12/9/2013: BlackRock Institute survey: N. America & W. Europe: September 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for North America and Western Europe region for September 2013.

Per summary: "This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 71% of 119 economists expecting the global economy will get stronger over the next year. (1% higher than within the August report). 

At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen or remain the same. 

The consensus outlook for the Eurozone continued to improve, where the 6 month forward outlook shifted from 75% to 86% expecting the currency-bloc to move to an expansionary phase. The picture within the bloc was not uniform however, with most respondents expecting Portugal, Greece, Belgium and the Netherlands to remain in a recessionary phase over the next 2 quarters. 

With regards to the US, the consensus view firmly that North America as a whole is in mid-cycle expansion and remaining so through H2 2013."

September improvement for the global outlook was much shallower than a 10 point jump in August. Ditto for Eurozone outlook: this rose from 57% in July to 75% in August to 87% in September. Italy outlook seemed to have improved quite markedly, however.

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

Two charts as usual:

Ireland continues to lead expectations, just as it did in previous 3 months.

In global expectations there were some notable movements in analysts' replies. 6% of analysts expected global economy to get a lot stronger over the next 12 months back in August, and this declined to 2% in the current survey. 69% expected it to get a little stronger in August and this proportion rose to 76% in September. 5% expected the global economy to get a little weaker in the next 12 months back in August, which in September rose to 6%. 

In Ireland's case, in August zero percent of analysts expected the economy to get a lot stronger over the next 12 months and this remained unchanged in September survey. All analysts (100%) expected the Irish economy to get a little stronger over the next 12 months in September survey - same as in August. 57% of analysts expected the economy to be in an early-cycle recovery over the next 6 months back in August, and this fell to 50% for September survey. There was significant rise (from 0% to 17% between August and September surveys) in the proportion of analysts expecting Irish economy to be in mid-cycle expansion over the next 6 months period. The number of analysts expecting the economy to be in a late-recession over the next 6 months dropped from 43% in August to 33% in September.

12/9/2013: Lorenzo Bini-Smaghi Strikes... again

A very interesting article in Telegraph quoting from Lorenzo Bini-Smaghi's book on went inside Berlusconi's PMship at the 11th hour of his tenure. Bini-Smaghi is one of the key ECB and Euro system insiders and is hardly a naive or malinformed observer.

Link: http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100025507/italy-floated-plans-to-leave-euro-in-2011-says-ecb-insider/

If true, there are massive implications (items 1 and 2) on political/governance side and a point of deflated rhetoric (item 3):

1. According to information give by Bini-Smaghi, Berlusconi was effectively removed from democratically-held office due to his willingness to discuss Italy's exit from the euro. This puts a solid boot into the idea of democratic EU and limited sovereignty. If a democratically elected head of state raising concern about the suitability of his/her country membership in the common currency leads to the removal of the head of state, the notion of sovereignty is not limited (as in restricted by the letters of the treaties signed), but truncated (implying absolute exclusion of some considerations from the set of feasible policies).
2. The only thing that held the Euro together in the end was not the ECB with its OMT, but convincing Merkel of the MAD consequences of Greek exit from the union. This in turn implies that there are no institutional constraints on German (or Germano-French axis) power within the union. This problem will not be fixed by all the policies harmonisation and banking supervision reforms anyone can imagine.
3. Being not a specialist on Target 2, I cannot exactly / scientifically confirm or decline Mr. Evans-Pritchard's concerns about the risk transfer within the eurosystem. My understanding is that Target 2 'imbalances' on Bundesbank side are caused by deposits swelling, not assets. Here is how the system functions, in my view: peripheral bank borrows funds from the ECB against collateral. Collateral lands at ECB as an asset. Peripheral bank uses borrowed funds to repay liability to a, say, German bank. Peripheral bank writes down liability to offset the writedown of cash paid. Peripheral bank remains oweing to the ECB. German bank gets cash in exchange for writing down the asset (peripheral bank's liability) and deposits money with Bundesbank which enters as a positive entry on Target 2. Now, suppose the peripheral bank defaults on ECB loan. ECB still has a collateral claim. The net loss (loan amount less collateral value), shall one arise, is amortisable over the entire Eurosystem - all CBs, not just Bundesbank or ECB alone. And more, per Jorg Asmussen: "If a net loss remains even after taking into account all provisions and reserves, it could be recorded on the balance sheet as losses carried forward and be offset by any net income in the following years." (see: http://www.ecb.europa.eu/press/key/date/2013/html/sp130611.en.html). Finally, I do not know where he is getting the information that Bundesbank is selling offset securities to any banks to balance out inflows of funds to German banks from the periphery.

Note: many thanks to Lorcan Roche-Kelly (@LorcanRK) for acting as a sounding board for my doubts on Target 2 and the link to Asmussen's speech above.

6/9/2013: BlackRock Institute survey: North America & Western Europe: August 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for North America and Western Europe region.

Per summary: "This month’s North America and Western Europe Economic Cycle Survey presented an improvement in the outlook for global growth over the next 12 months – the net proportion of respondents with a positive outlook increased to 70% from 60% last month. 

The consensus outlook for the Eurozone was particularly positive, where the 6 month forward outlook shifted from 57% to 75% expecting the currency-bloc to move to an expansionary phase. 

The picture within the bloc was not uniform however, with most respondents expecting Portugal, Greece, Belgium and the Netherlands to remain in a recessionary phase, while the consensus has shifted to expect expansion for France, Spain, Finland and Ireland over the next 2 quarters. An even mix of economists expect Italy to be expansionary or recessionary at the 6 month horizon (and similarly so for Norway, outside of the currency-block). 

With regards to the US, the proportion of respondents expecting recession over the next 6 months remain low, with the consensus view firmly that North America as a whole is in mid-cycle expansion and remaining so through H2 2013."

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

Here are two summary charts:

9/8/2013: Political Waffle Passing for Learning?

Mr Schulz - the President of the European Parliament - has penned an op-ed that is available here: http://www.linkedin.com/today/post/article/20130809113308-239623471-did-we-really-learn-the-lessons-of-the-crisis?trk=tod-home-art-large_0


My response is as follows:

This article is a trite rehashing of cliches, some of which have served as pre-conditions to the crisis, by a man who is presiding over the institution complicit in creation of the crisis in the first place, as well as in exacerbating the adverse impact of the crisis on the member states of the EU. 

Let me just deal with the first set of Mr Schulz's core hypotheses: 

"Firstly, the invisible hand of the market does not work and needs a robust regulatory framework." 

Given that the Euro area crisis arose from the disastrous mis-management of the monetary union, the statement is absurd and ideologically dogmatic. Markets require proper regulation and are legally-based structures. Mr Schulz seems to fail to understand this and is confusing anarchy with the 'invisible hand' of the markets. European markets have failed, in part, due to wrong regulation (not the lack of regulation) and in part due to the lack of enforcement of existent regulation. Mr Schulz seems to have no idea as to these facts. Institutions that commonly failed to enforce existent regulations and treaties include, among others, the European Commission (allegedly reporting to the EU Parliament, that Mr Schulz presides over) and the European Parliament itself.

The markets failures were, in the case of the 'peripheral' euro states, exacerbated by the inactions and actions of the European authorities, including those by the European Parliament.

"Secondly, politics should gain primacy over markets and labour over capital." 

Primacy of politics over markets (or rather economics) in Europe is exactly what led us into this crisis. 

Political dominance over economic policies design is behind the creation of the monetary union and the expansion of the union to include countries that are not ready for a single currency regime. It is also responsible for the fraudulent ways in which some member states have acceded to the monetary union (e.g. Italy and Greece, where misreporting and financial instrumentation of deficits and debt were rampant and Mr Schulz's institution was amongst those that were aware of these facts, were required to be aware of these facts, and yet were inactive in the face of these facts). Politicization of the markets for Government bonds, for foreign exchange, for credit, for equity, for risk pricing, etc has been responsible for inducing many deep failures in the markets in Europe. For one, this politicization has led to an unsustainable debt accumulation in the private sector and transfer of private debts onto the shoulders of taxpayers. 

I might agree with Mr Schulz on the point of 'labour' supremacy over 'capital'. Alas these are poorly defined concepts in Mr Schulz's case. Labour can mean labour unions (organised labour movement) or labour as human capital (skills, entrepreneurship, creativity, etc) and everything in-between. All of these definitions will contain internal contradictions in incentives, preferences for policies and responses to policies to each other and to the definitions of capital that can be deployed. Mr Schulz fails to define the categories he references, which suggests that his assertions are once again nothing more than populist sloganeering. Mr Schulz seems to have no idea that capital can be physical, technological, financial, intellectual or human. That 'labour' can be complementary to physical and technological capital in which case primacy of labour over technology can be destructive to the objectives of both. Mr Schulz appears to be inhabiting a simplistic universe more corresponding to that inhabited by Marx and Engels in the late 1840s than the one that exists today.

"Thirdly, and most importantly, the economy and politics should return to the values of solidarity, social justice, decency and respect." 

This is both historically incorrect and, frankly put, too rich coming from someone heading a powerful EU institution. 

It is inherently incorrect because a return implies existence of something in the past. European societies never possessed any real sense of 'solidarity' or 'social justice' but historically (and to-date) relied on preservation of the status quo of distribution of wealth within the set confines of the European elites and independent of merit. Thus, Europe never pursued meritocratic systems of wealth and income allocations. And subsequently never developed such systems. What Mr Schulz might mean (and we are reduced here to guessing) is the return to the status quo of interest groups-driven 'social' allocations of resources - a system commonly known as tax (someone else) and spend (on me or my friends). 

It is a rich statement coming from Mr Schulz because he presides over the EU institution that was at least complicit in forcing member states to transfer private sector losses onto taxpayers and failed to structure properly core institutional frameworks of the EU. Whether this complicity involved errors of omission or commission is irrelevant. The outcomes of these errors are Greece today, Cyprus today, Ireland today, and Italy, Spain, Portugal and so on. From this point of view, the perspective of returning to values by the political and economic institutions of Europe would first and foremost involve (require) restructuring of the European institutions from the top. Mr Schulz's job would be on the line in any such process of renewal and return to accountability. 

That, alas, is the nature of leadership: you fail and you are gone. Writing op-eds full of well-meaning waffle is, frankly, not an excuse for the failures of both action and inaction.

25/7/2013: BlackRock Institute latest survey results for global economic outlook: June 2013

The latest summary of the global growth conditions from the BlackRock Investment Institute. Click on the chart to open larger version. I have highlighted Ireland on the chart.

Blue bars reflect consensus on current phase of economic development (for example, in Ireland's case, current phase is seen as being recessionary by roughly 25% of respondents to the survey). Red dot corresponds to 6mo forward expectation (in Ireland's case, 50% of respondents expect recession in Ireland to either continue or to present itself again in 6 months time).

Note: this is the view of surveyed economists and not the view of the BlackRock II. The chart is based on the "trailing 3 survey reports for the other regions we poll. In our first month of this initiative, we collected the views of over 430 economists from more than 200 institutions, spanning over 50 countries"

25/7/2013: More on Sovereign-Banks Contagion risks in Spain and Italy

Two interesting charts detailing continued rise in risk links between the sovereigns and Italian and Spanish banks:

 Both via Ioan Smith @moved_average.

16/7/2013: Italian Government Debt: All Is Going According to 'Plan'

Today's news:

ITALY'S GENERAL GOVERNMENT DEBT: €2.074 trillion (setting a new all-time record) and up on €2.0413 trillion prior… in other words, all is going according to the EU 'sustainability' plan.

A gentle reminder, back in April 2013, IMF forecast for Italy's 2013 GGD was EUR2.0405T, so that fiscal consolidation, then, is outperforming the targets, clearly… In fact, IMF forecast for 2014 GGD was EUR2.08055, so Italy is well into getting to 2014 target by the end of 2013. Keep digging, folks. Perhaps a French solution of raising taxes? Just for 'fairness' sake.

A chart via Ioan Smith @moved_average :

To update: via @lemasabachthani two charts:

Notice in the above chart the evolution of debt over years. And recall that Italy is cutting and cutting deficits. Clearly, something is amiss: there is austerity and there are continued increases in debt in levels terms, as well as in GDP-referenced terms. In other words, forget growth effects of austerity - Italian-styled policies are not cutting Government spending.

Also, notice the effect of the absurd Euro area 'solution' system whereby already over-indebted country like Italy is forced to take on more debt to fund 'adjustment' programmes for the peripheral states.

But even disregarding the above absurdity, there is a new spiking in funding requirements for the Italian Treasury.

4/7/2013: Blackrock Institute Surveys: North America, Europe and EMEA: June 2013

Two charts showing most recent consensus expectations on North American, Western European and EMEA economies from the Blackrock Investment Institute panel of economists (note: these do not represent views of Blackrock).

Notice clustering of peripherals and France, as opposed to marginally better clustering of the Netherlands, Sweden, Belgium and Eurozone.

Note Ukraine as the sick man of the region. Also note Slovenia and Croatia - two EU economies that are significantly under-performing the regional grouping.

4/7/2013: Blackrock Institute Surveys: North America, Europe and EMEA: June 2013

Two charts showing most recent consensus expectations on North American, Western European and EMEA economies from the Blackrock Institute panel of economists (note: these do not represent views of Blackrock).

Notice clustering of peripherals and France, as opposed to marginally better clustering of the Netherlands, Sweden, Belgium and Eurozone.

Note Ukraine as the sick man of the region. Also note Slovenia and Croatia - two EU economies that are significantly under-performing the regional grouping.

16/6/2013: Euromoney Country Risk Scores Update

Some updates from Euromoney Country Risk (ECR) reports. First a summary of latest credit risk assessment scores moves:

And on foot of Russia's score move, a related story on Russian government delaying issuance of much expected sovereign bond. Via Euroweek:


"Russia is likely to wait until autumn before bringing its mandated sovereign bond, said analysts. Forcing through a $7bn bond in one deal might also be unwise, but demand is deep and the sovereign could spread its funding plan out across separate transactions, said bankers... Investors have already priced in a large sovereign issue and Russia would not struggle to drum up demand, he added. But the problem is price."Everything is 100bp wider than a month ago and so the sovereign will hope things calm down and allow them to issue closer to the historic tights they were looking at just a few weeks ago," said another syndicate banker."

10/6/2013: Italian GDP for Q1 2013

Italian GDP release for Q1 2013 in few tweets and a picture

So, 'fail' on preliminary reading, showing lead indicators being too optimistic. Expectations average was for -2.2% decline. And per components:

 Note the last one - growth crisis accelerating, not otherwise.

Note one positive contributor... the only one...

And quarterly changes on real GDP side:

So we know austerity has been savage. Really, savage...

30/5/2013: That fiscal adjustment race... where we are?

How much more adjustment needed for Ireland to reach fiscal debt stabilization? Ok, nice folks at Deutsche Bank Research have done some plots and:

Which is, of course IMF number of ca 5% of GDP, and it puts Ireland neatly ahead of all peripheral states. We are, afterall, in a better position... except... well, except of one snag: GDP is not something that matters much for Ireland. Instead - we are more like a GNP economy, by which metric the primary adjustment required for Ireland to reach debt/GDP stabilisation is more like... 6.25% of GNP which puts us right at Portugal's doorsteps. Now, consider that Ireland has started the crisis well ahead of all other peripheral states and went into the Troika programme well ahead of all peripheral states, save Greece. Which means that at least a year ahead of all peripherals, we are barely ahead of them in distance to target. Yep, you know - that race ain't over until it is over.

15/5/2013: Italy v Spain in Big 4's Sickest Economy contest

More unpleasant stuff from the Euro zone. Headlines in the morning today:

• Italian banks suffer the worst credit crunch in their history with banks credit down 2.12% in March 2013 y/y, according to the Italian Banking Association (ABI);
• Meanwhile, bad loans have reached €64.3bn in March, rising by 4.3% y/y and by 33% m/m. 
• Italian banks loans to households and non-financial companies dropped 3.1% in March y/y, falling to €1.46bn. 
• Italian industrial production fell 5.2% in March y/y, the worst figure in the Eurozone’ Big 4 economies. Industrial production was down 1.5% in Germany in March and 1.6% in France.
• The Italian housing market activity its now at lowest level since 1985. Last year 448,364 properties were sold, or 27.5% fewer than in 2011 and only 18,000 ahead of 1985 sales. 

It looks like Italy is going head on into competing with Spain for the title of the Big 4's sickest economy.

5/5/2013: Things are going according to plan... in Italy & Germany

That euro area 'policy' for dealing with the crisis is working marvelously, yeah?

Source: Euromoney Country Risk
Note: lower ECR score = higher sovereign credit risk

Yes, Italy's bonds are trading at much lower yields, and the country is issuing new debt at lower costs... but how much of that has to do with something / anything that Italian Government has done, as opposed to the overall shifts in markets sentiment / liquidity flows, who knows? One thing is for sure, absent yields changes, Italian fundamentals are getting worse, not better. Ditto, between, for all other 'peripherals'.

28/4/2013: That German Miracle...

Germany... the miracle economy of Europe:

Let's do some growth facts. recall that G7 includes such powerhouses of negative growth as Japan and Italy, and the flagship of anemia France.

1) Germany vs G7 in real GDP growth:

From data illustrated above:

• In the G7 group, Germany ranked 6th in growth terms over the 1980s, rising to 5th in the 1990s and 2000s, and, based on the IMF forecasts, can be expected to rank 4th in the period 2010-2018. In simple terms - Germany ranked below average in every decade since 1980 through 2009 and exact average in 2010-2018 period.
• On a cumulated basis, starting from 100=1980, by the end of this year, judging by latests IMF forecast for 2013, Germany would end up with second slowest growth in G7, second only to Italy. 
• On a cumulated basis, starting from 100=1990, by the end of this year, judging by latests IMF forecast for 2013, Germany would end up with fourth fastest growth in G7. Ditto for the basis starting from 100=2000.

2) Germany vs G7 in annual growth rates in GDP based on Purchasing-power-parity adjustment (PPP) per capita to account for exchange rates and prices differentials:

From data illustrated above:

• In the G7 group, Germany ranked 5th - or below average - in PPP-adjusted per capita growth terms over the 1980s and the 1990s, rising to 4th - group average - in the 2000s, and, based on the IMF forecasts, can be expected to rank 3rd - slightly above average - in the period 2010-2018. In simple terms - Germany ranked below or at the average in every decade since 1980 through 2009 and one place ahead of the average in 2010-2018 period.
• Note: Germany is the only G7 country with shrinking overall population, that peaked in 2003 and has been declining since, thus helping its GDP (PPP) per capita performance.

Here's the chart summarising Germany's rankings in G7 in terms of two growth criteria discussed:

Germany might have been performing well in 2006 and 2011 (when it ranked 1st in real GDP growth terms) and really well in 2007-2008 and 2010 when it ranked 2nd, but other than that, it has been a lousy example for any sort of a miracle.

26/4/2013: ECB's policy mismatch in 6 graphs

For those interested in the monetary drivers of the current euro area crisis, here's an interesting new paper from CESifo (WP 4178, March 31, 2013): "The Monetary Policy of the ECB: A Robin Hood Approach?" by Marcus Drometer, Thomas I. Siemsen and Sebastian Watzka.

In the paper, authors "derive four sets of counterfactual national interest rate paths for the 17 Euro Area countries for the time period 1999 to 2012. They approximate desirable national interest rates countries would have liked to implement if they could still conduct independent monetary policy. We find that prior to the financial crisis the counterfactual interest rates for Germany trace the realized EONIA rate very closely, while monetary policy has been too loose especially for the southern European countries. This situation was inverted with the onset of the financial crisis. To shed light on the underlying decision rule of the ECB, we rank different rules according to their ability to aggregate the national counterfactual paths to the EONIA rate. In addition to previous literature we find that those mechanisms which care for countries who fare economically worse than the Euro Area average perform best."

Paper is available at SSRN: http://ssrn.com/abstract=2244821

Here are few charts, illustrating the results. In these TR references Taylor Rule, quarterly estimated backward-looking Bundesbank rule denoted BuBa, monthly estimated Bundesbank rules with interest rates smoothing denoted BuBaS and BuBaGMM respectively for backward- and forward-looking, and realised EONIA rate.

Legend:

CHARTS

Per authors: "Two results are worth noting.

First, the counterfactual interest rate path derived from the original Taylor rule and our baseline counterfactual path (quarterly estimated backward-looking Bundesbank rule) trace each other very closely. In fact, they are hardly distinguishable. The monthly estimated Bundesbank rules with interest rate smoothing (backward- and forward-looking) deviate sometimes considerably from the quarterly paths. …all four paths yield qualitatively similar results...

Second, …all four counterfactual paths for Germany lie strikingly close to the actual realization of the EONIA rate. Especially
for the southern European countries the ECB’s monetary policy has been too loose according to all four counterfactuals."

And more: "For all four sets of counterfactual national interest rate paths the Robin Hood rules outperform the standard decision rules. Especially our "economic-needs"-rule performs exceptionally good across all four specifications. Moreover, the forward looking model performs worse than the three backward looking specifications."

In other words, ECB policy rules were completely mis-matching the reality in all countries, save Germany, with (per charts above) mismatch most dramatic in… right… Ireland.

23/4/2013: Updating the cost of banking crisis data

Nice update from the ECB on the cumulated cost of the banking crisis in Europe, now available through 2012. The net effect, summing up all assumed sovereign liabilities relating to the crisis, including contingent liabilities, and subtracting asset values associated with these liabilities are shown (by country) in the chart below:

Note the special place of Ireland in the above.

For the euro area as a whole, net liabilities relating to the crisis back in 2007 stood at EUR 0.00 (EUR36.72 billion for EU27). By the end of 2012 these have risen to EUR 740.15 billion (EUR 734.23 billion for EU27).

Net revenue losses for Government arising from the banking sector rescues, per ECB are:

31/3/2013: Draghi calling President Napolitano: a nasty precedent

Here's one of the best examples of the total departure of the EU institutions from the normal democratic constraints on their mandate vis-a-vis national affairs:

The story link is: http://www.reuters.com/article/2013/03/31/us-italy-vote-draghi-idUSBRE92U01W20130331?feedType=RSS&feedName=businessNews

For a reply:

That is correct (assuming the reported call did take place): the ECB represents a sub-section of the executive pillar of power in the EU (and via the national central banks - in the member states), just as the US Fed. Neither the Fed nor the ECB have any business in influencing or restricting the legislative pillar (in the case of the above incident - the electoral process) or the entire executive pillar (in the above case - pertaining to the Presidency to which monetary policy institutions are accountable or co-accountable whenever oversight over monetary policy institutions co-rests with legislature) or the judiciary (presumably, Mr Draghi might call on European or national judges too, should their workings approach the issues related to OMT or other aspects of the monetary policy).

To see this, simply replace ECB's Draghi with, say, General X of the Common Security & Defence Policy calling President Napolitano to express concerns about Italian elections. How fast will 'military interference in political affairs' rise to media headlines?

Europe is now clearly on a dangerous path that can lead to subversion or manipulation of democratic institutions and processes. 

26/2/2013: 'Italy effect"

Mid-day 'Italy effect' or may be 'democracy effect' or 'No Goldie Sachs Boy in Rome effect'? CDS markets (via CMA) the EU has not banned... yet

Also, note that everyone in the periphery is being clubbed: Ireland and Portugal inclusive (we can safely assume that Tunisia, Sweden, Russia and Bulgaria have been coupled into the group on ad hoc bases).