US dividends are being cut at a record pace (see here) and this is a welcomed news as it marks the beginning of a turning point in the market. I do not mean the turning point for an upward swing in equity prices, at least not yet. I mean a turning point from the relentlessly accelerating down trend and into a flattening section of the U-curve.
Here is the logic - corporate profits are lagged at the very least one-to-two quarters from real demand. This suggests that an accelerating fall in the dividends reflects the economic reality of Q3-Q4 2008. Assuming the real side of the US economy is going to start settling into the bottom section of the U-shape correction sometime in February-March, the current reporting season will be pricing exactly this forecast. Any pick up in growth from the low figures of December-January will be a bonus point to Q2 dividends.
Regardless of such a pick up, equity markets downgrades in the next few weeks will bring share prices down to reflect dividend cuts.
This will set the stage for the next move. End of Q2 is likely to see some upturn in the US economy. Real GDP growth is likely to stay negative in annual terms, but the latter part of Q2 will be marked by a rise in growth from the lows of Q1.
Equity markets will lead this trend with a potential rally in late Q1 - early Q2. Dividend cuts anticipations for Q2 will already be priced in by then, so aggressive cost cutting measures - implying lower sensitivity of Q2 profits to any further economic slowdown in Q1 2009 - will provide some additional potential mid-Q2 boost to the share prices.
A late Q1-early Q2 rally will be a payoff to today's realism...
Wednesday, January 28, 2009
Tuesday, January 27, 2009
Global trade protectionism: politics at its worst
To start with, here is a great quote from Jagdish Bhagwati - courtesy of the Cato Institute's Center for Trade Policy Studies:
"[L]abour union lobbies and their political friends have decided that the ideal defence against competition from the poor countries is to raise their cost of production by forcing their standards up, claiming that competition with countries with lower standards is “unfair”. “Free but fair trade” becomes an exercise in insidious protectionism that few recognise as such."
"Obama and Trade: An Alarm Sounds," Financial Times. January 9, 2009.
Lest anyone thought that one party controlling the Congress and the White House is such a handy idea, there is a welcome package for the EU's exporters being prepared by the Democrats.
According to the reports in today's press, President Obama's much-awaited $825bn stimulus package will include a “Buy America” clause - the American Steel First Act. The act will ensure that only US-made steel will be used in $64 billion of federally financed infrastructure projects.
Clearly, Anyone-but-the-Republicans EU leadership is going to see some nasty surprises from the new Administration - if not courtesy of Mr Obama himself, then certainly thanks to the good old protectionist traditional Democrats that Europeans love so much.
The initiative has already secured the House of Representatives Appropriations Committee blessing and is about to trigger a new Steel War with Europe. The EU Commission is already making noises about taking the US to WTO. The US, of course, signed and ratified the WTO's Government Procurement Agreement which requires it to grant fair access to its federally financed projects to all competitors.
If course, some EU states themselves are toying with 'Buy Domestic' types of rescue packages. France, usually the leader of the protectionist pack despite being economically open when it comes to French sales and investments abroad has squeezed in a €6bn aid package for its automakers that includes a commitment for them to purchase on French-made components.
In the UK, plans to give state aid to car makers are also reportedly to include assurances from the comapnies not to use funds outside the country.
A similar €4bn package of aid to Saab and Volvo in Sweden also came with the same strings attached.
And then there is a decision to reintroduce dairy export subsidies by the EU's Agricultural Commissioner, Mariann Fischer Boel. The measure is not only protectionist, but came despite the EU commitment in November 2008 not to introduce new trade barriers in order to allow the troubled Doha Round of global trade talks to be finalised with some face-saving dignity for the WTO.
So maybe in the end Mr Obama is an EU-like President?
Of course, the developing nations are also moving in quickly to shut some of their markets to foreign competition, but this is hardly a reasonable ground for EU and US to start erecting their own trade barriers. History offers a somber reminder: passage of the 1930 Smoot-Hawley Tariff Act in the US triggered a wave of tariff increases across the world. Within a year, average foodstuffs tariffs went up 53% in France, 60% in Austria, 66% in Italy, 75% in Yugoslavia, 80% plus in Czechoslovakia, Germany, Romania and Spain and more than doubled in Bulgaria, Finland and Poland. We all know what that led the world...
"[L]abour union lobbies and their political friends have decided that the ideal defence against competition from the poor countries is to raise their cost of production by forcing their standards up, claiming that competition with countries with lower standards is “unfair”. “Free but fair trade” becomes an exercise in insidious protectionism that few recognise as such."
"Obama and Trade: An Alarm Sounds," Financial Times. January 9, 2009.
Lest anyone thought that one party controlling the Congress and the White House is such a handy idea, there is a welcome package for the EU's exporters being prepared by the Democrats.
According to the reports in today's press, President Obama's much-awaited $825bn stimulus package will include a “Buy America” clause - the American Steel First Act. The act will ensure that only US-made steel will be used in $64 billion of federally financed infrastructure projects.
Clearly, Anyone-but-the-Republicans EU leadership is going to see some nasty surprises from the new Administration - if not courtesy of Mr Obama himself, then certainly thanks to the good old protectionist traditional Democrats that Europeans love so much.
The initiative has already secured the House of Representatives Appropriations Committee blessing and is about to trigger a new Steel War with Europe. The EU Commission is already making noises about taking the US to WTO. The US, of course, signed and ratified the WTO's Government Procurement Agreement which requires it to grant fair access to its federally financed projects to all competitors.
If course, some EU states themselves are toying with 'Buy Domestic' types of rescue packages. France, usually the leader of the protectionist pack despite being economically open when it comes to French sales and investments abroad has squeezed in a €6bn aid package for its automakers that includes a commitment for them to purchase on French-made components.
In the UK, plans to give state aid to car makers are also reportedly to include assurances from the comapnies not to use funds outside the country.
A similar €4bn package of aid to Saab and Volvo in Sweden also came with the same strings attached.
And then there is a decision to reintroduce dairy export subsidies by the EU's Agricultural Commissioner, Mariann Fischer Boel. The measure is not only protectionist, but came despite the EU commitment in November 2008 not to introduce new trade barriers in order to allow the troubled Doha Round of global trade talks to be finalised with some face-saving dignity for the WTO.
So maybe in the end Mr Obama is an EU-like President?
Of course, the developing nations are also moving in quickly to shut some of their markets to foreign competition, but this is hardly a reasonable ground for EU and US to start erecting their own trade barriers. History offers a somber reminder: passage of the 1930 Smoot-Hawley Tariff Act in the US triggered a wave of tariff increases across the world. Within a year, average foodstuffs tariffs went up 53% in France, 60% in Austria, 66% in Italy, 75% in Yugoslavia, 80% plus in Czechoslovakia, Germany, Romania and Spain and more than doubled in Bulgaria, Finland and Poland. We all know what that led the world...
Euro Area GDP forecast - Update I
Last month I predicted that the forward looking barometer of economic activity in the Euro-area, the €-coin indicator published by CEPR and Banca d’Italia will register a small temporary correction from its historically low level of -0.15% (growth of Euro-area GDP forecast) in December 2008. I also forecast that the Euro-coin indicator will follow the downward path in February back to -0.15% reading.
Alas, I was too optimistic. Today’s Euro-coin data shows that the measure of economic activity in the Euro-area has fallen once again, this time to -0.21% in January 2009. This changes both my original forecast for February 2009 Euro-coin indicator and for Q1 2009 GDP growth rate in the Eurozone.
My new forecasts are:
Alas, I was too optimistic. Today’s Euro-coin data shows that the measure of economic activity in the Euro-area has fallen once again, this time to -0.21% in January 2009. This changes both my original forecast for February 2009 Euro-coin indicator and for Q1 2009 GDP growth rate in the Eurozone.My new forecasts are:
- Eurozone GDP Growth rate: -0.8% in Q1 2009
- Euro-coin: -0.17-0.25 February-March 2009, with expected value of -0.22.
Monday, January 26, 2009
Irish policy & rising jobs losses
750 job losses at First Active, over 2,800 jobs losses last week alone... we are in a meltdown mode by all possible means and the social partnership, the government and most of the opposition are clearly out of depth on what needs to be done.
I said 'most of the opposition' because there are pieces and bits of forward thinking still coming through in a handful of statements issued by FG and Labour. However, these do not, as of yet, represent a credible and effective platform for a policy response.
Here is a statement from Fine Gael Enterprise Spokesman Leo Varadkar TD issued today:
"Fine Gael has called on the Government to waive PRSI payments in 2009 for companies taking on new employees, declare war on red tape, launch an immediate review of overpriced electricity and gas charges, and impose a freeze on local authority charges and Government levies. The Government must also scrap the damaging VAT hike in the Budget, and overhaul FÁS into a rapid reaction agency which can provide public works schemes for the unemployed.”
Good beginnings of a policy here, but take a deeper look:
All three require a small number of resolute measures.
Public Sector: cut the spending (capital and current) by ca 10-15% and use one half of that to plug the deficit hole, while the other half should be rebated to the households to pay down homeowners' and pensions' deficits;
Households' balancesheets: the above will address, in part, the issue of precautionary savings demand and repair household balancesheets. More, though will be required to restore demand for credit, so use banks recapitalisation scheme to raise equity in the banks and rebate this equity back to the households via a voucher-like scheme;
Companies balancesheets: Many of the domestic Irish companies struggling today are, frankly, insolvent and incapable of operating as an ongoing concern in the environment where growth is slower than 4% per annum. These must be allowed to fail. As there is no better mechanism to sort the sick from the healthy than the market, the State should resist the desire to 'repair' companies' balancesheets. Instead, the state should enact emergency cuts in local authorities budgets and cut local authorities charges and tax cuts to consumers to stimulate demand (see below). One policy on business side to be enacted should involve a PRSI tax cut and the introduction of the full credit for private health insurance purchases against the health levy contributions.
Local Authorities & Quangoes/Regulatory Authorities (RA): Within 4 months, the Government should produce the first draft of a local authorities reforms package cutting the number of local authorities down to 4 - GDA, North East & Midlands, West and South. The savings to be achieved in this reform should be set at a minimum 50% of the combined budgets of the current authorities being pulled. A comprehensive review of the Quangoes and Regulators must be carried out by a non-political independent panel working in a transparent, open manner, reporting by April 1 2009. The objective should be to:
Domestic economy reforms:
(1) Tax policies:
I said 'most of the opposition' because there are pieces and bits of forward thinking still coming through in a handful of statements issued by FG and Labour. However, these do not, as of yet, represent a credible and effective platform for a policy response.
Here is a statement from Fine Gael Enterprise Spokesman Leo Varadkar TD issued today:
"Fine Gael has called on the Government to waive PRSI payments in 2009 for companies taking on new employees, declare war on red tape, launch an immediate review of overpriced electricity and gas charges, and impose a freeze on local authority charges and Government levies. The Government must also scrap the damaging VAT hike in the Budget, and overhaul FÁS into a rapid reaction agency which can provide public works schemes for the unemployed.”
Good beginnings of a policy here, but take a deeper look:
- Waiving PRSI payments in 2009 for companies taking on new employees is, in effect, a subsidy for jobs creation, not for jobs retention. On the margin, it is an incentive to create lower-end jobs, but it will do nothing to preserve thousands of financial services jobs;
- Declaring war on red tape is simply sloganeering. Most of our red tape comes from Brussels and the Irish Government has no say on this. Instead, culling the army of quangoes that mushroomed in recent years and rebating the savings back to the taxpayers might help;
- Reviewing energy prices - a good idea, but beware: it will spell an end to the Green Party agenda of subsidising wind and other alternatives via minimum price guarantees. I personally have no problem with this, though;
- Freezing local charges and levies - at current levels - will do nothing more than provide an injection of a vitamins potion to a dying patient. We need a wholesale reform of the local authorities structure to lead in cutting - dramatically - these costs;
- VAT increases must be scrapped, and in fact, a cut in the VAT rate should be implemented, but the main problem is in declining after-tax incomes, not in rising consumption expenditure;
- Overhauling Fas into some sort of a lean, mean jobs-creation machine ignores the basic problem with this organisation - no state body can 'create' jobs. The best Fas can do is take money from the taxpayers and spend this money on token training programmes. The efficiency of such programmes to date has been €250K spent per job added. Even if Mr Varadkar manages to cut this by 2/3rds, it will still be more than €2.40 spent per €1 in average wages added. You might as well pay the unemployed that €1 in welfare and burn the remainder €1.40 in a fireplace. At the very least you'll get some heat - more than what you'll get out of 'overhauled' Fas. For a real solution to the Fas problem - see the second bullet point above.
- Public sector insolvency;
- Households' and companies' indebtedness; and
- Uncompetitive domestic economy dragging down exports growth with it.
All three require a small number of resolute measures.
Public Sector: cut the spending (capital and current) by ca 10-15% and use one half of that to plug the deficit hole, while the other half should be rebated to the households to pay down homeowners' and pensions' deficits;
Households' balancesheets: the above will address, in part, the issue of precautionary savings demand and repair household balancesheets. More, though will be required to restore demand for credit, so use banks recapitalisation scheme to raise equity in the banks and rebate this equity back to the households via a voucher-like scheme;
Companies balancesheets: Many of the domestic Irish companies struggling today are, frankly, insolvent and incapable of operating as an ongoing concern in the environment where growth is slower than 4% per annum. These must be allowed to fail. As there is no better mechanism to sort the sick from the healthy than the market, the State should resist the desire to 'repair' companies' balancesheets. Instead, the state should enact emergency cuts in local authorities budgets and cut local authorities charges and tax cuts to consumers to stimulate demand (see below). One policy on business side to be enacted should involve a PRSI tax cut and the introduction of the full credit for private health insurance purchases against the health levy contributions.
Local Authorities & Quangoes/Regulatory Authorities (RA): Within 4 months, the Government should produce the first draft of a local authorities reforms package cutting the number of local authorities down to 4 - GDA, North East & Midlands, West and South. The savings to be achieved in this reform should be set at a minimum 50% of the combined budgets of the current authorities being pulled. A comprehensive review of the Quangoes and Regulators must be carried out by a non-political independent panel working in a transparent, open manner, reporting by April 1 2009. The objective should be to:
- completely and effectively separate regulatory authorities from their respective sectors and the Government;
- introduce effective RAs oversight by the Dail;
- reduce the number of quangoes by at least 75% and the number of RAs by at least 30%, with corresponding reductions in staff and budgets; and so on.
Domestic economy reforms:
(1) Tax policies:
- cut VAT back to 17% across the board,
- cut CGT to 15%,
- replace stamp duty with a land-value tax (or a variant of such) phased along some amortization schedule for stamp duty paid by the existent homeowners;
- dissolve the Social Partnership;
- privatise - via a public voucher system for disbursement of state shares - all semi-state enterprises (those state enterprises that hold more than 50% market share in their respective sectors - e.g ESB, CIE, DAA, VHI, etc) must be broken up in the process of privatisation;
- beef-up the Competition Authority with direct enforcement and prosecution powers;
- reform CBFSAI to detach it completely from the Department of Finance.
Eurzone's growing pain
Willem Buiter's post makes a timely and an obvious point that the new stage of the global financial crisis is beginning to pull Eurozone monetary structures apart. Buiter starts the argument by describing a rising tide of financial protectionism:
“Consequently, we have seen two forms of re-nationalisation of banking and finance. The first form of nationalisation has been the taking into partial or complete public ownership of banks and other financial institutions deemed too systemically important (too big, to interconnected or too politically connected) to fail. This has happened virtually everywhere... More examples will follow. The second form of re-nationalisation of banking and finance is the restriction of access to the fiscal and financial resources of the nation state just to those banks and other financial entities that have a significant presence in that nation state.”
Buiter points to the lack of coherent single fiscal policy platform for the EU as the underlying cause for these developments. In particular, he stresses that the Eurozone has common monetary policy, but national regulatory environments and fiscal polices, all pulling in different directions at the time of the crisis.
“The Eurozone is in a bit of a pickle here, because although it has a central bank with supposed uniform access to its resources for all Eurozone banks, regulation and supervision remain national and fiscal bail-outs (recapitalisation by the state, guarantees, insurance, loans or whatever provided by the sovereign) definitely remain national. When the central bank acts as market maker of last resort, as the Banca d’Italia is now doing in the Italian interbank market, it takes on significant credit risk which requires a fiscal back-up - the Italian Treasury. But that undermines the principle of equal treatment of banking institutions across the Eurozone...”
Solutions:
• either a “supranational fiscal authority with its own tax and borrowing powers, accountable to the European Parliament …and the Council...” or
• “…a pan-Eurozone fund, fully pre-funded and containing, say, 2 or 3 trillion euro to begin with. This Eurofund could be managed by the European Commission, subject to parliamentary oversight and control by the European Parliament and the Council. The fund could be drawn upon to provide financial assistance to systemically important troubled banks in the Eurozone, according to guidelines agreed by the EC, the EP, the Council and the ECB. …the fund [is] to raise its resources through the issuance of bonds that would be guaranteed jointly and severally by all Eurozone member states.”
Of course, there are other solutions, which Buiter omits for obvious political reasons. These include:
1. Doing nothing, threatening a disorderly collapse of the Euro, should the current crisis continue to deepen; or
2. Partially re-introducing parallel national currencies to run alongside the Euro.
The last option is a milder version of a ‘nuclear’ first option, but desperate times do call for desperate measures.
The two solutions Buiter proposes are about as realistic as Salvador Dali’s landscapes:
• A common fiscal policy is a complete non-starter at this time.
• While a joint EU15-wide fund would be welcomed by the EU officials – ever hungry to get more power – underwriting such a fund (in excess of 32% of the Eurozone 2008 GDP) will be crippling for national governments, especially at the time when their own finances are under immense pressure from banks bailouts and fiscal stimuli.
In addition, the ages old concern of Germany and other states that the fund will be abused by the less fiscally prudent states, e.g Italy, Spain and France, constrains its feasibility, while strained sovereign debt markets are constraining the feasibility of raising such amount of money to capitalize the fund.
In this framework, unless the current downturn is reversed in the next 3-6 months, it is clear that an evolutionary process of fiscal policy responses and monetary policy constraints across the Eurozone will be creating more incentives for Balkanization of the Euro. Short of lapsing into oblivious denial of the reality, it is only a matter of managing this process that the ECB can be concerned with at this moment in time.
“Consequently, we have seen two forms of re-nationalisation of banking and finance. The first form of nationalisation has been the taking into partial or complete public ownership of banks and other financial institutions deemed too systemically important (too big, to interconnected or too politically connected) to fail. This has happened virtually everywhere... More examples will follow. The second form of re-nationalisation of banking and finance is the restriction of access to the fiscal and financial resources of the nation state just to those banks and other financial entities that have a significant presence in that nation state.”
Buiter points to the lack of coherent single fiscal policy platform for the EU as the underlying cause for these developments. In particular, he stresses that the Eurozone has common monetary policy, but national regulatory environments and fiscal polices, all pulling in different directions at the time of the crisis.
“The Eurozone is in a bit of a pickle here, because although it has a central bank with supposed uniform access to its resources for all Eurozone banks, regulation and supervision remain national and fiscal bail-outs (recapitalisation by the state, guarantees, insurance, loans or whatever provided by the sovereign) definitely remain national. When the central bank acts as market maker of last resort, as the Banca d’Italia is now doing in the Italian interbank market, it takes on significant credit risk which requires a fiscal back-up - the Italian Treasury. But that undermines the principle of equal treatment of banking institutions across the Eurozone...”
Solutions:
• either a “supranational fiscal authority with its own tax and borrowing powers, accountable to the European Parliament …and the Council...” or
• “…a pan-Eurozone fund, fully pre-funded and containing, say, 2 or 3 trillion euro to begin with. This Eurofund could be managed by the European Commission, subject to parliamentary oversight and control by the European Parliament and the Council. The fund could be drawn upon to provide financial assistance to systemically important troubled banks in the Eurozone, according to guidelines agreed by the EC, the EP, the Council and the ECB. …the fund [is] to raise its resources through the issuance of bonds that would be guaranteed jointly and severally by all Eurozone member states.”
Of course, there are other solutions, which Buiter omits for obvious political reasons. These include:
1. Doing nothing, threatening a disorderly collapse of the Euro, should the current crisis continue to deepen; or
2. Partially re-introducing parallel national currencies to run alongside the Euro.
The last option is a milder version of a ‘nuclear’ first option, but desperate times do call for desperate measures.
The two solutions Buiter proposes are about as realistic as Salvador Dali’s landscapes:
• A common fiscal policy is a complete non-starter at this time.
• While a joint EU15-wide fund would be welcomed by the EU officials – ever hungry to get more power – underwriting such a fund (in excess of 32% of the Eurozone 2008 GDP) will be crippling for national governments, especially at the time when their own finances are under immense pressure from banks bailouts and fiscal stimuli.
In addition, the ages old concern of Germany and other states that the fund will be abused by the less fiscally prudent states, e.g Italy, Spain and France, constrains its feasibility, while strained sovereign debt markets are constraining the feasibility of raising such amount of money to capitalize the fund.
In this framework, unless the current downturn is reversed in the next 3-6 months, it is clear that an evolutionary process of fiscal policy responses and monetary policy constraints across the Eurozone will be creating more incentives for Balkanization of the Euro. Short of lapsing into oblivious denial of the reality, it is only a matter of managing this process that the ECB can be concerned with at this moment in time.
Saturday, January 24, 2009
Public Sector: A Feast Amidst the Plague: Update I
Here is another interesting observation concerning Public Sector earnings.
The figure below clearly shows that wages in the lowest earning categories of public sector fall within 1 standard deviation of the total public sector wage (i.e the average). This disputes an argument that there is any significant degree of heterogeneity in pay within our public sector.
Statistically, this shows that not a single category of workers in the Public Sector (identified by their respective sub-sectors of employment) earn less than the overall Public Sector average.
Indeed, this data (taken from the CSO - see here) proves that within the public sector, the so-called 'low paid' areas or professions enjoy a relatively average rate of pay, with the average itself being artificially inflated by the higher earning categories. In other words, there is no pleading relative poverty for any sub-sector of the public sector employment.
PS: Did anyone notice an apparently bizarre logic our public sector trade unions have taken to in arguing against any cuts in public sector wages?
Well, they are arguing that such a cut would be deflationary (in case you have not noticed, deflation is a new evil). Thus, their argument goes, to rescue our economy out of the current crisis, one should stick to the excessive wage increases granted to the public sector employees under the last Social Partnership deal. But hold on, weren't the same trade unions also arguing that high inflation in the past made it imperative to raise wages paid to the public sector employees?
In other words, ICTU/SIPTU and the rest of them are having it both ways: inflation or deflation, they'll have a pay rise in the name of the nation's economic health...
Have a cake, eat it, and get the rest of us to pay for both?
The figure below clearly shows that wages in the lowest earning categories of public sector fall within 1 standard deviation of the total public sector wage (i.e the average). This disputes an argument that there is any significant degree of heterogeneity in pay within our public sector.
Statistically, this shows that not a single category of workers in the Public Sector (identified by their respective sub-sectors of employment) earn less than the overall Public Sector average.
Indeed, this data (taken from the CSO - see here) proves that within the public sector, the so-called 'low paid' areas or professions enjoy a relatively average rate of pay, with the average itself being artificially inflated by the higher earning categories. In other words, there is no pleading relative poverty for any sub-sector of the public sector employment.
PS: Did anyone notice an apparently bizarre logic our public sector trade unions have taken to in arguing against any cuts in public sector wages?
Well, they are arguing that such a cut would be deflationary (in case you have not noticed, deflation is a new evil). Thus, their argument goes, to rescue our economy out of the current crisis, one should stick to the excessive wage increases granted to the public sector employees under the last Social Partnership deal. But hold on, weren't the same trade unions also arguing that high inflation in the past made it imperative to raise wages paid to the public sector employees?
In other words, ICTU/SIPTU and the rest of them are having it both ways: inflation or deflation, they'll have a pay rise in the name of the nation's economic health...
Have a cake, eat it, and get the rest of us to pay for both?
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