Trade Data for June and First Half 2014

Bottom line: Jerusalem, we have a problem. The trade data for June were unsatisfactory, but what is far worse is that they represent another link in a steadily deteriorating trend. This review will focus on the data for the first half of the year, which present a coherent — and distinctly negative — picture.

  • The deficit for June, on a seasonally-adjusted basis and after excluding trade in ships, aircraft and diamonds, was $1.45bn, marginally more than in April and May. However, the total deficit for the second quarter of 2014, on this basis, was some $1.1bn higher than the parallel quarter of 2013.
  • For the first half of 2014, total imports, not seasonally adjusted, rose by almost $1bn compared to January-June 2013, while total exports rose by less than $500mn, pushing the deficit for H1 2014 to $6.46bn, nearly  $500mn higher than that for H1 2013.
  • Most categories of imports posted small rises or were stable compared to 2013, whereas most categories of exports saw declines — in same case, quite large ones.
  • The only important category of imports to post a significant decline was fuels, the ‘bill’ for which fell by over $700mn in H1 2014, compared to the H1 2013 total of $7.5bn. In other words, production from the Tamar offshore natural gas field has prevented a much sharper rise in the trade deficit.
  • The key feature among exports is that although exports of high-technology industries rose by some 2.5% in H1 2014, compared to H1 2013, this was due ENTIRELY to a 14% rise in pharmaceutical exports, while all other high-tech sectors declined.
  • Meanwhile, in the unfashionable and unloved low-tech sectors, exports posted a strong rise of almost 10% over the first half of 2013, led by textiles and apparel.

 

Trend data (in $mn) for exports of high-technology and medium-high technology industries, January-June 2014

Trend data (in $mn) for exports of high-technology and medium-high technology industries, January-June 2014

Consumer Price Index and Inflation Data for June and January-June 2014

Bottom line: The Consumer Price Index (CPI) rose by 0.3% in June, slightly above the consensus expectation. However, the primary factor in this rise was a jump in clothing prices — a seasonal development and hence transient. The underlying trend is toward ever-lower rates of inflation and, excluding housing prices, the Israeli economy is already experiencing deflation (see graph).

  • The clothing sub-index jumped 11.5% in June, and contributed 0.25% to the rise in the overall index. The Central Bureau of Statistics noted that this is a seasonally-driven event, as summer clothes are repriced from last year’s levels.
  • Other seasonally-driven sub-indices, such as fresh fruit, pushed in the opposite direction, but with much less impact.
  • The other sub-index contributing to the overall rise was housing — which measures rental prices and posted a rise of 0.4% in June.
  • The index of house prices, which is not part of the CPI, rose by 0.5% in the latest month, and its 12-month rate of increase climbed from 8.0% to 8.8%.
  • Other than in the housing sector, price pressures are almost absent. Despite the 0.3% rise in June, the CPI showed no change over the first six months of 2014, and in the twelve months from July 2013 it rose by only 0.5%.
  • The CPI net of its housing sub-index fell by 0.5% in January-June and by 0.2% in the twelve months through June.
  • The Wholesale Price Index of Industrial Output for Domestic Uses dropped by 0.5% in June, by 0.8% in the first half of 2014 and by 1.1% in the twelve months through June.

 

Trend data for the general Consumer Price Index (CPI) and the  CPI net of the housing sub-index, January 2013 – June 2014 (indices based on average 2012=100).

Trend data for the general Consumer Price Index (CPI) and the CPI net of the housing sub-index, January 2013 – June 2014 (indices based on average 2012=100).

Even ‘They’ Are Warning You

Most people don’t think — many no longer can, even if they try, because their capacity for independent thought has been systematically eroded by prolonged over-exposure to the media. Every successive technological leap, from radio to TV to the internet to social media, has led to a parallel increase in the ease and intensity with which the brains of the masses have been addled and rendered dysfunctional.

Such thinking as is done by the media-shepherded sheeple is in line with the pattern drilled in to them: How can I be ‘better’ — better-off, better-looking, better-regarded, etc. — and how can my life be made easier, more convenient and hence more successful (in the eyes of other sheeple). Unpleasant or negative things are systematically strained from the canned infotainment served up via every available channel. There remains a vague awareness that these negative phenomena exist, but every effort is made to train sheeple not to think about them — and the best way to ensure that outcome is by training them not to think at all.

The idea that if you ignore something, or deny its very existence, it will fade out of existence, is very tempting and can be – and is – applied to every area of human activity. In the financial sphere there are two phenomena that cause much anguish, namely risk and uncertainty. Libraries have been written about this pair and the problems they generate, but the starting point is the distinction between them: risk can be measured, and therefore mitigated, whereas uncertainty cannot.

Financial markets can therefore be defined as mechanisms wherein risk — of one sort or another — is measured and traded between market participants. However, if the methodology for measuring risk is systematically warped — for example, by central banks artificially keeping interest rates at extremely low levels — then the ability to assess and protect against that kind of risk is crippled.

After almost six years of institutionalized distortion, most markets have ceased to function in the way they were intended, namely as a method of pricing financial instruments on the basis of supply and demand. With prices warped, the relative risk of various instruments is impossible to measure – with results as ludicrous as they are dangerous. To take two simple and current examples: the yield on a ten-year bond issues by the Kingdom of Spain is only one-tenth of a percent higher than that on a 10-year US Treasury bond. Does that mean that Spain and the US carry virtually the same degree of risk? And if the spread between ‘junk-bond’ yields and ‘investment grade’ corporate bonds is at the lowest level ever, does that mean that the risk of weak corporations going bust is also lower than ever?

You had better hope so, because the people who manage your pension fund are acting as if it were.  I noted last week that concern about these distortions is becoming more widespread. This week it has widened further, to include even central banks who are the agents ultimately responsible for the problem in the first place!

Fed chair Janet Yellen repeated this week, in testimony to Congress, her view (call it an admission) that ‘some’ areas of the markets have become over-valued, such as internet shares. Back home, the Bank of Israel issued its first half-yearly Financial Stability Report, in which it warned explicitly that banks have exposed themselves to serious risk by their aggressive mortgage lending – and that the Israeli corporate bond market is also out of whack. Do not check the portfolio of your pension fund or ‘keren hishtalmut’, because you will find it massively skewed towards these corporate bonds.

The purpose of these warnings is not that innocent sheeple should listen, think about the implications and take action. They are, instead, to be used after the now-inevitable crash, to provide evidence that ‘the authorities’ were doing their job and looking out for the average Joe. If a large number of sheeple were to stop acting like sheep and actually think things through for themselves, there would be a rush for the exits and a crash – for which the people issuing the warnings would be blamed. The confidence of the central bankers that their words will have no impact in the face of their deeds –  warning of the dangers while pumping more money to keep the markets rising endlessly – enables them to behave this way.

Risk has not been eliminated, as the operators and primary beneficiaries of the financial system – banks and brokers – blithely pretend. It has instead been covered up by a flood of liquidity, so that it is invisible, unmeasurable and impossible to accurately protect against. That means that the markets, like the world in general, have become more rather than less dangerous, as a result of deliberate, consistent policies by governments around the world.

Budget Data for June and Year-To-Date

Bottom line: The budget data for June showed a deterioration, for the first time this year. The problem is concentrated on the revenue side and may be a temporary phenomenon, but the latest numbers raise warning flags as to the viability of the fiscal strength that has characterised 2014 to date. The data for the next month or two will need to be scrutinized, but the security situation is certain to have a dampening effect on economic activity and hence on tax receipts in July.

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The Voice of Sanity

In the hierarchy of the financial world, there are banks and central banks. The latter are tasked — along with directing the monetary policy of their country — with supervising the former and acting as ‘lender of last resort’ in the event that a specific banking institution gets into severe trouble. Furthermore, in the post-crisis world, central banks have been tasked with a new role, “macro-supervision”. As the term implies, this involves supervising not merely individual entities, but the entire system — the “macro” — so that a systemic crisis like that of 2008 does not recur.

That’s the theory. In practice, the world’s key central banks — the Fed, the ECB, the Bank of Japan, the PBOC (People’s Bank of China) and the Bank of England — have spent the six years since the crisis conducting an unprecedented, hitherto unimaginable, monetary policy. Interest rates have been held at or near zero — last month the ECB went still further, to NIRP, or negative interest rate policy — and systematic intervention in the bond markets has become the norm. On the other hand, reform of the banking systems, to make them less prone to potentially disastrous behavior, has been fitful and partial.

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Revised GDP Estimates for Q1 2014

Bottom line: The second estimate of GDP growth in the first quarter of 2014 was revised sharply upwards, to an annualized rate of 2.7%, from 2.1% initially. Every component of GDP, except investments, was revised higher, most of them significantly. The conclusion arising from the first estimate, namely that the economy is undergoing a sharp slowdown, has been shown to have been premature.

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Rehypothecation

Frankly, I don’t expect many readers to be familiar with the term above, let alone to know what it means. So let’s begin by turning to the fount of all knowledge in our age — Wikipedia. Here we learn that “hypothecation is the practice where (usually through a letter of hypothecation) a borrower pledges collateral to secure a debt or a borrower, as a condition precedent to a loan, or has a third party (usually an affiliate) pledge collateral for the borrower. The borrower retains ownership of the collateral, but the creditor has the right to seize possession if the borrower defaults. A common example occurs when a consumer enters into a mortgage agreement, in which the consumer’s house becomes collateral until the mortgage loan is paid off”.

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Budget Data for May and Year-To-Date

Bottom line: The positive trend in the budget continued through May. The key numbers showed further improvements and the only sources of concern were “second derivatives” — meaning the rate of change of the main trend. This is slowing, so that the chances of the fiscal situation improving further are low — but with five months of 2014 gone, and barring negative shocks, this year’s budget deficit should be significantly below target. The focus now moves to the 2015 budget, which the government will shortly begin debating.

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More Disconnect

The latest meeting of the Federal Reserve Bank’s Open Market Committee (FOMC) — which determines the monetary policy of the United States and fixes short-term interest rates — ended on Wednesday afternoon (EST). The decisions announced were exactly in line with what had been expected — primarily, another reduction in the Fed’s program of bond-buying, in line with a process that began late last year. Nevertheless, financial markets were very pleased with the outcome: prices of stocks and bonds rose, first in the US and subsequently in most global markets.

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Current Account Data for First Quarter of 2014

Bottom line: Israel posted its largest-ever quarterly current account surplus in January-March 2014 — of $3.5bn. This was almost double the (revised) surplus for the fourth quarter, of $1.8bn, and compares to an average quarterly surplus of $1.5bn in the six quarters ending in December 2013. However, the factors responsible for this outcome are unlikely to be repeated, at least in the same degree, and the surplus will shrink in the current and subsequent quarters.

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