Sunday, January 6, 2013

6/1/2013: Italy's Growth, Reforms & Austerity Conundrum

I've written before about the Italian Dilemma and the debt trap on a number of occasions (see this article for example) and my basic view remains the same - Italian economy needs structural reforms to escape the debt overhang trap and increase productivity in non-exporting firms. That gap, in productivity, between the exporters and non-exporters in the Italian case is vast.

Now, it is great to see BCA Research wading in with the similar concern about Italy's productivity problem and the issue of structural reforms: link here.

A chart from BCA:
Alas, the problem is that Italian economy is saddled with rapidly ageing population and the fact that the extent of it has been somewhat masked by the artificial inflow of lower-skilled migrants during the 2000-2007 years (link here) and underemployment of Italian younger workers.

Italian workplace structures (from hiring to firing) and firm ownership (especially smaller family firms, but also unionised larger or legacy employers) actively obstruct promotion of non-Italians to management and higher professional grades. Non-EU citizens with higher skills and their residency in Italy have been regulated by antiquated laws until August 2012 (see here). These are non-meritocratic (see here and here for examples) systems that cannot be sustained in younger societies, let alone in Italy, where emigration and ageing are forcing the workforce to become older and less productive (see an early study here on effects of migration on Italian labor force comparative to other EU countries).

On underemployment of Italian younger workers, here's a chart from 2012 OECD study:

None of this is new, as this study from James Heckman dating back to 2001 illustrates. And none of it is being addressed in Italy so far through the crisis. Monti Government has tinkered along the edges (see here and here), but failed to tackle the real causes of the long-term (decades long in fact) crisis so far - lack of merit in Italian promotion, hiring and firing structures. Monti has tried, but so far failed to push through more ambitious reforms (link here) and Italy remains trapped in the high debt - low growth scenario.

The issue, of course, is whether austerity (cuts and taxes) is in itself structurally reformist. 

In and by itself - it is not, especially if the balance of taxes v cuts is shaded toward the former rather than the latter. 'Shaded' here depends not so much on some set rule (as the Irish Government, for example, likes to pretend) of 40% v 60% or 50% v 50%, but on the starting point for the reforms and the nature of the reforms, as well as other conditions. 

Italian economy is already weighted heavily by huge taxes and indirect charges. For example, Italy has the sixth highest income tax wedge for single average wage earners with no children, per OECD. It is also suffering from a massive demographic problem that exacerbates taxation policy inefficiencies (younger workers are saddled with higher long term tax bills, while older workers are looking forward to a cushioned retirement). Between 2012 and 2016, the IMF expects Italian Government spending to run above 50% of the country GDP, and there was not a single year since 1988 when the Italian Government spending dropped below 47% of the country income. These figures are 1-2 ppts above the Euro area average, but full 15% above the average for advanced economies ex-G7 and Euro area - in other words, the economies with which Italy competes for global markets in skills and exports.

Thus, IMF assessment of the Italian reforms in July 2012 stated: "The government’s near-term fiscal plans are ambitious and critical for sustainability, but more can be done over the medium term to strengthen the fiscal outlook. To support growth, the composition of adjustment should be rebalanced more towards expenditure cuts and lower taxes". 

In other words, austerity is needed (if only to deflate the burden of debt servicing for the Government debt and provide some breathing room for structural reforms that will require much longer-term approach than currently envisioned). But not austerity-for-the-sake-of-austerity alone. Deficit targets are meaningless, in the case of Italy. Reduction in expenditure targets are necessary, and alongside these, reforms of the labour markets.

Saturday, January 5, 2013

5/1/2013: Irish Market M&A and ECM activities in 2012

Per Experian release (from yesterday) covering the latest M&A (mergers and acquisitions) and ECM (flotations, rights issues and placements) data for the Republic of Ireland, 2012:

  • During 2012, there were 294 transactions announced in Ireland, down on 2011 total of 307 deals (-4.2% y/y). However, the value of transactions rose 1% from €28.343bn in 2011 to €28.596bn in 2012.
  • The most active sector for M&A in 2012 were: Materials & Equipment Wholesale (just over 20% of all transactions), Professional & Business Activities (15.5%) and Computer Activities (15.2%). The largest value deals were in Banking, Credit & Leasing (€10.5bn), and Electrical Manufacturing (€10.2bn).
  • Ireland represented ca 3% of the total volume of all European transactions and 3.9% of their total value.
  • There were 29 large deals announced in 2012 in the over-€120mln category, "up by 20.8% from the 24 transactions recorded for 2011". "…The aggregate value of large deals was up by 1.38%, from €25.25bn in 2011 to €25.597bn in 2012. The largest deal completed in the Republic of Ireland in the year was the acquisition by US industrial engineering group Eaton Corp of Dublin-based Cooper Industries Plc, for €8.971bn."
  • Deal volume in the mid-market (€12-€120mn) segment in 2012 "stayed level on 64 deals. Values declined to €2.237bn in 2012 – representing a fall of 3.8% over deals worth €2.325bn 2011. The largest completed deal in the mid-market saw real estate investor Kennedy Wilson acquire the Irish Headquarters of State Street Corp for €106.9mln in November; this was the US firm’s second large acquisition of the year in the Irish property sector, it having acquired the Alliance Building, a 210-unit residential property in Dublin, for €40mln in June."
  • "Deal flow in the small market (under €12m) value segment fell from 47 transactions in 2011 to 44 transactions for 2012, a decline of 6.4%. However the aggregate value of deals saw a 9.2% increase; there were €232mln worth of small transactions in 2012, up from €212mln in 2011. The largest completed deal in 2012 saw diversified building materials group CRH Plc acquire Anchor Bay Construction Products Ltd, an English company that provides reinforcement, formwork and waterproofing products to the construction industry, for €11.97mln. This was one of fourteen acquisitions made by the acquisitive Irish company in 2012".

5/1/2013: US Mint December 2012 sales

In the previous post (here), I looked at the annual data for US Mint gold coins sales. Here, let's take a quick look at the shorter-term, monthly trends and dynamics for December 2012.

Following a robust monthly rise in sales of coins by oz (weight) totals to 136,500 oz in November, December sales moderated to 76,000 oz (down 44.32% m/m), still posting a healthy 16.92% increase y/y. Compared to historical average of 56,346 oz the sales are still up, although December 2012 is below 87,717 oz average sales for the crisis period (since January 2008). However, while difference to historical (1987-2012) average is significant statistically, it is not significant relative to crisis period average. Furthermore, 6mo MA is at 68,250 which is well below the December sales levels.

For those thinking of a 'big fall-off in sales', December 2012 marked the highest volume (by weight) of sales since December 2009 and the fourth highest volume since January 2000.

In terms of number of coins sold, December 2012 came in at 82,000, or 52.74% down on November robust sales of 173,500, but monthly sales were up 26.15% y/y. Compared to historical averages, December 2012 sales are statistically indifferent from historical average sales of 98,758 coins per month, and from crisis-period average of 119,642. 6mo MA sales are at 93,500, ahead of December sales, while H1 2012 average sales were at 93,750, also well ahead of December 2012 volumes.

The relative moderation in the number of coins sold compared to the trends in the volume of coinage gold sold (oz) can be explained by the increased oz content of average coin sold. In terms of oz/coin sold, December 2012 sales stood at 0.927, well ahead of 0.787 in November, posting the highest gold content reading for any month since December 2011. Historical average content is at 0.590 oz/coin and crisis period at 0.790 oz/coin, both statistically significantly lower than December 2012 figure.

Charts and dynamics:

As above clearly shows, the historical trend is upward sloping and the current reading is comfortably at the trend levels both in terms of 6mo MA and actual level reading for December 2012.

The chart above shows contemporaneous negative correlation in price of gold v volume of gold coins sales between September 2009 and April 2012, with exception of December 2010 - August 2010. This correlation has now been broken down and turned positive since April 2012 - a new sub-trend that remained consistent since then and was reinforced in December 2012 figures. Chart below illustrates this much more clearly:

A little more statistical 'beef' on these: 12mo dynamic correlation between gold prices and total gold sales via coins (total oz weight of sales) rose to +0.34 in December from +0.28 in November 2012, so declined prices (y/y) have been associated with some increase in demand. Recall that in November-December 2011, gold prices fell from $1,746 to $1,531, while in the same period 2012 they moderated from $1,726 to $1,657.50. December marked 4th consecutive month of positive 12mo dynamic correlations. Historical 12mo dynamic correlation of +0.17. Looking at longer-range correlations, 24mo dynamic correlation in December 2012 stood at -0.23 against the historical average of -0.10 and up (in absolute terms) of -0.19 in November.

Per average coin sold gold content:

As mentioned above, December 2012 sales were characterised by a substantial increase in average gold weight of coins sold which is running well ahead of the historical (upward sloping) trend. More significantly, this year sales fell below the historic trend in 6 months out of 12. Hence, neither trend direction, nor current deviation from the trend are indicative of any severe downward demand pressures.

Overall, sales dynamics show that since February 2012, volumes of sales in oz have recovered nicely back to their historical trend (upward sloping) and are currently running above the January 2000-July 2008 averages.

Historical, long-term relationship between gold prices and demand:

While December 2012 observation is to the downside of the trend, it is clear from the picture overall that changes in gold prices during a given month have statistically no discernable relation to the demand for gold via US Mint coins sales. This simply confirms the nature of fundamentals driving demand for coins as discussed in my previous posts on the issue (see previous post linked above for one such link).

5/1/2012: US Mint Gold Coins Sales: 1986-2012 data

The readers of this blog would be familiar with the exclusive time series on US Mint sales of Gold coins that I have maintained for some years now. With December 2012 sales finalised, it is time to update the annual and monthly data analysis on these.

Here is the analysis for January 2012 - to open the year - that predicted 'return to fundamentals' theme for coin sales. And here is my article for Globe & Mail on what fundamentals relate to gold coins sales.

I am happy to note that my prediction of moderating trend in speculative buying and restoration of stronger link to long-term behavioural demand and savings fundamentals has been confirmed through 2012.

Looking at annual data for 2012 (note: subsequent post will provide more shorter-term dynamics analysis for December data), first in weight terms:

  • In 2012 the US Mint sold 747,500 oz of gold in form of coins, down 25.25% y/y, with demand for coinage gold declining below 2008 levels of 860,500, but well-ahead of the 2005-2009 average annual sales of 640,800 oz per annum.
  • In terms of longer-term averages, 1990-1994 average was at 384,050 oz, 1995-1999 average at 1,047,800 oz, 2000-2004 average run at 386,550 oz, 2005-2009 average at 640,800 oz per annum and 2010-2012 average is currently at 989,333 oz per annum. 
  • 2012 was the 10th highest demand year in history in terms of volume of gold coins sold in oz of gold, with series covering 1986-2012 period. In other words, 2012 was not a good year for Gold Bears and for Gold Speculators alike. This doesn't make it a great year for Gold Bulls, but, given that the average annual gold price in 2012 stood at $1,678/oz - ahead of any on the record and up  7.0% on 2011 - it does appear to have been another year when fundamentals seemed to triumph over shorter-term psychosis. 
  • My annual forecast for sales in 2012 was 694,050, which means that simple dynamic trend of moderating sales expectations based on previous years' price effects was bearish.
In terms of number of coins sold:
  • US Mint sold 1,123,500 coins in total in 2012, down 21.27% on 2011. The demand for actual coins was at the levels compatible with 2008 when the Mint sold 1,172,000 coins and well ahead of all annual sales in 2000-2007 period.
  • In terms of longer-term averages, 1990-1994 average was at 637,620 coins, 1995-1999 average at 2,246,300 coins, 2000-2004 average run at 738,700 coins, 2005-2009 average at 955,800 coins per annum and 2010-2012 average is currently at 1,397,167 coins per annum. In other terms, current sales are annually bang on at the annual average for the last 8 years.
  • 2012 ranks as the 10th most successful year for coins sales in terms of the number of coins sold, confirming my view in the third bullet point above regarding sales of coinage gold in oz.
  • My forecast for 2012 sales was at 1,21,223 coins - a much closer call than on oz of gold sold via coinage, suggesting that the demand remains closely driven by long-term dynamics.
In terms of both - sales in coins numbers (1,123,500 coins) and oz (747,500 oz), 2012 results stand in close comparative to the historical averages. Historical average (1986-2012) for coins sold is 1,261,170 and for oz of gold sold through US Mint coins is at 717,343 oz.

In terms of average gold content of coins sold:
  • 2012 average coin sold by the US Mint contained 0.665 oz of gold per coin, down slightly on 0.701 oz/coin in 2011 and well-ahead of the historical average of 0.574 oz/coin.
  • 2012 ranks as the fifth highest year on record in terms of average oz/coin sales.

Historical dynamics:

As charts above illustrate, all time series have shown convergence to the long-term upward trend:

  • There is, so far, no overshooting of the trend to the downside - something that could have been expected if demand for gold coins was showing speculative bubble deflation dynamics or post-bubble correction, although, of course, we cannot say with 100% accuracy that this is not going to materialize with some lag.
  • There is no acceleration in the convergence trend in 2012 or since convergence began in 2009.
  • This episode of convergence is shallower (in terms of annual speed to target) than in 1997-2002 period and 1986-1991 period.

Historical correlations:

  • In terms of historical correlations, the following matrix holds, showing overall zero to low level negative correlations between prices and demand for coins and coinage gold:

The above, of course, implies that given moderating price increases in gold (+7% for annual monthly average in 2012 compared to 22.21% rise in 2011, 25.61% in 2010, 11.44% in 2009 and so on), we can expect a slowdown in overall oz and coins volume demand, which can lag price changes. This is exactly what appears to have taken place in 2012.

As before, I remain comfortable with the 2012 trend and am looking forward toward more stabilised demand dynamics in 2013, with volume of sales declining in 2013 to ca 500,000 marker in oz terms and 850,000 in coins numbers terms, assuming no major volatility in gold price and in line with continued stabilisation in the world economy.

1) I am a non-executive member of the Heinz GAM Investment Committee, with no allocations to any specific individual commodities
2) I am long gold in fixed amount over at least the last 5 years with my allocation being extremely moderate. I hold no assets linked to gold mining or processing companies or gold ETFs.
3) I receive no compensation for anything that appears on this blog. Everything your read here is my own personal opinion and not the opinion of any of my employers, current, past or future.

Friday, January 4, 2013

4/1/2013: Major economies PMIs for December 2012

Global PMI snapshot:

Previously covered:

Some top line performance for the global economy:

  • US Manufacturing: December 50.7 from November 49.5 - statistically not significant as above 50 reading, so a shallow positive, with a swing of 1.2 ppts being a good indicator of gradual strengthening. New orders static at 50.3 and employment gains at 52.7 in December against 48.4 (contraction) in November.
  • Germany: 46.0 in December a deterioration on already abysmal 46.8 reading in November. Clear contraction territory. 
  • France: 44.6 in December after 44.5 in November - an outright recession.
  • Italy: 46.7 in December on 45.1 in November - falling off the cliff at a slightly reduced rate.
  • UK: 51.4 in December on 49.2 in November - expansion, albeit moderate in December.
  • Japan: 45.0 in December, worse than already recessionary November reading of 46.5.
  • China: 50.6 in December, unchanged on November - both not statistically significantly different from 50.0. Employment continues to contract: 49.0 in December on 48.7 in November, while New Orders are growing at 51.2 in both months - modest growth rate.
  • Brazil: 51.1 in December on 52.2 in November - signalling slowdown in already weak growth in November.
So Manufacturing sector is pretty ugly.

  • US: to 56.1 in December from 54.7 in November, confirming strong growth trend. Employment at 56.3 in December - a robust uplift, on top of relatively static 50.3 in November. New Orders rising to blistering 59.3 in December from 58.1 in November.
  • Euro area: to 47.8 in December from 46.7 in November - both signalling contraction
  • Germany: bucking the trend for the euro area to 52.0 in December from 49.7 in November, with now moderate expansion
  • In contrast to Germany, France went deeper into contraction territory: 45.2 in December against 45.8 in November.
  • Italy matched France and raised: 44.6 in December (a depression-level reading) from 46.0 in November (a recession reading).
  • UK stumbled: 48.9 in December (mild contraction) against 50.2 (effectively flat) in November.
  • China: robust 56.1 in December on foot of strong 55.6 in November
  • Brazil slightly less impressive, but stil positive: 53.5 in December relative to 52.5 in November.
So Services are all over the shop with the euro area remaining the Ugly of the Bad.

4/1/2013: Irish Manufacturing PMI: December 2012

The latest Manufacturing PMI for Ireland, released this week by the NCB, reflect a number of ongoing changes that can lead to a confirmation of the new trend toward slower expansion for Q4 2012 – Q1 2013. At the same time, the overall series continued to post expansion, in contrast with all euro area PMIs – a rather impressive performance.

Hence, my top conclusions – based on the detailed analysis below – are:
  • Irish Manufacturing continued (albeit slowing in the rate) expansion reflects impressive robustness of the exports-driving MNCs, while
  • The overall strong and persistent headwinds of slower global trade flows growth and the contractions in trade within the euro area are starting to feed through to Irish manufacturing sector – a trend that can prove to be a significant drag on growth in Q4 2012 – Q1 2013.

Now to the detailed analysis:

Top line reading for PMI came in at 51.4 in December, down from 52.4 in November. December reading printed exactly at 12mo MA and below 6mo MA (52.1) and 3mo MA (52.0). 3mo MA of 52.0 for October-December is down on 52.2 3mo MA for Q3 2012, but is above Q2 2012 average (51.5) and Q1 2012 (49.8). Q4 2012 average is bang on at Q4 2010 average and ahead of 49.1 average for Q4 2011. The December reading was the lowest in 4 months.

All of this implies a weakening growth momentum with output index peaking, for 2012 at 53.1 and 53.9 in June and July, afterward slipping toward 51.7 average reading. It is worth noting that a reading above 53 is statistically significantly different from 50.0, while a reading at or below 52.2 is not significantly different from 50.0.

Output PMI fell from 54.4 in October to 53.8 in November and to 51.2 in December 2012. December 2012 reading was the first statistically insignificantly different from zero-growth 50.0 in 3 months and marked seventh month in 2012 when growth was statistically at or below 50.0. At the same time, December reading was the 8th consecutive month that output index printed above 50.0 level. All of which only makes sense when one recognizes that Output index is strongly volatile. For example, historical STDev for overall PMI is at 4.44, while STDev since January 2000 is at 4.36 and the crisis period STDev since January 2008 is at 5.43. In Contrast, Output PMI STDevs were 5.14, 4.94 and 6.04 respectively.

At 51.2, December output reading was below 12mo average of 51.7, and below 6mo average of 52.6. However, on a positive side, and statistically significantly, Q1 2012 index averaged 50.2, rising to 51.4 in Q2 2012, followed by 52.1 in Q3 and 53.1 in Q4.

While Output slowdown was marked only in December, fall off in the New Orders sub-index was much more pronounced and is signaling a longer term trend down. New Orders reading came at 50.9 (still above the 50.0 libne, but not statistically significantly different from 50.0) down from November reading of 52.1. New Orders activity peaked in 2012 in June-July and has fallen since. At the same time, in simple level terms, the index was for the tenth consecutive month above 50.0.

12mo MA for the New Orders sub-index is at 51.8, while 6mo MA is at 52.6. Q1 2012 average was at 49.9, Q2 at 52.0, Q3 at 53.3 and Q4 2012 came in at 51.9.

In contrast with sluggish bouncing along the zero growth line in the New Orders series, New Export Orders series posted surprising rise in December, reaching 53.6 (statistically significantly above 50.0) from 52.1 (not statistically significantly different from 50.0). This marked the highest reading in the series since July 2012 and allowed the sub-index to regain territory lost since August 2012. Per survey respondents, the core driver for new export orders was rising demand from the US.

New Export Orders have been steady on a gentle upward trend – based on averages and correcting for some shorter term volatility – Q1 2012 average was at 51.9, Q2 and Q3 2012 at 52.8, Q4 at 52.5. Thus, 12mo MA is at 52.5, very close to 6mo MA of 52.7.

Other subcomponents:

I will deal with employment and profit margins conditions once I complete analysis of the Services PMI in the next few days, so stay tuned.

Thursday, January 3, 2013

3/1/2013: Irish Income Par Capita at 1998-1999 levels

On foot of the post on the US household incomes (see here), I took a look at CSO series for Ireland's per capita national income. Here's a chart:

As the chart shows, Ireland's current per capita national incomes stood at EUR27,105.6 in 2011, down 19.74% on peak and below 1999 level. Irish per capita national disposable income at EUR26,575.7 in 2011 was down 20.2% on peak levels and was below 1998-1999 average.

Using IMF projections for personal consumption and private investment for 2012, Ireland's 2012 per capita national income can be expected to remain below 1998-1999 averages in 2012.

Put in different terms, as the result of the current crisis, Ireland's real economy has already lost not a decade but over 14 years worth of growth. Assuming disposal incomes per capita grow at 2.5% per annum into perpetuity, Ireland will regain 2006 peak levels of real income per capita by 2022, at 2% by 2024 and at 1.75% - by 2026, implying that the 'lost decade' for Ireland's economy is likely to last not 10 years, but between 16 and 20 years.

2/1/2013: Euro area PMIs - dire state of economy persists through December

More on PMIs trail: euro area PMI for Manufacturing, per Markit, implies that "Eurozone manufacturing ends 2012 mired in recession, as demand from domestic and export markets remains weak".


  • Final Eurozone Manufacturing PMI at 46.1 in December (flash estimate 46.3), down from 46.2 in November. Effectively, the rate of contraction continues unabated and we are in the seventh consecutive month of contracting output.
  • Downturn remains widespread, with all nations bar Ireland reporting contractions (I will update Ireland database once I am back in Dublin).
  • Cost caution leads to job losses and further scaling back of inventory holdings.
  • Downturns accelerated in Germany, Spain, Austria and Greece, but eased in France, Italy and the Netherlands. 
  • Greece remained bottom of the PMI league table, still well adrift of the next-weakest performing nations France and Spain.
  • Eurozone manufacturing production declined for the tenth successive month in December, as companies were hit by reduced inflows of both total new orders and incoming new export business.
  • However, over Q4 2012 as a whole, the average rates of decline in both output and new orders were the slowest since the opening quarter of the year.
  • The latest decline in  new export orders took the current sequence of contraction to one-and-a-half years, despite the rate of reduction easing slightly to a nine-month low.
  • Only Spain, the Netherlands and Ireland saw increases in new export orders during December, although the trend in Italy also moved closer to stabilising. In contrast, Germany, France and Greece all reported substantial declines in new export business.
  • Employment in manufacturing is now in contraction for 11 consecutive months.
  • Selling prices were unchanged, although this was nonetheless an improvement on the discounting reported in the prior six months. 
  • Input cost inflation eased and was the weakest during the current four-month sequence. 
  • Profit margins continued to shrink.

Wednesday, January 2, 2013

2/1/2013: Netherlands Manufacturing PMI for December: Not Pretty

Regular readers of this blog know that I like referencing the Netherlands as the 'leading' indicator for the Euro area growth for a number of reasons:

  1. The Netherlands have a stable, even 'boring' economic make up, combining (despite a relatively small size) healthy drivers of domestic demand and investment with robust exporting economy;
  2. The Netherlands supply side of the economy is also relatively well balanced with strong domestic and exports oriented manufacturing and services;
  3. The Netherlands are a major entry port for the Euro area imports and the shipping and logistics hub for its exports;
  4. The Netherlands are well-positioned to serve as lead indicators for household investment cycles changes.
With that in mind, yesterday's PMI for Manufacturing is disappointing:

Several things come to view:
  • Dutch manufacturing posted a "broadly flat output in December. This reflected a combination of a slower fall in new orders and a further reduction of backlogs. Jobs were cut at a weaker rate, while input price inflation eased and output charges were raised at a faster pace. 
  • NEVI  PMI rose to 49.6 in December from 48.2 in November, marking the highest reading in three months. Despite this, the index remained below 50.0, implying stagnation-to-reduction in activity. The index is compounding, which means that December decline came on top of declines in November and October.
  • New orders fell for the third month running in December, although at slowest rate of decline.
  • Export sales rose for the sixth consecutive month, although the increase was the slowest in 6 months period.
  • Input prices eased, but remained in strong inflationary territory, while output prices rose modestly. This means profit margins shrunk.
Not quite ugly, but certainly not pretty.

2/1/2013: The Bitter ATRA Fudge

Some say never shall one let a good crisis go to waste... US Fiscal Cliff 'deal' of December 31st is an exact illustration. Here is the list of pork carriages attached to the Disney-styled 'train' of policies the US Congress enacted.

Have a laugh:

And to summarise the farcical output of the Congressional effort:

  • The American Taxpayers Relief Act (ATRA) has raised taxes on pretty much everyone. Taxes up means growth down. Now, recall that the US economy is not exactly in a sporting form to start with (link here).
  • The payroll taxes cuts are not extended into 2013 so every American is getting whacked with some 2% reduction in the disposable income, taking out $115 billion per annum (the largest revenue raising measure in the ATRA) out of households savings, investment and consumption, or under 1% of annual personal consumption.
  • The super-rich (or just filthy-rich, take your pick, but defined as those on joint incomes at or above $450K pa) will see income tax rising to 39.6% and will have to pay an additional 0.9% in Medicare tax to cover that which they will not be buying - the Obamacare. They (alongside anyone earning above $250K pa) will also pay 3.8% additional tax on 'passive' income - income from capital gains and dividends for same Obamacare.
  • Dividends and CGT are raised from 15% to 20% (again for joint earners above $450K pa).
Meanwhile, the US has already breached the debt ceiling and the ATRA has done virtually nothing to address the deficit overhang. So in a summary, the 'deal' is a flightless dodo flopping in the mud of politics. There are no real cuts on the expenditure side, there are loads of tax hikes that are likely to damage demand and investment and lift up the cost of capex funding for the real economy. And there is simply more - not less - uncertainty about the future direction of policy, as the White House and the Congress are going to be at loggerheads in months to come dealing with the following list of unaddressed topics:
  1. Spending cuts
  2. Budget deficit
  3. Further tax hikes
  4. Debt
  5. Reforms of the entitlements system
  6. Growth-retarding effects of ATRA and Obamacare.
Obamanomics have delivered fudged recovery, fudged solutions to structural crises and real, tangible increases in taxation. The latter is the 'first' since 1993.

1/1/2013: Recovery in Asia? Well... not so fast, folks

The Year is only 1 day old (almost) and the trigger-happy Bulls' headlines are all around. Forget the 'Fiscal Cliff' non-solution in the US (it kicked the can of excessive deficits by about 1 month out, before uncertainty about the longer term outlook returns with renewed 'negotiations' and it failed completely and spectacularly in even approaching any workable solution to the US debt overhang). The chirpy sound of 'optimism at any cost' is now coming out of Asia.

Today, we saw Korean and Taiwanese PMIs released. Here are the facts:

  • HSBC South Korea PMI for manufacturing sector rose from 48.2 in November (outright recessionary levels) to 50.1 in December. Now, 50.1 sounds like being above 50 (the 50 points mark identifying level of activity consistent with zero growth on previous month), statistically it is not significantly distinct from 50.0 or, for that matter, from 49.9. In other words, since May 2012, PMI registered continuous consecutive contractions in the manufacturing sector, compounded over time. In December, there was effectively zero growth from the bottom levels of November. And this some media heralded as the 'return' to growth. Worse, new export orders - the staple of Korean economy, continued to contract in December for the seventh consecutive monthly period.
  • Taiwanese PMI did pretty much the same, rising from an outright contraction of 47.4 in November to 50.6 in December. Taiwanese level of activity (at 50.6) was probably statistically significantly above 50, but hardly anywhere near the levels consistent with a definitive growth trend. This was the first above-50 reading in 7 months and was underpinned (positively) by expansions in both new orders and exports orders. Importantly, input prices rose in Taiwanese manufacturing sector, while output prices shrunk - profit margins, therefore, have dropped - a trend established for at least 3 months now.

Meanwhile, unreported by the Bulls:

  • Vietnam manufacturing PMI sunk to 49.3 in December from 50.5 in November, with 8 out of last 9 months posting contracting activity.
  • Indonesia's manufacturing PMI remained above the 50.0 line at 50.7 in December, but growth fell from 51.5 in November.
  • Earlier report from China showed December manufacturing PMI at 51.5 up from 50.5 in November, "signalling a modest improvement of operating conditions in the Chinese manufacturing sector. Moreover, it was the highest index reading since May 2011." But new export orders actually fell in December after a 'modest increase in November', which implies that China's manufacturing 'revival' is driven most likely by state spending boost, not by any 'resurgence in global economic activity'.
  • And Australian manufacturing PMI was continuing to tank in December: "Manufacturing activity contracted for a 10th consecutive month in December, with the seasonally adjusted Australian Industry Group Australian Performance of Manufacturing Index recording a level of 44.3, unchanged from a slightly upwardly revised reading of 44.3 one month ago. The slump in manufacturing new orders also extended into the 10th month albeit at a slower rate, reflecting weak global demand and a softening Australian economy. The new orders sub-index rose 1.6 points to 45.7 in December."

So, pardon me, but what 'resurgence in Asia'?

1/1/2013: US Household Income: down 7.8% on January 2000

Sentier Research have published analysis new series on the US Household Income data (see report here).

Topline analysis, quoted directly from the report (emphasis mine):

  • According to new data derived from the monthly Current Population Survey (CPS), real median annual household income in November 2012 was  $51,310, statistically unchanged from the October 2012 median of $51,134. 
  • This is the second month in a row that real median annual household income has failed to show a statistically significant change. I
  • With the exception of a 0.7 percent increase between April and May, all of the other month-to-month changes in real median annual household income since January 2012 have not been statistically significant. 
But wait, things are even worse:
  • The November 2012 median annual household income of $51,310 was 4.4 percent lower than the median of $53,681 in June 2009, the end of the recent recession and beginning of the “economic recovery.” 
  • The November 2012 median was 6.9 percent lower than the median of $55,093 in December 2007, the beginning month of the recession that occurred more than four years ago. 
  • And the November 2012 median was 7.8 percent lower than the median of $55,650 in January 2000, the beginning of this statistical series. 
  • These comparisons demonstrate how significantly real median annual household income has fallen over the past decade, and how much ground needs to be recovered to return to income levels that existed more than ten years ago.
And two charts to illustrate: