11/1/2015: Ending 2014 with a Bang: Russian Inflation & Ruble Crisis

Couple footnotes to 2014, covering Russian economic situation. Much is already known, but worth repeating and tallying up for the full year stats.

Ruble crisis with its most recent up and down swings took its toll on both currency valuations and inflation. Over 2014, based on the rate tracked by the Central Bank of Russia, the ruble was down 34% against the euro and 42% against the USD. The gap reflects depreciation of the euro against the USD.

Virtually all of this relates to one core driver: oil prices. In 2014, Brent prices lost 48% of their values and Urals grade lost 52% of its value. Urals is generally slightly cheaper than Brent, but current gap suggest relatively oversold Urals. It is a bit of a 'miracle' of sorts that Ruble failed to completely trace Urals down, but overall, you can see the effect oil price has - overriding all other considerations, including capital flight and sanctions.

Ruble valuations took their toll on Moscow Stock Exchange - RTS index, expressed in USD, lost 43% of its value, reaching levels comparable to Q1 2009 (791 at the end of 2014, from 1,388 at the start of January 2014).

And ruble crisis pushed inflation well ahead of 5% short term target from CBR set for 2014. Preliminary estimates for December put inflation at 11.4%, with food inflation at 15% (7.3% in 2013), goods (ex-food) at 8% (4.5% in 2013) and services at 10% (8% in 2013). M/m inflation hit 2.6% in December 2014 - the highest since January 2005). Overall inflation was 6.5% in 2013, 6.6% in 2012, 6.1% in 2011 and 2010 and 8.8% in 2009. Last time Russian inflation hit double digit figures was in 2008 - at 13.3%.

Comment via BOFIT: "The pick-up in inflation at the end of the year reflected the ruble’s sharp depreciation and the ensuing frenzy of household spending. Following the ban on certain categories of food imports last autumn, food prices have risen even if no food shortage has actually emerged." Most of this is pretty much as reported. One point worth highlighting - lack of shortages, which is contrary to some of the hype paraded in the media about Russians suffering greatly from diminished supplies and stores running out of goods.

Again per BOFIT: "Representatives of food producers and retail chains committed in September to a government initiative that their members would not raise prices without good reason or create artificial shortages in the market. There has been no move by the government as yet to impose price controls as in 2010. The agreement could have limited price increases somewhat."

And a chart from the same source illustrating pick up in inflation:

Update: Some more numbers on inflation: Meat prices were up 20.1% in 2014, having posted deflation of 3% in 2013; fish prices were up 19.1% in 2014, a big jump on 7.6% inflation in 2013. Cereals are up 34.6% against 3.2% in 2013.

10/1/2015: Where did Europe's EUR3 trillion worth of debt go?

You know the Krugmanite meme… Euro area is doing everything wrong by not running larger deficits. But here is an uncomfortable reality: since 2007, Euro area countries have managed to increase their debt in excess of 60% of GDP by a staggering EUR3 trillion.

So here's the crux of the problem: where did all this money go?

We know in terms of geographic distribution:

EUR1.6 trillion of this debt increase went to the 'peripheral' countries, and EUR39.2 billion went to the Easter European members of the Euro area. EUR517 billion went to the 'core' economies. And a whooping EUR759.9 billion to France. Now, across the 'periphery' some 20-25% of the debt increase is attributable to the banks measures directly, but the rest is a mix of automatic stabilisers (e.g. increases in unemployment benefits due to higher unemployment) and old-fashioned Keynesian policies.

It might be that Euro area is not spending enough in the right areas of fiscal policy. But to make an argument that it is not spending enough across the board is bonkers. We have allocated some EUR3 trillion in borrowed spending and we will continue to run the debt up in 2015. And still there is no sign of growth on the horizon.

So, again, where is all this money going?

10/1/2015: Irish Retail Sales: November

Irish retail sales figures for November, published by the CSO earlier this week came in at the weaker end of the trend. Here is detailed analysis.

On seasonally-adjusted basis:

• Value of retail sales ex-motors fell 0.31% m/m in November having posted a 1.04% gain in October. 3mo MA through November was down 0.11% on 3mo MA through October, which itself was down 0.07% on 3mo MA through September.
• Volume of retail sales ex-motors was up 0.19% m/m in November, having posted a rise of 0.96% in October. 3mo MA through November was up 0.26% m/m  for the 3 months through November compared to 3mo MA through October, having previous posted identical increase in October, compared to 3mo MA through September.
• Meanwhile, Consumer Confidence was, for a change, more closely aligned with value of sales indicator. Consumer Confidence indicator was down0.23% m/m in November, having posted 0.68% decline in October.

Two charts to illustrate:

The first chart above plots longer-range series, showing two main insights:

1. Consumer confidence continues to vastly outpace actual retail sales performance in terms of both value and volume of sales, although we are starting to see de-acceleration in consumer confidence growth in terms of trend. Nonetheless, consumer confidence bottomed-out around July 2008. Actual retail sales did not bottom out until June 2012 (in Volume and Value of sales terms).
2. Since bottoming out, retail sales have been performing with virtually divergent dynamics. Trend in Volume of sales is relatively strong, upward. Meanwhile, trend in Value of sales is relatively flat, upward. In more recent months, this divergence is increasing once again.

The above is again confirmed in November data and in year-on-year comparatives too, as shown in the next chart.

Year on year (based on seasonally unadjusted data):

• Value of retail sales ex-motors rose 1.33% y/y in November having posted a 1.91% gain y/y in October. 3mo MA through November 2014 was up only 1.4% on 3mo MA through November 2013.
• Volume of retail sales ex-motors was up robust 3.92% y/y in November, having posted a rise of 4.40% in October. 3mo MA through November was up 3.7% y/y.

The above data clearly supports trends identified in previous months: Irish consumers are not striking, nor are they holding back consumption. Instead, they are willing to buy when they see value. Unfortunately for our retailers, that means more sales with lower profit margins. As the chart below shows, we now have 13 consecutive months of growth in volume of sales outstripping value of sales and out of the last 21 months, only one posted growth rate in value of sales in excess of volume of sales.

Using my Retail Sector Activity Index to plot underlying activity across the sector (note: the RSAI has much higher correlations with both indices of retail sales than consumer confidence), chart below shows that in 2014, growth rate in overall sector activity slowed down significantly compared to 2013.

The above, of course, is rather natural for the recovery that first produces a faster bounce up and then settles into more 'sustainable' over time rate of growth. The problem, however, is that current activity by value of retail sales is still 39.1% below the pre-crisis peak levels and for volume of sales it is 34% below peak. Even compared to the pre-crisis average (2005-2007), activity is down 11.2% in value terms and 3.2% lower in volume terms.

9/1/2015: Advisor-Driven Investment Management: Partial, Biased and Risky?

My post for Learn Signal blog on the issue of sell-side advice and inherent conflicts of interest and biases that are material to advice-driven investments: http://blog.learnsignal.com/?p=142

7/1/2015: China Threat: Europe's Exports Under Pressure

Recently, Irish Times run an article about threats and challenges to Irish economic model (whatever it might be - I have no idea), concluding that all is down to 'political leadership' (whatever that might be is also something I can't comprehend). But in reality, a key threat to Irish economy is the threat of changing nature of global production and demand patterns, related to

• Challenges from China and other emerging economies (which increasingly produce goods and services for global consumption that rival in quality European goods and services);
• Challenges from growing regionalisation of trade (with producers, including the MNCs, moving closer to the demand growth centres - which are nowhere near Europe); and
• Challenges from growing regionalisation of investment and capital flows, including financial and human capital (which puts pressure on our funding models for enterprise formation and growth).

There is little in the above that is subject to our policymakers' 'leadership' and much in the above that is subject to our internal market competitiveness.

But, setting aside the above considerations, what is the evidence of the growing threat from the emerging markets economies? Take a look at a recent paper by Benkovskis, Konstantins and Silgoner, Maria Antoinette and Steiner, Katharina and Wörz, Julia, titled "Crowding-Out or Co-Existence? The Competitive Position of EU Members and China in Global Merchandise Trade" (ECB Working Paper No. 1617: http://ssrn.com/abstract=2354238).

Keep in mind - this is ECB, so all conclusions might have been relatively placated or moderated to suit the prevalent narrative that things are going fine for Europe.

In their paper, the authors "analyse export competition between individual EU Member States and China in third-country goods markets."

Top of the line finding is that "competitive pressure from China is strongest for small and peripheral EU members, especially for the Southern periphery, Ireland and Central, Eastern and South-eastern European EU members. While we find no hard evidence for "cut-throat" competition between China and EU countries, we see an increasing tendency of smaller EU exporters leaving markets that are increasingly served by China." And another note of caution: data only goes to 2011, which means that whatever intensification in competition that might have happened in 2012-2014 - the years when European producers saw increased incentives to export due to sluggish growth in Europe, while Chinese exporters faced similar incentives to export due to decline in domestic returns on capital, and changing nature of domestic investment markets.

So some details.

Authors note that "the extent of existent competition between individual EU members and China (observed at the margin of the markets served by EU members) is fairly homogeneous across all EU countries." Figure 1 below (labeled Figure 7 in the paper) "shows that the fraction of trade links where both China and the given EU member are active in two consecutive periods amounts to roughly 62% in 2009, up from 49% in 2001. Thus, mutual competition increased for all EU members."

More per Chart above: "With an overlap of 65% and beyond in 2009, countries like Portugal, Sweden, Ireland, Denmark and the Czech Republic face the strongest existent competitive pressure from China in terms of the fraction of markets where they are directly exposed to China. The group of large exporters shows an overlap of existent markets between 60% and 64%, while many small Eastern European countries and Greece only serve between 56% and 59% of their export markets jointly with China."

Out of all EU countries, therefore, Ireland is 4th most-exposed to competition from China. Good luck devising a 'policy leadership' for that.


What about the markets where China is not operating, yet? Authors have the following to say on this: "the fraction of “newly conquered markets”, i.e. newly established trade links by either an EU member or China where the other exporter did not already operate (figure 8 below), declined from 5.6% in 2001 to 2.4% by 2009 on average across all EU members. Thus, with heightened existent competition, the number of new market conquests where China was not active decreased in all countries over time. The decline was particularly pronounced for large exporter such as Italy, Spain, Germany and Finland. But a number of CESEE-10 countries likewise shows a relatively strong decline, such as Lithuania, Hungary, Poland and Slovakia."

Ireland faired a little better in terms of "new market entry" for China risks, but that is because we already face much more direct pressure from China's competition.


Next up, the potential for Chinese exporters crowding out Irish (and other European) exporters.

Per study: "the most interesting type of competitive pressure is depicted in figure 10. The four combinations which are summarized here all represent different forms of potential crowding-out of one exporter by its competitor. …As a first interesting observation, even taken together, these cases are less important than the creation of new competition. However, we observe an increasing trend over time. Furthermore, with 10% or more of all cases, in particular CESEE-10 countries and the small peripheral EU members are especially affected by this type of competition."

And, by the above chart, Ireland is under some serious pressure here too.

The authors disaggregate the bars in the above figure in order to "extract information on the crowding-out of EU countries by China."

"Figure 11 [below] shows the share of crowding-out cases in which an EU country exits a market which China has just entered or continues to operate. …[in] Germany [case] crowding-out is observed for only 4.8% of all trade links in 2009 [see chart above] and Germany crowds out China in half of these cases (Figure 11 below). In contrast, evidence for the CESEE-10 is mainly characterized by China crowding out the CESEE-10 countries (Figure 11), and, furthermore, the incidence of crowding-out increased markedly over time (Figure 10 above). The same holds true for the EU’s small peripheral countries Ireland, Portugal and Greece. In all three countries, 90% of all crowding-out cases refer to their exit from a market where China enters or is active (Figure 11 below). Compared with 2001, crowding-out by China has generally gained importance over crowding-out of China, particularly for the core EU members."

Again, Ireland is under huge pressure here from China.

Overall, the paper conclusions are uncomfortable.

"In general, we find that export growth is mainly driven by the intensification of existing trade relationships rather than by the formation of new trade links (extensive margin)." Here's a problem: Irish policy has been about opening new markets (jumping head-to-head into competition with China and other exporters), instead of maximising presence in the already serviced markets (holding onto and expanding exports presence in already profitable markets). And that is despite the fact that "…the extensive margin turns out to be more important for the CESEE-10 than for the EU periphery, the core EU countries or even China."

"Small and peripheral countries are more exposed to competition from China than the large EU export nations." And Ireland is even more exposed here, since we rely almost exclusively on exports as the driver for growth.

"…the crowding-out potential is considerably higher for the CESEE-10 and the small peripheral EU countries than for larger EU members…" As commented earlier, this is about the need to pursue more intensification of our exports, rather than constantly attempting to chase 'new markets' as the core exports growth strategy.


Finally, for illustration purposes, chart below maps the composition of European exports by category of goods.

7/1/2015: Another One for European Century

A chart via @Schuldensuehner this one pointing at another myth of the European Century blowing up: the myth of Euro becoming the global reserve currency.

That's right, Official Reserves held by the Central Banks in euros are down 8.1% in Q3 2014.

This, as Bloomberg notes, is a much faster rate of decline in reserves than during 2010-2011 crisis. "In the third quarter of 2011, the common currency slid 7.7 percent, while its reserves fell 2.8 percent. A deeper plunge of 9.4 percent in the euro in the second quarter of 2010 only prompted a 1.3 percent loss in holdings, the IMF data showed."

Remember, this was supposed to be a European Century (http://www.dw.de/barroso-europe-is-a-success-of-globalization/a-2414542 and http://arc.eppgroup.eu/Activities/docs/berlin_declaration/en.pdf).

6/1/2015: BRIC PMIs: Weaker Outrun in December

Markit released PMIs for all BRIC countries for both Services and Manufacturing covering December 2014. Here are the main results.

Starting with manufacturing:

• Brazil Manufacturing PMI posted its first 50+ reading after 3 months of consecutive sub-50 readings. December PMI came in at 50.2, which is basically signalling no statistically significant growth. On a quarterly basis, Q4 2014 average came in at 49.3 - a contraction, against 49.3 (yep, same) for Q3 2014 and 50.1 (almost no growth) in Q4 2013.
• Russian Manufacturing PMI for December came at disappointing 48.9, marking the first month of sub-50 readings since June 2014. Q4 2014 average is at 50.3 (basically near-zero growth) against Q3 2014 reading of 50.4 (very weak growth) and Q4 2013 reading of 50.0 (stagnation).
• China Manufacturing PMI came in at 49.6, the first monthly contraction that follows six consecutive months of at or above 50 readings. Q4 2014 average was 50.0 - meaning Chinese manufacturing posted flat growth across the quarter. Q3 2014 average was 50.7, same as Q4 2013. Overall, there are some very serious weaknesses in Chinese manufacturing sectors.
•  India Manufacturing PMI jumped from 53.3 in November to 54.5 in December, signalling acceleration in activity in the sector. Q4 2014 average is at 53.1 - up on 52.0 average for Q3 2014 and on 50.5 average for Q4 2013.

Now, Services:

• Brazil's Services PMI was even worse, set at 49.1 in December (a shallow contraction), continuing with sub-50 readings for the third month in a row. Q4 2014 average is at 48.6 (outright contraction), against Q3 2014 average of 50.5 (weak expansion) and 52.1 (stronger expansion) in Q4 2013.
• Russian Services PMI stood at 45.8 - sharp contraction - in December 2014, marking third consecutive month of sub-50 readings. The index averaged less than impressive 45.9 in Q4 2014, showing severe strains from collapse in domestic services, such as financial services. The index averaged 50.1 in Q3 2014 and 53.0 in Q4 2013.
• China Services PMI surprised to the upside, posting 53.4 reading in December, up on 53.0 in November. Q4 2014 average is at 53.1 - faster growth signal compared to Q3 2014 reading of 52.7 and Q4 2013 reading of 52.0.
• India Services PMI, lastly, posted a slight de-acceleration in growth, slipping from 52.6 in November to 51.1 in December. Q4 2014 reading is now at 51.2, which marks a slowdown in growth from 52.2 index reading in Q3 2014 and47.0 reading in Q4 2013.

And a table and a chart summarising changes in both sets of PMIs

Note the increase in weaker growth signals in December data compared to previous month, driven by poorer PMIs in Manufacturing and by unchanged performance outlook in Services. Also note, per chart above, Russia not only acts as a main downward driver for the BRIC overall PMI-related performance, but it shows strong decoupling in the direction of trend from January-March 2014 on, with the divergence now accelerating over the last three months.

6/1/2015: The Darker Side of Sell-Side Research?

My blog post for @LearnSignal blog on the topic of conflict of interest problem with sell-side markets research: http://blog.learnsignal.com/?p=138.

6/1/2015: Irish PMIs December 2014: Strong End to 2014 Activity

Markit-Investec Irish PMIs releases were finalised today with Services data made public few minutes ago. Here is my quick analysis:

• December 2014 Manufacturing PMI reading stood at 56.9, signaling a strong expansion. The index was at a 4-months high. 3mo average (Q4 average) stood at 56.7, which represents a rise on Q3 2014 average of 56.1. Q4 2014 marked the highest quarter in terms of Manufacturing PMI average. The series are now 4.5 points ahead of post-crisis average.
• December 2014 Services PMI reading stood at 62.6, which, as Markit commentary says is a tie with June 2014 reading for the highest mark since February 2007. It is worth noting that September 2014 reading of 62.5 was, of course, statistically indistinguishable from December and June readings. 3mo average through December (Q4 average) is at 61.9, which is only marginally below Q3 and Q2 averages of 62.1. Relative to longer-period average, December reading is 7.1 points ahead of post-crisis average for the series.

Chart to illustrate:

Predictably, given the levels of both indices, there is some moderation in the growth rate of the index (second derivative, effectively):

Which is not a discouraging sign, as historically, the indices do signal strong growth in both sectors:

And as the chart above shows, uplift in Manufacturing is very strong, relative to historical trends. All good signals so far, but do stay tuned for some longer-range analysis later.

Note: as usual, I do not cover composition of the indices, as Investec refuses to supply actual data on indices components.  Should you want to consult their sell-side analysis, feel free to do so at http://www.markiteconomics.com/Public/Page.mvc/PressReleases

6/1/2015: Glance Back: Grey and Black Swans of 2014

Portuguese blog by Jorge Nascimento Rodrigues quoting my comments on the topic of black swan and grey swan events of 2014: http://janelanaweb.com/novidades/2014-em-revista-cisnes-negros-cinzentos-6-surpresas/

My comment in English in full:

Black swan events are defined not only by their unpredictability ex ante the shock and the magnitude of the shock-related losses, but also by the fact that the rationale for their occurrence becomes fully explainable ex ante the event. In this sense, looking back at 2014, one can only imperfectly interpret key events as either black or grey swans.

One of the major black swan events of 2014 was the flaring up of a major geopolitical crisis involving Russia and the West. This pre-conditions for the emergence of this crisis were present throughout the late 2000s - early 2010s, but its rapid escalation from to the state of a proxy war fought by the two players over the Ukraine was not something we could have foreseen at the end of 2013.

On economic front, the decoupling of the US economy from global economic outlook and acceleration in the US growth was accurately reflected in a number of major forecasts published in the second half of 2013. As was the associated continued downtrend in growth in the euro area. But the simultaneous crisis across the major emerging economies, including Brazil and South Africa, as well as the onset of the outright recession in Russia and the Russian Ruble crisis of Q4 2014 were black swan events.

A good example of the grey swan event - an event with some predictability ex ante, but with unpredictable timing, was a massive decline in global oil prices. The decline was forecastable in 2013, given the rate of growth in potential supply from the non-OPEC countries, primarily Canada and the US. The rates of new wells drilling and the levels of average output and output dynamics from the existent wells should have told us well in advance that the decline in oil prices was coming. Ditto for the signals coming from the natural gas price divergence in North America against Europe and Asia Pacific. But the exact timing of this decline in oil prices was not easily predictable. In the end, the drop in oil prices in 2014 was driven by a combination of two forces. The supply dynamics - largely predictable, and the contraction in demand driven by the black swan shock to global (and in particular emerging markets) growth.

Two major themes that dominated the financial markets in 2014 - continued decline in sovereign debt yields and simultaneous divergence in prices between the US and European equity markets - was hardly a black swan, given the differences in monetary policies between ECB and the Fed. Nonetheless, to some extent both themes were shaped also by the global growth divergence, and as such, both constitute a sort of a grey swan event.

Last, but not least, the flaring up of the euro area peripheral crisis, starting with Q4 2014 political risk flaring up in Greece, was neither a black swan nor a grey swan, and instead constitutes an empirical regularity of long term instability in the euro area periphery. This instability (both political and economic) is driven by the legacy of the debt crisis and the fallout from the policies used to address it. Nothing, absolutely nothing, has been resolved within the euro area when it comes to addressing debt overhangs present in a number of economies. Nothing has been done to address the endemic lack of structural growth drivers in the majority of the peripheral economies. If anything, the structural growth crisis contagion has now firmly spread to the core economies, such as France and Finland, and is impacting even Germany. Despite lots of sabre-rattling, the ECB remains in a passive policy mode, with the central bank balancesheet stubbornly stuck in the post-crisis lows and liquidity fully captured within a fragmented banking sector.

5/1/2015: 2015 Outlook: Ireland

My overview of 2014 and outlook for 2015 for the Irish economy, via @sheehymanning : http://issuu.com/manning-financial.ie/docs/mf_christmas_newsletter_web

5/1/2015: The Value of Better Teachers

Hanushek, Eric A. and Piopiunik, Marc and Wiederhold, Simon, paper, "The Value of Smarter Teachers: International Evidence on Teacher Cognitive Skills and Student Performance" (December 2014, NBER Working Paper No. w20727: http://ssrn.com/abstract=2535179) looks at the differences in teacher quality and the impact of these differences on students' outcomes.

Per authors, "difference in teacher quality are commonly cited as a key determinant of the huge international student performance gaps." The authors "use unique international assessment data to investigate the role of teacher cognitive skills as one main dimension of teacher quality in explaining student outcomes. Our main identification strategy exploits exogenous variation in teacher cognitive skills attributable to international differences in relative wages of nonteacher public sector employees." The study also controls for parental inputs and other factors.

"Using student-level test score data, we find that teacher cognitive skills are an important determinant of international differences in student performance. Results are supported by fixed-effects estimation that uses within-country between-subject variation in teacher skills."

First table below shows basic estimation results highlighting the positive effects of teachers skills (in maths and reading) and parental skills on outcomes (in mathematics and zero effect in reading).

Second table above shows sample statistics. An interesting comparative in terms of Irish teachers' skills being very much average and ranked below average in the group of countries.

Third table below shows more advanced econometric controls for estimation, showing qualitatively similar results as above

And finally, chart below showing Ireland's relative position, compared to other countries in terms of the relationship between teacher skills and students' outcomes:

The above clearly shows below average link between teacher skills and student outcomes for Ireland (which are sub-standard relative to the average) in maths and slightly above average link between teacher skills and student outcomes in literacy (which are above average in terms of outcomes, but near average in terms of the teachers' skills effects).

The key, from my point of view, is that the paper shows a clear link between measurable metrics of teacher quality and measurable outcomes for students, while controlling for a number of other factors. This supports my view that pay-for-performance can and should be used to incentivise, support and promote better teachers, and that such system of compensation can be of benefit to our students.

Our education system pursuit of homogeneity and collective bargaining-set pay scales is outdated, outmoded and inefficient from social and economic point of view. Our teachers and students deserve better. Reforming education system should not be about reducing average wages and earnings, but realigning rewards with effort and outcomes.

5/1/2015: IMF on Debt Relief for Greece: Repeating the Repeats

Much of talk nowadays from the European leaders on Greek debt situation and the link to political crisis in the country. Some conversations are about lack of potential contagion from Grexit, other conversations are about the right of the Greeks to decide on their next Government, whilst all conversations contain references to the new Government having to abide by the previous commitments. Which is fine. Except, what about the European partners commitments? Specifically one commitment - relating to further debt relief for the country?

Here is 2013 IMF assessment of the Greek situation (emphasis in italics is mine):

"47. The program continues to satisfy the substantive criteria for exceptional access but with little to no margin. Delays in the implementation of structural reforms raise concerns about the capacity of the authorities to implement the program in a difficult political environment. …The continued commitment of euro area member states to support Greece, including by providing additional official financing to fill future financing gaps and through further debt relief as necessary, is an essential part of meeting the criteria."

And then:

"48. …The program is fully financed through July 2014, but a projected financing gap will open up in August 2014. Thus, under staff’s current projections, additional financing will need to be identified by the time of the fifth review, to keep the program fully financed on a 12-month forward basis. The Eurogroup has initiated discussions on how to eliminate the projected financing gaps. In this regard, the Eurogroup’s commitment in February and November 2012 to provide adequate support to Greece during the life of the program and beyond, provided that Greece fully complies with the program, is particularly important."

For some more on debt relief:

"55. As noted in the third review staff report, debt sustainability concerns continue to remain a risk. …The commitment of Greece’s European partners to provide debt relief as needed to keep debt on the programmed path remains, therefore, a critical part of the program. But the programmed path entails still very high debt well into the next decade, leaving Greece accident prone for an extended period. Should debt sustainability concerns prove to be weighing on investor sentiments even with the framework for debt relief now in place, European partners should consider providing relief that would entail a faster reduction in debt than currently programmed."

And

"56. …The program remains subject to numerous risks, mainly from the worsening of the macro outlook combined with a further deterioration in banking sector assets (feeding back to the real economy), difficulties with the implementation of ambitious fiscal policy and administrative changes, and—above all—failure once again to ensure a reinvigoration of structural reforms in the face of strong resistance from vested interests. Absent a critical mass of structural reforms that would transform the investment climate, the growth outlook—and, therefore, crucially the assumptions regarding financing needs for the rest of the program period and the debt path—would not materialize. Externally, closing financing gaps and delivering on the commitment to reduce debt will be a test of European support."

And in Box 4, Criterion 2:
" …In light of the commitments from euro area member states to provide additional debt relief as necessary, the baseline debt trajectory is sustainable in the medium-term but subject to significant risks."

Link to the above: http://www.imf.org/external/pubs/ft/scr/2013/cr13241.pdf


But there are more statements from the IMF on the issue of debt relief for Greece.

Take for example Transcript of a Press Briefing by William Murray, Deputy Spokesman, International Monetary Fund, from September 11, 2014 (http://www.imf.org/external/np/tr/2014/tr091114.htm):

"QUESTIONER: You told us many times from this podium that the issue of the Greek debt will be discussed at the sixth review. As I understand this, it's going to begin at the end of the month. The Euro Group said on Monday that the debate will begin after the sixth review. What we want to hear is that are the discussions about the financing of the Greek program and about the debt, still proceeding on an orderly way as you told us before many times? And what is your plan or your strategy for the Greek debt? Is there an option of those talks between you and the Europeans? Are the Europeans onboard to discuss this big problem for Greece?

MR. MURRAY: ...I do want to remind you and others what we have said all along. There is an agreed framework in place for ensuring debt sustainability with Greece's European partners agreeing to provide any additional debt relief as needed to help bring Greece's debt down to 124 percent of GDP by 2020. And to substantially below 110 percent of GDP by 2022 as long as Greece continues to deliver on its program commitments."

Now, IMF estimates debt/GDP ratio for Greece to be at 170% of GDP. Which means that over the next 5 years, the programme will have to deliver debt.GDP ratio reduction of a massive 50 percentage points. How on earth can this be achieved without debt relief is anyone's guess.

And more: Interview by Greece’s newspaper Ethnos with IMF Mission Chief for Greece, Poul Thomsen, published in Ethnos, June 15, 2014 (http://www.imf.org/external/np/vc/2014/061514.htm):

"QUESTION: You talk constantly about the commitment of Europeans regarding the financing needs of Greece and Greek debt relief. If Europeans do not show the determination needed or the courage to take bold decisions, like last time, what is the IMF planning to do?

ANSWER: We are confident that the European partners will deliver on their commitments. Do you believe that Greece's debt is now sustainable or do you believe that the situation needs new and drastic interventions? Are European commitments to contribute to debt relief enough for the IMF? What could the potential tools for debt relief be? The agreed framework is credible, provided that Greece and its European partners deliver on their promises. For Greece, this means continuing to advance reforms and achieving and maintaining a fiscal primary surplus of 4.5 percent of GDP. For the European partners, this means providing additional debt relief, if required, to keep debt on the programmed path. Thus, if adhered to, the framework will make the debt sustainable."

So 4.5% primary surplus over 5 years - even if achieved, will deliver somewhere in the neighbourhood of 1/2 of the required debt adjustment. The rest, presumably, will have to be achieved via economic growth, which will have to be running, on average, at 4% per annum to provide for the adjustment planned. And, thus, do tell me if the above any realistic, let alone probabilistically plausible.

In its 5th (most recent) assessment of the Greek situation, IMF reiterated (paragraph 49) that "The continued commitment of euro area member states to support Greece, including by providing additional official financing to fill future financing and through further debt relief as necessary, is an essential part of meeting the criteria" for debt sustainability. (see http://www.imf.org/external/pubs/ft/scr/2014/cr14151.pdf)

And it also carries Greek authorities expectation of the European funders agreement to further debt relief: "The program is fully financed through the next twelve months. Firm commitments are also in place thereafter from our euro area partners to provide adequate support during the program period and beyond, provided that we comply fully with the requirements and objectives of the program. In this regard, we remain on track to receive the first phase of conditional debt relief from our European partners, as described in the Eurogroup statements of November 27 and December 13, 2012." (page 71)

The same was stated in May 2014 Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding from the Greek authorities (see: http://www.imf.org/external/np/loi/2014/grc/051414.pdf). On foot of the IMF press conference statement on same (see: http://www.imf.org/external/np/tr/2014/tr050814.htm).

And so on, to no end and… no closure from the European partners…

4/1/2015: Eurasian Economic Union: Extra "E" & Less of "U"

In other 'Russia et al' news, Eurasian Economic Union came into force this week. This includes original founders (2010): Russia, Belarus and Kazakhstan, plus Armenia which joined in October 2014. In May, Kyrgyzstan is expected to join, having signed formal agreement last month.

Here's a summary of the EEU economic position, based on IMF data and forecasts.

The EEU objective is to increase economic integration and coordination within the sub-set of CIS states. Like the EU, it also sets a target of achieving integrated energy and capital markets.

In 2012, the EEU founding states agreed to implement free mobility of labour and capital, as well as free movement of goods and services. While there were transitionary periods set, integration to-date has been relatively limited and in recent months it came under increasing pressure, primarily driven by Belarus, but also, to a lesser extent, by tougher-talking Kazakhstan.

Ruble crisis certainly not making things easier. In recent weeks, there have been renewed border inspections between Russia and Belarus, and the latter demanded that trade with Russia be settled in foreign currency, not Ruble.

4/1/2015: Russian Economy Update

As I noted earlier, Russian economy posted an estimated decline in real GDP of 0.5% in November for the first time since 2009, while Russian inflation accelerated to 11.4% y/y in December, up from 9.1% in November. Latest guesses for economic growth in 2015: -4.0% at average crude prices of USD60 bbl via Finance Minister, Siluanov. Previous estimate by CBR consistent with this oil price level was 4.5-4.7% contraction.

To reduce inflationary pressures and to alleviate 'precautionary demand' (stockpiling) of some core goods, the Government is considering imposing a freeze on some food prices, according to Andrei Tsiganov, deputy head of the Federal Anti-Monopoly Service.

Still, according to CBR First Deputy Governor Ksenia Yudaeva, long term inflation target remains in place at 4% by the end of 2017. Good luck to that…

Largest driver for inflation was mid-December Ruble crisis (December 16-17). While Ruble posted some recovery in subsequent days, it came at a hefty price tag for the Russian foreign exchange reserves and Ruble resumed slide last week as CBR refrained from intervening in the markets from December 22nd.

Key driver for the upside of the Ruble has been, in addition to aggressive interventions by the CBR, the decision on December 17th to mandate five largest Russian state-owned enterprises: Gazprom, Rosneft, Alrosa, Zarubezhneft, and Kristall to reduce their foreign exchange holdings to the levels of October 2014. The deadline for this is March 2015. The companies will report their forex levels on a weekly basis. Behind the scenes, President Putin started discussions with larger private enterprises to also reduce their forex deposits.

Talking about deposits, to reduce pressure on retail banks, Duma passed the legislation to raise deposit insurance coverage from RUB700,000 to RUB1.4 million on December 19th. Russian Finance Ministry supported the bill, having previously resisted smaller increase. On corporate funding side, CBR announced, on December 23rd, new forex credit lines of 28-days and 365-days basis.

4/1/2015: "Betting on Ukraine" - Project Syndicate

I have been trying to reduce my commentary on Ukraine to a minimum for a number of reasons, including the viciousness of the 'Maidan lobby' and the fact that Ukraine is not a part of my specialisation.

However, occasionally, I do come across good and interesting commentary on the subject. Here is one example: http://www.project-syndicate.org/commentary/european-union-ukraine-reform-by-andres-velasco-2014-12.

To add to the above: the USD15 billion additional funding required, as reported to be estimated by the IMF, will also not be sufficient. Ukraine will require double that to address investment gap. USD15 billion estimate only covers the short-term fiscal gap.

Note: I called from the very start of the crisis for a Marshall Plan for the Ukraine, and suggested that for it to be more effective it should include Russian participation in funding and economic engagement. Funding Ukraine via standard IMF loans (shorter maturity instruments designed to address immediate liquidity crises) is simply useless. The country needs decade-long reforms and these reforms will have to be accompanied by investment and growth for them to be acceptable politically and socially. Such funding can only be supplied by a structured long-term lending programme. One additional caveat to this is that funding sources must be distinguished from funding administration. Given extreme politicisation of Ukrainian situation, neither Russia, nor the EU or the US can be left to administer actual funding programme. Hence, the task should be given to an World Bank or IMF-run administration mechanism that includes direct presence at the Board level of funders.

4/1/2015: Greek Crisis 4.0: Politics 1 : Reality 0

With hundreds of billions stuffed into various alphabet soup funds and programmes, the EU now thinks that Greece has been isolated, walled-in, that contagion from the volatile South to the sleepy North is no more (http://www.reuters.com/article/2015/01/03/us-eurozone-greece-germany-idUSKBN0KC0HZ20150103). Backing these beliefs, the EU and core European states have gone on the offensive defensive when it comes to Greek latest iteration of the political mess.

Yet, for all the 'measures' developed - from European Banking Union, to 'Genuine' Monetary Union, to EFSF, EFSM, ESM and ECB's OMT, LTROs, TLTROs, ABS, etc etc - the EU still lacks any clarity on what can be done to either facilitate or force exit of a member state from the EMU.

The state of the art analysis of the dilemma still remains December 2009 ECB Working Paper on the subject, available here: http://www.ecb.europa.eu/pub/pdf/scplps/ecblwp10.pdf which is, frankly put, a fine mess. Key conclusion, however, is that "a Member State’s exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable; and that, while perhaps feasible through indirect means, a Member State’s expulsion from the EU or EMU, would be legally next to impossible."

So much for all the reforms, then - lack of clarity on member states' ability to exit the euro, whilst lots of clarity on measures compelling and incentivising a member state to submit to the euro area demand (e.g. bail-ins, access to Central Bank funding etc) - all the evidence indicates that the entire objective of 2009-2014 reforms of the common currency space has been singular: an attempt to simply lock-in member states' into the euro system even further. Disregarding any monetary or fiscal or financial or economic or social realities on the ground.

Which brings us back to the starting point: at 175% debt/GDP ratio, Greece cannot remain within the euro area (for domestic and international financial, economic and social reasons). Yet, it cannot exit the euro area (for domestic and international political reasons). Politics 1 : Reality 0, again.

4/1/2015: Homeownership, House Prices and Entrepreneurship

Two papers on related topics, the link between enterprise formation and homeownership/mortgages. In the past, I wrote quite a bit about various studies covering these, especially within the context of negative equity impact of reducing entrepreneurship and funding for start ups.

In the first paper, Bracke, Philippe and Hilber, Christian A. L. and Silva, Olmo, "study the link between homeownership, mortgage debt, and entrepreneurship using a model of occupational choice and housing tenure where homeowners commit to mortgage payments."

The paper, titled "Homeownership and Entrepreneurship: The Role of Mortgage Debt and Commitment" (CESifo Working Paper Series No. 5048: http://ssrn.com/abstract=2519463) finds that, from theoretical model perspective, "as long as mortgage rates exceed the rate of interest on liquid wealth [short-term bonds, deposits etc - and this usually is the case in all markets]:

1. mortgage debt, by amplifying risk aversion, diminishes the likelihood that homeowners start a business; 
2. the negative relation between mortgage debt and entrepreneurship is more pronounced when income volatility is higher; and
3. the relation between housing wealth and entrepreneurship is ambiguously signed because of competing portfolio and hedging considerations. 

Empirical analysis by the authors "confirm these predictions. A one standard deviation increase in leverage makes a homeowner 10-12 percent less likely to become an entrepreneur."

So back to negative equity. Negative equity is significantly increasing leverage taken on by the borrower. For example: original mortgage with LTV of 75% set against property price decline of 10% generates leverage increase of 8.3 percentage points. In Irish case, same mortgage (in Dublin case) brought back to current valuations of the property from the peak prices pre-crisis implies a leverage increase of, roughly, 50 percentage points, which is, roughly an increase of 12 standard deviations.


The second study is by Jensen, Thais Laerkholm and Leth‐Petersen, Søren and Nanda, Ramana, titled "Housing Collateral, Credit Constraints and Entrepreneurship - Evidence from a Mortgage Reform" (CEPR Discussion Paper No. DP10260: http://ssrn.com/abstract=2529930). The paper looks at "how a mortgage reform that exogenously increased access to credit had an impact on entrepreneurship, using individual-level micro data from Denmark."

The authors find that "a $30,000 increase in credit availability led to a 12 basis point increase in entrepreneurship, equivalent to a 4% increase in the number of entrepreneurs. New entrants were more likely to start businesses in sectors where they had no prior experience, and were more likely to fail than those who did not benefit from the reform."

What does this mean? "Our results provide evidence that credit constraints do affect entrepreneurship, but that the overall magnitudes are small. Moreover, the marginal individuals selecting into entrepreneurship when constraints are relaxed may well be starting businesses that are of lower quality than the average existing businesses, leading to an increase in churning entry that does not translate into a sustained increase in the overall level of entrepreneurship."

So the study basically shows that mortgage credit constraints in Denmark are not highly important in determining the rate of successful entrepreneurship. But the study covers only intensive margin constraints - in other words it covers credit availability increases over and above normal operating credit markets. This does not help our understanding of what happens in the markets where credit constraints are severe. 

3/1/2015: Greek Crisis 4.0: Timeline

Neat timeline of the Greek Crisis 4.0 forward, via @zerohedge

Click on the chart to enlarge

The above shows key points of uncertainty and pressure, with all of these hanging in the balance based on January 25th national elections.

Prepare for loads of politically-induced volatility.

Meanwhile, Greek manufacturing PMI remain in contraction territory:

3/1/2015: Can LTV Cap Policies Stabilise Housing Markets?

The Central Bank of Ireland late last year unveiled a set of proposals aimed at cooling Irish property markets, including the controversial caps on LTV ratios on new mortgages. And this generated loads of controversy, shrill cries about the cooling effect of caps on property development and even speculations that the caps will put a boot into rapidly rising (Dublin) property prices. In response, our heroic property agents unleashed a torrent of arguments about supply, demand, sparrows and larks - all propelling the property prices to new levels, 'despite' the CBI measures announced (see for example here:  http://www.independent.ie/business/personal-finance/property-mortgages/property-prices-set-to-rise-despite-lending-cap-plan-30879087.html for a sample of property marketers exhortations on matters econometric).

But never, mind the above. Truth is, the measures announced by the CBI are genuinely, for good economic reasons, have low probability of actually having a serious impact on property prices. At least all real (as opposed to property agents' economists') evidence provides for such a conclusion.

A recent paper by Kuttner, Kenneth N. and Shim, Ilhyock, titled "Can Non-Interest Rate Policies Stabilise Housing Markets? Evidence from a Panel of 57 Economies" (BIS Working Paper No. 433: http://ssrn.com/abstract=2397680) used data from 57 countries over the period spanning more than three decades, to investigatee "the effectiveness of nine non-interest rate policy tools, including macro-prudential measures, in stabilising house prices and housing credit."

The authors found that "in conventional panel regressions, housing credit growth is significantly affected by changes in the maximum debt-service-to-income (DSTI) ratio, the maximum loan-to-value ratio, limits on exposure to the housing sector and housing-related taxes. But only the DSTI ratio limit has a significant effect on housing credit growth when we use mean group and panel event study methods. Among the policies considered, a change in housing-related taxes is the only policy tool with a discernible impact on house price appreciation."

On DSTI finding, the authors estimate that setting a maximum DSTI ratio as the policy tool allows for a typical policy-related tightening, "slowing housing credit growth by roughly 4 to 7 percentage points over the following four quarters." In addition, on tax effectiveness, the authors found that while "an increase in housing-related taxes can slow the growth of house prices", this result is "sensitive to the choice of econometric method" used in model estimation.

Finally, on CBI-favoured LTV limits: "Of the two policies targeted at the demand side of the market, the evidence indicates that reductions in the maximum LTV ratio do less to slow credit growth than lowering the maximum DSTI ratio does. This may be because during housing booms, rising prices increase the amount that can be borrowed, partially or wholly offsetting any tightening of the LTV ratio."

In other words, once prices are rising, LTV caps are not terribly effective in controlling house price inflation.

3/1/2015: Trade Protectionism Since the Global Financial Crisis

A year ago, ECB paper by Georgiadis, Georgios and Gräb, Johannes, titled "Growth, Real Exchange Rates and Trade Protectionism Since the Financial Crisis" (ECB Working Paper No. 1618. http://ssrn.com/abstract=2358483) looked at whether the current evidence does indeed support the thesis that "…the historically well-documented relationship between growth, real exchange rates and trade protectionism has broken down."

Looking at the evidence from 2009, the authors found that "the specter of protectionism has not been banished: Countries continue to pursue more trade-restrictive policies when they experience recessions and/or when their competitiveness deteriorates through an appreciation of the real exchange rate; and this finding holds for a wide array of contemporary trade policies, including “murky” measures. We also find differences in the recourse to trade protectionism across countries: trade policies of G20 advanced economies respond more strongly to changes in domestic growth and real exchange rates than those of G20 emerging market economies. Moreover, G20 economies’ trade policies vis-à-vis other G20 economies are less responsive to changes in real exchange rates than those pursued vis-à-vis non-G20 economies. Our results suggest that — especially in light of the sluggish recovery — the global economy continues to be exposed to the risk of a creeping return of trade protectionism."

One thing to add: the above does not deal with trade-restrictive policies relating directly to financial repression, such as outright regulatory protectionism of incumbent domestic banks and asset managers, or direct and indirect subsidies pumped into the incumbent banking system.

2/1/2015: Irish Banking System: Still Reliant on Non-Deposits Funding

A handy chart from Deutsche Bank Research on sources of funding - focusing on deposits - for euro area banks.

Irish banks are an outlier in the chart, with domestic household and Non-Financial Companies deposits forming second lowest percentage of banks' funding in the entire euro area. As of Q3 2014, Irish banking system remains less deposits-focused and more funded by a combination of other sources, such as the Central Banks, Government deposits and foreign/non-resident deposits.

And the dynamics, post-crisis, are not impressive either: since the onset of the Global Financial Crisis, there has been lots of talk about increasing reliance on deposits for funding banking activities. Ireland's extremely weak banking sector should have been leading this trend. Alas, it does not:

2/1/2015: Credit and Growth after Financial Crises

Generally, we think of private sector deleveraging as being associated with lower investment by households and enterprises, lower consumption and lower output growth, leading to reduced rates of economic growth. However, one recent study (amongst a number of others) disputes this link.

Takats, Elod and Upper, Christian, "Credit and Growth after Financial Crises" (BIS Working Paper No. 416: http://ssrn.com/abstract=2375674) finds that "declining bank credit to the private sector will not necessarily constrain the economic recovery after output has bottomed out following a financial crisis. To obtain this result, we examine data from 39 financial crises, which -- as the current one -- were preceded by credit booms. In these crises the change in bank credit, either in real terms or relative to GDP, consistently did not correlate with growth during the first two years of the recovery. In the third and fourth year, the correlation becomes statistically significant but remains small in economic terms. The lack of association between deleveraging and the speed of recovery does not seem to arise due to limited data. In fact, our data shows that increasing competitiveness, via exchange rate depreciations, is statistically and economically significantly associated with faster recoveries. Our results contradict the current consensus that private sector deleveraging is necessarily harmful for growth."

Which, of course, begs a question: how sound is banking sector 'return to normalcy at any cost' strategy for recovery? The question is non-trivial. Much of the ECB and EU-supported policies in the euro area periphery stressed the need for normalising credit operations in the economy. This thinking underpinned both the bailouts of the banks and the bailouts of their funders (bondholders and other lenders). It also underwrote the idea that although austerity triggered by banks bailouts was painful, restoration of credit flows is imperative to generating the recovery.

2/1/2015: Monetary Policy and Property Bubbles

Returning again to the issue of lender/funder liability in triggering asset price bubbles (see more on this here: http://trueeconomics.blogspot.ie/2015/01/112015-share-liability-debtor-and-lender.html), CEPR Discussion Paper "Betting the House" (see
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=10305) by Òscar Jordà, Moritz Schularick, Alan M. Taylor asks a question if there is "a link between loose monetary conditions, credit growth, house price booms, and financial instability?"

The authors look into "the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions."

Do note: Ireland and the rest of euro periphery are the prime examples of this specific case.

The authors find that "…loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era."

So let's give the ECB a call… 

2/1/2015: Negative Deposit Rates: Swiss Method

The best explanation of the Swiss negative deposit rates intervention I've read so far is here: http://perspectives.pictet.com/2014/12/19/switzerland-the-snb-introduces-negative-interest-rates/ via Pictet Perspectives.

1/1/2015: Russian Reserves Down USD10.4bn in the Week of December 26th

CBR published data on Russia's foreign exchange reserves for last week (through December 26th), showing another drop in reserves to the tune of USD10.4 billion. So far, since the onset of the accelerated Ruble crisis, Russian FX reserves are down 26.1 billion. December total (excluding December 29-31) decline in reserves is now USD32 billion, which makes it the  worst month for FX losses since the January 2009 when Russia lost USD39.4 billion in reserves. December 2014 so far ranks as the third largest decline month for the entire period for which data is available (since January 1998).

Couple of charts to illustrate:

As of the end of last week, Russian External (Forex) Reserves stood at USD388.5 billion, down from USD420.5 billion in the last week of November. Since the beginning of the sanctions period (from the week of the Crimean Referendum) through the end of last week, Russian reserves are down substantial USD 98.1 billion, while from January 2014 through end of December 2014, the reserves are down approximately USD107 billion. At this rate, and accounting for varying degree of liquidity underlying the total reserves cited here, but omitting the reserves held by larger state-owned enterprises, by my estimates, Russia currently has roughly 18-20 months worth of liquid reserves available for cover of debt redemptions and unrelated forex demand.

1/1/2015: Tech Bubble 2.0 & the Irrelevant VCs

Very interesting take on the growing irrelevance of the VC sector in terms of tech funding and tech valuations bubble: http://www.institutionalinvestor.com/Article.aspx?ArticleId=3412986#.VJzH58AjJA

Some quotes:

"…standard VC line on a standard question in technology today…" is that "it's been a very good year for VC, but 2014 fundraising is still nowhere near levels of 1999 and 2000". Hence, no tech bubble, despite the fact that "Soaring valuations for private companies, some of them in sectors previously thought bubble-prone - even media start-ups are being valued at over USD1 billion these days - have made the bubble question one of this year's most asked". In fact, "2014 has been the year of the monster funding round, led by taxi service Uber, which raised USD1.2 billion in June; Cloudera, a big data start-up, and Flipkart, an e-commerce site, also closed rounds greater than USD1 billion." Note: Uber is now being forced, literally, out of major markets by legislators, regulators and bad PR.

The reason why VC industry is below 1999-2000 bubble funding allocations is, however, not the absence of the bubble, but the decline of the VCs relevance to the sector, where increasingly funding comes from hedge funds, large mutual funds and other non-VC investors.

The above makes it also harder for us to put actual data behind the argument as to whether or not we are witnessing a bubble formation in tech funding, because many non-VC funding sources are not transparent. Two players who tried to put the number on 2014 funding inflow into tech sector find "overall equity funding levels for this year, including investments from traditional VC, dedicated seed funds, angel investors, corporate venture arms and private equity, in the region of USD100 billion. Once mutual and hedge fund stakes are added, it seems fair to conclude that investments in private companies will end the year at or above the levels seen during the dot-com boom."

Ouch! There is a good indication of a bubble maturing, not just forming.

And double-ouch! The old VCs are simply not as relevant anymore.

And triple-ouch! When the dot-com bubble burst in 2001-2002, much of the impact was absorbed by the VCs, which have weaker exposure to the markets at large. This time around, the impact is going to be more broadly based, with adverse spillovers to the markets, pensions funds and bigger investment funds.

1/1/2015: US Mint Gold Coins Sales: 2014

End of 2014 and Q4 2014, so time to update my relatively infrequent coverage of data for US Mint sales of gold coins. Here's the data for the sales of American Eagles and Buffalo coins.

Starting with quarterly data:

• Sales of US Mint gold coins in Q4 2014 reached 183,500 oz up on 141,000 oz in Q3 2014 and the highest reading since Q1 2014. However, y/y Q4 2014 sales were down 4.2% having posted a rise of 24.2% y/y in Q3 2014. There is quite a bit of volatility in Q4 sales. For example, Q4 2013 sales were down 29.5% y/y and Q4 2012 sales were up 74% y/y.
• Sales of US Mint gold coins also fell in terms of average coin weight. In Q4 2014, average coin sold carried 0.57 oz of gold per coin, down from 0.61 oz in Q3 and down from 0.71 oz/coin average in Q4 2013. Still, Q4 2014 reading was second highest in oz/coin sales terms in 2014.

Chart below illustrates.

Monthly trends were less favourable in December. Volume of gold sold via coinage sales by the US Mint fell well below the period average and the series have now been trending below historical averages (both across 2006-2014 range and 2012-2014 averages) since May 2013.

The same dynamics: falling oz/coin average, and falling number of coins sold can be traced in full year sales figures, as illustrated in the chart below.

As above clearly shows, the decline in total number of coins sold has been relatively moderate, compared to historical trend, with sales of 1,322,000 coins in 2014 running very close to 2006-2013 average of 1,361,625 coins. But sales in oz terms have been poor: in 2014 total sales of US Mint gold coins run at 702,000 oz against the 2006-2013 average of 983,250 oz. Thus 2014 was the third worst year on record (since 2006) in terms of sales of coinage gold, but ono the fifth worst year on record in terms of sales of coins by numbers. The average coin weight at 0.53 oz per coin in 2014 was the poorest on record.

Year on year full-year dynamics were poor as well: total coinage gold sold by oz fell 36% y/y in 2014 and there was a decline of 22% in the number of coins sold. Meanwhile price of gold declined (based on month-end USD denominated prices) by 9.94% y/y.

Most of the poor performance in US Mint sales took place in H1 2014, when coinage gold sales in oz terms fell from 790,500 oz in H1 2013 to 377,500 oz in H1 2014.

In the end, 2014 was a poor year for US Mint sales. Even stripping out the sales of the American Buffalo and looking at the American Eagle sales alone - thus allowing the data to cover 1986-2014 period - the trend remains to the downside for both oz sold and coin numbers, with oz sold under-performing the downward trend.

That said, sales of American Eagles remain above the averages for both coin numbers and gold volumes once we strip out 1998-1999 anomalies.

All in, the explanation for 2014 performance is continued decline in demand for gold coins from shorter-term investors seeking safe haven. In general, this is expected and is likely to continue: gold coins are normally the domain of collectors and longer-term long-only investors. We are witnessing a moderation in demand trends toward 1987-1997 and 2000-2008 averages. 

1/1/2015: Shared Liability: Debtor and Lender

In a recent blogpost on geography of Euro area debt flows prior to the crisis, I noted the extent to which Irish (and other peripheral euro area economies') debt bubble pre-2008 has been inflated from abroad (see here: http://trueeconomics.blogspot.ie/2014/12/27122014-geography-of-euro-area-debt.html). The argument, of course, is that the funding source, just as the funding user, should co-share in the liability created by the bubble.

This argument, advanced by myself and many others over the years of the crisis, has commonly been refuted by the counter-point that no such liability is implied: borrowers willingly borrowed from the banks, banks willingly borrowed from the markets (aka other banks) and that is where liability ends.

Here is a cogent paper on the subject from the Bank for International Settlements (not some lefty-leaning think tank or a libertarian hothouse of dissent): Turner, Philip, Caveat Creditor (July 2013). BIS Working Paper No. 419: http://ssrn.com/abstract=2384445).

The paper asserts that "One area where international monetary cooperation has failed is in the role of surplus or creditor countries in limiting or in correcting external imbalances." In common parlance, that is the area of liability of one economic system that, having generated surpluses of savings, provides funding to another economy.

"The stock dimensions of such imbalances - net external positions, leverage in national balance sheets, currency/maturity mismatches, the structure of ownership of assets and liabilities and over-reliance on debt - can threaten financial stability in creditor as in debtor countries." In other words, net lender (e.g. Germany) co-creates the imbalance with the net borrower (e.g. Ireland).

And thus, "creditor countries ...have a responsibility both for avoiding "overlending" and for devising cooperative solutions to excessive or prolonged imbalances."

Unless responsibility does not imply liability (in which case me being responsible for driving safely should not translate into me being liable for any damages done to other parties from failing to do so), we have confirmation of my logic: net lending countries (I refer you to the chart in the blogpost linked above) bear shared liability with the borrowers. By extension, lending banks share liability with the borrowers. Per BIS. Not just per the unreasonable myself.

1/1/2015: Population Ageing and Economic Growth

What happens to economic activity with population ageing? And, crucially, what happens in the context of free mobility of labour, currency union and open trade and capital mobility? These are the questions to be answered for European policymakers, facing rapid increases in population age and in some countries (Germany and Italy already) facing decreases in working age population.

An interesting paper on the subject was just published in the U.S. authored by Maestas, Nicole and Mullen, Kathleen and Powell, David, study titled "The Effect of Population Aging on Economic Growth" (October 2014, RAND Working Paper Series WR-1063: http://ssrn.com/abstract=2533260).

Per authors, "Population aging is widely expected to have detrimental effects on aggregate economic growth. However, we have little empirical evidence about the actual existence or magnitude of such effects. In this paper, we exploit differential aging patterns at the state level in the United States between 1980 and 2010. Many states have already experienced high growth rates of the 60 population, comparable to the predicted national growth rate over the next several decades. Furthermore, these differential growth rates occur partially for reasons unrelated to economic growth, providing a natural approach to isolate the impact of aging on growth."

The study predicts "the magnitude of population aging at the state-level given the state’s age structure in an initial period and exploit this predictable differential growth to estimate the impact of population aging on Gross Domestic Product (GDP) growth, and its constituent parts, labor force and productivity growth."

The result is an estimate showing "that a 10% increase in the fraction of the population ages 60 decreases GDP per capita by 5.7%. We find that this reduction in economic growth caused by population aging is primarily due to a decrease in growth in the supply of labor. To a lesser extent, it is also due to a reduction in productivity growth. We present evidence of downward adjustment of earnings growth to reflect the reduction in productivity."