2/1/2012: Latest Composite Leading Indicators for Q4 2011

Latest leading economic indicators for Q4 2011 for OECD are not showing any real signs of economic recovery for the euro area. Here are some of the details (please note, data is through October, so forward signal is for November-December 2011).

For Australia, Q4 2011 indicator is now down at 100.55 against Q3 2011 reading of 100.80. 3mo MA is 100.71 against previous 3mo MA of 100.89. For comparative purposes, 2007 average reading was 101.96, 2009 average of 96.07 and 2010 average 101.13. 2011 average to-date is 100.99.

Canada's CLI is at 99.66, ahead of Q3 2011 reading of 99.42. 3mo MA is at 99.62 and previous 3mo MA was 100.72. 2011 average to-date is 100.90, well behind 102.13 average for 2010 and 101.26 average in 2007.

France current reading is at 98.13 slightly behind Q3 2011 at 98.60. 3mo MA is at 98.69, behind previous 3mo MA of 100.96. 2011-to-date average is at 101.16, behind 2010 average of 103.38 and 2007 average of 101.37.

Germany's current reading is at 98.28, down from 99.10 in Q3 2011 with current 3mo MA at 99.26, down from the previous 3mo MA of 102.93 - one of the highest rates of slowdown at 3.57%. 2011-to-date average is at 102.77, down from 2010 average of 104.08 and 2007 average of 103.96.

Ireland (for our local interest) is at 96.99 against Q3 2011 of 96.19 - one of the handful of countries (such as Greece) that shows some improvement. 3mo MA is at 100.40 against previous 3mo MA of 101.00. 2011-to-date reading is at 100.94 against 2010 average of 99.74 and 2007 average of 105.28.

Italy is currently reading at 96.55, down from 97.47 in Q3 2011. Current 3mo MA is at 97.50 down from 100.46 for previous 3mo MA - a decline of 2.95%. 2011-to-date average is 100.58 against 2010 average of 103.93 and 2007 average of 101.69.

Japan current reading is at 101.33 against previous reading of 101.55. 3mo MA at 101.62 down from 102.69 for previous 3mo MA. 2011-to-date average is 102.65 against 2010 average of 100.78 and 2007 average of 102.29.

Spain latest reading is 100.16 against previous reading of 100.65. 3mo MA is at 100.52 against previous 3mo MA of 101.18 and 2011-to-date average is at 101.38 against 2010 average of 102.86 and 2007 average of 102.52.

UK current reading is at 98.64 against previous reading of 99.01, with current 3mo MA of 99.14 against previous 3mo MA of 101.13 (-1.96%). 2011-to-date average is at 101.02 against 2010 average of 103.14 and 2007 average of 102.13.

US current reading is at 100.95 down from the previous reading of 101.25. 3mo MA is at 101.24, down from previous 3mo MA of 102.37 (-1.11%). 2011-to-date average is at 102.20 and 2010 average was 100.39, while 2007 average was 103.20.

In terms of EA17, current reading for the euro area stands at 98.53, down from previous reading of 99.13. 3mo MA currently stands at 99.20 against previous 3mo MA of 101.67 (down 2.43%). 2011-to-date average is at 101.75 against 2010 average of 103.34 and 2007 average of 102.81.

Big Euro Area 4 economies index is now at 98.12, down from the previous reading of 98.77. 3mo MA is at 98.88, down from 101.66 for the previous 3mo MA (-2.74%) and 2011-to-date average is at 101.66, down from 103.77 average for 2010 and 102.44 average for 2007.

Charts to illustrate:

1/1/2012: That debt overhang problem: replay

I am delighted to note that John Mauldin is also stressing the issue of total real economic debt overhang that I have been vocal about for some time now. Here's his 2012 predictions post: http://www.businessinsider.com/mauldin-collateral-damage-2011-12
that also contains this delightful chart:

And, spot the one country that stands out? Yep, that's Ireland - second to Japan in terms of total combined debt/GDP ratio, and well ahead of Japan when GNP is referenced in the above.

I have highlighted the issue of debt overhang and the long term real growth drag exerted by it in a number of articles now, including articles in the Sunday Times, the Globe and Mail, Ireland's Village magazine and on this blog. At last, analysts are starting to pay attention to the issue.

1/1/2012: Groundhog Year 2012 - part 2

And on with another summary of 2011. One side of the euro area economy had a boom year in 2011, unlike the rest of us. The boom, of course, was of a very dubious nature, but it is set to continue through 2012. That side was the ECB balance sheet.

Check out the following charts to spot the 'up year' for ECB's 'assets':

But what about ECB's capacity to carry these? Well, of course, ECB doesn't really function like a regular bank, but were it, with capital and reserves finishing 2012 at €81.481bn against total assets of €2,733.2 billion, ECB's leverage currently stands at 3,354%, which is well above 2000-2004 average of 1,372% and 2005-2008 average of 2,180% and 2009 level of 2,609% and 2010 level of leverage of 2,565%.

And, of course, more financial wizardry to come in 2012, folks. So brace yourselves for another 'up-and-up they go' year at ECB.

1/1/2012: Groundhog Year 2012 - part 1

In the tradition of looking back at the year passed, let's take a quick view of one of my favorite indicators for risk assets fundamentals: the VIX index.

CBOE Volatility Index finished the year well off the inter-year highs, but nonetheless in an unpleasant territory. VIX closed December 2011 at an elevated 23.40, ahead of December 2010 close of 17.75, 2009 close of 21.68 and only behind the December 2008 levels of 40.00. December 2007 close was 22.50 and December 2006 was 11.56.

More unpleasant arithmetic emerges when we consider inter-annual performance. Historical maximum for daily close (from January 1990 through present) is 80.86, while maximum for 2010-present was 48.00 set on August 8, 2011.

The historical average for VIX is 20.57, while the average for January 2008-present is 27.74, for January 2010-present is 23.38 and for 2011 as a whole - 24.20, implying that wile 2011 was not the worst performing year on the record, it was certainly worse than 2010. Table below summarizes annual data comparatives.

Average intra-day volatility actually marks 2011 as the worst year on record. Average intra-day spread for VIX stands at 9.28 in 2011 against 8.97 in 2010-present and 9.08 in 2008-present. And both 3mo and 1mo dynamic standard deviations posted poor performance for VIX in 2011, making it the worst year on the record other than 2009. VIX dynamic 1mo semi-variance closed the year on 7.80 and annual average of 4.26 against 2010 average of 3.96 and 2009 average of 5.78.

Charts below highlight the fact that 2011 was a poor year for fundamentals-based analytics:

All above suggest that volatility is the starting point for 2012. Welcome back to the New 'Groundhog Day' Year.

30/12/2011: Eurocoin December 2011: recession + inflation

Eurocoin - euro area's leading indicator of growth environment - posted another disappointing month in December. December reading came in at -0.20, same as November with 'stabilization' accounted for by improvement in surveys-based indicators for industrial and services firms, offset by material deterioration in actual demand indicators. Core Q4 2011 forecast for euro area growth now moved to -0.2, dangerously close to establishing a full-blown statistical contraction in the economy. More significantly, current growth and inflation conditions pairing pushed ECB policymaking into a proverbial straight jacket corner: rates consistent with inflation remain in the region of 3-times higher than current rate, while rates consistent with growth conditions are about right for the current 1.0% rate.

Charts below illustrate.

3mo MA for Eurocoin is now at -0.18, against 6mo MA of +0.03. YOY Eurocoin is down 141% and the indicator remains at the lowest level since August 2009. Annualized growth rate is forecast is running at -0.798% and 6mo MA annualized growth rate is running at +0.117% (also the worst performance since August 2009).

30/12/2011: Taleb's quote

AN excellent quote from Nassim Taleb via @econbrothers :

"If we attempt to systematically extinguish all forest fires, we will eventually experience a big one".

Which, of course, goes to describe concisely and precisely the fallacy of rescuing all banks that Europe has pursued as a principled policy. The old Schumpeterian creative destruction is a required condition for functioning of the private economy, with the latter being the required condition for functioning of the public economy as well. Bankruptcy - as a tool for clearing the hazardously dead forest of private enterprises - must apply to the banks too.

By underwriting the entire private banking system, the EU has created the Mother of All Hazards - a dry forest with numerous pockets of quasi-extinguished fires burning. Now, all we need is wind...