9/2/16: Currency Devaluation and Small Countries: Some Warning Shots for Ireland

In recent years, and especially since the start of the ECB QE programmes, euro depreciation vis-a-vis other key currencies, namely the USD, has been a major boost to Ireland, supporting (allegedly) exports growth and improving valuations of our exports. However, exports-led recovery has been rather problematic from the point of view of what has been happening on the ground, in the real economy. In part, this effect is down to the source of exports growth - the MNCs. But in part, it seems, the effect is also down to the very nature of our economy ex-MNCs.

Recent research from the IMF (see: Acevedo Mejia, Sebastian and Cebotari, Aliona and Greenidge, Kevin and Keim, Geoffrey N., External Devaluations: Are Small States Different? (November 2015). IMF Working Paper No. 15/240: http://ssrn.com/abstract=2727185) investigated “whether the macroeconomic effects of external devaluations have systematically different effects in small states, which are typically more open and less diversified than larger peers.”

Notice that this is about ‘external’ devaluations (via the exchange rate channel) as opposed to ‘internal’ devaluations (via real wages and costs channel). Also note, the data set for the study does not cover euro area or Ireland.

The study found “that the effects of devaluation on growth and external balances are not significantly different between small and large states, with both groups equally likely to experience expansionary [in case of devaluation] or contractionary [in case of appreciation] outcomes.” So far, so good.

But there is a kicker: “However, the transmission channels are different: devaluations in small states are more likely to affect demand through expenditure compression, rather than expenditure-switching channels. In particular, consumption tends to fall more sharply in small states due to adverse income effects, thereby reducing import demand.”

Which, per IMF team means that the governments of small open economies experiencing devaluation of their exchange rate (Ireland today) should do several things to minimise the adverse costs spillover from devaluation to households/consumers. These are:

1. “Tight incomes policies after the devaluation ― such as tight monetary and government wage policies―are crucial for containing inflation and preventing the cost-push inflation from taking hold more permanently. …While tight wage policies are certainly important in the public sector as the largest employer in many small states, economy-wide consensus on the need for wage restraint is also desirable.” Let’s see: tight wages policies, including in public sector. Not in GE16 you won’t! So one responsive policy is out.
2. “To avoid expenditure compression exacerbating poverty in the most vulnerable households, small countries should be particularly alert to these adverse effects and be ready to address them through appropriately targeted and efficient social safety nets.” Which means that you don’t quite slash and burn welfare system in times of devaluations. What’s the call on that for Ireland over the last few years? Not that great, in fairness.
3. “With the pick-up in investment providing the strongest boost to growth in expansionary devaluations, structural reforms to remove bottlenecks and stimulate post-devaluation investment are important.” Investment? Why, sure we’d like to have some, but instead we are having continued boom in assets flipping by vultures and tax-shenanigans by MNCs paraded in our national accounts as ‘investment’. 
4. “A favorable external environment is important in supporting growth following devaluations.” Good news, everyone - we’ve found one (so far) thing that Ireland does enjoy, courtesy of our links to the U.S. economy and courtesy of us having a huge base of MNCs ‘exporting’ to the U.S. and elsewhere around the world. Never mind this is all about tax optimisation. Exports are booming. 
5. “The devaluation and supporting policies should be credible enough to stem market perceptions of any further devaluation or policy adjustments.” Why is it important to create strong market perception that further devaluations won’t take place? Because “…expectations of further devaluations or an increase in the sovereign risk premium would push domestic interest rates higher, imposing large costs in terms of investment, output contraction and financial instability.” Of course, we - as in Ireland - have zero control over both quantum of devaluation and its credibility, because devaluation is being driven by the ECB. But do note that, barring ‘sufficient’ devaluation, there will be costs in the form of higher cost of capital and government and real economic debt.It is worth noting that these costs will be spread not only onto Ireland, but across the entire euro area. Should we get ready for that eventuality? Or should we just continue to ignore the expected path of future interest rates, as we have been doing so far? 

I would ask your friendly GE16 candidates for their thoughts on the above… for the laughs…

9/2/16: We've Had a Record Year in M&As last... next, what?

Dealogic M&A Statshot for the end of December 2015 showed that global M&A volumes have increased for third year running, reaching USD5.03 trillion in 2015 through mid-December. Previous record, set in 2007, was USD4.6 trillion.

• 2015 annual outrun was up 37% from 2014 (USD3.67 trillion) 
• 2015 outrun was the first time in history that M&As volumes reached over USD5 trillion mark.
• 4Q 2015 volume of deals was the highest quarterly outrun on record at USD1.61 trillion, marking acceleration in deals activity for the year
• There is huge concentration of deals in mega-deal category of over USD10 billion, with 69 such deals in 2015, totalling USD1.9 trillion, more than double USD864 billion in such deals over 36 deals in 2014.
• Even larger, USD50 billion and over, transactions accounted for record 16% share of the total M&As with 10 deals totalling in value at USD798.9 billion.
• Pfizer’s USD160.0 billion merger with Allergan, officially an ‘Irish deal’, announced on November 23, is now the second largest M&A deal in history (see more on that here: http://trueeconomics.blogspot.com/2016/01/28116-irish-m-not-too-irish-mostly.html)

The hype of M&As as the form of ‘investment’ in a sales-less world (see here http://trueeconomics.blogspot.com/2016/02/9216-sales-and-capex-weaknesses-are-bad.html) is raging on and the big boys are all out with big wads of cash. Problem is:

• M&As are not that successful as a strategy for corporate growth (http://trueeconomics.blogspot.ie/2015/05/21515-global-m-and-economic-fundamentals.html), 
• They are pretty terrible deal for organic capital investment (http://trueeconomics.blogspot.com/2015/11/141115-more-evidence-us-capex-cycle-is.html), and
• They are usually jobs subtractive, rather than jobs additive. 

The former, however, is trouble for investors, not management. The latter two are trouble for us, mere mortals, who want well-paying jobs. which brings us about to 'What's next?' question.

Given lack of organic revenue growth and profitability margins improvements, and given tightening of the corporate credit markets, one might assume that M&As craze will abate in 2016. Indeed, that would be rational. But I would not start banking on M&A slowdown returning companies to real capital spending. All surplus cash available for investment ex-amortisation and depreciation and ex-investment immediately anchored to demand growth (not opportunity-creating investment) will still go to M&As and share support schemes. And larger corporates, still able to tap credit markets, will continue racing to the top of the big deals. So moderation in M&As will likely be not as sharp as moderation in corporate lending, unless, of course, all the hell breaks loose in the risk markets.

9/2/16: Sales and Capex Weaknesses are Bad News for U.S. Jobs Growth

In a note from February 4, Moody Analytics have this two key messages about the U.S. economy, none pleasant:

• Business sales are ‘mediocre’ outside energy sector, so that jobs growth singled by business sales outside energy sector should be slowing; and
• Capex slowdown is about to smack jobs growth even further to the downside.

Take their numbers with a gulp of some oxygen.

Point 1: Business sales

The old-fashioned statistics don’t quite fudge stuff as well as the more modern hoopla about users, unique visits and signups deployed in the ICT sector. So here we go:

“Don’t fall into the trap of believing all is well outside of oil & gas. According to Bloomberg News, the 52% of the S&P 500 that has reported for 2015’s final quarter incurred over-year setbacks of -4.9% for sales and -5.7% for operating income. To a considerable degree, the declines were skewed lower by annual plunges of -34.2% for the sales and -64.2% for the operating profits of the latest sample’s 18 energy companies. For the 53% of the S&P 500’s non-energy companies that have reported for Q4-2015, sales barely rose by 0.6% annually, while the 2.6% increase by operating income fell considerably short of long-term profits growth of 6.5%.”

You’ve heard it right: in a recovery the U.S. is having, sales are up 0.6% y/y. Know of any real business that lives off something other than sales? I don’t.

Based on the Commerce Department broad estimate of business sales “that sums the sales of manufacturers, retailers and wholesalers. …even after excluding sales of identifiable energy products, what I refer to as core business sales posted annual increases of merely +2.1% for 2015 and +1.0% for Q4-2015”.

“…payrolls have been surprisingly resilient to the slowest growth by business sales excluding energy products since Q4-2009.” But, based on 3-mo average payrolls correlation with 12-mo average business sales data (estimated by Moody’s at 0.87), 2015 figures for sales suggest “…the average increase of private sector payrolls may descend from 2015’s 213,000 new jobs per month to 42,000 new jobs per month. Unless core business sales accelerate, 2016’s macro risks are most definitely to the downside.”

A handy chart:

Point 2: Capex headwind for jobs growth

“Business outlays on staff and capital spending are highly correlated. Over the past 33 years, the yearly percent change of payrolls revealed a strong correlation of 0.84 with the yearly percent change of real business investment spending.”

So, based on 2015 yearly increase in capital spending private sector payrolls “should have approximated 0.8% instead of the actual 1.9%. In other words, Q4-2015’s 1.6% yearly increase by real business investment spending favored a 91,000 average monthly increase by 2015’s payrolls, which was considerably less than the actual average monthly increase of 221,000 jobs.”

All of which puts into perspective what I wrote recently about the U.S. non farm payroll numbers here: http://trueeconomics.blogspot.com/2016/02/5216-three-facts-from-us-labor-markets.html

You really have to wonder, just how long can the U.S. economy continue raising the bar on additional bar staff hiring before choking on shortages of sales and capital investment?

9/2/16: Echoes of 2011 at Deutsche?

Almost 4 and a half years ago, I wrote about the systemic weaknesses in the Deutsche Bank balancesheet: http://trueeconomics.blogspot.com/2011/09/13092011-german-and-french-banks.html, And now we are seeing these weaknesses coming to the front.

It is not quite Europe's Lehman Moment, yet, but if Deutsche goes to the wall at the rates implied by its CDS, we are into more than Lehman-deep pool of the proverbial...

Source: @Schuldensuehner 

7/2/16: You Gotta Have Some Heart: Baltic Dry Index

As the global growth prospects are apparently and allegedly improving, and the world is busy printing money left right and centre with currency devaluations rounds stimulating the fabled 'competitiveness', the world trade indicators are no longer flashing red. They are, frankly, in a free fall.

Remember Baltic Dry Index? The one that reflects volumes of goods trade flows? And the one that was testing new record lows almost daily around the end of December 2015 through January 2016?

Behold the latest record: Baltic Dry is now below 300

H/T to @soberlook

Time for IMF eagles to fly some forecasting models to tell us things are just going fine at 5% annual global growth click... Yes, yes... that is, to repeat gain, Baltic Dry at its lowest level in its history.

PS: Ireland's exports are, of course, insulated from all this global nonsense... because when times get tougher in the markets, tax optimisation becomes even more important to MNCs.

6/2/16: Down the Ruble Hole? Russian Opinions & Russian Economy

Latest Russian figures on wages and earnings, rounding up 2015, are pretty horrific. In USD terms, average wage is now down more than 30 percent in a year through December, falling to around USD560 per month at year end.

Wages Woes?

In Ruble terms, things are more palatable. Nominal wages are up 4.5 percent to RUB34,000, which means that real wages have fallen roughly 9.5 percent in 12 months through December. The average salary was down to RUB30,311 (USD381) per month, from end of September average of RUB32,911 (USD463). Rate of real wages decline accelerated in December compared to full year averages to 10 percent compared to December 2014.

However, average real incomes excluding wages, but including private business income and state payments, were down 4% y/y in 2015. One sign of the fiscal policy direction is that President Putin signed off on a minimum wage hike for 2016 that raised (as of January 1st) the minimum wage to RUB6,204 (USD87) a month, up on RUB5,965 or USD84 per month in 2015.

Beyond this, underlying labour markets trends, despite sharp cuts to employment reported in all surveys of PMIs for Services and Manufacturing over the last 24 months, official unemployment remains benign at 5.8 percent. This masks vast regional variation. In the Central Federal District, which includes Moscow, unemployment is below 4 percent, against, per BOFIT data, 12 percent in North Caucasus. BOFIT reports figure for Inigushetia at  30 percent. Unemployment rate for under-20 years of age is at around 20 percent.

2016 is expected to be another hard year for wage earners, as Korn Ferry — Hay Group forecast that Russian companies will increase salaries on average by only 7 percent in 2016. Given expected inflation in 14.6 percent range this will entail another 7.5 percent cut to real wages.

Feeding Rising Cutbacks by Households

Notably, economy, salaries and inflation have been identified as the main economic concerns in this week’s survey by state-run pollster VTsIOM. Low salaries were raised as concern by 13 percent of respondents in January survey. 12 percent of Russians were concerned about rising inflation in December 2015 and this rose to 20 percent in January data. Another 12 percent of respondents said they were concerned about unemployment.

These trends are feeding into decline in consumer demand. Based on state-run VTsIOM poll published earlier this week, as of the end of December 2015, some 63 percent of Russians have cut back purchases of goods over the last 6 months. 59 percent are substituting in favour of cheaper goods and 26 percent are dipping into personal savings to make ends meet.

In another poll, published at the end of December, covering the period of mid-December, VTsIOM, Russians are reporting lower social well-being with the welfare Self-Estimate Index reporting own conditions of the respondents falling to the lows of 2009 and 24 percent of Russians estimating their own financial situation as being “bad”. The Social Optimism Index was showing that only 27 percent of Russians think their lives are going to improve in 2016, and 33 percent of Russians said the economic situation in the country was bad.

That said, for now at least, 45 percent of Russians positively assess country’s overall development path and only 17 percent of respondents disagree with this view.

Still, based on yet a third poll (also from December and also by VTsIOM), if in August 2014 introduction of the food imports embargo against the Western countries was opposed by only 9 percent of Russians, by mid-November 2015, some 20 percent of respondents expressed opposition to the embargo. Still, as shown by the poll results, the majority of Russian citizens continue to support the ban on food imports, although the number of those supporting it falling from 84 percent to 73 percent since the introduction of the embargo. In line with this, fewer Russians consider the food embargo to be an effective measure: down from 80 percent in August 2014 to 63 percent mid-November 2015.

And Touching the Values Systems

In a way, all of this translates into some serious fodder for political analysts (apart from us, economists). You see, much of Russian system legitimacy rests on two factors: immense economic gains over the period of 2000-2012 or 2013 (depending on timings of the crisis) and national (not quite nationalist) aspirations for a historical revival.

Back in July 2015, Levada Centre - probably Russia’s most reputable polling organisation - found that 42 percent of Russians said they preferred "decent" wages and pensions over the freedom of speech and the opportunity to travel abroad. 49 percent, though said they won’t. The results in July 2015 (data was collected in June) were similar to those in 2013 survey (43 percent preferred financial stability over the opportunity to travel abroad and the right to free speech, against 46 percent who opposed such  trade off). But this still marked a big change on 2008 when only 35 percent of Russians were willing to trade freedoms for income and 54 percent of Russians opted for freedom of speech and travel ahead of pensions and salaries.

While the above figures suggest that large share of population is closely anchored to financial and economic fortunes of the country, there are preciously few signs that those adversely impacted by the crisis are willing to take up the issue with authorities. Levada Centre July poll found that 69 percent of Russians would tend to avoid any interactions with the authorities and only 23 percent were determined to press authorities to deliver on promises. Not surprisingly, 60 percent of Russians do not believe that people can hold authorities to account and 22 percent believe they can. Subsequently, only 18 percent of the Russian population thought that mass protests are likely to arise as the result of the ongoing crisis and only 14 percent of respondents expressed willingness to participate in protests.

Yet, for all their imperfections, opinion polls are showing some tremors in the facade of the public support for state policies and institutions.

Obshchestvennoye Mnenie Foundation poll published on February 5th showed that 54 percent of Russians see economy as being in a crisis. 41 percent said the economic situation in Russia is satisfactory and only 3 percent of the participants said that the economy is in a good state. The number of Russians that have a negative view on the state of the economy is increasing, and rapidly so: just 43 percent of the respondents in December last year felt the economy was in bad shape and only 30 percent did so in May of 2015. And 58 percent now think that the economic situation in the country is worsening, while a month ago this answer was given by 41 percent of people. Which flies in the face of many analysts and the Government view that the economic crisis has bottomed out. Note: it is worth noting that in general, public opinion on timing of bottoming out of the recessions lags actual underlying numbers. Still, for a ’stabilising’ economy, only 9 percent of Russians currently believe that the economic situation is improving.

Levada Centre poll published at the end of January found that 45 percent of Russians believed that the country was “moving in the right direction”, down from 64 percent in June 2015, and from 56 percent in December 2015. January marks the first time for over a year that the state policy approval rating fell below 50 percent mark. Meanwhile, those who feel that the country was on a “wrong route” rose to 34% in January poll compared to 22 percent back in June 2015 and to 27 percent in December 2015.

President Putin's personal approval rating fell to 82 percent in January, compared to a record high of 89 percent in June 2015 and to 85 percent in December 2015. The proportion of respondents who named him among the politicians they trust also declined. This currently stands at 58 percent, down on 64 percent in June 2015 and 60 percent in December 2015.

What Does All of This Mean?

All of the above adds up to a picture in which the country is sliding gradually toward becoming un-anchored from the key driver for social cohesion: economic normalisation (compared to the 1990s) delivered during the so-called Putin Era. While the ongoing geopolitical revival still compensates for the negative economic momentum, that compensation is starting to fade.

One reason for it - cumulative losses on the economy front. Key responses to the crisis have been: devaluation of the Ruble, push toward imports substitution and conservative push back against the pressures on capital account side. All were necessary and rather successful. But all of them also transferred large amounts of pain onto the shoulders of the households and SMEs working in the private sector. Public sector employment and wages have been better shielded from the crisis, but there too, strains are starting to appear. As the result, real, tangible and compounded pain is now feeding through to the ordinary folks.

The other reason is the weakening of the geopolitical dividends perceived by the ordinary Russians. Crimea was the high point of 'return to roots' in Russian psyche - a point of reversal of perceived historical injustice inherent from the Soviet times and a point of a payback for years (since 1991) of virulent anti-Russian rhetoric across the majority of the former USSR states, including Ukraine. These were perceptions of the average Russian (do not confuse them with my own views). The conflict spillover into Eastern Ukraine was already a step away from the Crimean narrative, but it was a proximate one. And hence it had weaker, but nonetheless significant, support on the ground in Russia. But Russian push into Syria has completely divorced the country geopolitical strategy from the hearts-and-minds of the Russians on the ground. Syria is a foreign land, with alien religious strife and probably more reminiscent of Chechnya to an average Russian, than of the traditional spheres of Russian interest.

The twin factors: increased economic pressures and weakening geopolitical dividends, are now working through public perceptions. The outcome of these is far from predictable. Current lack of serious discontent is likely to persist over time: Russia is not Ukraine and it will not opt (socially) for the convulsions of knee-jerk 'revolutions' . But, if the economic crisis continues unabated, there will be political 'blood'. One way or the other.



A note to the above: Surveys in Russia — even those conducted by reputable pollsters such as Levada Center — need to be taken with a pinch of salt. Reliance on polls is a tricky thing, especially for polls in societies highly skeptical of social researchers and authorities, like Russia. Here is a good article on some problems identified in some recent polls: http://www.themoscowtimes.com/news/article/what-do-russians-really-think-the-truth-behind-the-polls/558537.html.

5/2/16: Ifo Economic Climate Index for Euro area: 1Q 2016

Ifo Economic Climate Index in the Euro Area has posted another contraction at the start of 1Q 2016 marking the third consecutive quarter of declines and reaching the lowest level since 1Q 2015. IFO Economic Climate Index (the headline index for the series) for the Euro area fell to 118.9 in 1Q 2016 from 122.0 in 4Q 2015. Activity signalled by the index, however, remains above the historical average at 107.5 an well above downturns-consistent average of 84.8.

The chart below shows index trends:

As highlighted in the chart above, EU Commission own sentiment index for economic activity is also pointing to weakening growth conditions in 1Q 2015. The EU Commission Sentiment Index was un a divergence to the Ifo index since the start of 2015.

Two core components of the Index also moderated in 1Q 2016. Present Situation sub-index fell from 153.8 for 4Q 2015 to 151.0 in 1Q 2016, marking the first quarter of contraction after four consecutive quarters of increases. The sub-index remains firmly ahead of the historical average of 127.5.

Perhaps the most worrying is the decline in Expectations for the next 6 months sub-index which fell from 103.3 in 4Q 2015 to 100.0 in 1Q 2016. This marks third consecutive quarter of declines in expectations and the index level currently is closer to the historical average of 95.8.

Overall, the gap between expectations forward and present conditions assessment has declined. Gap index (my own calculation) is now at 66.2 for 1Q 2016 against 67.2 in 4Q 2015. This suggests that weaker expectations are now starting to feed through to weaker present assessments.

A chart below illustrates the trends for sub-indices:

Per Ifo release: “Assessments of the current economic situation were most negative in Greece and Finland, but the current economic situation also remains strained in France, Italy and Cyprus. The situation was only slightly better in Spain, Portugal and Austria; but assessments for Austria were far less negative than last quarter. The sharpest recovery was seen in Ireland, where survey participants assessed the current economic situation as very good. In Germany the economic situation is considered to be good, although assessments were somewhat less favourable than last quarter.

The six-month economic outlook remains positive nearly everywhere. Economic expectations brightened in Austria, France, the Netherlands, Estonia and Latvia. In the other countries the outlook either remains unchanged, or is somewhat less positive. WES experts were only slight pessimistic about Greece, Portugal and Spain.”

5/2/16: Three Facts from the U.S. Labor Markets & Reality of the U.S. Economy

Three interesting snapshots of the U.S. economy: Non-Farm Payrolls, Initial jobless claims and Labour Productivity. Individually - they are important to traders. Jointly, they are important to investors.

But, first, what has been happening.

Let’s start with jobless claims. Initial jobless claims rose in the last week of January by 8,000 to a (seasonally-adjusted) 285,000. This was worse than consensus forecast by some 5,000 jobs. And worse, 4-week average rose to 284,750 at the end of January, up 2,000.

For history wonks, numbers below 300,000 are considered a sign of tight labour market, so no surprise here that claims can rise with a bit greater volatility when the labour markets are running some overheating.

But last two weeks of January also marked something that has not happened in the markets in some three years - they marked two consecutive weeks of y/y increases in new claims. As always, weather is being blamed, and as always, two weeks are just two weeks. So far, nothing hugely significant. Just a hiccup.

Which brings us to today’s release of NFP. Going into it, consensus forecast was for a ca 180,000 new jobs print (Marketwatch) and ca 190,000 (Bloomberg & Reuters) for January, to compensate for a large 292,000 print in December. What was delivered? Revised December Non-farm payroll figure to 262,000 and January figure of 151,000. Revision to December was large, but smaller than under-shooting in January. January preliminary estimate came as third weakest preliminary figure printed in the last 13 months.

Yes, everyone is running around with 4.9% unemployment figure - sub-5% expected. Good news. However, U-5 unemployment (Total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force) rose on seasonally-adjusted basis from 6.1% in November and December 2015 to 6.2% in January. And U-6 Unemployment (U-5, plus all employed part time for economic reasons) was static at 9.9% for the third month in a row, having previously been at 9.8% in October 2015.

And average hourly earnings up 2.5% y/y (same as previous month growth) and m/m growth of 0.5% (better than 0.3% consensus forecast and way better than 0% growth in December). These look like positives. Another positive is labour force participation - up to 62.7% in January, against 62.6% in December. But this positive is questionable: not seasonally adjusted participation rate in January 2016 was 62.3% which is lower than same for January 2015 at 62.5%.

So now we have: wages up, unemployment rate down, claims down by a lot less than expected, and participation rate is virtually flat. All at high levels of employment. 

Which gets us around to the last bit: productivity. Per U.S. latest data, non-farm labour productivity has fallen a whooping 3% y/y in 4Q 2015 - third biggest decline in productivity for any period since 1Q 2007 and the largest 4Q decline in productivity over the same period. Consensus was for 1.8% drop on foot of 2.2% rise in 3Q 2015. The Unit labour costs went up 4.5% over the same period of time (against consensus forecast of 3.9% rise and up on 1.8% increase in 3Q 2015). Labour costs were up in three quarters of 2015.

Problems with productivity growth have been plaguing the U.S. recovery - in 2015, non-farm productivity was up only 0.6%, which is massively below historical averages (more than x3 2015 rate of expansion).

Here’s the real problem, folks: U.S. economy is struggling to sustain growth absent real investment and absent new technological improvements. It is that simple. And the jobs markets are starting to show the strains of this. Productivity growth being weak, while employment rising and remaining high amidst rising labour costs means only one thing: the U.S. is currently running above its potential rates of growth. It is, in other words, overheating. And that at roughly 2% annual growth rates against pre-crisis averages above 3%. One of two things will have to happen:

• One: employment moderates and labour costs growth abates; or
• Two: business investment has to rise (note: explicitly not public investment, because raising public investment in these labour markets conditions will simply exacerbate the twin problem of tighter labour markets and low productivity growth).

Good luck taking an investment strategy on one. Which leaves us with taking a strategy on two… or going defensive on an expectation that stagnation will be setting in...

4/2/16: Tear Gas v Lagarde’s Tears: Greece

Here’s Greece on pensions reforms:

Source: https://www.rt.com/news/331265-greece-tear-gas-protet/#.VrN56JItCdA.twitter

Here’s IMF on same:

Note: to watch the video comment by Mme Lagarde on Greek situation, please click on this link: http://www.imf.org/external/mmedia/view.aspx?vid=4739363229001 (answer on Greece starts at 22’:22”). Otherwise, here’s official IMF transcript of it:

“I have always said that the Greek program has to walk on two legs: one is significant reforms and one is debt relief. If the pension [system] cannot be as significantly and substantially reformed as needed, we could need more debt relief on the other side. Equally, no [amount of debt relief] will make the pension system sustainable. For the financing of the pension system, the budget has to pay 10 percent of GDP. This is not sustainable. The average in Europe is 2.5 percent. It all needs to add up, but at the same time the pension system needs to be sustainable in the medium and long term. This requires taking short-term measures that will make it sustainable in the long term.

“I really don't like it when we are portrayed as the “draconian, rigorous terrible IMF.” We do not want draconian fiscal measures to apply to Greece, which have already made a lot of sacrifices. We have said that fiscal consolidation should not be excessive, so that the economy could work and eventually expand. But it needs to add up. And the pension system needs to be reformed, the tax collection needs to be improved so that revenue comes in and evasion is stopped. And the debt relief by the other Europeans must accompany that process.  We will be very attentive to  the sustainability of the reforms, to the fact that it needs to add up, and to walk on two legs. That will be our compass for Greece. But we want that country to succeed at the end of the day, but it has to succeed in real life, not on paper.”

Yep. Lots of good words and then there are those ungrateful Greeks who are just refusing to understand:

1. How can Mme Lagarde insist that there’s a second leg (debt relief) where the EU already said, repeatedly, there is none? and
2. How there can be sustainability to the Greek pensions reforms if there are actually people living on them day-to-day who may be unable to take a cut to their pay? Who's going to feed them? Care for them? On what money? Where has IMF published tests of proposed reforms with respect to their impact on pensioners?

Strangely, Mme Lagarde seems to be not that interested in answering either one of these concerns.

4/2/16: Smal v Large Cap Stocks: Recession Cycle Performance

Credit Suisse did an interesting exercise recently in a note to clients. They took U.S. equities indices for large cap (S&P500) and small cap (Russell 2000) stocks and computed an average downside to each index across all U.S. recessions from 1980 on and then to the upside from the post-recession trough. The episodes averaged over are: 1980, 1981-1982, 1990-1991, 2001, and 2007-2009. As a caution, there is no survivorship bias (index composition risk) adjustment to the resulting data.

So per CS: “Measuring the average peak-to-trough performance of the Russell 2000 and S&P 500 from one year before the start of each recession to the end of the downturn, the bank found that large caps were more resilient than small caps across the five slumps: the S&P 500 fell by an average of 32 percent, while the Russell 2000 dropped 37 percent. But it was a different story on the way back up. The Russell 2000 averaged returns of 86 percent from the start of each recession to one year after its end, while the S&P 500 posted returns of just 51 percent.”

So over the part of the cycle covered by CS, Russell 2000 was up, net, 17 percent, while S&P was up, net, only 3%.

4/3/16: Irish PMIs for January: Growth Is Up at Year Start

Irish Manufacturing and Services PMIs for January were published earlier this week and are worth looking into as a signal for the underlying economic activities at the start of 1Q 2016.

Irish Manufacturing PMIs rose for the second month in a row in January, reaching 54.3 from 54.2 in December. This is the highest level of activity since July 2015 and confirms some reversal of PMIs dynamics from slower growth recorded from August 2015 through November. Of course, when we are talking about ‘slower growth’ we are talking about still very high rates of expansion as singled by PMI. 3mo average through January 2016 is at blistering 53.9, which is up on scorching 53.7 3mo average through October 2015 and down on scorching 56.1 3mo average through January 2015. These telephone numbers compare extremely well against the historical average of 51.0 and even post-crisis average of 53.0.

Per Markit: “Business conditions in the Irish manufacturing sector improved solidly at the start of 2016, as had been the case at the end of 2015. A sharp and accelerated expansion in new orders was the key driver of strengthening conditions, with output and employment also continuing to rise. Lower raw material costs led to the sharpest fall in input prices in three months, while output charges decreased for the first time since last October… The health of the sector has now strengthened in each of the past 32 months.”

Notably, per Markit: “The decrease in output prices ended a two-month sequence of inflation” which is suggesting that Irish producers are now contributing to downward pressures in Euro area markets.

Meanwhile, Irish Services PMI also rose robustly in January, reaching 64.0 against 61.8 in December 2015. Again, these are unbelievably strong  numbers that raise some serious questions about the survey methodologies and/or coverage, but more on this later. 3mo average Services PMI for Ireland was at 61.5 in 3 months through October 2015 and rose to 63.1 in 3mo period through January 2016, up on already unbelievable 62.2 for the 3 months through January 2015. Historical average of 54.9 - again, extremely strong by any measure - is in the dust.

Per Markit, Services PMI “signalled the sharpest expansion in services output since June 2006. Activity has now risen in each of the past 42 months. Companies expect further improvements in economic conditions over the coming 12 months to lead to growth of activity. Business sentiment picked up slightly at the start of 2016. The rate of expansion in new business also quickened in January, and was the joint-fastest since August 2000. New orders have risen continuously throughout the past three-and-a-half years. As has been the case throughout the past four-and-a-half years, new export business rose in January. Moreover, the rate of expansion accelerated from that seen in December. … Consequently, employment rose at a substantial pace during January and one that was sharper than seen in the previous month. A further sharp rise in input costs was recorded in January, as the effect of higher wages and salaries outweighed the downwards impact of lower fuel costs. The rate of inflation across the service sector ticked up marginally, remaining above the series average.”

As per chart above, both Services and Manufacturing sectors are now in a massive expansion, with rates of growth in the underlying activity well in excess of those historically anchored in the pre-crisis period. Services divergence toward higher growth is still being contrasted by lagging growth in Manufacturing, but signs of possible catching up in Manufacturing to the upside are also present.

Per chart above, we can confirm new growth trend in Services and the potential for sustained growth acceleration in Manufacturing (albeit no new trend yet).

Per chart above, both sectors of the Irish economy are operating at the margins of economy’s potential (judging by historical trends). This is hard to interpret as an organic shift in potential rates of growth, so most likely, we are going to witness some growth moderation in months ahead.

Still, current performance raises serious questions as to where this data is coming from. It has long been suspicion of this author that the surveys dynamics have been driven by multinational enterprises operating in both sectors. We have no confirmation of this nor denial of this from Markit and we do not know the quality of their coverage across two sectors. However, one has to be aware of the simple fact - as shown on this blog in the past, survey results have been (in the past) deeply out of line with actual underlying activity registered in the sectors. Currently, both Services and Manufacturing indices are running fairly closely correlated with the reported activity in these sectors, but past low correlations with GDP and GNP and sectoral value added metrics suggests that the survey base can be skewed in favour of unweighting MNCs.

4/2/16: BRIC Composite PMIs: January

In two recent posts, I covered

• Services PMIs for BRIC economies http://trueeconomics.blogspot.com/2016/02/3216-bric-services-pmis-for-january.html and
• Manufacturing PMIs for BRCI economies http://trueeconomics.blogspot.com/2016/02/1216-bric-manufacturing-pmi-january.html

Now, let’s take a look at the Composite PMIs.

As noted in a more in-depth analysis, here: http://trueeconomics.blogspot.com/2016/02/3216-russian-services-composite-pmi.html, Russia’s Composite Output Index remained in contraction territory in January, posting a reading of 48.4, up on 47.8 in December 2015. The Composite index was helped to the upside by the Manufacturing PMI which was also in a contractionary territory at 49.8, but above the very poor performance levels of the Services PMI. January marked second consecutive month that both Manufacturing and Services PMIs for Russia were below 50.0. Last time that this happened was in December 2014-January 2015 and in February-March 2015 - in other words, at the dire depth of the current crisis. Overall, Russia is once again (second month in a row) ranks as the second lowest BRIC performer in terms of Composite PMI reading, ahead of only a complete basket case of Brazil.

As also noted in an in-depth analysis here: http://trueeconomics.blogspot.com/2016/02/2216-china-services-composite-pmis-for.html due to a substantial improvement in the Services PMI, China’s Composite PMI signalled stabilisation in overall economy-wide business activity in January, with Composite Output Index registering fractionally above the no-change 50.0 value at 50.1, up from 49.4 in December. However, overall, Composite PMI of China has been above 50.0 in only two of the last 6 months and on both occasions, index readings were not statistically distinguishable from 50.0. 3mo average through January for Composite PMI stood at 50.0 (zero growth) against 48.9 average through October 2015 and 51.3 average through January 2015. In other words, the economy, judging by Composite PMI might be closer to stabilising, but growth is not exactly roaring back.


India’s Composite PMI rose from 51.6 in December to an 11-month high of 53.3 in January. Per Markit, “Lifting the index were a rebound in manufacturing production as well as stronger growth of services output.” 3mo average for Composite reading is now a5 51.7, slightly down from 52.3 3mo average through October 2015 and compared to 52.8 3mo average through January 2015. With manufacturing and services order books now in an expansionary territory, “growth of new business across the private sector as a whole was at a ten-month high… Higher workloads encouraged service providers to hire additional staff in January, following a stagnation in the prior month. …Meanwhile, manufacturing jobs rose at a marginal rate.” While overall Indian economy has clearly returned to robust growth, underlying conditions remain relatively weak by historical standards. 3mo average Composite index at current 51.7 is well below the historical average of 54.8. India remained on track to being the strongest economy in the BRIC group overall for the 7th month in a row.

In the case of Brazil’s Composite PMIs, the index registered continued rate of contraction rate of contraction for 11th month in a row - a record that is worse than that for Russia. Over the last 24 months, Brazil’s Composite PMI has managed to reach above 50.0 on only 5 occasions, against Russia’s Composite PMI’s 7. Over the last 12 months, Brazil’s Composite PMI was above 50.0 only once, with Russian counterpart rising above 50.0 in 4 months. On a 3mo average basis, Brazil’s Composite PMI stood at 44.5 in January 2016, slightly better than 43.4 reading for the 3mo period through October 2015, but below 49.3 reading attained in January 2015. Per Markit: “January saw Brazil’s economic recession weighing on the private sector for another month …the seasonally adjusted Composite Output Index remained in contraction territory, highlighting a further sharp drop in activity. Moreover, the current sequence of continuous downturn has been extended to 11 months, the longest in almost nine years of data collection.” Both Services and Manufacturing sectors order books posted contractions, meaning that “the private sector as a whole posted an eleventh successive monthly decline in new business. Firms reported tough economic conditions and a subsequent fall in demand.” Once again, Brazil retained its dubious title as the worst performing BRIC economy - a title it has been holding for the last 11 months.

Charts and table to illustrate:

As shown in the above charts, Russia is now exerting a downward momentum on overall BRIC growth dynamics for the second month in a row. However, due to improvements in India and China, BRICs as a whole are now adding positive support for global growth. That support is relatively new and still fragile enough not to call a change in trend in the series.

3/2/16: BRIC Services PMIs for January: Some Rays of Hope

In the previous two posts, I covered

• Russian Services and Composite PMIs: see detailed discussion here http://trueeconomics.blogspot.com/2016/02/3216-russian-services-composite-pmi.html and 
• China Services and Composite PMIs here: http://trueeconomics.blogspot.com/2016/02/3216-russian-services-composite-pmi.html

Now, let’s take a look at the Services PMIs for all BRIC economies, followed by a post on their Composite PMIs.


Russian Services PMI for January 2016 came in with a hugely disappointing reading of 47.1 from already poor 47.8 recorded in December. On a 3mo average basis, the index is now at 48.2, worse than already poor 49.4 average for the 3 months through October 2015, although, as expected - well above the abysmal 44.7 average for the 3mo period through January 2015. The Services sector has now posted sub-50 PMI readings in 4 consecutive months, with deteriorating readings in 3 consecutive months, signalling no respite to the Services sector contraction.


China Services PMI came in at a surprising uplift in January, reaching 52.4 - the highest reading since August 2015, and up on 50.2 in December. This move was surprising since Chinese services PMI has been deteriorating every month from October 2015. As a reminder, the downturn in the manufacturing sector hit Chinese Manufacturing PMI hard with index falling to a 3-mo low in January and staying below 50.0 line of zero growth for 11 months in a row.


Brazil Services PMI remained the weakest of all BRIC economies at 44.4 in January up on a truly abysmal 43.5 in December. 3mo average for Brazil Services PMI was at 44.5, which is somewhat better than 43.2 average for the 3mo period through October 2015, but worse than 48.7 3mo average through January 2015. Brazil’s Services PMIs have now been below 50 line for 11 months in a row.

According to Markit: “Current downturn longer than 08-09 crisis… Activity decreased in all six monitored categories, with the quickest contraction seen at Renting & Business Activities. Leading services output to fall was another decline in incoming new work. Inflows of new business dipped at a softer pace, but one that remained sharp.” As in the case with Russian economy, inflationary pressures, primarily driven by currency devaluations, have created adverse headwinds for Services sector firms in Brazil. “January data pointed to a build-up of inflationary pressures in Brazil’s service economy. A weaker currency (particularly against the US dollar) combined with higher utility bills had reportedly resulted in an overall increase in cost burdens. The rate of inflation climbed to a three-month high and was well above the long-run series trend. As a consequence, service providers raised their average tariffs again, and at the fastest pace since October.”

Brazil’s economy not only continuing to contract, but remains the weakest of all BRIC economies, in Services sector terms since April 2015.


India Services PMI posted an impressive rise from already rather robust 53.6 in December to 54.3 in January 2016. The 3mo average has reached 52.7 in the period through January 2016, which is stronger than 52.1 recorded for the period through October 2015 and ahead of 52.0 3mo average through January 2015. Overall, this was the highest Services PMI reading for India since January 2013 and marks second consecutive month of PMIs acceleration. With this, Indian economy clearly has shaken off some of the downward momentum on growth that was building up in May-September 2015 and again roared it’s head in November 2015.

Per Markit: “Posting a 19-month high… Services Business Activity Index pointed to a marked and accelerated expansion of activity across the sector. Growth was noted in four of the six monitored categories, the exceptions being Hotels & Restaurants and Transport & Storage. Underpinning the overall increase in services output was a seventh successive monthly expansion of new business inflows. Having accelerated to the joint-fastest since June 2014, the growth rate was marked. Anecdotal evidence highlighted strengthening underlying demand and improved weather conditions.”

Overall, January marks the second month of India’s Services PMI leading other BRIC economies to the upside.

Chart and summary table to illustrate:

3/2/16: Russian Services & Composite PMI: Poor Start for 2016

Russian Services PMI for January 2016 came in with a hugely disappointing reading, falling to 47.1 from already poor 47.8 recorded in December. Per Markit: “This fall was driven by a solid contraction in new business levels, leading to another deterioration in backlogs of work. Meanwhile, job shedding persisted throughout the sector as firms turned pessimistic towards their future outlook for activity. Input prices continued to rise at a much quicker pace than average charges.”

On a 3mo average basis, the index is now at 48.2, worse than already poor 49.4 average for the 3 months through October 2015, although, as expected - well above the abysmal 44.7 average for the 3mo period through January 2015. Just how bad the current 3mo average and the latest monthly index reading is? Historical average for Russian services PMI is at 55.0 - full 7.9 points ahead of January reading.

Bad news is that the Services sector contraction has now accelerated (on both monthly basis- for the second consecutive month) and on 3mo basis too.

Again, per Markit: “Operating conditions in the sector remained challenging… Down from 47.8, the latest reading signalled the quickest decline in output for ten months.”

Chart to illustrate the Services sector woes:

Meanwhile, Russia’s Composite Output Index remained in contraction territory in January, posting a reading of 48.4, up on 47.8 in December 2015. The Composite index was helped to the upside by the Manufacturing PMI which was also in a contractionary territory at 49.8, but above the horror show of Services PMI. January marked second consecutive month that both Manufacturing and Services PMIs for Russia were below 50.0. last time that this happened was in December 2014-January 2015 and in February-March 2015 - in other words, at the dire depth of the current crisis.

Note: I covered Russian Manufacturing PMIs in detail here: http://trueeconomics.blogspot.com/2016/02/1216-russian-manufacturing-pmi-january.html.

Per Markit, “the rate at which incoming new orders contracted [for Services providers] was the fastest since March 2015, with anecdotal evidence linking this to a lack of market demand. That said, Russian manufacturers reported a slight expansion in incoming new orders in January, having registered a decline in December.”

Overall, Russia is once again (second month in a row) ranks as the second lowest BRIC performer in terms of Composite PMI reading, ahead of only a complete basket case of Brazil. More on this to come, so stay tuned.

2/2/16: China Services & Composite PMIs for January: No Signs of Roaring Growth

China Services PMI came in at a surprising uplift in January, reaching 52.4 - the highest reading since August 2015, and up on 50.2 in December. This move was surprising since Chinese services PMI has been deteriorating every month from October 2015.

Per Markit: services “providers had a strong start to 2016, with business activity increasing at the fastest rate in six months. …According to panellists, improved inflows of new business underpinned the latest expansion of services activity.”

As a reminder, the downturn in the manufacturing sector hit Chinese Manufacturing PMI hard with index falling to a 3-mo low in January and staying below 50.0 line of zero growth for 11 months in a row. Details of Manufacturing PMI dynamics are covered in-depth here: http://trueeconomics.blogspot.com/2016/02/1216-bric-manufacturing-pmi-january.html.

On a 3mo moving average basis, China Services PMI stood at 51.3 in January 2016, exactly the same as for the 3mo period through October 2015 and down on 52.7 reading for the 3mo average through January 2015. It is worth noting that the index never dipped below 50.0 in its entire history and the historical average for the index is at 55.1. Current reading is statistically significantly below the historical average.

Due to substantial improvement in the Services PMI, China’s Composite PMI signalled stabilisation in overall economy-wide Chinese business activity in January, with Composite Output Index registering fractionally above the no-change 50.0 value at 50.1, up from 49.4 in December. However, overall, Composite PMI of China has been above 50.0 in only two of the last 6 months and on both occasions, index readings were not statistically distinguishable from 50.0.

Still, 3mo average through January for Composite PMI stood at 50.0 (zero growth) against 48.9 average through October 2015 and 51.3 average through January 2015. In other words, the economy, judging by Composite PMI might be closer to stabilising, but growth is not exactly roaring back.

2/2/16: Irish Examiner on Electioneering and Fiscal Policy Space

Irish Examiner article on fiscal policy space entertained by various political parties with a couple of comments of my own: http://www.irishexaminer.com/ireland/opposition-claims-fine-gael-and-labour-figures-on-the-economy-just-dont-add-up-379637.html.

2/2/16: MNC Ireland: A new Documentary

A new and well-worth watching documentary on the power of multinational companies in Ireland and Ireland's status as a corporate tax haven is available here: https://vimeo.com/137175562.

Note: Strangely enough, the documentary cites me as a Chairman of the IRBA (which I was at the time). It is worth repeating again that I never speak on behalf of any organisation I am involved with and the IRBA never had a corporate opinion on any policy-related issues. I only express my own personal views.

1/2/16: BRIC Manufacturing PMI January: A Test of Stagnation?

I covered China Manufacturing PMI in an earlier separate note here: http://trueeconomics.blogspot.com/2016/02/31116-china-manufacturing-pmi-its-at.html with core conclusion that Chinese Manufacturing PMIs have been now running second worst in the BRIC’s group since July 2015, staying above only Brazil’s - a country that is in an outright recession. PMI index came in tat 48.4 in January, marginally up on 48.2 in December 2015, marking 11th consecutive month of sub-50 readings. 3mo average through January 2016 is now at 48.4 against 3mo average through October 2015 at 47.6. Current 3mo average is down significantly on 49.8 3mo average through January 2015. Last time Chinese Manufacturing posted statistically significant expansion (as measured by PMI reading above 51.46 - the statistically significant growth marker - was back in July 2014.

India Manufacturing PMI posted a rise to 51.1 in January from 49.1 in December, with January reading being highest in 4 months. This sounds like good news, expect it is not. The reason is that at 51.1, the PMI is well below historical average of 54.5. And it is below January 2015 level of 52.9. 3mo average through January 2016 is at zero growth mark 50.0, which compered poorly to 3mo average through October 2015 at 51.4 and worse relative to 53.6 which is 3mo average through January 2015. Market release was quite upbeat on India numbers, however, noting that “the industry recovered following the contraction seen at the end of last year. Alongside a resumption of output at some firms impacted by December’s flooding, manufacturers also benefited from rising inflows of new business from domestic and export clients.” The sectoral breakdown of the index is also concerning. Again per Markit, “The consumer goods subsector remained the principal growth engine at the start of the year, seeing substantial expansions of both output and new orders. In contrast, producers of investment goods saw output and new orders fall, while production volumes stagnated in the intermediate goods category.”

Russian PMIs were covered in a stand alone post here: http://trueeconomics.blogspot.com/2016/02/1216-russian-manufacturing-pmi-january.html with core conclusion that although Russia retained its's position as the second strongest performing economy by Manufacturing PMIs in the BRIC group in January, the latest reading puts Russian Manufacturing in a stagnation zone too close to 50.0 to call it a full-blown contraction. This has meant that over the last 3 months, Russian Manufacturing PMI averaged 49.7, a reading nominally below 50.0, although an improvement on 49.1 average for 3 months through October 2015, and on 49.4 3-mo average through January 2015. In simple terms, Russian Manufacturing continued to contract in 3 months through January 2016, but the rate of contraction was virtually indistinguishable from zero growth.


This leaves us to cover Brazil Manufacturing PMI. Brazil Manufacturing index posted a rise in January, hitting an 11-mo high of 47.4. By all normal metrics, this is a disaster territory reading, consistent with rather sharp deterioration in trading conditions. But for Brazil - this was an improvement, especially as output and news orders both were contracting at slower rates in January. Per Markit: “The downturn in the Brazilian manufacturing sector continued at the start of 2016, with levels of production and new orders contracting for the twelfth successive month. This continued to filter through to decisions relating to staff hiring, stock holdings and purchasing activity, all of which also declined during the latest survey month.”  On the positive (sort of) side, “output declined at weaker rates in each of the three production categories (consumer, intermediate and investment) covered by the survey. Underlying the latest decrease in output was a further reduction in the level of incoming new orders. The latest drop in inflows of new work received was mainly centred on the domestic market, as the volume of new export business expanded for the second straight month in January.” On a 3mo average basis, 3mo average through January 2016 is at 44.5, which is worse that 3mo average through October 2015 (45.6) and 3mo average through Ja
nuary 2015 (49.9). In simple terms, Brazil remains the basket case of BRIC economies, leading the group to the downside on Manufacturing.

Chart and table below summarise the BRIC’s outlook:

So, overall, BRIC Manufacturing side of the economy is still in a woeful shape. India's return to growth is relatively weak, while contractionary conditions prevail in Brazil (strong, albeit moderating on the end of 2015), Russia (very weak contraction, closer to stagnation) and China (where PMI data has been at serious odds with official national accounts data for some time now). The net result for the global growth is not exactly encouraging.

1/2/16: Russian Manufacturing PMI January 2016: Stagnation Looms

Russian Manufacturing PMI rebound in January compared to December slump, rising from 48.7 in December (the lowest reading since August 2015, to 49.8. Still, January reading was nominally below 50.0, signalling second consecutive month of contraction in country manufacturing activity. In statistical significance terms, January reading is basically singling zero growth.

Per Markit, this means that “Russian manufacturing sector edgeed closer to stability during the first month of 2016” with “both output and incoming new orders return to growth territory”. However, overall, “survey data for the first month of 2016 remained disappointing for Russian manufacturers, as the sector stayed in contractionary territory. Although there were marginal increases in volumes of both production and incoming new orders, job shedding was still evident. Meanwhile, average cost burdens increased at a marked pace, while a more moderate rise in output charges was reported”.

On sectoral basis,”production volumes grew at Russian goods producers during January, having contracted in the final month of 2015. Anecdotal evidence suggested the expansion in output was linked to an increase in
incoming new orders. Job cuts were still evident in the manufacturing sector of Russia in January, continuing a trend that began in July 2013. The rate of job shedding accelerated to a four-month high and was solid overall.”

All of the expansion in new orders was contained within domestic economy, “as new export orders contracted. Falling new business from abroad has been reported in every month since September 2013.”

On a 3mo average basis, Manufacturing PMI for 3 months through January 2016 was 49.7 - below 50.0, although an improvement on 49.1 average for 3 months through October 2015, and on 49.4 3-mo average through January 2015. In simple terms, Russian Manufacturing continued to contract in 3 months through January 2016, but the rate of contraction was virtually indistinguishable from zero growth.

As shown above, Russia retained its's position as the second strongest performing economy by Manufacturing PMIs in the BRIC group.

31/1/16: China Manufacturing PMI: It's at Recession Levels, Folks

China manufacturing PMI signalled another month of deterioration in operating conditions for January 2016. Per Markit, “with both output and employment declining at slightly faster rates than in December. Total new business meanwhile fell at the weakest rate in seven months, and despite a faster decline in new export work.’

Overall, PMI index came in tat 48.4 in January, marginally up on 48.2 in December 2015, marking 11th consecutive month of sub-50 readings. 3mo average through January 2016 is now at 48.4 against 3mo average through October 2015 at 47.6. Current 3mo average is down significantly on 49.8 3mo average through January 2015. Last time Chinese Manufacturing posted statistically significant expansion (as measured by PMI reading above 51.46 - the statistically significant growth marker - was back in July 2014.

Interestingly, Markit is using very ‘diplomatic’ language in their release, saying that “Production at Chinese goods producers fell for the second successive month in January. Though modest, the rate of contraction was the fastest seen in four months. According to panellists, relatively weak market conditions and fewer new orders had led firms to cut production.” In simple terms, this means that the Manufacturing sector in Chine is not growing slower, but is contracting. Which, of course, is vastly inconsistent with official GDP growth data. Over the last 15 months, Chinese Manufacturing managed to hit PMI >50.0 on only one month. One month. How this can be consistent with an economy growing at 6.9 percent is anyone’s guess.

And Chinese companies are now appearing to be deep in revenue recession too. per Markit: “Weaker client demand led manufacturers to discount their prices charged again in January, thereby extending the current sequence of deflation to 18 months (although the rate of reduction was the slowest seen since June 2015). Lower selling prices were supported by a further fall in average input costs at the start of the year.”

In fact, Chinese Manufacturing PMIs have been now running second worst in the BRIC’s group since July 2015, staying above only Brazil’s - a country that is in an outright recession.

I mean you getting any signs of the 6.8-6.9 percent growth anywhere here? No? Well, in general, Services PMIs are also in a tanking mode, but more on this separately.

31/1/16: Why is Inflation so Low? Debt + Demand + Oil = Central Bankers

One of the prevalent themes in macroeconomic circles in recent months has been what I call the “Hero Central Banker” syndrome. The story goes: faced with the unprecedented challenges of dis-inflation, Heroic Central Bankers did everything possible to induce prices recovery by deploying printing presses in innovative and outright inventive ways, but only to see their efforts undermined by the falling oil prices.

Of course, the meme is pure bull.

Firstly, there is no disinflation. There is a risk of deflation. Let’s stop pretending that negative growth rates in prices can be made somewhat more benign if we just contextualise them into a narrative of surrounding ‘recovery’. Dis-inflation is deflation anchored to an invented period duration of which no one knows, but everyone assumes to be short. And there is no hard definition of what 'short' really means either.

Secondly, there is no mystery surrounding the question of why on earth would we have ‘dis-inflation’ in the first place. Coming out of the Global Financial Crisis, the world remains awash with legacy debt (households) and new debt (corporates and governments). This simply means that no one, save for larger corporations and highly-rated governments, can borrow much in the post-GFC world. And this means that no one has much of money to spend on ‘demanding’ stuff. This means that markets are stagnating or shrinking on demand side. Now, the number of companies competing for stagnant or shrinking market is not falling. Which means these companies are getting more desperate to maintain or increase their market shares. Of these companies, those that can borrow, do borrow to fund their expansions (less via capex and more via M&As) and to support their share prices (primarily via buy-backs and further via M&As); and the same companies also cut prices to keep their effectively insolvent or debt-loaded customers. slow growing supply chases even slower growing (if not contracting) demand… and we have ‘dis-inflation’.

Note: much of this dynamic is driven by the QE that makes debt cheaper for those who can get it, but more on this later.

Thirdly, we have oil. Oil is an expensive (or used to be expensive) input into producing more stuff (more stuff that is not needed, by the companies that can’t quite afford to organically increase production for the lack of demand, as explained in the second point above). So demand for oil is going down. Production of oil is going up because we have years of investments by oil men (and few oil women) that has been sunk into getting the stuff out of the ground. We have falling oil prices. Aka, more ‘dis-inflation’.

Note: much of this dynamic is also driven by the QE which does nothing to help deleverage households and companies (supporting future demand growth) and everything to support financial sector where inflation has been all the rage until recently, and in Government bonds continues to-date.

Fourth, when Heroic Central Bankers drop policy rates and/or inject ‘free’ cash into the economy. Their actions fuel  borrowing in the areas / sectors where there either exists sufficient collateral or security of cash flows to borrow against or there is low enough debt level to sustain such new borrowing. You’ve guessed it:

• Financials (deleveraged using taxpayers funds and sweat with the help of the "Heroic Central Bankers" and protected from competition by the very same "Heroic Central Bankers") and 
• Commodities producers (who borrowed like there is no tomorrow until oil price literally fell off the cliff). 

When the former borrowed, they rolled borrowed funds into public debt and into financial markets. There was plenty inflation in these 'sectors' though they didn't quite count in the consumer price indices. For a good reason: they have little to do with consumers and lots to do with fat cats. However, part of the inflows of funds to the former went to fund ‘alternative’ energy projects - aka subsidies junkies - which further depresses demand for oil (albeit weakly). Both inflows went to support production of more oil or distribution of more oil (pipelines, refineries, export facilities etc) or both.

Meanwhile, inflows from the financial institutions to the markets usually went to larger corporates. Guess where were the big oil producers? Right: amongst the larger corporates. Thus, cheap money = cheaper oil, as long as cheap money does not dramatically drive up inflation. Which it can’t because to do so, there has to be demand growth at the household level, the very level where there is no cheap money coming and the debts remain high.

Now, take the four points above and put them together. What they collectively say is that the risk of deflation in the euro area (and anywhere else) is not down to oil price collapse, but rather it is down to demand collapse driven by debt overhang in the real economy (corporates and households and governments). And it is also down to monetary policy that fuels misallocation of credit (or risk mispricing). Only after that, risk of deflation can be assigned to oil price shock (in so far as that shock can be treated as something originating from the global economy, as opposed to from within the euro area economy). And across all these drivers for deflation risks up, there are fingerprints of many actors, but just one actor pops up everywhere: the "Heroic Central Banker".

A recent paper from the Banca d’Italia actually manages to almost grasp this, albeit, written by Central Bankers, it just comes short of the finish line.

Antonio Maria Conti, Stefano Neri and Andrea Nobili published their “Why is Inflation so Low in the Euro Area?” in July 2015 (Bank of Italy Temi di Discussione (Working Paper) No. 1019: http://ssrn.com/abstract=2687105). They focus on euro area alone, so their conclusions do treat oil price change as an exogenous shock. Still, here are their conclusions:

• “Inflation in the euro area has been falling steadily since early 2013 and at the end of 2014 turned negative. 
• "Part of the decline has been due to oil prices, but the weakness of aggregate demand has also played a significant role. …
• "The analysis suggests that in the last two years inflation has been driven down by all three factors, as the effective lower bound to policy rates has prevented the European Central Bank from reducing the short-term rates to support economic activity and align inflation with the definition of price stability. Remarkably, the joint contribution of monetary and demand shocks is at least as important as that of oil price developments to the deviation of inflation from its baseline.” 

Do note that the authors miss the QE channel leading to deflation and instead seem to think that the only thing standing between the ECB and the return to normalcy is the need to cut rates to purely negative nominal levels. In simple terms, this means the authors think that unless ECB starts giving money away to everyone, including the households (a scenario if nominal rates turn sufficiently negative) without attaching a debt lien to these loans, there is no hope. In a sense, I agree - to get things rolling, we need to cancel out household debts. This can be done (expensively) by printing cash and giving it to households (negative nominal rates). Or it can be done more cheaply by simply writing down debts, while monetising write-offs to the risk-weighted value (a fraction of the nominal debt).

I called for both measures for some years now.

Even "Heroic Central Bankers" (for now within the research departments) now smell the rotten core of the QE body: without restoring balancesheets of the households and companies, there isn't much hope for the risk of dis-inflation abating.

30/1/16: Russian Trade Balance in Goods: 2015

On foot of my note covering Russian preliminary estimates for external trade, some readers asked if the figures provided (see here: http://trueeconomics.blogspot.com/2016/01/23116-russian-external-balance-2015.html) were indeed in Rubles. The answer is no - these are US Dollar amounts at the exchange rate posted time of data release (so preliminary figures are subject to change due to exchange rates effects as well as data updates).

As with all national statistics everywhere, Russian data has better coverage of goods trade, than services trade. Services trade generally lags goods trade in terms of reporting for a range of reasons that are reflected in all countries accounts. While we have only estimates for services trade through November 2015, we have actual figures for goods trade through the same period. These are reported by the Central Bank of Russia and provided below.

For 11 months (January-November) of each year, Russian exports of goods (only) fell from USD459.381 billion in 2014 to USD311.934 billion in 2015 - a decline of 32.1% y/y and a drop of 34.9% on comparable figure in 2012. Meanwhile, imports of goods (only) fell from USD283.541 billion in 2014 to USD176.652 billion in 2015 -a decline of 37.7% y/y and a drop of 41.9% on 2012 levels.

As the result, Trade Balance (goods only) for 11 months of 2015 fell from USD175.84 billion to USD135.582 billion - down 23.1% y/y. The Trade Balance (for 11 months cumulative) was down 22.8% on 2012 levels.

We can, with some stretch of imagination, extrapolate 11 months figures to full year. To do this, we adjust the figures for seasonality (December imputed weighting in trade volumes across both exports and imports).

If we do so, full year exports of goods for Russia come in at around USD342.9 billion down 31.1% y/y, while imports come in at USD194.32 billion, down 36.9% y/y. Trade balance for the full year 2015 (goods only) comes in at around USD147.6 billion, down 22.2% y/y, making 2015 the lowest trade surplus year (goods only) since 2010 when trade balance stood at just under USD147.0 billion.

Charts to illustrate the dynamics based on imputed full year values (note: horizontal lines are period averages):

For what it is worth, it might be interesting to make a comparative between 2015 levels of external trade and pre-2000 era. Average exports of goods in 1994-1999 were USD79.4 billion and 2015 levels were 4.3 times higher. Average imports of goods in 1994-1999 were USD58.45 billion and these rose 3.3 times in 2015 figures. As the result, average 1994-1999 trade balance was USD20.95 billion. 2015 trade balance was 7 times larger than that.

Not too shabby numbers, event though 2015 was a tough year of trade for Russian exporters.

29/1/16: Murray Index of Top 20 Journalists on Twitter

I don't usually post this sort of things around here, but given my fond memories of working as the editor of Business & Finance and my deep respect for the profession of journalists, I am delighted to have made some sort of rankings in the field:

Respectable 14 for such an august company!