Greek GDP Prospects: Housing And Tourism

Understanding Gross Domestic Product (GDP) boils down to just three numbers: consumption, investment (also known as capital formation) and trade balance.  That's it.

Understanding the Greek Depression is even easier, since it boils down to just one number: investment in housing, i.e. new home building.  As you can see in the chart below,  housing construction - the largest driver of investment in the boom years, by far -  collapsed to nearly zero (0.65 billion euro in 2016).  I don't know how far one has to go back to see similar numbers - statistics only go as far back as 1995. If I had to guess, I would say at least back to the 1970's.

Transportation equipment (new car and truck sales) have also come down, while the rest of the sectors are basically unchanged.

 

The chart also points to how the Greek economy may revive. Given that a massive boost in consumption is unlikely with constricted personal incomes, substantial growth can only come from two sectors: construction and tourism (i.e. service exports).

How are things there? There is good news on both.

• After ten years of constantly dropping (chart below), private sector building permits are finally on the rise.  Year to date (Sept. 2017) the number of permits are up +8.6% and the surface area +16.8% versus 2016.  There are more, and bigger, buildings being constructed in Greece this year.  

• Tourism is going very well in 2017.  For the first nine months tourist arrivals and receipts were both up 10% and it looks like the fourth quarter is up strongly, too. Tourism is the single largest industry, accounting directly for roughly 8% of GDP and nearly 20% when all effects, indirect and induced are accounted for, so a strong showing there has a multiplier effect on the economy.

Strength in the tourist sector is also attracting capital investment, so we have a rather nice one-two punch going on here.

 
Assuming consumption does not take a dive (unlikely, given the robust increase in tourist arrivals), GDP should show a healthy rise in 2017, gathering momentum for 2018.


P.S.  Interestingly, new car sales are up, too: +21.6% ytd in September.

Greek Residential Real Estate Construction

Just one chart today (ok, three ;) - the complete evaporation of new home building in Greece. 

Top to bottom the annual value of new home construction collapsed 25 billion euro, going from 26 billion per year in 2007 to just 1 billion in 2016. That's a 95.5% collapse!

In the same period Greek annual GDP dropped 50 billion, from 225 billion to 175 billion.  In other words, an amazing 50% of the Greek Depression is due to the collapse in residential real estate construction.

Housing construction is a sub-component of gross capital formation (a.k.a. investment), itself one of the three main components of GDP : consumption, gross capital formation and trade balance. 

From the chart below it is easy to see what led the Greek economy into a tailspin: housing construction collapsed from an unsustainable high 11.2% of GDP to a likewise unsustainable low of 0.65%.

 Why do I say "unsustainable"? Because (a) in the "boom" years Greek population,  new household formation and external demand (e.g. foreigners buying vacation homes) did not rise nearly as fast as the new supply of homes and, (b) in the current "bust" years this natural demand must be rapidly absorbing the excess housing stock created in prior years.

Using the number of weddings taking place every year in Greece as a very rough guideline for new housing demand, we can see how the boom years created a housing bubble (marriages did not rise nearly as fast as construction), and why the bust may now be overdone (marriages have not fallen off as dramatically as construction). 
 

 My prediction is that housing construction will soon start rising again to more sustainable levels, boosting gross capital formation and - thus - GDP growth.

And Yet, It Moves..

One of the most obvious characteristics of bubbles, manias and their opposites, implosions and apathy, is the stubborn refusal of the crowd to see what stares them in the face, choosing instead to believe only their version of "truth" - no matter how outrageous.

Thus, tulips are forever rare and precious, people invest in companies formed "for carrying-on an undertaking of great advantage but no-one to know what it is!!” (1720 South Seas Bubble),  real estate only goes up, big banks can't go bust, Capesize bulk carriers are "worth" $250 million each, garbage (sub-prime loans) cut into small pieces turns into gold (CDOs), etc.

It doesn't matter what it is, once people fall victim to the crowd mentality they take leave of their common sense.  Those who try to say otherwise are scoffed, ridiculed or outright threatened with dire consequences.  Galileo was a famous case in point, when he had to choose between scientific nonsense or death on the pyre - though he did manage to say "E pur si muove" (and yet, it moves) sotto voce.

Today's case in point is the cacophony of analysts who stubbornly refuse to accept that the Greek economy is rebounding and that investor confidence is returning fast.  

On the economy (see previous posts), one can parse the GDP numbers and come up with their own interpretation - at least for a while. But you definitely cannot "spin" government bond yields crashing to 4.78%, the lowest levels since 2009 when they stare you in the face.  Greek risk is going down fast, period.

The good news is that some smart money is taking notice.  Brevan Howard is one of the world's most respected hedge fund money managers with some $20 billion AUM, and it just announced the launch of two long only funds to invest in Greek securities and real estate.

 Yes, it moves.  And IMHO it has a very long way to go before Greek assets are fairly valued once again.

Greek Electricity Consumption

The Greek economy is finally growing again. Official projections put real GDP growth for 2017 at 1.6% but many think it will be less, closer to 1%.   I disagree with the lowball estimates because, as always, the devil is in the details.

In my opinion current euro (aka "real") GDP numbers are more valid in an economy going through a long period of deflation because GDP deflators can be very tricky in such circumstances. For example, Greek CPI jumped from -1% to +2% in just a couple of months early in 2017.  

Greek CPI: Red dot is month YOY, Blue line is 12 month average

The latest 3Q GDP growth number in current euro came in at +2.1% versus 3Q2016, the highest since 2008.  Also, GDP has been growing for three consecutive quarters, also a first since 2008. In contrast, "real" growth came in at just +1.3% showing just how noise in the CPI series can affect popularly reported GDP.

 Being an engineer by training, I prefer to pay attention to more basic data such as electricity consumption.  Looking at the chart below, it is clear that the Greek economy is rebounding strongly in 2017 when compared to a weak 2016, particularly in the summer tourist season which went very well this year. As of October electricity consumption is up 3.8% year to date versus 2016.

Greece: The Emperor's New Clothes

Today's post will feature mostly charts, and some will be a bit repetitious from previous "Grecian" posts.  Unlike the US, Greece is a small country with fewer parts to examine, so repetition is inevitable.  I will attempt some insights, nevertheless.

Between 2008-13 Greece suffered an economic meltdown of epic proportions as GDP plunged 25%, unprecedented for a country not at war. It's been been going sideways ever since.

 

Gross fixed capital formation (i.e. investment) collapsed 70%.

Why? Greece saw its share of  the "Sudden Debt" bubble between 2000-2010, when loans to the private sector doubled as a percentage of GDP, albeit from low levels when compared to other Western nations.
 

Public debt soared, too, and the budget - always in deficit - went into deep red, reaching over 15% of GDP.

Fearing a repeat of the Great Depression's bank failures or Weimar Republic type hyperinflation, deposits fled, credit vanished and loans turned sour. Bank balance sheets have shrunk 43% since 2010.

 

Markets went into a tailspin. Government bond yields reached 40% (a significant bond haircut took place in 2012) and the Athens Stock Exchange (ASE) index collapsed 90%.

While the rest of the world found its post-bubble footing and markets eventually reached new highs, Greece did not.  The performance gap between S&P 500 and ASE is eye-popping.

S&P 500 (bars) vs. Athens SE General Index (line)

The reason for this lag is twofold:

• The structure of the Greek economy itself was an unproductive Borrow-Import-Consume bubble which boosted GDP but did not have any permanent positive effects.  Investment was mostly in residential real estate, also fed by easy credit. Reshaping the economy has taken a long time and is still ongoing.
• Politics. When the bubble burst and the EU stepped in with its bailout, all Greek politicians went populist. Even though they knew that hard reforms were necessary they fought hard against them.  Until a year ago governments did not "own" the bailout programs they promised to follow.

Having told this tale of Woe it is my opinion that Greece is now rapidly changing for the better and has - finally - become an Opportunity.  

Why? As is common after prolonged bear markets, people ignore positives and choose to remain apathetically focused on negatives only.  This creates a gap between current asset prices and their  value as calculated by normalized P/E ratios, book/tangible values, ROAs, rent yields, etc.

To put it another way, this is the exact reverse of Andersen's tale about the Emperor's clothes: after years of seeing him go about naked, his subjects ignore it when he shows up in new breeches. For those more inclined to quantum physics, your reality exists as you expect it.  

And therein lies opportunity.

December 2, 2006 - A Day To Remember

I started this blog on December 2, 2006.  Wow! Literally, an Age ago: The Age Of The Debt Bubble.

I feel almost humbled by that younger person who went on a crusade against that Debt Bubble with a zeal that now seems somewhat naive and idealistic. But, hey, I was right and I was earlier than most.

Even after the first signs of trouble, a lot of people still doubted that we were in for a truly epic meltdown. Until Lehman collapsed, Bear was bought out for a pittance, Citi and AIG were bailed out, Merrill was sold... and so on and so forth. The global financial system teetered on the edge of the abyss until money started pouring down from the Ben Bernanke helo, a process that lasted almost a decade and is still ongoing in Europe.

 For me, the greatest “I told you so” came in 2015 as I watched The Big Short. I must have been the only one in the movie theater who didn't need those cute vignettes with Selena Gomez and Anthony Bourdain explaining CDOs and other such financial mines. And though I don't play the drums, I do play the piano (sort of..).

Alright... but this post is not about patting myself on the back for being right in the past (ok, ok, just a little).  As my first boss in the securities business used to say, "yeah, yeah... and what have you done for me today?"  Stan was demanding - and rightly so, because finance is: a) not for the lazy or fainthearted, b) a dog-eat-dog business and, c) an activity where your decisions are marked-to-market ALL THE TIME.

So, what is this post about? It's to explain that I am primarily a serial bubble hunter, one who tries to identify financial extremes on the upside (Greed/Mania) AND the downside (Fear/Apathy).

With "regular" bubbles, people ignore the obvious because they are blinded by their Greed. With "reverse" bubbles people initially become gripped by Fear and then fall victim to Apathy. 

I believe that I have now identified such a "reverse bubble", so I have been posting  about Greece, its economy, bond and equity markets. 

As the saying goes, "bear markets end with a whimper".  Another goes, "nobody rings a bell at the end of bull or bear markets".

Well, I think I see a bell... or is it a coffee cup? Time will tell.

Hey, Anyone Remember The DotCom Craze?

People have short memories when it comes to swinging from caution to exuberance, from panic to greed.  Thus, history is littered with the empty purses of those who so madly plunged into "investments" like tulips, South Seas undertakings, silver mines in Peru, Florida real estate in 1890's, inept canal and tunnel projects, loony dotcom ideas, Peak Oil baloney (the very top of the craze, not the fundamental idea)...

And the empty purses don't belong to just the IQ lightweights, as Isaac Newton's disastrous foray into the South Seas Bubble so glaringly attests.

Thus, when something goes ballistic and "analysts" start projecting even more stratospheric levels... curb your Greed and raise your Fear. 

Bitcoin... seriously, folks?

Oh, and just like the dotcom craze there are now a bunch of crypto-currency imitators out there... Ding, ding, ding...

The same contrarian concept holds true on the downside, when fear and apathy blind people to obvious value-price discrepancies, but that's another story..

Greek Banking: The Fat Lady Sings

It ain't over till the fat lady sings.  

I am not a huge fan of opera, but the dramatic gyrations of financial markets from boom to bust and back again are  melodramatic.  And just like in opera, there are plenty of signs that the show is over, one way or another. The key is to know the clues.

The worst that can happen to you in the opera house, if you are not an aficionado, is a mild case of embarrassment when you applaud all by yourself before the proper time. But markets can be extremely punishing if you join a show too late or too soon, by going long near the top or short at the bottom.

So, let's look for a "fat lady" clue in banking.

Here's what a complete boom-bust-boom cycle looks like for US commercial banks. Net income as a percentage of assets (ROA) started collapsing in late 2006 (yes, that's when I started Sudden Debt!) and bottomed out two years later.

Picking JP Morgan as an example, its stock performance tracks closely with the above chart. You definitely did not want to buy late in 2006 or be short in 2009.

Notice the time lag between ROA and stock performance: ROA started going down before JPM's price peaked in 2007 and started rebounding sharply before the stock bottomed out in 2009.  In other words, the fat lady started singing and giving notice well before the "boom" and "bust" cycles were over. 

 So.... How about Greek banks? Is there a "fat lady"?

I'll look at one of the four big systemic banks - again, I won't mention its name because (and I stress this very strongly again) this is NOT AN INVESTMENT ADVICE blog.

Earnings turned to heavy losses in 2010, necessitating massive re-capitalizations, the latest in 2015 (the same happened to all Greek banks). Things are  on the mend now - the bank eked a tiny profit in 2016 and is on surer ground in 2017 (figures are 6m annualized).

... and here is its stock chart, with all other clues removed to protect the innocent and/or greedy. I think the "fat lady" sings in Greek too.  

Conclusion? I like Verdi best :)

Of Cats And Mice

Deng Xiaoping famously said that it doesn't matter if a cat is black or white so long as it catches mice.  Given China's extraordinary economic performance since, I'd say he was the best cat manager in human history.

In late 2014 Greeks elected their first ever Leftist government and then re-elected them in September 2015 in a snap election.  Despite early warnings of total fiscal derailment (arguably well founded, given some of the "interesting" characters then in ministry posts) results were not what many feared.  In fact, the opposite.  VERY opposite.

The Greek Government budget is benefiting from an extraordinarily tight fiscal policy, completely in line with the most conservative edicts.  Tight control of core expenses and expansion of the tax base (Greeks were/are notorious tax cheats).

In the following chart you can easily see the tax base expansion (green bars). Core expenses (blue bars) include: salaries, pensions, social and health services and operational costs.

They exclude public works, inter-government transfers, defense materiel, loan guarantees and other such non-core expenses.  They are basically either constant over the years or one-time items, and they don't alter the overall picture.

The net of the two, which I call adjusted primary budget surplus (before interest), is shown in orange: up  a massive 32% in three years.

(Note: I have just added the 2018 budget projections.  The positive pattern continues - this time with another cut in expenses, mainly due to lower pensions). 

 This government is turning into the best "mouser" ever, when it comes to fulfilling budgetary promises made to Greece's lenders.  Which explains why EU/ECB officials (and very grudgingly IMF) are lately so enamored with the "leftist" Greek government.

Meow...

Confidence Is The Name Of The Game

If the economy is all about psychology, as the latest Nobel Prize makes abundantly clear (*), then bond markets and banking are certainly all about confidence, aka trust.  

Confidence in Greek bonds and banks evaporated in 2010 and then slowly started to mend in 2013-14, only to deteriorate badly when the Leftist government took over. Deposits rushed out, capital controls were imposed, yields on bonds soared.  

And then... Left did an about face and went Right. Quite right!  

So, where is confidence in Greek bonds and banking now?  If you only listen to various Greek "analysts" you would think that things are still in the proverbial outhouse. Actually, trust and confidence are coming back very nicely. 

 Here are two charts.

• Since the beginning of 2017 the yield curve on Greek Government Bonds has moved down sharply across the  board. Medium term 3-7 year maturities have seen the biggest improvement, as one would expect.  As trust is restored, investors first buy the less volatile shorter maturities and then gradually extend to the longer end of the curve.

• Greek banks' reliance on the ECB's expensive Emergency Liquidity Assistance is coming down fast.  In just ten months it is down 47% by a whopping 24 billion euro, making their funding much cheaper (and increasing profit margins, aka NIM).  The decline became more pronounced starting in May.  Given that retail deposits have not yet come back in volume, where is the funding coming from to replace the ELA? Some of the decline comes from balance sheet deleveraging through asset sales, but a chunk of it must come from the wholesale market, i.e. interbank transactions with foreign counterparties, mainly in repos. This means credit lines are being restored, a major vote of confidence in the health of Greek banks.

(*) The 2017 Nobel Prize for Economics was awarded to Richard Thaler for his work on Behavioral Economics, a radical departure from the Chicago School's efficient market hypothesis.  Funny enough, the latter's "father" is Eugene Fama who also got a Nobel.  And they both teach at the University of Chicago!