Greece’s fable continues to unravel

It could have been the scenario of a TV series, but it will not last over as many years as to Dallas or The Experts did.

The past two weeks have been rather rich with events:

3^rd May: Portugal agrees to a 3 yr EUR 78 billion funding from the IMF and Europe.

6^th May: An article published in Der Spiegel magazine says Greece may leave the eurozone.

Unscheduled meeting in Luxembourg of several eurozone Finance Ministers (France, Germany, Greece, Italy and Spain in addition to the President of the Eurogroup, Jean-Claude Juncker, the ECB President, Jean-Claude Trichet, and the European commissioner for economic and monetary affairs Olli Rehn).

8^th May: rumors emerge of an additional loan to Greece anywhere between EUR 25 to 45 billion

9^th May: S&P downgrades Greece from BB- to B with negative watch joining the highly speculative bandwagon; now we are halfway from investment grade and default. Moody’s puts Greece under credit watch with potentially a multi- notch downgrade.

10^th May: IMF and EU experts arrive to Greece to discuss the budget execution progress and I guess a maturity extension of the EUR110 billion rescue package together with an interest rate reduction plus any additional “adjustments” i.e. new loans.

15^th May: meeting in Berlin between Angela Merkel and Dominique Strauss-Khan (pulled by the Police In New York out of an Air France flight because of an accusation of sexual assault!).

As a side question, I would really be interested in knowing who in Germany did leak the information to Der Spiegel (since the source seems to be German, even if I wonder this is not playing in the Greek’s hands to extract more palatable terms by threatening to leave the Euro): budget hawks to pressure the Chancellor Angela Merkel not to give away anything? Germany to weight on Greece and other EU countries to come to their terms? Any other?

I having no way to know where the truth lies, and can only use conjectures, I therefore prefer to focus on hard facts, as validated by Eurostat:

• 2010 Government deficit/GDP: 10.5% (just as a reminder: 8.1% were targeted when the rescue package was agreed last year, 7.6% in 2011 and 6.5% in 2012)
• 2010 debt/GDP: 142.8% (worse than my May 2010 forecast of 132%, yet rather deemed to be on the doom side at the time)
• 2010/2009 debt: + EUR 29.9 billion
• 2010 debt maturing: EUR 40.5 billion

In addition:

• Debt issuance in the market: only 13 and 26 weeks T bills were issued since mid April 2010, rapidly shortening debt maturity.
• Nearly EUR 10 billion are due in May, including a 6.2 billion 10 years bond maturing on May 18. Greece could try to refinance it with 13 and/or 26 weeks bill, but this would spur the. If they do not receive the EU and IMF EUR 15 billion installment due at the end of May (who knows, maybe the IFM will leave politics aside -I do not expect anything form the dogmatic European side), they can close the door and leave the key to anybody who wants it.
• Interest payments represent more than 6% of GDP, and these rates are heavily subsidized by the EU taxpayers via the EUR 110 billion bailout at 4% (market rate are north of 10%).
• Greece is running a deficit in the turn of EUR 500 million/month over the budget.
• All economic and social indicators are worse this year than the previous.

The latest release of the budget execution shows that the gap between the planned (EUR 6.9 billion) and the actual deficit (EUR 7.2 billion) is increasing month after month. And this does not include the figures for the Public Investment Budget which were grossly manipulated in February, artificially reducing the deficit by EUR 1.6 billion and allowing Greece to show a budget in line with plans until March.

As I was forecasting last year, the austerity program is exerting its toll on the economic activity which in turn is translating into lower tax revenues despites efforts to fight tax fraud. There is no reason why this should change, any additional austerity measure will weight on GDP in the absence of an export boom that will not occur.

According to my calculation (at least the optimistic one), in 2011 the deficit and the debt will respectively reach 11.3% (EUR 25 billion) and 158% of GDP (EUR 354 billion), using the actual (optimistic) official growth forecasts. This is no more sustainable than in 2010, to the contrary.

Then only trump card Greece holds (and only to some extent) is a successful privatization plan (that may be completed too late anyway) which could amount up to EUR 50 billion (I do not believe one minute that the final number will be near half of it). Nice number, but it does not address the root of the Greek problem: its lack of competiveness and structurally negative trade & services balance. And the lack of competitiveness is not only a question of labor cost, it is also and mainly having goods and services that other want to buy: the DM, like the Swiss franc, always revalued versus the Club Med currencies and Germany has had positive trade balances for decennials. The strong euro did not deter Germany to remain the world largest exporter. And on this count, I do not see what Greece can do… On a more fundamental basis, this leads to wonder how countries (generally small ones because lacking of critical mass) without a specific competitive advantage will be able to remain independent in a world which is increasingly opened and interconnected. In this context, a new rescue package would be a waste of money and time (the UK wisely indicated that they would not participate).

The numbers are rather striking: according to the OECD, since 1993 Germany has cumulative trade surplus of USD 2,075 billion (70% of the eurozone total!) whilst Greece had a deficit of USD 373 billion.

The train is in motion, the wall is getting closer by the day whilst the EU pointsmen are asking the taxpayer to lengthen the rail tack faster instead of stopping the train before the disaster occurs and the eurozone ends up in a wreck. The EU is in denial as usual whilst there is absolutely no way Greece can abide, even lousely, by the original bailout terms (for example to private capital markets in 2012): there is no way Greece can increase its tax receipts by +/- 35% (on official numbers, 50% according to my calculations) to get a flat budget. In order to get a budget surplus to pay down debt in a reasonable way (say 10% a year), Greece needs to more than double its tax receipts – so, forget it.

A default is certain (whatever you call it: debt restructuring or rescheduling, interest deferral or reduction, etc.): let’s investors (banks and money market/bond funds) pay for their mistakes and if this leads to some bank not being well-capitalized enough (I would not buy shares of Dexia! – nor any European bank for the matter), let shareholders be wipped-out and bondholders take their losses, not the taxpayer: this is called capitalism.

Quid about the ECB balance sheet, which must hold +/- EUR 50 billion of Greek debt (not talking about Portugal, Ireland and Spain)…?

And, one last word, watch France.

Source:

Der Spiegel (international edition): Greece Considers Exit from Euro Zone

http://www.spiegel.de/international/europe/0,1518,761201,00.html

Moody’s: Moody's places Greece's ratings on review for possible downgrade

http://www.moodys.com/viewresearchdoc.aspx?lang=en&cy=global&docid=PR_218672

Hellenic Republic - Ministry of Finance: Budget Execution Bulletins

http://www.minfin.gr/content-api/f/binaryChannel/minfin/datastore/f1/75/38/f1753817b1599ffefcabffb9c5e1e68ade5532ec/application/pdf/Prel_Bulletin_4_ENG_10-05-2011_no2-6.pdf

Eurostat: Statistics

http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/themes

OECD: Statistics from A to Z

http://www.oecd.org/document/39/0,3746,en_2649_201185_46462759_1_1_1_1,00.html

Associated Press: IMF chief accused of sexual assault at NYC hotel

http://hosted.ap.org/dynamic/stories/I/IMF_HEAD_ASSAULT?SITE=CAVIC&SECTION=HOME&TEMPLATE=DEFAULT

Banks’ exposure to PIGS countries

© Markets & Beyond

Every quarter, the BIS publishes with a 6 months lag, banks exposure country by country. I drew a table to compare the evolution from June to September 2010; banks in main creditor’s countries continued to cut (sell to the ECB) their exposure in the tune of well over EUR 100 billion, and there is no reason that this trend has abated since:

However, banks in Germany, France and the UK remain deeply vulnerable with commitments of over EUR 1 trillion:

Source:

Bank for International Settlements: Consolidated foreign claims of reporting banks

http://www.bis.org/publ/qtrpdf/r_qa1103.pdf#page=72

Greece: State Budget Execution Jan-March 2011 - Not looking good

As my readers know, I closely follow Greece’s budget execution. The situation is not improving:

• Revenues continue to lag forecasts and the fiscal position is deteriorating: -9.8% during Jan-Feb 2011, -11.0% during Q1 2011.
• Expenditures seem to have reached a point where it is very difficult to significantly cut further.
• The PIB item was actively “managed” in February (see my previous comment on 29^th March) but this could not be repeated.
• GDP is expected to contract for the third year in a row and there is no way that unemployment will not also deteriorate to ~15%.
• Debt as a % of GDP will continue to increase at least until 2014 according to my calculations.

5 yr CDS spreads are at record levels at 1221 b.p. on Friday according to CMA, the world riskiest sovereign by a long margin, i.e. a 63% of default risk. Markrit has 1090 b.p. CDS insurance cost, a 117 b.p. increase over the week and +51 b.p. Friday alone.

Spreads with Germany’s 10 yr bond yield have also passed the 10% mark!

I have long been advocating a restructuring/default/rescheduling of the Greek debt, since the current bailout is only postponing the inevitable, and the CDS market is clearly showing the way…

Bondholder will take a haircut, which is perfectly normal since investors should pay for their mistakes, not the taxpayer. This is the only way to finally clean banks’ balance sheets and let go under the ones that are undercapitalized.

The EUR has been unscratched since early January due to major events in other parts of the world, but I do not believe this is going to last for very long, at least the CDS markets believes so. The more so if the FED takes a less dovish stance at its next meeting April 26-27, which I expect.

Source:

Markets & Beyond: Portugal, Greece and the EURO crisis- What the news are?

http://marketsandbeyond.blogspot.com/2011/03/portugal-greece-and-euro-crisis-what.html) and this cannot be repeated

The French mint issues a limited series of gold and silver coins: a rip-off!

The French mint (“Monnaie de Paris”) is issuing 10,000 gold EUR 1,000 face value (weight 20 g or 0.71 oz @ 999.99/1000 title) and 50,000 silver EUR 100 face value (weight 50 g or 1.76 oz @ 900/1000 title). They will be delivered from mid-June to end July and a 30% deposit is required to reserve them.

Do not rush!

First, Gold coins were already sold out within 48 hours with people queuing in the street at “ Monnaie de Paris” Thursday and Friday. Tuesday, I was told by officials there that silver coins were also sold out.

Second, it is a rip off!!

1) Investors get a 1:3 leverage for +/- 3 months having to deposit only 30% of the face value until delivery

2) The interesting feature is that the coins have legal tender and it is therefore possible to exchange them at face value at any bank in France (and probably throughout the eurozone but I could not find confirmation of this). This means that if the metal value of coins was to fall below the face value of coins, investors would still get the face value. This puts a floor on gold and silver prices: it is the same as having a free undated long put on gold and silver prices.

Let’s take an example.

If gold prices continue to go up, then the value of coin will go up accordingly. If gold prices were to fall to EUR 500/oz giving a gold value for gold coins of EUR 323, your coin would still be worth EUR 1,000.

BUT

There is more than one catch however: as usual no free lunch!

1) According to the data indicated on “Monnaie de Paris” web site, the oz used is an ounce and not a troy ounce; this means 28.35 g/oz is used instead of the 31.104 g/oz for the quotation of precious metals, a ratio of 0.912 (see calculation below).

2) At the time of writing, the value of precious metal for each coin is well below the face value:

Gold @ $1,460/oz x 0.912 x 1.44 EUR/USD x 0,71 oz= EUR 656.51, over 50% premium!

Silver @ $40.6/oz x 0.912 x 1.44 EUR/USD x 1.76 oz = EUR 45.26, over 120% premium!!!

I doubt the collectable value (if any) warrants such premia. As usual the poor guy in the street has been ripped off.

And paying a put option at such premia looks very rich to me.

3) If the price of precious metals were collapsing, I also doubt that French authorities would not renege on the possibility to exchange the coins at their face value.

One last thing, the price includes 19.6% VAT; if you are a non-EU resident you are normally entitled to the reimbursement of VAT (and you pay whatever tax, if any, in your country of residence); here, forget it: you pay the full price.

Why on earth any rational investor would buy these coins when much cheaper alternatives are available; the history of love French have with gold is so long that they were trapped once again by the Ministry of Finance... (this does not mean that there will not be a mini-bubble in the short term – Oops! A bubble created by a Ministry of Finance, anything new?).

Source:

Monnaie de Paris: La Boutique

http://boutique.monnaiedeparis.fr/is-bin/INTERSHOP.enfinity/WFS/Monnaie-Front-Site/fr_FR/-/EUR/ViewStandardCatalog-Browse?CatalogCategoryID=6PqsE6zmTcYAAAEuIykkXE22

Portugal, Greece and the EURO crisis: What the news are?

1. Portugal

© Markets & Beyond

Despite repeated attacks against the euro, it has rather well survived so far, mainly thanks to the ECB buying PIGS sovereign debt in the open market, the bailout of Greece and Ireland and an agreement reached at the EU Summit in Brussels on March 11 that unveiled a plan to expand the EU bailout fund (the ESM) to EUR 700 billion on a permanent basis, up from the EUR 440 billion EFSF mechanism currently in place that only has an effective EUR 250 billion lending capacity.

However, EU politicians are delaying until June the announcement of details on how it will finance the interim EFSF mechanism that must address sovereign debt issues in the period from now until the ESM goes into effect in mid-2013. This is happening at a time where Portugal Government had to resign.

Portugal has long been the next in line since the crisis publicly emerged in 2010: Last week Prime Minister Jose Socrates had to quit following his defeat before the parliament over a third round of austerity measures did not trigger a wave of euro selling beyond a short lived small dip. From what I read, Portugal can match EUR 4.5 billion of debt becoming due in April; things might be more difficult for the EUR 4.9 billion due in June at a time when the next election should take take place. As a consequence, rating agencies downgraded Portugal and CDS increased. A bailout of Portugal would require ~ EUR 70 billion.

June looks like a key month, if markets wait until then, which I doubt. However, always watch interest rate differentials (real or anticipated) with the USD which are currently supportive of the euro.

PIGS economies are at best anemic and I do not see how long they can sustain high unemployment, high interest rates and negative growth without bond investors having to pay their share of any debt rescheduling (in essence debt rescheduling is what is happening with Greece right now: interest rates lowered by EU Finance Ministers and debt maturity lengthened; this is a bailout that will be paid for by European taxpayers).

2. Greece

It is always interesting to look at number beyond the large prints shouted at the media by politicians.

“According to the data available for the State Budget execution for the two months January – February 2011, on a fiscal basis, the State Budget deficit is Euro 55 million lower than the target set in the 2011 Budget for the first two months of the year. The two first months 2011 State Budget deficit amounts at Euro 1,024 million compared to a Euro 1,076 million target.
The 2011 State Budget deficit has grown – as expected – by 8.5% compared to the 2010 deficit during the same period, as a result of the non repetition of some measures as well as the higher than projected GDP decline during the last quarter of 2010, which has been recently revised for the whole year by ELSTAT.” [emphasis mine]

Down the press release, the explanation is given for this good performance despite a worse than expected economic situation and decreasing tax receipts.

“Public Investment Budget (P.I.B.) revenues increased by 354.5% and P.I.B. expenditures declined by 67.9%”

After all, nothing really abnormal, good management; well, look at the table below:

One will notice that this good performance comes from the PIB deficit that turned to be positive: since I started to look at the Greek Budget (2009), this item has always been negative but for one month in 2009 and 2010 -for figures rather meaningless- and suddenly it becomes hugely positive when headline numbers are awful (revenues substantially down at - 9.1% and expenditures up at +3.3%) and well below what was planned. If one compares the actual number to the target, we are totally out of line: + 604 x for PIB revenues and -70% for expenditures!! They either got their math wrong or it smells manipulation; the PIB item is quite easy to manipulate (just postpone investments and cash in revenues ahead).

Let see whether this rather long quite period for the euro will last much longer (probably a bit since markets still anticipate a rate hike in the eurozone).

Source:

Greek Ministry of Finance: State Budget Execution

http://www.minfin.gr/content-api/f/binaryChannel/minfin/datastore/fc/a6/88/fca688dfad038ce88efd687c303b6968f2c0251b/application/pdf/Preliminary_Bulletin_02_2011_Eng.pdf

Markit: CDS market summary

http://www.markit.com/cds/cds-page.html

Saxo Bank:  The EU and the siren song of the expected outcome

                        CDS 5 yr cost and PIIGS 2 yr yields

Bloomberg: Portuguese Bonds Slide as Prime Minister Quits on Budget, Fitch Downgrades

http://www.bloomberg.com/news/2011-03-24/bunds-rise-on-safety-demand-as-portugal-s-prime-minister-quits-over-cuts.html

Uranium: follow-up

© Markets & Beyond

Uranium shares were hammered Monday and Tuesday following the nuclear crisis in Japan and its consequences in the world for the nuclear electricity generation as a whole.

This is chilling people (therefore politicians in the West) and, as for the Three Mills Island and Tchernobyl accidents, the anti-nuclear lobby is becoming more voiceful and media start to listen.

• In India, the Minister (whoever he his) in charge of the nuclear industry said that the design of nuclear plants will need to be reviewed (Areva is building 2 there).

• In France, ecologist are calling for a referendum within the next 2 years and undoubtedly they will use this for the local elections next week et the following

• Gemany’s Merkel called for a 3 months moratorium on expanding the life of old nuclear plants.

Let’s pause and reflect. Beyond the weak links (Germany, Switzerland, probably some other Northern European countries and the Obama’s Administration), the leading nuclear countries reaffirmed their commitment to the nuclear industry (France, fast growing economies) – have they any sensible choice anyway. I even do not see Japan renouncing to the nuclear electricity. After all the Fukushima nuclear power station sustained the earth quake perfectly; it is the tsunami’s wave’s height that was higher than the plant was designed for and caused damages to the cooling system. In addition, from what I read (intox or reality?), the Fukushima reactors are from an old GE design (1960s…) much less robust than recent designs. As reported by the NYT:

“But the type of containment vessel and pressure suppression system used in the failing reactors at Japan's Fukushima Daiichi plant is physically less robust, and it has long been thought to be more susceptible to failure in an emergency than competing designs.”

The question I am asking myself is: what could replace nuclear energy in the 20 coming years to meet demand? I do not see any but (1) increasing the consumption of fossil fuel (coal and natural gas in particular - green energies will only represent a fraction a requirements), (2) a technological breakthrough or (3) a substantial reduction in demand. 

Today, (1) is the most likely alternative if the nuclear industry growth was to be phased down, which I do not expect but if the Japanese problems turn out to be a nuclear disaster; even so, I doubt China and other fast growing economies will stop their programs beyond rhetoric toward the population to alleviate their fears. In the West, it may be different in some countries, but I do not see the main nuclear ones to shift away from this source of energy (France not being the least).
If one believes my "optimistic" (realistic) view of the nuclear industry, the coming days may provide great opportunities to buy good uranium mining companies as well as others involved in the nuclear chain.

In any case, contracts are long term by nature and due to the time horizon from the start of building a plant to its completion, the collapse of uranium share prices (up to 50% in 48h for most junior and intermediate miners), including Cameco (-24% at its lowest Tuesday compared to Friday’s closing), the leading one, is unjustified in my opinion when compared to fundamentals.

Disclosure: This was written to my Partners at P&C on Monday and updated/completed Wednesday at Australia’s closing.

Source:

The New York Times: Experts Had Long Criticized Potential Weakness in Design of Stricken Reactor

http://www.nytimes.com/2011/03/16/world/asia/16contain.html?hp

Chart of the Day: Family Home Price/Gold

An interesting chart showing US median family home price in gold: today it takes 120ounces of gold to buy the median single-family home vs. 601 ounces in 2001, 80% down from the peak and near it previous trough in 1980. Markets tend to overshoot however and I expect this ratio to significantly decrease. We probably are in for a 35-40 years cycle before it rebounds.

Source:

Chart of the Day: Median Single-Family Home Price / Gold

http://www.chartoftheday.com/20110311.htm?T

The Seven Immutable Laws of Investing

A down to earth paper on investing from James Montier of GMO, full of common sense, far away from all the mathematical/statistical models that failed so badly during the financial crisis.

GMO is a top notch value investor.

Source:

Grantham, Mayo, Van Otterloo & Co (GMO): The Seven Immuable Laws of Investing – James Montier, March 2011

http://www.gmo.com/

The magnificent 7 and equity markets - Review 10

I have not written about the magnificent 7 for a couple of months and it is rather appropriate to review them following the strong performance displayed by equity markets around the world since then.

In September I wrote: “I have not changed my view of no double dip and the FED QE2 (USD 1 trillion dollar additional liquidity) if confirmed will fuel asset prices. […]The S&P500 … has yet to pass the 1200 mark again which I expect to be done by the end of the year”. Since September, the S&P 500 went up 20% (including last week correction). Late October the market started to accelerate and became overextended; events in the Arab world have triggered an overdue correction.

Economic news from the US continue to point towards a continued GDP growth and a (slowly) improving situation in unemployment; Commercial and Industrial Loans at All Commercial Banks in the US have definitely passed the trough and now seems to be well entrenched in an upward move: it shows that banks are again net lenders to the economy (+ USD 13.7 billion in two months – for other economic indicators please refer to http://marketsandbeyond.blogspot.com/2011/02/us-economy-outlook.html). In Europe Germany is almost exclusively the only growth engine with a rapidly improving economy on the back of strong exports and an improving domestic consumption. Fast growing economies in the rest of the world continue to forge ahead whilst inflation is becoming a real issue and will put pressure on Central Banks/Governments to act sooner rather than later; this is reflecting in stock markets (+/- 10% down).

S&P 500 Banks index: the index has traded range bound for 18 months and has yet to decisively to breach the 165 level; there is no sign this happening any time soon and, conversely, there is no sign of a deterioration either. In my opinion, the level comes from a continuing reappraisal of the future profitability of banks (less leverage more controls) versus their ability to pass on additional costs to customers. Positive.

Global 1200 financial index: Since July 2009, the world financial is trapped within a 20% range, 800 representing a solid floor and 1000 a ceiling difficult to decisively pass. Reasons for this are equivalent to the US: new domestic/regional rules and new BIS capital ratios. However, in Asia, banks are slightly under pressure due to persisting questions about the magnitude of non-performing loans in China in a booming economic environment which is spurring inflation, whilst in Europe fears about the health of Eurozone banks regularly comes back to the forefront together with problems with PIGS countries. The index continues trading around its 200 days moving average. Positive.

TED spread (LIBOR USD 3 mth - US 3 mth T-bills): the spread continues to stand well below its 20 years average (the OIS displays the same pattern whilst has started to pick up since December reflecting persistent question marks about the quality of European banks’ assets) . The interbank market shows no stress. Positive.

USD bank BBB 10 yr - US 10 yr yield: After posing for a coupe of months, the spread started to march downwards again in November. Positive.

OEX volatility: OEX volatility continued to regress to break the 20% level, recently checked by events in North Africa and the Middle East. Neutral.

S&P Case Shiller house price index: The latest data for US home values (December) published 22^nd February have continued to go down for the 5^th consecutive month, only two cities showing positive numbers.

The unadjusted data are negative (-4% since July, the recent high) - adjusted data post the same pattern:

Composite-10: Dec 2010: m/m -0.85%; y/y -1.20%

Composite-20: July 2010: m/m -0.96%; y/y -2.38%

As the report comments:

“We ended 2010 with a weak report. The National Index is down 4.1% from the fourth quarter of 2009 and 18 of 20 cities are down over the last 12 months. Both monthly Composites and the National Index are moving closer to their 2009 troughs.”

The slow recovery faltered. Negative.

Oil price: The oil prices broke through $ 90/b to trade at $ 112 for the Brent and $98 WTI. The situation in the Arab world compounded already rising oil prices. Events in Libya (1.6 million b/day production, now shut down) escalated fears in the market even if there is no penury expectation due to spare capacity within OPEC that would come on-stream if needed (+/-3 million b/day). However, continued unrest in the region and a real possibility of this spreading to Gulf producing states, including Saudi Arabia, will continue to maintain high prices: this will act as a tax on growth; for the past 40 years, all recessions had oil prices spiking beforehand. In the US natural gas prices traded well below $4/btu until Friday when prices passed the $4 mark; still, they remain at depressed levels thanks to shale gas. Uranium jumped 50% to $65 since our last review late September. Half-way has been walked to the June 2007 at $138: Negative.

Conclusion: The indicators on the banking situation remain significantly positive, the rest definitely turned down. Equity markets are correcting (overdue since the divergence with the 200 days MA was getting overstretched); the risk is that this correction gathers pace due to higher oil prices and inflationary pressure already significant in fast growing economies (and starting to appear in the Western world) leading to monetary tightening. The magnificent 7 are telling us that it is time to reduce exposure to equity markets in fast growing economies and high beta stocks elsewhere.

Continue investing in high yielding equities / net cash companies with a strong franchise. Opportunities will soon come up in emerging markets.

Sources:

S&P/Case-Shiller Home Price Indices

http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/eu/?indexId=spusa-cashpidff--p-us----

US economy outlook

I follow US tax receipts which give a rather accurate picture of the state of the real economy. Whilst tax receipts from individuals have turned around in November 2009, they started to be positive in May 2010 and have substantially increased for the sixth month in a row to January 2011.

On the corporate front, the turnaround was in September 2009 and numbers became positive in February 2010.

All-in-all, tax receipts increased USD 44 billion in FY 2010 (end September) compared to FY 2009, the latter collapsing USD 248 billion with respect to FY 2008. For the first four months of FY 2011, tax receipts are USD 50 billion higher than in 2010, over 90% of this improvement coming form individuals.

These tax receipts are matching the (slow) improvement in the US unemployment situation: the US added 1 million jobs over 12 months and all indicators were better in January 2011 compared to January 2010 (duration of unemployment, part-time workers for economic reasons and no change for discouraged workers). The unemployment rate is down to 9%.

This tells me that consumers are better off and this is translating into other economic data like retails sales; the yoy rate of change is back to historic levels.

Total credit available to consumers has also turned around.

 If one analyses US Inc. accounts, I would draw three conclusions:

• Cash flows are improving and even accelerating
• The balance sheet is still plundered with toxic assets
• Off-balance sheet is rather awful (non-funded future liabilities)

We are not out-the-woods as yet, but trees’ density is reducing.

Source:

Federal Reserve Bank of St. Louis - Economic Research

http://www.research.stlouisfed.org/

US Department of the Treasury – Daily Treasury Statement

http://www.fms.treas.gov/dts/index.html