28/05/11: A note on my appointment to GoldCore

As many of you have heard by now (see brief mention here) I have joined, in a non-executive capacity, the Investment Committee of GoldCore Ltd (link here).

In this capacity, I am looking forward to bringing additional expertise to the company's already rigorous and comprehensive internal processes designed to assure the quality and depth of market and product research, offered by GoldCore. In addition, I hope to be able to help the company in assuring that its core philosophy of well-diversified, client safety-focused, low cost/fee investing is consistently reflected in its research and structuring of its product offers.

Contrary to some erroneous assertions, I am not endorsing any products, nor providing any sort of investment advice. My independent opinions and views, supported by my best knowledge, error-prone sometimes, on-the-money on other occasions, will remain my own. I am stressing once again that this is a non-executive appointment.

I am on the record (in academic research and in applied analysis) in stating my views which, consistently over the years held that:
1) Diversification across asset classes (including, but not limited to precious metals) is the best risk management approach for all investors;
2) Diversification across various geographies and sectors of economies is the necessary risk management tool for structuring the investment portfolia that aim to simultaneously maximize returns and minimize risks;
3) Financial services providers should strive to deliver best suited products to their clients at a minimal possible cost to the clients;
4) Financial services should be offered on the fully legally compliant basis with all regulatory requirements and authorization requirements adhered to;
5) Regulation should strive to minimize unnecessary burden on those regulated and their clients, but provide meaningful, robust, transparent and unwavering enforcement of standards set. It should be effective, not maximal for the sake of being maximal.

If these principles are of value to some service providers in Ireland and abroad, I am happy to help. If not, I am not going to sacrifice them.

Several points worth making in relation to a couple of comments I have seen floated around:

Firstly, GoldCore provide a wide range of products as a part of their well-diversified investment offer. GoldCore philosophy is to deliver strong risk management ethos in products offered and to give investors a wide range of regulation-compliant investment products while minimising cost to investors and optimising risk-return tradeoffs inherent in any financial product.

All of the products that require regulatory approval and / or licensing offered by GoldCore are fully compliant with the Irish Financial Regulator requirements.

Secondly, the provision of precious metal product or service does not require licensing, authorisation, or registration with the Irish Central Bank and, as a result, it is not covered by the Irish Central Bank's requirements designed to protect consumers or by a statutory compensation scheme. In fact, physical purchases of commodities in general are not regulated by the Irish Central Bank, as confirmed by the Central Bank officer. This is the law of the land - no one offers investors 'Irish-regulated' sales of gold or other precious metals. Surely, no one sane enough would suggest that gold and other precious metals therefore should not be offered as an investment.

Client security in the case of precious metals investment is assured by the storage facilities where client assets are deposited. GoldCore works with the most secure storage facilities in Australia, Switzerland and the UK - as is required by the best industry-wide practices. In the current environment, these storage facilities have mechanisms to deliver security of client assets to the standards far in excess of the risk ratings attained by some European Governments, so while in the real world nothing is risk free, in my own humble opinion, and in the opinion of the majority of investors around the world, holding precious metals assets today may be safer than holding 'guaranteed' and 'regulated' government securities of some euro area Governments. (Note: please do not confuse this with an advice to buy gold at some price level or any given moment in time).

Thirdly, GoldCore are fully compliant with the Financial Regulator requirements set out for its operations. The company is listed on the Register of Investment Business Firms authorised under Section 10 of the Investment Intermediaries Act, 1995 (as amended) and Register of Investment Product Intermediaries maintained by the Central Bank of Ireland in accordance with Section 31(4) of the Investment Intermediaries Act, 1995 (as amended).

I am looking forward to working with GoldCore on providing the company with an independent, external 'sounding board' for ideas and new directions for research. GoldCore already have excellent research team and products in-house and my role is to help that team to strengthen its connections into cutting edge academic research that is being done around the world.

Note: the opinions expressed in this post are solely my own.

28/05/11: Retail sales for April 2011

As promised in the previous post, here's the analysis of retail sales for April 2011.

Headline figures:

• The volume of retail sales (i.e. excluding price effects - which in effect means excluding the revenue factor or margin factor for retail services providers) was down by 3.9% in April 2011 year on year (for the third month in a row).
  
• There was a monthly decrease of 0.8% for the first month after two consecutive months of increases (retail sales volume was up 3.1% in February and 0.8% in March with both increases attributed to the correction on big contractions in December 2010 (-1.5%) and January (-3.4%).
  
• Over the last 6 months, therefore, volume of retail sales was down cumulative 3.07%. since January 2008 the volume of retail sales has fallen total of 20.92%.
• The value of retail sales decreased by 3.5% in April 2011 year on year, marking a third consecutive month of annual decreases.
  
• There was a month-on-month decline of -0.7%. The wedge between value and volume decrease can be interpreted as being driven by inflation, suggesting modest inflation in retail sales sector. The monthly pattern of retail sales value is virtually identical to volume with April decrease coming after two months of moderate increases which compensated for the poor weather (and poor Christmas sales) in December-January.
• Over the last 6 months value of retail sales has declined by 2.56% held above the decline in volume index solely by rising prices. Since January 2008 Irish retail sector activity as measured by value of retail sales (turnover and margins being best reflected by this metric, rather than CSO-preferred volume index) has fallen by a cumulative of 26.1%.

Charts to illustrate:

• Excluding Motor Trades there was an annual decrease of 2.4% in the value of retail sales in April. This was the 34th consecutive month of annual decreases.
  
• Ex-Motors retail sales posted a monthly decrease of 0.3% in April, continuing up-down monthly cycle that started in August 2010.
• Over the last 6 months, value of ex-motor retail sales has increased by 0.1% and since January 2008 the value of core retail sales is down 18.3%.
  
• The data on value suggest that inflation is starting to pick up in core retail sales.
• Ex-Motors volume of retail sales fell a massive 5.0% yoy in April (again, supporting the assertion that the end of sales season saw price increases across core retail sales in 2011 relative to 2010, which means that with lower disposable incomes Irish consumers are now facing rising cost of living once again). This marked 12th consecutive month of volume decreases in annual terms.
  
• Month-on-month core retail sales were down 1.0% in April, after posting zero change in March and contracting 0.3% in February.
• Over the last six months, core retail sales volumes have declined by 2.16% and since January 2008 they are down 14.25%.
  

Charts to illustrate:
Sources of core declines were:

• In terms of volume: Fuel (-11.9), Pharmaceuticals Medical and Cosmetic Articles (-7.4%) and Furniture & Lighting (-16.2%) were among the ten categories that posted year-on-year decreases in the volume of sales in April. Books, newspapers & stationery fell 14.9%, Bars -6.0%, Food, beverages & tobacco were down 5.7%.
  
• In terms of value: largest annual declines were posted in Food, beverages & tobacco (-5.2%), Pharmaceuticals Medical & Cosmetic Articles (-6.2%), Furniture and Lighting (-19%), Electrical Goods (-8.5%), Books, Newspapers and Stationery (-14.4%), and Bars (-4.7%).
• The list of heaviest-hit sub-categories of retail sales in annual terms suggests that these might signal renewed push for shopping in Northern Ireland. In particular, large ticket items and higher cost items might be now more efficiently purchased outside ROI given the strength of the Euro. Another possibility might be continued drive by consumers into on-line sales channels which come from outside Ireland.
  

Lastly, some anecdotal evidence - reports by retail shop owners I had communications with - suggest that May might be another bad month for the sector already virtually decimated by the crisis.

27/05/11: Retail sales and consumer confidence

Updated chart for retail sales (see analysis of today's release to follow) and consumer confidence:
ESRI's Consumer Confidence index for April was down from 59.5 in March to 57.9. This decline was not marginal, but it does come at the end of three months of increases, so can be seen as at least in part a technical correction. Three month moving average continued to increase simply due to the momentum - a point that was missed by those observers who made much of hay out of this increase.

Contrary to the Sentiment momentum, of course, the Retail Sales fell in April:

• the volume of retail sales (i.e. excluding price effects) decreased by 3.9% in April 2011 when compared with April 2010 and there was a monthly decrease of 0.8%.
  
• ex-Motor Trades the volume of retail sales decreased by 5.0% in April 2011 yoy, while there was a monthly decrease of 1.0%.
• the value of retail sales fell 3.5% in April 2011 yoy and -0.7% mom.
  
• ex-Motor Trades annual series for value fell 2.4% and there was a monthly decrease of 0.3%.
  

Overall, it is believed that the 3mo MA is a better predictor of the general direction in the series. I am not so sure. Here's why. Both the contemporaneous (spot) indices and 3moMA are pretty much similar in tracking volume and value of retail sales. The charts below illustrate:
The 3moMA is somewhat better on both value and volume, but not by a massive margin.

Incidentally, the ESRI release on Consumer Sentiment index this month forgot (for some probably simple error reason) to update data tables from January 2011 through April 2011 (link here).

22/05/11: Ireland and BRICs - Trade flows

Just run thought the figures for external trade (goods) for February 2011 and updated my files for bilateral trade with Russia and BRICs overall. Here are the core results:
Bilateral trade with Russia is booming and the trade balance surplus is heading for historical highs, as I have predicted in a recent interviews with Rossijskaja Gazeta (here) and Voice of Russia (here).
Here's the chart:

Note that Irish trade authorities have been stressing -as strategic objective - development of trade with the BRICs. In particular, China has been a major target for Irish trade promotion and development agencies, well ahead of Brazil, India and Russia. You'd expect China to be net importer of Irish goods for suhc attention to be paid to the country. Take a look:
It turns out that our policy has been targeting the country that runs a massive trade surplus against Ireland. In other words, our imports from China are vastly in excess of our exports to China. In the mean time, Russia - which generates consistent trade surpluses for Ireland - is largely untouched by the Government agencies, when compared to China.

Here are the cumulative surpluses from our trade with Russia since 2004:

16/05/2011: Debt Restructuring - two insights

What if, folks... what if default or debt restructuring is the end game?

Here are two sets of thoughts on the topic. The first one is from the Lisbon Council and the second set is adopted (via my edits) from here.

Lisbon Council launched last week Thinking the Unthinkable: Lessons of Past Sovereign Debt Restructurings See , an e-brief by Alessandro Leipold, chief economist of the Lisbon Council and former acting director of the European Department at the International Monetary Fund (IMF). See www.lisboncouncil.net for full details

Mr. Leipold argues that "European debt resolution requires a much more forward-leaning, information-driven approach, involving

• Supplying markets with better, more timely information (including tougher banking stress tests - I would give credit here to CBofI which did carry out much more rigorous testing of Irish 4 than the EU has ever allowed to take place across the euro area)
  
• Abandoning untenable timelines (such as the “no-restructurings-before-2013” mantra), and
  
• Staying ahead of the game via recourse to tools such as pre-emptive bond exchange offers

Mr. Leipold draws five key lessons from past sovereign debt restructurings:

1. Avoid Detrimental Delays. Delays in restructuring are costly (output losses, entail “throwing good money after bad” via increasingly large official bailouts, and ultimately require a larger haircut on private claims). Realistic debt sustainability analyses are needed to detect, and communicate, the possible need for debt restructuring. The EU’s “read-my-lips: no-restructuring-until-2013” sets an arbitrary and non-credible deadline: the sooner it is abandoned, the better.
2. Repair the Banking Sector. The equation “euro debt crisis = core European bank crisis” needs to be broken. I might add that the equation 'euro debt & banks crises = European taxpayers destruction' must be broken even before we break he debt-banks link. This requires getting tough on bank stress tests, enhancing their rigour and credibility, possibly by associating the Bank of International Settlements (BIS) and IMF with European Union supervisors. Banks tests must be accompanied by much greater pressure from EU supervisors to speed up bank recapitalisation and to close down non-viable entities. Banking resolution legislation should proceed rapidly, as should creation of an EU-wide bank resolution mechanism.
3. Remove Politics from the Driver’s Seat. The current set-up, including the European Stability Mechanism (ESM), which will begin operations in 2013), "virtually ensures that EU creditor countries’ domestic political interests will play a front-and-centre role. The recent attempted quid pro quo with Ireland whereby Europe would agree to a reduction in the cripplingly high interest rate on its loans in return for changes to the Irish corporate tax code is but one indication of this. Put simply, the decision-making and governance mechanism should be distanced from the high-pitched political positioning characteristic of EU ministerial meetings, thereby also facilitating constructive communication with markets, and helping shape expectations as needed to promote crisis resolution". I can only add to this that politicization of the economic concept of debt restructuring is also evident within the PIIGS themselves. In Ireland, we have now a virtual army of pundits - many well-meaning, of course - arguing against the restructuring on the basis of (1) 'default'=evil, (2) our debts are sustainable, and (3) current path of delaying restructuring until post-2013 is the optimal choice. These are supported, in some instances via lucrative public appointments, by the political elite.
4. Stay Ahead of the Curve with Preemptive Exchange Offers. "Traditional bond exchange offers, made preemptively, prior to an actual default, worked well in several emerging country debt restructurings over the last decade or so, including Pakistan, Ukraine, Uruguay and the Dominican Republic. Experience indicates that such voluntary restructurings need not, contrary to some claims, be too “soft” for the debtors’ needs. Reasonably priced, and with proper incentives, deals can be concluded rapidly with negligible free riding."
5. Do Not Expect Too Much from Collective Action Clauses. "Contractual provisions such as collective action and aggregation clauses no doubt help at the margin. But they have not shown themselves to be decisive in debt restructurings. Furthermore, they cannot help in dealing with the current stock of debt".

Much of the above prescriptions/warnings is echoed in the tables summarizing debt restructuring options available to the PIIGS that I have edited based on their original source (here).

Both provide one core lesson to us - any state close to the point of no return when it comes to its debt levels (and no one is denying that we are close to that point, all arguments today are about whether we have crossed it or not) should be:

1. Prepared to act
2. Prepared to act preemptively
3. Be transparent about the problems faced

On all 3 so far our officials are failing miserably, although we are making some progress on the 3rd point...

15/05/2011: Some data on electricity prices comparatives

Here is some interesting data on electricity prices comparatives from Eurostat (note: chart below refers to simple EU averages for EU27 and weighted EU averages for EU15, while table below is based solely on weighted EU15 averages):