Economics 12/08/2009: An afront to our democracy

So Mr Carroll's case has been now refused the examinership by the Supreme Court. Welcome news - at least there is a remnant of sanity left in this country and it is the Judiciary. But the telling reaction to the highest court in the land verdict came from the Department of Finance. In a blatant disregard of the Supreme Court powers, a mere civil servant-run lowly department (that is but a fraction of one of the three pillars of the state) has in effect told the Supreme Court (the highest body of another pillar of this state) to pack off.

In a response penned, most likely well in advance of the Supreme Court decision, the DofF stated that (quoting the Irish Times report - here): "The Department of Finance rejected any suggestion that the Government’s plans for Nama were affected by the court ruling. “It makes no difference – Nama will proceed as planned,” said a spokesman for the Minister for Finance. “We’ve always made clear that Nama will operate in line with EU Commission guidelines, which set out the use of the long-term economic value measurement.”

So Supreme Court telling the nation that, in agreement with the Commercial Court, its assessment of Mr Carroll's assets is that these assets are not worth even 15-20% of loans advanced to the company, 'makes no difference' to the NAMA. We will still pay Euro60bn for the same assets.

Now, do the math, Mr Carroll owes the banks over Euro2bn. He has trouble paying on Euro136mln. His companies are generating around Euro27-30mln per annum - and that according to his company records, that Commercial Court, in the context of his the survival plan, identified as “lacking reality” and bordering, if not trespassing, on the “fanciful”. So here we are, the valuations of Mr Carroll's loans quality is in (this time confirmed by the highest authority in the land):

• According to the courts, Mr Carroll's loans are not worth 21.3% of their face value (in other words, a discount of 78.7% on their value will not bring the price down to the current market valuation) (Euro265mln out of Euro1.26bn = 21.3% value of assets);
• The balance sheet below illustrates clearly that even assuming 7% annual cash flow growth, plus 5% asset growth per annum for 2008-2020, a very benign interest rate environment (note we assume max cycle interest rate of 10% on Mr Carroll's borrowings in Scenario 2) and disposal of all his properties in the end of the term, the net market value of Mr Carroll's companies in 2020 will be a negative Euro5.7-7.5bn.

Now, it is the only attempt of estimate Mr Carroll's loans net worth at this stage known to me, so do take your time to read through it. The really, really scary part, that if NAMA were to buy his loans at a 50% discount, NAMA will be making a cumulative loss of between Euro2.41-2.56bn by 2020. If the discount were to 70%, NAMA resulting losses will be Euro1.19-1.34bn. At a 70% discount, folks!

And DofF still thinks we shall all p***s off: NAMA is here and there is nothing we can do about it!

This is bad news for:

• the responsible and accountable Government and governance, for our DofF in effect is stating the position of the State as 'NAMA - no matter what'; and
• the Irish democracy, for DofF has expressed absolute and public disdain for the highest court of this land.

And thus we have (courtesy of http://farm3.static.flickr.com/2452/3813875003_7e58e1ddc3_o.jpg):

Economics 10/08/2009: Industrial production blues and fun-NAMA

Brian Lucey has an open petition on NAMA on his site (here):
http://brianmlucey.googlepages.com/namapetitionandoireachtasemails
which is, in my view, spot on in terms of what each member of Oireachtas should read before the NAMA debate takes place.


Before we begin with CSO's data on industrial production - few NAMA posters are posted below, so do make sure you get to the end of this post...


CSO data on industrial production was published earlier today. Trumpets are blowing that things are turning around for Ireland Inc. But hold your horses...

On an annual basis production for Manufacturing Industries for June 2009 was 4.3% higher than in June 2008. So turnaround is here, then? Well, no... The most significant changes were in:

• Basic pharmaceutical products and preparations (+35.1%),
  
• Other manufacturing (+25.9%) and
  
• Computer, electronic and optical products (-17.7%).

What does the above mean? Pharma guys are chugging along in transfer pricing / tax optimization, but computers and electronics - hammered by exits and layoffs and the collapse in private investment worldwide - can't even master a tax optimization scheme. I mean, Table 3 in CSO release clearly shows this sector having suffered the greatest layoffs of all other sectors in proportional terms, and of all other Modern sectors in absolute and proportional terms.

The seasonally adjusted volume of industrial production for Manufacturing Industries for the three month period April to June 2009 was 2.0% lower than in the preceding three month period. This is volatile stuff, so 3-mo aggregates are a bit more telling.

The “Modern” Sector, comprising a number of high-technology and chemical sectors, showed an annual increase in production for June 2009 of 16.0% - the same transfer pricing argument holds. But there was a decrease of 16.6% in the “Traditional” Sector.

The seasonally adjusted industrial turnover index for Manufacturing Industries was 1.9% lower in the three month period April to June 2009 when compared with the preceding three month period. Now, outside the current crisis, turnover is actually less volatile than production volumes, and yet now it tracks almost 1:1 the more volatile series. What's going on? I am not sure, but one potential explanation is that we have gone into a severe enough jobs/production capacity cutting mode earlier this year to allow for some stabilization during May-August period. Of course, this means September-October turnover will make or break our stabilization. If turnover falls, new layoffs will be coming. If it rises, well, if it rises by a hell of a lot, then hiring might commence.

On an annual basis turnover was 0.6% lower when compared with June 2008.

Now, few interesting charts:
Taking a closer look above, compare the changes over the last four months reported relative to sector activity in 2005 (the 100 line):

• In March 2009, 8 sectors performed above their 2005 levels in volumes. In June, the number was 6.
• But in April 2009, this number was 5, while in May it was 3...

In effect, the whole manufacturing sector is sick and the disease is not new to this crisis. Read through this chart above - it is really, really telling. The same chart with monthly changes May-June (preliminary results, of course for June) - 11 sectors show no improvement, 9 show improvement.

Now step back for a bit of a broader view:
Self-explanatory, but few notes worth making:

• Capital goods are slightly up +4.66% mom in June, but that is after being slightly down -2.83% in May, so change on March 3.75%, but on April only 1.7%. Not exactly a robust start of a new cycle here, but not a disaster.
• Intermediate goods down - MNCs might be scaling back for summer.
• Consumer goods up, but no durables - weather effect?

Unfortunately, CSO can't get their act together on surveying new orders for all sectors, so we have a snapshot of what's happening in the very limited number of areas. But what the chart below really shows us is our dependence on MNCs - yeah, those American (and other countries') companies who are still trading, if only because of our tax arbitrage opportunity...

Credit for the following due to:
http://img7.imageshack.us/img7/5391/namahaughey.jpg
http://i38.photobucket.com/albums/e146/vgupload/sofew02.png

Economics 09/08/2009: Banks

A new post - the one promised a while ago - on Euro Area Banking Survey by ECB (July 2009 results), part 1 is now available on my Long Rune Economics blog here. Enjoy - most of this data has not seen the daylight in any media outlet and some of it has serious consequences for Irish banks, consumers etc... in other words - this is the bigger fish worth frying...

Economics 09/08/2009: Calling a turning point?

Forward looking update: I am working on detailed analysis of the latest ECB data on banks activity survey across the Eurozone, plus Ireland's own Earnings and Labour Costs data for Q4 2008... posts will be coming on these two, so stay tuned.

Now, I am skeptical about the 'Green Shoots' theory primarily for two reasons:

1. Relative to current fundamentals, the markets (equities) are overbought and bonds are at extremely low yields. Two possible scenarios can unfold from here on: Scenario 1 = we get growth in the US in Q3 2009, through Q4 2009 and inflation in Q1 2010. This means preciously little for Europe and Japan. Scenario 2 = we get growth in the US in Q3, then a contraction in Q4, and then out of a recession in Q1-Q2 2010 - a 'correction in the middle' scenario. Inflation will rise in Q2 2010 then. Again, Europe lagging and Japan is stagnating. Either way - I believe inflation is coming and it will be very hard hitting - 5%+ in 2010 as a peak, then up to double digits in 2011. Someone will have to pay for all this cash sloshing around courtesy of the Fed.
2. Real fundamentals - unemployment, personal disposable income, investment and so forth - bar the Government spending and printing presses - are still in a fall.

Now, I am much more comfortable with 6-months scenario of seeing the return to growth - albeit to moderate growth at the very best (especially when it comes to Europe). Here, we have Composite Leading Indicators from the OECD that do a decent job tracking trend (but not inflections necessarily) pointing to some interesting things. That said, I would be not as upbeat as OECD in interpreting these results...

• June 2009 data points to stronger signs of improvement in the economic outlook of OECD economies compared with June.
  
• Strongest recovery signals in Italy and France and clearer signals of troughs in Canada, Germany, the United Kingdom and the United States.
  
• In Japan tentative signs of improvement have also emerged.
  
• Troughs can also be observed in China and India, with tentative trough signals now appearing in Brazil and Russia.

TOk, let's take a look:

• CLI for the OECD area increased by 1.2 point in June 2009 but was 5.0 points lower than in June 2008. Now, note that in the previous recession, the CLI signal as about 1.5 years ahead of actual growth...
• The CLI for the United States increased by 1.3 point in June but was 7.2 points lower than a year ago. The same accuracy for CLI here as in the case of OECD (above) and Euroarea (below) when it comes to timing growth return... Now, note that the US has much better data available than the rest of the world, and here, things are really all over the place. Unemployment is down to 9.4%, but on the back of massive exits from the labour force. Structural unemployment has actually worsened: the number of people out of work longer than six months soared by a record 584,000 to 5 million, accounting for more than a third of all unemployment for the first time on record (chart below). While unemployment fell by 267,000 to 14.5 million, employment fell by 155,000. The labor force declined by 422,000, which means per Marketwatch, "the jobless rate declined because people dropped out of the work force, not because they got jobs". The participation rate fell from 65.7% to 65.5%. Unemployment chart below:There are some signs of improvement on jobs front, however. The average work week rose to 33.1 hours after falling to a record-low 33 hours in June. The average work week in manufacturing (a key leading indicator) rose from 39.5 hours to 39.8 hours. Total hours worked in the private-sector were unchanged. Good news, but one has to put this into perspective - a rise of 0.1 hour on a record low? Average hourly earnings rose by 3 cents, or 0.2%, to $18.56. Even better news, but again - state and local taxes are rising... Disposable income is singing the blues still. Higher working hours might see increased industrial production in Q3. Of 271 industries, 30.1% were hiring on net in July, up from 28.6% in June. In manufacturing, 22.3% of industries were hiring, the highest percentage since September.
  
  
• The Euro area’s CLI increased by 1.5 point in June but stood 1.6 points lower than a year ago. Now, that sounds misleading - as in - we are closer to trend than the US or OECD... true, but the problem, of course is that our trend is soo low, it would be considered a majour downturn for the US economy to run at our long term growth rates...
  

• Oh and take a look at Japan - the sickest economy in the universe. Now, note that those years above 100 - that was actually pure stagnation. Yet, CLI still gunned for growth there.
  

• The CLI for the United Kingdom increased by 1.1 point in June 2009 but was 0.9 point lower than a year ago. The UK is much closer to a recovery, unless, of course we have a double dip as in 2000-2003...
  
• The CLI for Germany increased by 1.7 point in June but was 6.6 points lower than a year ago. To be honest, there is no way the CLI for Germany can stay off the rising path from now on - the sheer collapse of exporting activity there was so deep earlier this year, you would have to put those Germans through another world war to get any worse destruction of productive capacity than we saw. So is CLI really meaningful here at all? And then, spot that double dip in previous episode.
  
• The CLIs for France and Italy, after having increased by 1.4 and 2.2 points respectively in June, are now above the level reached a year ago, by 2.7 points in the case of France and 4.8 points in the case of Italy. Well, France is appearing to do just fine here - national consumption-driven economy (as opposed to the German exporting model) is underpinning more stability in the downside part of the cycle. There is also massive spending by the French government on everything under the sun. But the question is - are we in a double-dip here? Once stimulus runs out, and assuming the Germans are not going to stand by and watch the French issuing more debt in their name, something will have to give. It won't be a devaluation of the Euro, and it won't be unionised wages. And it certainly won't be Sarko cutting his populist spending sprees... Now, Italy is to Europe what Japan is to the world, so frankly, after 30 years of disastrous growth, who cares that Italy is in a 'recovery'? Can they themselves even notice that they are? Without Berlusconi trumpeting around Rome about his super-human manly and stately powers? I'll check in 10 days and will report from there...
  

So here we are.

• In my view, we can call a global recession turning point somewhere around now;
• But the meaning of this statement is hollow unless there is a return to real growth - not the corrective 3-4% for half-a-year and then 1% for the rest of our lives, but 3-5% trend - and this is unlikely, especially given the necessary therapy we will have to undergo to cure inflationary hangover of Obama-nomics, Brownist Monetarism and Trichetisation of the Euro;
• Individually, the US is probably past the turning point now and is accelerating rapidly (though the risk of a double dip, in y view is somewhere around 30% now);
• UK is also past the turning point and probability of a double dip is also around 30%;
• Euroarea is not going to see real growth for years to come and probability of a double dip is around 40%.

The CLI for China increased 1.4 point in June 2009 but was 3.7 points lower than a year ago. The CLI for India increased by 1.2 point in June 2009 but was 3.4 points lower than in June 2008. The CLI for Russia increased by 1.2 point in June but was 17.7 points lower than a year ago. In June 2009 the CLI for Brazil increased by 0.4 point but was 11.4 points lower than a year ago. So BRICs are for now decoupling from each other and there is possibility that a new bubble is forming in equity markets in Brazil and Russia...

Happy hunting.

SCAMA - a joke that's touching reality

From http://img218.imageshack.us/img218/9136/scama.gif

Economics 07/08/2009: Live Register - unemployment's deeper roots

Before we begin on Live Register - I would recommend an excellent post by Myles on Irish automotive sales - read it here.

So Live Register is in, prompting some cheerful commentary as per slowdown in the rate of increases in unemployment. Ahem... not that I noticed.

To be honest - there are some signs of a slowdown in the rate things deteriorate, true, but these are:

1. Hardly well-underpinned and can be easily reversed (see Female trends below); and
2. Are pure mathematical (non-fundamentals-driven) in nature, as things must be asymptotically converging to some longer-term equilibrium at some point in time.

So here are the details:

First CSO statement: "The seasonally adjusted Live Register total increased from 412,900 in June to 423,400 in July, an increase of 10,500. In the year to July 2009, there was an unadjusted increase of 197,495 (+82.9%). This compares with an unadjusted increase of 197,781 (+89.6%) in the year to June 2009. [So so far we are still in worse dynamics than in 2008 - pretty bad, wouldn't you agree?]

• The monthly increase in the seasonally adjusted series consisted of an increase of 5,100 males and an increase of 5,500 females. [Females now outnumber males - a sign that more dual unemployed families are being hatched under the nurturing light of our Government policies, and that better quality jobs are now being destroyed at a faster rate];
• The average net weekly increase in the seasonally adjusted series in July was 2,100, which compares with a figure of 3,000 in the previous month. [Sounds better, until you recognise that last months basis was 4 week, this month's basis is 5 weeks];
• The standardised unemployment rate in July was 12.2%. This compares with 10.2% in the first quarter of 2009, the latest seasonally adjusted unemployment rate from the Quarterly National Household Survey. [But it also shows that the rate of increase - by 0.3 percentage points per month - has been steady since May];
• In the month, the estimated number of casual and part-time workers on the Live Register was 37,415 males and 32,138 females [Which means nothing - nada - because many, if not a majority, of these workers are now facing hidden forms of unemployment, aka working, but not being paid on time!]
  

Now, few charts:
Note slight acceleration in females (more on this in a sec) and basically imperceptible changes in the slopes? So much for the 'green shoots'.The real disgrace is in the unemployment rate - back to April 1995 now. Less than 14 months of economic destruction and 12 years of new jobs creation erased. Surely, Bertie would say that the doomers-and-gloomers should now hang themselves.Weekly changes in the LR plotted above. Again, one note of caution - the averaging was done on 4 weeks basis in June and 5 weeks basis in July. If it was done on 4-weeks basis, the weekly average in July would be 4,286, still below 5,530 in June. Then again, July is a much slower month in general for any sort of business strategy change, let alone for mass layoffs. Let's wait till October/November... Again, note females - the average weekly change also declined, but at a much shallower rate, pointing to the pressures on female employment rising relative to males.Now, to monthly rate of growth (chart above). The rate at which females are signing is up in monthly terms. This is the evidence of really bad news to come. Recall that layoffs happen sectorally and sequentially (meaning last in = first out). Females' job tenure is shorter than males' over economy, so if new sectors come on-line for mass layoffs, and these sectors are not dominated by males (like construction in the past), we should see an uptick in female unemployment rising faster first, followed by males in the same sectors. While there is no certainty as to whether this is what's happening, that blue line trending up in the chart above is a reason for concern and suspicion that a new wave of unemployment increases might be gaining mass.
Last chart is showing monthly figures deviations from the 3-mo Moving Average in total LR. This was converging toward the long run trend between January 2009 and May 2009 (the blue graph heading toward zero), but it now diverged again in June and July. Last time we crossed the long run trend line was in September 2008, which marked a smaller peaking cycle of April-August 2008. Duration of the last cycle was just 4 months. The current cycle is into 10th month and now apparently diverging further once again.

Other cycles were equally short-lived (2 months in 2007, 4 months in early 2008).

All of this makes me very conservative to call and 'improvement' - the series, in my view, are suggesting:

• At least 60% chance of serious deterioration in September-November 2009; and
• A very significant sign of long-term unemployment rising through the roof.