB Will Still Need Outright QE...

My comments on ECB policy moves last week and what awaits euro area in terms of monetary policies in the near future is on Expresso website (Portuguese) : http://expresso.sapo.pt/bce-pode-estar-a-alimentar-duas-bolhas-financeiras=f874782 and a longer version in English here: http://janelanaweb.com/novidades/constantin-gurdgiev-ecb-will-need-further-measures-including-an-outright-qe/

Needless to say, no one in the Irish mainstream media asked for my two-pence.

8/6/2014: Piketty - briefly...

It's a lazy man's way out, but given all the 'Piketty-Smiketty' debates raging on about his errors and errors of those who find errors, I am simply not in the mood for deep commenting on the infamous book. So here is my earlier exchange on twitter with @DrKeithRedmond  on Piketty's core theses:

7/6/2014: Ireland's Questioned Tax Regime & Taoiseach's Magnets

Two articles this week highlight the on-going saga of Irish corporation tax regime:

1) One covering California's Governor comments made to our Taoiseach: http://www.independent.ie/irish-news/politics/california-would-be-an-independent-state-if-it-had-irelands-tax-regime-30336242.html

2) And another covering the EU probe being launched: http://www.businessweek.com/news/2014-06-05/eu-said-to-decide-next-week-on-probe-of-irish-dutch-tax-breaks

The topic is of huge importance to Ireland and I covered it on the blog continuously over the years, so no comment from me on these.

One quick point. In the Irish Independent report, there is a quote from our Taoiseach Enda Kenny that strikes me as absolutely out of touch with reality. Taoiseach said that Dublin is "becoming a magnetic attraction for young people from all over the world".

Granted, he said Dublin, not Ireland, but… the bit of facts in order: based on CSO data (latest through April 2013, available here: http://cso.ie/en/releasesandpublications/er/pme/populationandmigrationestimatesapril2013/#.U5Npz5SwJ9k), in 2011, 2012 and 2013 the largest group with net emigration from Ireland was… the young people: those of age 15-24, in 2009 and 2010 the largest group was 'youngish' people - aged 25-44 (same group was the second largest source of net emigration in 2011, 2012 and 2013.

So, dear Taoiseach, it might be worth revisiting that high school physics class where you were (presumably) taught about magnetic force and polarity...

6/6/2014: The King of Scariest Charts is Dead... Long Live the King...

Over recent years, I occasionally returned to the famous CalculatedRisk chart plotting jobs recovery in the Great Recession against the record of post-war US recessions. At last, today, the US economy has completed the arduous task of getting back to the pre-crisis level of employment.

The chart is completed:

The job is done. 76 months - longer than 46 months in the previous record-busting recession of 2001 - it took for the US economy to regain the pre-crisis milestone.

But the lessons are yet to be learned. Since 1981 recession, every recession has been worse and worse in terms of speed of jobs recovery. Why?

Since 1981 recession, the US deployed ever increasing firepower to fight off adverse effects of recession on jobs markets. And the task is not getting easier. Why?

And finally - a scary chart to replace the above scary chart: duration of unemployment in the US has been on a massive upswing during the current Great Recession and it is yet to yield its highs:

Scary charts do go away... but this one is likely to stay with us for some time... most likely - till the next recession hits...

6/6/2014: Credit to Irish Resident Enterprises: Q1 2014

Since time immemorial (ok, since around 2009) Irish Government after Irish Government has been promising the restoration of functioning credit markets. Targets were set for the banks to lend out to non-financial (aka real economy) enterprises. Targets were repeatedly met. Banks have talked miles and miles about being open for lending, approving loans etc etc etc. And credit continued to fall and fall and fall...

And so the story repeats once again in Q1 2014. Central Bank latest data on credit advanced to Irish resident private sector enterprises attests to the lifeless, deleveraging-bound, zombified banking sector.

• Credit advanced to financial intermediation companies is down 3.63% in Q1 2014 compared to Q4 2014. This marks 9th consecutive quarter of declines. Since Q4 2008, credit has fallen in 11 quarters, and actually it has fallen in 12, since Q4 2011 rise was down to reclassifications being factored into the equation for the first time. Worse than that, majority of declines came since the current Government took office, not before. 
• Credit advanced to financial intermediation and property sectors fell 4.05% q/q in Q1 2014. The fall was steeper than in Q4 2013 compared to Q3 2013 and also marks ninth consecutive quarterly decline in the series or 11th if we are to control for 2011 reclassifications.
• Excluding financial intermediation and property, credit advanced to Irish resident non-financial companies ex-property sector has fallen 1.31% q/q in Q1 2014. This marks fourth consecutive quarterly fall. Credit to the real economy is now down in 20 quarters since Q4 2008. Since the current Government came into office, credit to these companies is down in 10 quarters out of 12.
• Total credit advanced to Irish resident enterprises was down 3.49% q/q in Q1 2014 - steeper than the decline of 3.07% recorded in Q4 2013, and marking ninth consecutive quarter of declines (11th, if reclassifications are ignored).

So keep that hope alive... one day, some day... things will be better. Do not forget to give credit to the Government and the Central Bank - they predicted this 'betterment' years ago and like a stopped clock, one day they will be proven right...