22/10/2012: Is Ireland a 'Special Case' in the Euro area periphery?

Since the disastrously vacuous summit last Thursday and Friday, there has been a barrage of 'Ireland is special' statements from Merkel and other political leaders. The alleged 'special' nature of Ireland compared to Greece, Portugal and Spain is, supposedly, reflected in Irish banks being successfully repaired and Irish fiscal crisis corrected to a stronger health position than that of the other peripheral countries.

I am not going to make a comment on the banking system's functionality in Ireland compared to other states. But on the fiscal front, let's take a look. Per IMF:

• In 2012 we expect to post a Government deficit of 8.30% of GDP against Greece's deficit of 7.52%, Portugal's 4.99% and Spain's 6.99%. We are 'special' in so far as we will have the highest deficit of all peripheral countries.
• In 2013, Ireland is forecast to post a Government deficit of 7.52% of GDP against Greece's 4.67%, Portugal's 4.48% and Spain's 5.67%. Once again, 'special' allegedly means the 'worst performing'.
• In 2012, Ireland's structural deficit would have fallen from 9.31% of potential GDP in 2010 to 6.15% - a decline of 3.16 ppt. For Greece, the same numbers are 12.12% to 4.53% - a decline of 7.59 ppt or more than double the rate of austerity than in Ireland. For Portugal, these numbers are  8.96% to 4.09% - a decline of 4.87 ppt of more than 50% deeper reduction than in Ireland. For Spain: 7.32% to 5.39% - a drop of 1.93 ppt or shallower than that for Ireland.
• In 2013 in terms of structural deficit, Ireland (5.38% of potential GDP deficit) will be worse off than Greece (-1.06% of potential GDP), Portugal (2.28%) and Spain (3.52%)

Now, run by me what is so 'special' about Ireland's fiscal adjustment case?

Can it be that we are 'lighter' than other peripherals on debt?

• 2010 Government debt in Ireland stood at 92.175% of GDP and this year it will be around 117.743% - up 25.255% of GDP. For Greece this was respectively 144.55% of GDP in 2010 and 170.731% in 2012 - a rise of 26.181%, marginally faster than that for Ireland. For Portugal, gross Government debt was 93.32% of GDP in 2010 and that rose to 119.066% in 2012, an increase of 25.746%. Again, not far from Ireland's. And for Spain, these numbers were 61.316% to 90.693% - a rise of 29.377%. So while Spain is clearly the worst performer in the class, Ireland, Greece and Portugal are not that far off from each other.

Wait, what about economic reforms and internal devaluations? Surely here Ireland, with its exports-focused economy is a 'special' case?

• In 2012, Ireland is expected to post a current account surplus of 1.813% of GDP, against deficits of between 0.148% and 2.909% for the other three peripheral countries. This, of course, is not the legacy of Irish reforms, but of the MNCs operating from here.
• However, in terms of current account dynamics, Ireland is not that special. Between 2010 and 2012, Greece will reduce its current account deficit by 4.294 ppt, Ireland will improve its external balance by 0.674 ppt, Portugal by 7.105 ppt and Spain by 2.278 ppt. So Ireland is the worst performing country of four in terms of current account dynamics, while the best performing in terms of current account balance.

Now, do run by me what can it possibly mean for Ireland to be a 'special' case compared to Greece, Portugal and Spain?

21/10/2012: Some links for Investment Analysis 2012-2013 course

For Investment Analysis class - here are some good links on CAPM and it's applications to actual strategy formation & research, and couple other topics we covered in depth:

Classic:
"The Capital Asset Pricing Model: Theory and Evidence" Eugene F. Fama and Kenneth R. French : http://papers.ssrn.com/sol3/papers.cfm?abstract_id=440920

"CAPM Over the Long-Run: 1926-2001", Andrew Ang, Joseph Chen, January 21, 2003: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=346600

"Downside Risk", Joseph Chen, Andrew Ang, Yuhang Xing, The Review of Financial Studies, Vol. 19, Issue 4, pp. 1191-1239, 2006

"Mean-Variance Investing", Andrew Ang, August 10, 2012, Columbia Business School Research Paper No. 12/49  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2131932&rec=1&srcabs=2103734&alg=1&pos=1



More related to the Spring 2013 course on HFT and Technical Models:
"A Quantitative Approach to Tactical Asset Allocation" Mebane T. Faber : http://www.mebanefaber.com/2009/02/19/a-quantitative-approach-to-tactical-asset-allocation-updated/

"The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset Allocation", Andrew Clare, James Seaton, Peter N. Smith and Stephen Thomas, 11th September 2012: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2126478

"Dynamic Portfolio Choice" Andrew Ang: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2103734

21/10/2012: Overselling & Overhyping

Here's at last a significant recognition from the Irish media that the Government should be held accountable for the claims it makes relating to 'selling' newsflow to the public.

The Irish Government has grossly oversold and mis-interpreted the June 29 EU Summit outcomes, and then subsequently opted to actively undervalue the statements made by the EU states' officials on interpretation of the summit results.

I wrote about this matter here, here, here and here.

20/10/2012: Is there a WW3 going on somewhere?

Is there a war of major proportions the US fighting somewhere?..

And may be Japan and Europe are all fighting for something pretty big too?

20/10/2012: Irish Agriculture 2009-2011 - Value Added

CSO released data for gross value added in agriculture for 2009-2011 yesterday - a set of data that reveals the final figures for the various sources of income in Irish agriculture. The good news is that in 2011 the subsidies junkies have managed (in part on foot of booming agricultural prices) to derive some net value added from their activities. The bad news is that ba far the Agricultural sector in Ireland remains unproductive.

The core figures are defined as follows:

• Net subsidies: Subsidies on products less taxes on products plus subsidies on production less taxes on production.
• GVA at basic prices = Operating surplus + Compensation of employees + Fixed capital consumption - Other subsidies less taxes on production

I have written on many occasions before that Irish agriculture is an extension of the welfare state, in so far as most of the value added in it is provided for by the subsidies. Here are the latest details:

Thus, only in the South-West did 2011 net of tax subsidies cover less than 50% of the operating surplus. In Broder, Midland and Western region, net subsidies exceeded operating surplus.

Over the last 3 years:

• Value of the total output in Livestock nationwide rose from €2,225 million in 2009 to €2,281 million in 2010 and €2,665 million in 2011 - an increase for 2009-2011 of cumulative 19.8%
• Value of the total output in Livestock Products nationwide rose from €1,148 million in 2009 to €1,591 million in 2010 and €1,887 million in 2011 - an increase for 2009-2011 of cumulative 64.3%
• Value of the total output in Crops nationwide rose from €1,377 million in 2009 to €1,523 million in 2010 and €1,751 million in 2011 - an increase for 2009-2011 of cumulative 27.1%
• Value of the Total Goods Output in Agriculture nationwide rose from €4,751 million in 2009 to €5,395 million in 2010 and €6,303 million in 2011 - an increase for 2009-2011 of cumulative 32.7%
• However, there was also a 16.9% rise in Intermediate Consumption of inputs that went into supplying the above Total Goods Output in Agriculture, which rose from €4,185 million in 2009, to €4,302 million in 2010 and €4,890 million in 2011.
• At the same time, Net Subsidies (as defined above) rose only marginally - by 0.04% cumulative, from €1,813 million in 2009declining first to €1,649 million in 2010 and rising to €1,814 million in 2011.
• As the result of this, Operating Surplus in Irish Agriculture went from €1,446 million in 2009 to €1,841 million in 2010 and to €2,395 million in 2011, posting a cumulated rate of growth for 2009-2011 of 65.7%.

All of the above means that absent net subsidies, Irish Agriculture's contribution to the economy (net of costs) would have been: a loss of €367.4 million in 2009, a gain of €192.5 million in 2010 and a gain of €581.5 million in 2011. With a sector that has managed to add - out of its own activity - just €406.6 million to the economy cumulative over last 3 years, we have a lot of policy and marketing hoopla about the value of Ireland's Agriculture.

The table below summarizes inputs and outputs in the GVA calculation for Irish Agriculture:

Even taking into the account wages paid by and to Irish farmers, the overall Agriculture's importance to the economy is (on the net) minor. Oh, and above does not account for the cost of running the Department of Agriculture and other tax-related spending that effectively is an added cost to the taxpayers.

19/10/2012: FDI: It ain't all it is claimed to be...

Quite an interesting little study out of the US worth reading (link here to an earlier version).

Christian Fons-Rosen, Sebnem Kalemli-Ozcan, Bent E. Sørensen, Carolina Villegas-Sanchez, and Vadym Volosovych just published a working paper titled "Where are the Productivity Gains from Foreign Investment? Evidence on Spillovers and Reallocation from Firms, Industries and Countries".

The paper identifies "the effect of foreign direct investment (FDI) on host economies by separating positive productivity (TFP) effects of knowledge spillovers from negative effects of competition."

"Policymakers around the world have welcomed this development and encouraged it given the perceived benefits of FDI such as technology transfer, knowledge spillovers, and better management practices. Several macro-level studies confirm these predictions by documenting a positive correlation between aggregate growth and aggregate FDI flows (see Kose, Prasad, Rogoff, and Wei (2009)). Researchers argue that this positive correlation between FDI and growth is a result of knowledge spillovers from multinationals and their foreign-owned affiliates to domestic firms in the host country."

Unfortunately, as the authors point out, "there is no direct causal evidence at the firm-level supporting this view for a large set of countries. Available evidence lacks external validity and the existing findings vary to a great extent between developed countries and emerging markets depending on the focus of the particular study".

The point raised is that "Any finding of a positive relation between foreign owner- ship and domestic productivity can be an artifact of (a) foreigners investing in productive firms in productive sectors and (b) exit of low productivity domestic firms following foreign investment. Establishing a causal effect of FDI on productivity (directly on foreign owned firms and indirectly via spillovers on domestic firms) is challenging: to identify such an effect, firm and sector specific selection effects must be accounted for, as well as the possibility of dynamic effects through the exit of weak domestic firms."

"The second difficulty in the quest for identification arises from the simultaneity problem. Foreign investment may be correlated over time with higher productivity of affiliates, or higher productivity of domestic firms with whom they interact; however, dynamic patterns might be driven simultaneously by time varying factors other than foreign ownership."

To control for the above, the study uses "a unique new firm/establishment-level data set covering the last decade for a large set of countries (60 countries) with information on economic activity, ownership stake, type, sector, and country of origin of foreign investors."

Top of the line conclusion is that:
"Controlling for foreigners potentially selecting themselves into productive firms and sectors, we show that the positive effect of FDI on the host economy’s aggregate productivity is a myth.
-- Foreigners invest in high productivity firms and sectors, but do not increase productivity of the acquired firms nor enhance the productivity of the average domestic firm.
-- In emerging markets, we find that the productivity of acquired firms increases but the effect is too small to significantly affect the aggregate economy.
-- For domestic firms, a higher level of foreign investment in the same sector of operation leads to strong negative competition effects in both developed and emerging countries.
-- In developed countries, we find evidence of positive spillovers through knowledge transfers only for domestic firms with high initial productivity levels operating within the same broad sector as the multinational investor but in a different sub-sector.
-- Our results confirm the predictions of the new new trade and FDI literature, in that more productive firms select themselves into exporting and FDI activities."

Oops!

More damning:
"Our preliminary results show that foreign owned firms/multinational affiliates are more productive … in developed countries; however, …this effect in developed countries is solely driven by future fundamentals (growth potential); i.e., growing firms becoming foreign-owned."

Double Oops!

Next:
"We find evidence of positive spillovers from foreign activity only when we look at a finer sectoral classification where the domestic firms are not direct competitors of the foreign firms and where domestic firms are at the top of the productivity distribution." Now, let's face it, folks, in MNCs-dominated sectors, Irish firms are not exactly a shining example of being at the top of the productivity distribution (except perhaps in ICT services, but most certainly not in pharma or medical devices or financial services). Which means that by and large we should not expect significant spillovers from the MNCs to Irish firms.


PS: Sadly, the study was not able to incorporate data from Ireland, because - to use polite authors' expression - Ireland belongs to a group of countries with 'Problematic Data Coverage' (aka dodgy data) for Manufacturing firms 2002-2007.