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Markets Signal Double Dip Risk has Increased

Fri, 02 Jul 2010 13:13:00 GMT

Financial markets are forward looking and comprise, amongst other players, of tens of thousands of analysts and fund managers that dissect corporate reports to get their heads around future earnings and thus calculate whether the current share price represents a bargain or is over-priced. Since March 2009 we've been in an upward price trend reflecting increasing confidence that businesses will do better as the global economic recovery gathered steam and the common fear of a second leg down into another recession in OECD countries, faded.

But be aware, the trend appears to have changed. After hitting a high at well over 11,000 the leading index, the Dow Jones, which captures the value of 30 huge US headquartered multi-nationals has been slipping steadily back since May 2010 on the back of economic data that has been disappointing, especially job growth. Today marks another important event as US data for June is revealed. If it confirms the trend, financial markets will slip further and are likely to enter a bear market where most investors read further price falls.

Generally these trend shifts, if sustained, are a portent of economic difficulties to come. It may be some months before the news filters into life on the ground and rising consumer and Government confidence takes a hit to the downside. What's spooking markets is the big and unresolved question of our time and which won't be answered for a few years;

Can heavily indebted countries like the USA, UK, Ireland, Spain, Portugal and the list goes on, implement austerity programmes that involve massive spending cuts and tax increases yet, at the same time, stimulate economic growth?

It's a real puzzle as both seem to contradict each other and getting the balance right will require Governments walking a tightrope, at risk to overplaying austerity and nose-diving economies on the one hand and becoming overwhelmed by borrowings on the other.

But the good news, if you can call it that, is really for those in cash looking for value because as markets flit around looking for the bottom over the coming months there will be buying opportunities. Defensive investors huddled down in assets like inflation-linked bonds and gold should see some strengthening. So be prepared for increased choppiness in equities and especially in commodities over the summer months and don't be surprised if newspaper headlines in the autumn start snuffing out the positive the more positive economic headlines of recent days.

Right now my best estimate is that there will be a mild double dip followed by a modest and slow-paced global economic recovery, sitting beyond which is a date with a prolonged joust with high inflation and peak oil.

Government Speaks With Forked Tongue on Food

Oh woe the consumer, we gotta do something about grocery prices. So goes Government spin as soon as Eurostat revealed Irish prices are 20 to 30 percent above EU averages depending on whether you take the measure this year or last.

But the truth is the Government is scheming with the Irish food industry to erect old style protectionism that will reverse the trend in falling prices by restricting competition. Yep, as we sleep there is a plot to gouge out higher and not lower prices for Irish food. Surprised? Follow the money.

Through a classically misnamed piece of propaganda, a special "Code of Conduct" is to be made law that seeks to rebalance power to gouge out fat margins between participants in the chain between farmer and consumer in a pure arm wrestle between processors, distributors and retailers. It's beautifully clouded in the ugly language of nationalism, the small guy on the corner versus the big bad Brit multiple and so makes the perfect media smokescreen.

The opposite direction is the one we should take but that requires Irish politicians facing systemic competitiveness problems and politicians don't do courage unless, like a rat, they're backed into a corner. So why is it that we produce surplus milk and meat but pay far higher prices than buying the exact same Irish produce in Spain or in just about any other EU country other than Denmark?

Because in the chain between farm and fork are a plethora of business costs that are sky high compared to competitor countries plus fat margins for the most powerful players.
Rents are locked into medieval lease agreements paying robber landlords crazy money while Government does nothing to unlock them.
Energy prices are the second highest in Western Europe and levied by a dysfunctional, disorganised and hugely vulnerable energy market
Rates, waste and water charges, levies, and oceans of Government red tape is levied by local councils and quangos

Look through the list of causes and what you find are prices and practices being gouged out by Government in all its forms and that includes labour agreements that pay well above minimum wage. These are passed through to consumers. Will it change? Fat chance, not until political leaders start taking on these powerful forces by reducing costs to business, reversing protectionism and telling the food industry to sink or swim based on free and open competition.

That would take a revolution in a political culture which coldly calculates that disorganised, uninformed and gullible consumers are far less a threat than business, agri-food and labour lobby groups. So don't be surprised to find prices will get worse despite the price pressures from a two year recession as the food industry pulls the levers of power.

Leaky Debt Group Follows Master's Scent

Reacting to last week's IMF comments about the pressing need for a targeted rescue of irrecoverable and bust residential mortgages, the Government debt advisory group has already started spinning. This week's leak about clamping down on banks ripping off those rescheduling tracker mortgages with higher interest rates, is a routine job for the regulator and not this group. The leak instead is designed to mask the real issue;

The quango is to funk any limited bail out of Irish families sentenced to a lifetime of un-repayable debt.

Taking its lead, presumably, from the hard right hawks in its midst and mindful of the wishes of the Government, this carefully planned leak signals that there is to be no rescue, merely a loosening of the mortgage support scheme. Was the group stacked to give the Government the answer it craved? What do you think!

Families must not be let disintegrate due to inaction

Tue, 29 Jun 2010 08:59:00 GMT

Regardless of what hard right commentators, economists, senior bankers and regulators say about so called "moral hazard", it is simply unconscionable that genuine victims of the property burst should be left swinging in the wind, on a principle. Having published a DIY book, Debtbusters as early as January 2009 to help those in distress deal with the issues involved, I've been waiting for the inevitable blow up to begin. It's started. But what strikes me forcibly is that, invariably, those opposed to helping genuine hard cases have never had to sit down with adult couples who cry throughout interviews and where depression and thoughts of suicide lurk like dark shadows in the background. Neither have they visited sparse homes where all luxury items have already been sold, where parents are hiding the truth from their children and neighbours and where every waking hour is spent agonising over what is an insoluble problem. These opponents simply don't know what fear smells like and what continuous exposure does to families. They are many layers removed.

Hard-nosed commentators would prefer we continue to squeeze these people and even raid their pension funds, breaking open the trusts that ring fence these small assets in further punishment for not listening, for not being super consumers, the type of highly informed, well educated and financially trained set that didn't swallow the guff from auctioneers, solicitors, banks, regulators and Government that the bubble was a figment of the imagination of pessimists. Their sin is that they bought at the top and then lost their jobs. Their hard luck is that nobody represents them, no well financed pressure group, no barristers, no PR agencies, no economists, no on-line community because they are concealed from us and alone. Very alone.

It took nearly two years of crisis for this Government to acknowledge the scale of the social and economic catastrophe on its doorstep. When it finally did, this year, it's response was to appoint an advisory committee. But before the quango has reported, the IMF has waded in with a recommendation that something tangible is done. Immediately this has triggered the let-them-burn brigade. Hiding behind the moral hazard argument, the counter-intuitive notion that masses of Irish people will abuse any scheme as a financial planning tool, willingly making themselves bankrupt, is a very simple motive. It's called greed. Scratch most opponents and you'll find bank shareholders fearful of further recapitalisation and many others who simply want to pursue self interest. But ignorance and fear also plays a role.

Yet it's all really pretty simple. The money is gone. The money is never coming back. Whether this recorded now on bank balance sheets or in a few years is purely a matter for book-keepers. What's left are families on social welfare with creditors baying for cash they don't have. A work out, customised to their circumstances and operating within an agreed set of rules that bind both creditors and debtors, is the obvious answer. That, in some cases, this may include partial mortgage write offs, is the fear that stalks the hard right. But some kind of limited rescue scheme must be implemented. It makes sense too economically by helping these families restart their lives, paying back what they can and avoiding the inevitable cost of social breakdown which will be picked up for years ahead in bills needed to deal with the consequences of our inaction – ghettos, juvenile crime, drugs and social breakdown. We simply must act, we cannot stand by and let these families disintegrate.

Prof. Honohan's report misses point and Ivor the Engine scores own goal!

Thu, 10 Jun 2010 13:34:00 GMT

The Essence of the Banking Crisis Remains Hidden
Professor Honohan’s report is wrong. Wrong because it misses the essence of the crisis, by concentrating within the incorrect time line from 2003 forward. The big cock up occurred earlier. The essence of the Irish banking crisis extends back a few years earlier to how the Financial Regulator was established in a devious compromise engineered by The Central Bank in collusion with The Department of Finance to deny Ireland the establishment of a green field financial regulator with a new regulatory culture, new management and a new staff not captive to cosy relationships that spanned decades. This was the recommendation of the Mc Dowell Committee on regulatory reform whose work was undermined by both institutions in favour of a regulatory model that kept real change to a minimum and ensured that the new Financial Regulator would remain a child of Dame Street and Upper Merrion Street and would be led by their own kind of decent chaps who knew how things really worked.

A new regulator would have sundered the lethal nexus of “soft touch” relationships between Senior Irish Bankers, The Dept of Finance and The Central Bank. When the regulated openly lobby for the retention of the regulator you know something is seriously wrong. Irish banks stood against the establishment of a green field financial regulator. The Central Bank hired PR advisors to push its case across the financial media suckering some of its most ardent critics today into adopting its line. That’s when the biggest blunder in Irish economic history was made.

Professor Honohan’s report simply picks up the story several years later, fingering kowtowing relationships between senior regulators, Dept of Finance officials and Irish bankers even in the teeth of reports from officers concerned about excessive risks being taken. The rest is the detail of how the system collapsed in the face of a property bubble burst.

Honohan Nails the Propaganda

But Honohan scores heavily by nailing the propaganda spun by Bertie Ahern and Brian Cowen that, save for the yanks and their Lehmann collapse, Ireland was due a soft landing. In no uncertain terms it tells it as it is – the Irish economic collapse was home grown and was going to happen anyway. That it was exacerbated by the subprime debacle is a given but at its heart was the reckless political strategy of the last Government deliberately aimed at stoking property mania and buying votes. Banks, certain that they had the regulator compromised, did what banks always do when they are not controlled – they went bust. To find out what really happened Professor Honohan should examine how the green field financial regulator was strangled at birth. Then we’d really understand how we came into this mess.

Ivor's Cash Crunch

At fifty years of age Ivor Callely, it seems, simply ran out of cash. So Ivor decided to dip deeply into his expenses, maintaining an unusual story that he travelled to and fro from Kilcrohane to The Senate for over two years at a cost in excess of eighty grand tax free. If you’ve ever been to Sheeps Head peninsula, just about the last thing you’d ever willingly do is to commute weekly to Dublin. It’s God’s country on a fine day, walking the spine that separates Dunmanus and Bantry bays. Ivor should have known better than defy the elements from here. The French fleet came to grief in Bantry bay and part of Irelands biggest cocaine haul was consumed by eels off the rocks opposite Ivor’s retreat.

Ivor’s not alone

The big bust didn't collapse the mortgage debt that supports property investment, the favoured pension plan for most Irish small business people and middle income earners. The bust was followed by the destruction of rental incomes which is why most property investment portfolios are upside down and under severe pressure. That means debt worth more than asset values for lots of people, also known as negative net worth. Meanwhile lower rents (if you can get rents) combine with big losses in normal earned income to crush people’s financial strength and sense of well-being.

It's a real kick in the gut when you’re middle aged and feel the world is finally at your feet to have it all taken away. But that’s what’s facing investors who bet the house on just one asset type – property, especially those who went into 2008 with over 50% borrowings and whose main source of income was dependent on the construction sector. They are in a world of hurt.

Those who’d invested in development hoping to double their cash to compensate for higher risk taking have been wiped. Falling development land values and rolled up interest, has, over two years, gobbled up any remaining equity from The Baltics to the Balkans. Even those who followed the dogma of diversification have faced wipe outs, myself included in a Central European development site. But heavy falls have also been recorded in conservative property syndicates as well as shares, commodities even works of art.

The scale of wealth destruction worldwide runs into trillions and in Ireland into many tens of billions. Those that have suffered most in Ireland are those who took the highest risks, looping the money they earned from services like conveyancing, banking, architecture, plumbing, electrical, plastering, kitchens, tiling, landscape gardening etc. back into the asset class that supported their income - property. The bust destroyed their income and their assets in one vicious swipe.

But Ivor is Hung on his own Petard

Ivor Callely who cheered on a political class that brought Ireland to its knees seems to have dipped into public funds to bail himself out. Ivor isn’t depressed simply because he’s morphed from the Dail to the Senate. Ivor is sick because, in his fifties, his financial position has been undermined, his wife is going back to work and his former Fianna Fail colleagues are largely to blame for stoking up his property values, encouraging further borrowing and giving him an overbearing sense of omnipotence. It is an oily game called snakes and ladders and Ivor, is back at the bottom.

Three Road Trick

Thu, 03 Jun 2010 13:12:00 GMT

Guess which of the three roads political leaders in heavily indebted countries will take? That includes large parts of Europe, the US and UK;

1. Deflate – introduce savage cutbacks in spending and increase taxes hoping to gouge out the cash to pay off lenders and shrink spending to the bare minimum to prevent further runaway borrowing. Problem – it’s hugely risky from a political perspective and will lead to riots and stiff resistance from the more bloated part of the economy especially those in previously protected jobs like the public sector. Raising retirement age, cutting pensions and shedding jobs will make you as popular as a weasel in a henhouse. Good for DIY, home-made sandwiches, soup kitchens and the black market.

2. Default – Popular among anarchists, idealists and attention-seeking economists this proposes that a country unilaterally reschedules its debts. That means not paying back the money when its due and imposing write off’s. Problem – You can get locked out of debt markets completely and pay through the nose for any future borrowing because you represent a bad credit risk. Ultimately it leads to steep falls in the economy as huge numbers of public sector workers are laid off in an IMF bail-out but the anarchists love the mayhem. Good for reminiscent granddad Trotskyites, Garda overtime, bored middle class university students and the tee-shirt market.

3. Inflate – A subtle default, this involves stoking inflation by printing money thereby devaluing your paper currency so that when you do repay debt it’s only a fraction of what you borrowed as a percentage of the economy. Problem - Debasement of money runs the risk of creating runaway inflation but it screws lenders slowly over time rather than voters. Good for heavily indebted borrowers, sales of man-bags and politicians faced with either 1 or 2 above.

The road we’re on I’d say is obvious. That’s why I’ve been cautioning readers to prepare for inflation like we haven’t seen for three decades. Get out of variable mortgages, cash, government bonds and paper currencies and into stuff that responds to high inflation, real assets like commodities, precious metals, property and land. Choose only shares in businesses that can outrun inflation.

S&P Says Houses are Undervalued

So Irish house prices are undervalued? That’s according to Standard & Poors the same crowd that told banks worldwide US mortgage portfolios were top grade despite being infected with liar loans. Maybe the nice people at S&P are loading into Irish property themselves? Nah, read the small print. Prices are undervalued based on historical averages. Yeah, a bit like telling a patient in intensive care that if she were the average patient she’d feel better. There’s no chance of any price recovery until the excess on the market is cleared away and that excess is going to get worse as the bank squeeze tightens. So expect another dip in prices and little cause to celebrate until we’re a lot closer to the centenary of The Rising.

Small Business Wipe Out

Voiceless in the clamour for media attention, Ireland’s small business army continue to get it in the neck as banks, now flush with fresh capital, turn the knot on upside down investment properties. These are the new poor, emerging ruined after a lifetime in business, their retirement plans in tatters. Heaping indignity on distress, the bust self-employed have a long wait to get social welfare assistance. So next time you hear a well paid public sector worker whinge about pay cuts remind them what real carnage looks like - getting up in the morning to tell your wife and kids that the family is owned by the banks, that not only has the small business gone under but so too are all their assets.

The Latest Banana Skin

Thu, 06 May 2010 12:59:00 GMT

Current events are dominated by fears of a spill over from the Greek Sovereign debt crisis across recently downgraded Government debt raising projects. While it is inevitable that borrowing costs will rise for badly managed heavily indebted countries, the market is likely to calm over time, drawing a distinction between Greece’s long term failure to curb spending and the more recent difficulties of other countries who have begun austerity measures and are beginning to see economic recovery. Nevertheless the Greek blow up is a harsh reminder of the many banana skins that lie ahead. Market nervousness is will remain high leading to extra choppiness in the value of securities.

Double Dip Diminishes

There remains a continued risk of a W shaped recovery in other words a second leg down following the huge global economic contraction of 2008 and 2009, but as each quarter goes by that risk is diminishing as the recovery gains traction. The scale of the recovery can be best measured in a weathervane like the Dow Jones, the US main index of its leading 30 industrials that also reflects global trade. This hit the floor in March 2009 from over 14,000 pre-bust to 6,670 at the lowest point. It is now trading at a little under 11,000 a spurt over 60% in a short 13 months.

Broadly speaking stock markets are 25% shy of their pre-bust peaks and, despite ongoing volatility from nervousness and profit taking, are likely to nudge higher at a far slower pace than the last 13 months of frenetic growth which saw most general equity funds recover two thirds of their losses. That’s because the backdrop is extremely fertile for equities and especially for commodities and energy as red hot demand from fast growing BRIC ( Brazil Russia India and China) economies continues.

Fertilizer for Equities & Commodities

If you want strong grass growth you spread urea fertilizer. If you want businesses and economies to grow you inject stimulus, keep interest rates at historic lows and tempt the Alpine levels of cash estimated at $6 trillion out of banks, money market funds and collective investments funds into real assets. That's happening.

For the moment inflationary pressures remain mute in large tracks of the global economy especially in the US and Europe because of excess inventories and excess labour putting downward pressure on rising prices. So over the short term rates shouldn’t go up by much at all thus threatening growth. That means money remains very cheap for corporations and consumers for the time being. Elsewhere economies ahead of the curve like Australia, Brazil and China, are already moving to cool down overheating economies, by monetary tightening.

The Big Questions

But a big question remains like a trapdoor under this story ; Will sufficient consumers, especially US consumers who account for 20% of the global economy come back out spending again to take up the slack from the fading stimulus packages? The answer is that it is beginning to happen. We tend to forget how skewed US wealth is where the top 10% account for 60% of consumer spending. The biggest spenders, the over 50s carried little or no debt into the crash but suffered a huge blow to their sense of wealth when the stock market upon which they rely, caved in. The significant bounce in the value of US corporations is helping to raise consumer confidence far faster than many had thought and is confounding sceptics who’d prematurely written the US economy’s graveside oration.

The second big question is yet to be decided. National Governments have socialised much of the toxic debt hoping to raise taxes and cut spending in faster growing economies over the next few years to scale back ballooning debt/ GDP levels that threaten their credit ratings and future borrowing ability. Just how these programmes can be politically delivered remains up in the air as the UK general election campaign showed as each political party fudged post-election cuts and taxes policy. In that regard Ireland is, at least for the moment, enjoying first starter advantage over many countries including fellow PIGS, those Euro countries with bloated deficits.

While there remains a risk a contagion spreading for the moment from the near default of Greek Government debt following 11th hour intervention by the EU and the IMF, the Euro will remain damaged until such time as the Maastricht Treaty is renegotiated putting some type of architecture in place to prevent repeats. So expect further Euro softening against the Dollar and Sterling but for that to reverse as attention refocuses on the scale of US and British debt over the times ahead.

If Banana Skins Can Be Avoided

Provided the global economy can avoid other banana skins like the $1 trillion resetting of deeply discounted US residential mortgage debt known as ARMs, a string of Sovereign debt defaults or becoming choked by unaffordable oil and commodity price, the outlook for the next few years should be;

Global economic growth of 4% to 5% per year
Low interest rates remain well into 2011 in Europe and the US
The ECB base rate currently at 1% unlikely to break out above 2.5% before 2012
Asia excluding Japan to perform best followed by Europe and the US
Commodity returns likely to outperform especially oil and precious metals silver and platinum
Equity markets likely to pause in 2011 before moving strongly forward with the risk of some pull back this year remaining
The Euro to fall further before rallying on the strength of higher European saving rates, lower overall debt and more competitive exports
Conventional Government Debt at risk of falls in value as rates rise and inflation tip toes back. Index Linked Government Bonds to fare far better.
Cash returns to remain very poor and at risk to inflation.
China which is quickly becoming a voracious importer to reset its currency up against the Dollar.
Property in Europe and the UK while regaining some ground will repair slowly as the banking sector recovers and grapples with tighter regulation and less lending.

What happens when the Mayan Calendar Ends?

In my assessment, after 2012 I can’t see how a prolonged period of high inflation can be avoided as two forces converge. The first is the huge increase in money supply generated by extra Government debt over the past few years as it begins to increase in velocity in a normalised banking environment and the second is a return to high oil prices as strong Non-OECD demand growth outstrips supply hindered by underinvestment in infrastructure and larger than expected decline rates in jumbo oil fields.

That's why for private investment I continue to favour switching from conventional Eurobonds to Index Linked bonds and allocating up to 10% to precious metals on the one hand while spreading much of the remainder across European High Yield stocks, the Pacific region and especially energy, natural resources, green energy, water and energy efficiency.

For monies held within pension wrappers like personal and company pension schemes, long term investors should remain concentrated on an uncorrelated mix of diverse “risky”assets. Managed funds should be examined for their allocation to the above themes and investors should carefully consider moving to themed funds if their managed funds are not moving with the times.

Those close to retirement ready to draw cash down by buying a pension annuity or phased encashment from a post-retirement fund (ARF) should very carefully consider reallocating to funds less exposed to high inflation and volatility now. This needsconsidered advice with an emphasis on indexed Eurobonds in particular.

The above is my best assessment of data at the moment but I'd caution readers that, in this climate everyone's crystal ball s is pretty foggy, unreliable and likely to be blown off course by overwhelming short term events ie, other risks that materialise which have escaped general attention. Forecasts, especially short term forecast, are invariably wrong it's just a question by how much- nevertheless, the above are the assumptions I’m applying over these challenging times and I hope you find them useful.

Two Thieves & Honest Jack

Thu, 06 May 2010 13:04:00 GMT

Take your pick. Either the top brass at the Department of Finance is engaged in a cynical exercise with a National Solidarity Bond that’s not really designed to work (so as to protect the banks from a loss of deposits) or they’re just completely cack-handed and incompetent with no earthly idea of what will work. The bond is remarkably similar to a hoary old dinosaur of the Life Industry that robbed early withdrawers blind to pass the goods on to the minority that lasted the course. The only difference is that it’s the Irish Government who’re lining up to mug you and, not some faceless British Life office. There are two ways your money will be stolen;

If you bail out in any of the first four years you get a rotten 0.75% pa, stay for five full years it’s 2.65% pa, for seven its 3.57% pa and for ten years its 4.07% pa. Best results are after seven years. See what I mean by cack-handed. The Dept of Finance expects to screw anyone who bails out early. Financial history teaches us that that’s a huge minority of investors. If anyone else launched this product they’d be in the brig at the Financial Regulator.
But you will also be inflation-mugged by the old wheeze of Governments flogging debt at a time of historically low interest rates and tiny levels of inflation. Mark the spot with an “X” because the next long term cycle will be characterised by high inflation from all the money created by Governments. That means you’ll get back a fraction of what your money is worth today, in 2020.

So just say no. If you really do want to support your country ask the next public sector union hothead to chill out and think again. Ask them to listen to Jack O’Connor the SIPTU President and not the clowns who’d prefer to ape striking Greek unions that are actively destroying any chance the Greeks have to save themselves from a catastrophic default. Now I don’t care much for Jack’s economics but I admire and respect the man. He is showing real leadership in a refreshing display of resilience, courage and sure-footedness by telling his members the truth - that striking may lead to a win but at an indescribably high price that alienates four sixths of the workforce and leads to a higher debt burden. Jack may not welcome my endorsement but he will welcome with yours.

You have to hand it to the banks – they’re as predictable as Somali pirates back out raiding again as soon as the coast is clear. The latest scam is an attempt by some banks who’d sold tracker mortgages with long term price guarantees, to entice or arm wrestle distressed borrowers into higher priced conventional mortgages with lousy offers.

The cheapest tracker deals in town before the bust were priced at 0.5% above the ECB base rate. Today that means paying 1.5% pa. Take a mortgage sold two years ago with a balance of €300,000, the total interest that would be paid at these rates over the next 28 years is €66,900. (Even where the price was 1% above the ECB base the total would be €91,100).

Now compare these to the new fatter margin mortgages that banks are now offering as replacements. These range from 2.6% pa to a whopping 4.1% pa which translates to interest costs of between €121,000 and a staggering €200,600 over the remainder of the mortgage.

And guess what these thieves are offering as lures? A lousy fifteen grand if you're lucky. Time for Mathew Elderfield to swing his guns around and stop this robbery of uninformed and vulnerable Irish borrowers by the banks that have them captive.

An HSE Pharmacist Nails It On The Head

Mon, 19 Apr 2010 10:44:00 GMT

Eddie

As a public servant I AGREE with everything you say.
I came here 10 yrs ago from my home country and am now married to an Irish girl
I love my job as a hospital pharmacist BUT 18 years ago our department in my home country was

Available on-call 24/7
Working a few hours on Saturdays and Sundays to keep things ticking over

We still don’t do that here
I am starting to get really sick of this. I love Ireland and it's people but if this culture doesn't change I have NO INTENTION of investing my future or that of my children permanently in this country.....

Ni Shagu Nazad - 'Not a Step Back'

Thu, 15 Apr 2010 12:13:00 GMT

Stalin’s order 227 Stalingrad November 1942 uses the type of language tearaway union chiefs will understand. Ni Shagu Nazad – ‘Not a Step Back’ must become our catch cry if we are to win the next battle in our struggle for economic recovery and independence. Tearaway chiefs are laying siege to our economy with demands that cannot be met under any circumstances.

Get this right; the fast ballooning annual national deficit, not NAMA or bank recapitalisation which are both asset-backed projects, remains the single biggest threat we face. Watch what happens next to Greece because it is close to the tipping point, a death spiral of shrinking taxes, ballooning deficits and unaffordable interest repayments.

Tearaway unions who reject the peace deal are demanding we follow Greece and borrow more so they, uniquely, can recapture the Tiger years. That’s when public sector pay with no risk jobs for life paid 25% more than equivalent pay in the rest of the economy. Don’t be fooled by the guff from the cult.

Deduct the pension levy and the December pay cuts,
Add back tax relief on the levy and annual increments,
Compare it to shrunken pay in the private sector, and
The huge wealth transfer from private to public remains unchanged.

And it has become a cult. Listen closely to the beliefs. They think they are special, they think they are victims, they think they’re carrying us. They hide behind low paid workers, the old don’t-hit-me-while-I’m holding-the-baby tactic, they hide behind Anglo Irish, they hide behind colleagues who bought at the top of the property market, they hide behind just about anything to avoid facing their responsibilities and the truth.

Ni Shagu Nazad – Not A Step Back. These tearaway unions must be told we’ve had enough. Strike and be damned. Nearly half the 430,000 on the live register will shortly face tight-fisted means tests after which many will get little or nothing from the State. When they see public sector workers wave placards that translate into further cuts in their benefits to pay for their privileges, what kind of reaction will they face? When the heart and lungs of any recovery, private workers and business owners hear demands for tax rates at insane levels, what do you think they’ll do, go the extra yard so two thirds of it will be robbed to restore public sector pay to 2008 levels?

Ni Shagu Nazad – Not A Step Back. Tell the tearaways:

We’re not afraid. Strike and we’ll close down your pay. You can fund your mortgages from your savings and get a taste of life in the private sector for a while.
Pain works both ways. Cut off the life blood to tearaway unions by cancelling payroll deduction for subs. Let them chase their striking members for standing orders.
Alert Irish Government bond investors that we’re gearing up for a conflict to protect our creditworthiness. They’ll applaud.
The longer the strikes go on the more we’ll save. Ignore the poppycock about damage to the economy. The real economy will function just fine and the strikes will only last as long as the first mortgage direct debits fail.
Cut pay again in Autumn budget if they strike and tell them excess jobs will be made redundant.

Reform Flowers amongst the Rubble

Thu, 01 Apr 2010 14:11:00 GMT

So much has happened in the last 48 hours, what’s the most important? By far the biggest development isn’t the final butchers bill for the banks or the black hole now appearing in the insurance market as Quinn Insurance goes into administration, it’s the remarkable deal between the public sector unions and the Government.

If ever Ireland needed leaders to finally step up to the plate it was this week, albeit after a year of phoney warfare. In a week where international attention is shifting from Greece to Ireland where the economic numbers are worse, we have an agreement between two crucial parties to our economic recovery just when the true extent of our banking collapse was crystallising.

Fair dues to the union leaders and God knows I thought I’d never say it but as Brother Dominic who taught me history in Colaiste Chriost Ri used to say, always give credit where credit is due.

Without this dramatic step, make no mistake Ireland’s borrowing costs would be going through the roof this week adding a huge burden to our interest repayments and burying any talk of a sustained recovery over the next few years.

Yes, the devil will be in the detail and public sector pay must never again be allowed to inflate way above the private sector, yes the agreement has to be rubber stamped by members and yes the thorny issue of pension reform is postponed. But by heavens it’s a great start and a credit to all concerned;

In return for no further pay cuts until 2014 when we hope to reach the 2014 target of 3% debt to GDP borrowing, public sector efficiency is to be transformed with new working arrangements and cross – sector staff mobility.
Savings, over and above those needed to meet the reduced deficit targets are to be prioritised to lower paid workers.
Advancement is to be based on merit rather than age and each spring, beginning next year progress is to be revisited.

Banks

To be financed by a combination of asset sales and by Government borrowing we know the full extent of butcher’s bill from Ahern’s crazy vote buying policies, incompetent regulation and euphoric greed. Another €22 billion is needed to recapitalise the banks. That’s twenty two thousand million.

Divide by the number of taxpayers and each of us owe at least €11 grand more today than we did yesterday – that’s on top of all the extra taxes we owe to pay for the budget deficits.

Well how does it feel to be a banker? You now effectively own AIB and Irish Nationwide to be added to Anglo Irish and 40% of Bank of Ireland. Euro for Euro, Irish Nationwide was as bad if not worse than Anglo in recklessly gambling money on commercial property speculation. That Michael Fingleton has walked off with a €28 million pension pot and left us with nearly €3 billion of debt is nauseating.

Insurance

That Quinn Insurance has been forced into administration by the financial regulator doesn’t come as a surprise to those watching the general insurance market closely. It signals a get tough policy from the new regulator clearly frustrated by the light touch of the past. After a period of State involvement expect the business to be parcelled up and sold.

Depending on the extent of the problems we yet be saddled with a new insurance levy for years to come like PMPA.

Bank Raids Start – Customers are the Target

Thu, 25 Mar 2010 15:55:00 GMT

The MI5 of banking, the infamous credit control committee, has taken over loan reviews for Ireland’s vital SMEs based on mounting evidence of startling raids on credit facilities. It’s hard not to feel that your file has been subject to some form of rendition after a period of surveillance on your cash flows - that it’s personalized. In practice branches who deliver the bad news are mere middlemen devoid of power or discretion. The best they can do is to cower behind feeble excuses like they did their best, or that they recommended another course. But it’s all really just part of a game.

Behind the scenes a secret matrix, a scoring monster is fed data from the branches and if you happen to work in a newly black-listed sector of the economy, deemed high risk by these predators, your good record will be overwhelmed by that bad score.Here’s an edited version of an email I sent on Tuesday to one of the main bank branch managers after the bank announced it was pulling a modest overdraft facility and rolling it into a term loan for Robert (not his real name) a one-man business providing a highly skilled service in the film business and an award winning expert at his profession.

But first remember;

Overdrafts are designed to help bridge the ups and downs in cash flows and are especially important in an economy where payment can be slow. It is nearly impossible to operate without one.
Robert is married and in his early forties with a business track record that stretches nearly 20 years. His gross monthly cash flows average about five to six grand over the year and after paying costs including tax, levies and PRSI, he nets less than half of it to pay for a modest mortgage and the family lifestyle.

Dear Branch Manager

Robert has had an overdraft running during the worst trading conditions since the 1930’s, i.e. 2009 at a level of €6,000 to €8,000. Whereas you can argue that the “core” loan was €6,000 to €8,000, it’s a simple statement of fact that at no stage over his relationship with the bank has there been any missed payments in connection with credit facilities extended to him.

Separately, the €50,000 term loan for his equipment and which is now reduced to €40,000, has been fully maintained since the outset. You will be aware from examination of his accounts that he has managed his cash flows very well over this period. It is for this reason I cannot understand why the bank is demanding that the overdraft is cancelled and roll it into the term loan. This defies financial logic. I’m sending you this email as his advisor as well as to highlight what is really going on at the interface between the bank which is now being kept alive by the Irish taxpayer and customers like Robert. I look forward to hearing your comments.

I will keep you posted on the bank’s response.

Rip OFF Republic

Beware of any impending review dates on banking products. Watch out for cuts in deposit interest, rising interest rates, reduced credit or demands for repayment. The gloves are off. Everyone in a “high risk” sector is now a target. Your long history with the bank counts for nothing.

Government Reshuffle?

Changing sleeping pallets in Pompeii.

Eddie's speech to Fine Gael Conference in Killarney, 20th March 2010

Mon, 22 Mar 2010 15:32:00 GMT

Good Morning and firstly thanks for the opportunity to address you. ( I hope you won't regret it!)

The International Energy Agency, which had been telling us there wasn't a problem with global oil capacity has u-turned. The IEA now tells us that we need to harvest six new Saudi Arabia's over the next 20 years to meet energy demand especially from Non OECD countries, 80 percent of the worlds population.

We already had a sniff of what's to come when oil raced towards $150 a barrel before prices collapsed in 2008 during the great economic contraction. But the most recent report, the UK Industry Taskforce headed by Richard Branson foresees a doubling of oil prices again as early as 2014. The price is already back over 80 dollars a barrell.

So what? All modern global recessions bar one was preceded by a spike in energy costs. At the peak of the credit bubble just about everyone was borrowing like a baron on a crusade to free Jerusalem for the Pope. Money was dirt cheap until rising oil prices, the final straw caused US inflation and borrowing rates to rise in 2006 triggering the collapse of the most sensitive part of the bubble, subprime, thereafter.

I don't know if we'll avoid a second leg down, (over $1 trillion of deeply discounted interest only US mortgages reset upwards over the next 30 months to include capital repayments) but I do know with absolute certainty, that thereafter the biggest question facing us is how to build competitive advantage in a world characterised by very high energy costs.

That's why NewEra so important (and why I'm not a Croke Park with my kids). Ireland is still one of the most oil and gas import-dependent countries on the planet. Ask yourself how we could keep FDI like Intel with brown outs and black outs common? More fundamentally in the event of an extreme emergency how do we feed a population with just four days food supply in the shops?

On the other hand if Ireland formulates a credible strategy that secures our energy supply, guarantees far less volatility in prices compared to our competitors and maximises our capacity to bring on alternatives, consider the impact as Ireland becomes an FDI lighthouse during a global energy crunch likely to last 10 to 20 years?

But strip away the rhetoric and ideology and how prepared are we really?

We've decided to push 40% wind on to the grid. But you can't do so without lashing up prices as gas burners come on at short notice. On the coldest days this winter, wind produced little or no electricity.
We're keen to export excess capacity, but just one overseas interconnector being built. We need several including to France to import nuclear energy and complete a North West European grid.
The ESB facilitates homeowners adding electricity to the grid but the numbers don't add up because they've been engineered not to.
But the biggest farce is; we have no grid. What we have is a distribution network made up mostly of 110 KV lines that lose huge amounts of power. We've just two electricity motorways, 400 KV lines running from Moneypoint in Clare to Dublin. That's it. Visualise trying to run a transport economy with just two pieces of motorway and the rest, bicycle tracks, for the next 8 years, because that's where we are with the electricity grid. There's fat chance of exporting or importing electricity until then.
We were supposed to have made the grid independent. But EIRGRID, set up four years ago, can't raise a bean in capital. Guess why? The poxy grid is still on the balance sheet of the ESB because the ESB unions, management and its ESOP are still running the gaffe.
Every painful step runs through An Bord Pleannala and local planners but there is no workable national strategic guidelines. The reference point is overwhelmingly local planning issues. We're simply not moving fast enough.

What's needed?

Firstly a replacement of apathy with a clear-headed understanding of what's to come. That this isn't just a green issue but a centrepiece in all our lives.
Secondly new planning templates and timelines that fast track the use of the Strategic Infrastructure Act and builds a grid that matches our ambition.
Thirdly an envelope of proper incentives, reliefs and banking finance that encourages rapid semi-state and private capital penetration into Ireland's energy markets.

So you can see why the shape and strength of the next Government is so crucial since it is upon its doorstep the energy crunch will arrive. Sure you're on track to form the next Government but is that enough? Has Fine Gael really connected or is it just a case of lousy play by the opposition with the ball? My guess is that you haven't connected, you're not convincing the most important audience, those who've continuously voted against you.

Fine Gael can't change Ireland, only the Irish people can do that. Still people are hungry for a leadership in which they can believe, for transparency, accountability and high standards of governance but feel nothing they can do will change things.

Similarly we know intuitively that requires a lot of us to take responsibility for voting in successive administrations despite evidence of corruption, bribery, tax evasion, dishonesty, clientelism, cronyism, and perjury.

Then why offer people who feel this way a tweedle dum tweedle dee coalition that will limp along before the next Fianna Fail cycle? Why not ask for a commitment to support you for fifteen years of transformation for three administrations?. Give people a long term credible contract in which we can believe.

That means asking for as close to single party Government as you can get and promise to deal with leadership succession naturally and in due course. Be clear ,put up posters of Haughey, Burke, Lawlor, Pee Flynn, Ahern and you know the rest. Do you want more of the same tribe? Or transform Ireland in just five seconds?

That's all it takes, five seconds..................................................................

Five seconds of epiphany when you stand alone in the voting booth facing a list of photographs. In those five seconds with a drop of ink, a pen and a promise we can leave the broken model behind and with it the tribe that took over Fianna Fail and led us to the doorstep of the international debtors prison.

I'm convinced that this is a time of remaking, of taking down and rebuilding. I'm convinced that if you can capture that essence of those five seconds, you can lead the transformation of Ireland over several governments and that a stronger, wiser and finally grown up Ireland will emerge long before the centenary of the Civil War.

Thank you.

Eddie Hobbs Fine Gael Ard Fheis Killarney March 20th 2010

Government Expands The Pension’s Ghetto

Thu, 18 Mar 2010 15:41:00 GMT

The Government plans to enlarge the pension’s ghetto. Outside are the public sector pension rights valued at between 15 and 20 times final pay at retirement and amounting to over €100,000,000,000 in locked-in future income guarantees - and inside the rest of us poor mugs who, despite the pensions levy, are paying for vast majority of it. In the latest attempt at reform, this one by Mary Hanafin, the outcome will be further farce, complexity and inequality;

Self Employed workers are to be shafted, paying income tax and levies well over 50% but getting relief on pension investment at just 33% and then paying over 50% on pensions at the other end.
Tax free cash lump sums are to be capped at €200,000 in a move that will hammer any self employed worker who has the audacity to have a pension fund worth a little less than a teacher’s. Meanwhile this rule cannot hit lump sums for any retiring public sector worker earning less than €133,000- that’s over double a teacher’s pay. Guess who made up the rules!
Workers who can’t afford pensions are to be forced to save with the enticement of tax relief robbed from higher rate taxpayers but allowing them to opt out.
Nothing is being done to equalise the amount of money being spent across both private and public pensions – the rules are being written outside the ghetto.

Just like the introduction of PRSAs some years ago, the fanfare cannot hide the truth. This initiative is doomed from the start. Self employed workers can easily defeat the Government’s theft of their pension power by mimicking employer pensions through incorporation - having the limited company make the contributions rather than themselves.

This is typical stupidity from pension planners and adds more complicated trickery to a labyrinthine market bulging with unnecessarily high charges because successive Governments have abysmally failed to simply and reform. If any Irish government has the bottle to radically address this most unequal feature of modern working life then the route to take is the introduction of a universal pension benefit to which all workers contribute evenly. That means;

Setting a big bang date that scraps public and private sector pensions, capping existing benefits at what’s already been earned to that point.
Introducing a decent flat pension benefit in the range €35,000 to €50,000 financed by worker and state contributions and boosted by transfers in from existing private schemes.
Guaranteeing pensions for all but allowing some flexibility for extreme events like a collapse in asset values
Centralised administration and fund management that stresses lower costs and simplicity

Course that means telling high rollers both in the public and private sector that, once the universal benefit has been reached, they are on their own. But it would go a long way to address the unfairness where lower paid and risk taking private sector workers are subsidising higher paid public sector workers to the grave.

PS Public sector workers mis-sold AVC’s that have hardly held with inflation for ten years should use their stash to buy higher benefits directly from their main schemes before these loopholes are closed off.

PPS With over a trillion dollars in US deeply discounted mortgages (known as ARMs) about to reset over the next two years a further wave in the banking crisis can’t be ruled out. That’s why I still favour demand over fixed deposit accounts. The Irish subsidiary of the UK Nationwide Building Society and where you’re protected up to the first £50k or c.€55k is quoting best rate at 3.3%. The minimum is two grand.

Banking Crisis Deja Vu

Thu, 18 Mar 2010 15:40:00 GMT

Predictably, the banking crisis is morphing into a sovereign debt crisis. Greece is for openers. If the history of banking crises is anything to go by, inflation will be the final hotspot. Why should we be surprised? Modern history is littered with bones of Government's defaulting or rescheduling debt. Ireland doesn't feature in the list but that would change if the burn-the-bondholders brigade got their way with Anglo Irish bank. For good or ill the Government chose to guarantee corporate bondholders. Strike it down and we enter uncomfortable company with some high profile default risks;

Greece has defaulted or rescheduled five times since its independence in 1829 and has been in default for a quarter of its history.
Spain's record is 13 times having spent 23 years in default or rescheduling.
Portugal's record is 6 times.

Look around the world and few economies were spared defaulting especially if you consider ramping up inflation to cut the real cost of how much you owe lenders, as a de facto default. By 1947, due to WW2 and The Great Depression, countries responsible for 40% of global GDP were in default or rescheduling. Even the USA doesn't have a clean history having let inflation hit 200% in one of its early years and having reneged on repaying debt in gold - backed dollars in 1933. Neither is Iceland's desperate EU membership bid a new story. Newfoundland, with a similar population to Icelands, was forced by the British Government to relinquish 78 years of direct democracy over its debts and join a federation with Canada in the 1930's.

Each time, at the top of the debt bubble, the conceit that this time it's different blinds economists, governments and central bankers to the truth.
Before the latest crisis leading players like Alan Greenspan and Wall Street wizards of high finance reckoned that the massive debts growing in the US economy could be dissipated and controlled by spreading the risks wider through the global financial system, much like reinsurance does. But all the fancy derivative alchemy did was to blow the bubble higher and spread the muck wider when subprime debt burst. So what can we learn from past banking bursts;

Property on average falls 35% and stays down for 6 years. But there are exceptions; Finland and Hong Kong experienced 50% to 60% falls. Japan's property stayed down for 17 years!
Unemployment rises for 5 years and typically by 7%. But spare a thought for The Great Depression when unemployment rose nearly 17% across 15 countries
Real per capita GDP, a key measure of wealth, contracts -9.3% and takes nearly five years to recover lost ground.
Government borrowings rise a staggering 86% of GDP, not from banking bailouts but from the massive losses in tax revenues.

So what about now? In the past shares have fallen 56% and taken 3.5 years to recover. But this time while shares fell a little bit more they've recovered two thirds of their losses in just nine months. Markets read a sustained, though weak recovery. But is it really to be different this time?
Hell I wish I knew. Tell you what though, if we avoid a second leg down we'll definitely hit high inflation. The alternative is a perfect landing.
I don't do perfect landings, particularly when they're touted by the same crowd that misread the great credit bubble of the noughties.

PS All bets are off with Northern Rock Bank on May 24th when the 100% UK government guarantee is removed. The safest bridge to retreat over in the unlikely event of a second bank run will be AAA rated Rabobank.

Mary, Mary Quite Scary, How Will The Competition Authority Grow!

Thu, 04 Mar 2010 15:04:00 GMT

The natural instinct of business is to conspire against consumers to raise prices. When that happens the most vulnerable in society get hammered by paying more of their low incomes for essential goods and services. Whether it is a conspiracy between creameries to fix milk prices and undermine competition from Northern Ireland as happened in the 90's or a conspiracy between car dealers to fix prices and prevent discount wars, the result is the same; damage to the consumer and a less efficient economy - which always translates into job losses.

But the great game of interference in the forces of competition is far more subtle, canny and elevated than pure price fixing agreements in the trenches. It involves restricting entry, curtailing planning, lobbying Government for special privileges by exercising soft power between the deep carpets of Leinster House and high priced restaurants of St Stephens Green. Most TD's and Senators, anxious to bend to the will of professional, business and farming groups and terrified of being accused of threatening Irish jobs will just about do anything, say anything and promise anything to keep these powerful forces satisfied. After all with consumers generally disorganised, the NCA hog-tied by reliance on Government resources and with little common understanding of the great game, what's to be gained by standing up for consumer rights?

That explains the ambivalence and confusion among political parties including Fine Gael when Minister Michael Martin banished The Groceries Order. But not everyone was happy including the Minister now responsible for competition, Tanaiste and Minister for Enterprise Trade and Employment Mary Coughlan TD who is now determined to thwart competition within the grocery market through the back door by imposing a one-sided code of conduct that erects a cocoon around Irish food suppliers and by bypasses her own Competition Authority. Such a move will prove hugely damaging not just to consumers finally benefitting from falling prices and tighter margins, but also to Irish food itself as retailers switch to cheaper imports and jobs are lost. But it isn't the only way Coughlan is reversing the gains made by the competition agenda over the past ten years.

You'd think that in all the guff about making Ireland more competitive, the Tanaiste would be backing up her rhetoric with a simple process like renewing the Competition Authority, following the resignation of three key members including its Chairman Bill Prasifka - but she hasn't. In an extraordinary failure that smacks of incompetence or a deliberate attempt to put manners on The Competition Authority, The Tanaiste has not addressed the legal position of The Competition Authority to function after May this year. Under the 1991 Competition Act it must have five members and a quorum of at least three to continue its criminal investigations, examinations of mergers and takeovers and crucial studies of industry and the professions. Under its founding legislation and to avoid political interference, The Competition Authority permanent members must be appointed by open competition by an arm's length appointment body. That due process takes time but The Tanaiste has done nothing despite the May deadline.

Her Department will, no doubt, concoct a press statement that provides cover for their gaffe-ridden master with excuses about a merger with the NCA and an emergency clause that allows the Minster to make temporary appointments but the whole episode, including her unilateral interference in the groceries market against the express wishes of The Competition Authority stinks of narrow minded border politics being given preference over the national interest by the only member of the Dail whose home county twice rejected The Lisbon Treaty. How can Ireland ever hope to become more competitive with such double standards at the top?

Hard Left Loved Greece

Thu, 18 Feb 2010 09:49:00 GMT

When you're in the poop, strapped for dosh and living off credit, just about the last thing you do is to pick a fight with your lenders. That's why it's the end game for the Greeks as EU Finance Ministers get tough. Greece faces an ultimatum, either get your own house in order or face the consequences. It's hard to know how much of the rhetoric from the EU is designed to bolster Greek's Socialist Government in its attempts to introduce economic austerity and how much of it is real steel. But one thing is certain, international investors in sovereign debt aren't convinced by the Greek's plan to deal with its runaway deficit.

Brian Cowen knows full well that there, but for a backlash from the private sector, goes Ireland. Make no mistake, Ireland came within a hairs breath of Greece's fate when the Government dallied with a reckless compromise that involved substituting public sector pay cuts with unpaid holidays in a system already corrupted by sick leave and hog-tied by increments for all. Brian Cowen could so easily have been be in the dock with George Papandreou facing into an emergency budget right now. Greece is a harsh reminder of what happens when you attempt to cod markets with bull about spending cuts that avoid sacred cows like public sector pay.

There will be those in the Irish extreme left gaping enviously at their Greek counterparts enjoying the drumbeats of rebellion, flag waving, marching and social unrest – it's what they crave most. They look to the past to contextualise Ireland's plight as an Edwardian conflict between the unchecked forces of capitalism and the ordinary, decent and vulnerable worker. Thank heaven most Irish people don't buy a word of it and see plenty of evidence of rights and processes for resolving disputes. It also helps that the can-do part of our economy is free from the self destructive grip of old fashioned union demagogues that would, if they had the power today, join their fellow Greek comrades in glorious folly and shut down the country.

Ireland avoided the hammer blow this time because the Government has committed to a series of tough budgets. But it was a close call. Next up is the waste. If we're not getting value for money we simply must cut regardless of the counter pressure from vested interests. That means quangoes, sickies, grade-linked increases in pensions, age-related increments, fattened expenses, social welfare fraud and disincentives to go back to work are next up on the chopping block. Scarce money must go to the neediest and most deserving only, that means old age pensions, disability income and families swamped in mortgage debt due to unemployment.

There can be no room for complacency. The sooner Brian Lenihan lays down the marker for next December's budget the better. Ireland has to continue to put clear blue water between its economy and Greece by following a series of steps that are credible and not just politically digestible. Don't think for a minute that a Cowen-led Government has a universal spine for this job or that a replacement coalition with a strong Labour element would be any better. Last year's budget was touch and go, carried over the line by the stubbornness and unassailable arguments presented by the Minster for Finance in the face of jellies in the Cabinet. Next December we mightn't be as fortunate.

Silver Lining in Greek Tragedy

Thu, 11 Feb 2010 14:53:00 GMT

Sovereign debt is the new pressure point of the banking crisis. Right now the focus is on Greek bonds but Greece is really just a proxy for the Euro which is being tested by speculators betting that Euro members will fail to find a convincing solution to the common problem of unstable economies. Expect the old guard, led by Germany and France, to figure out a new financial architecture to save Greek, Spanish, Portuguese, Italian and Irish bonds from speculators.

The attention then will switch to sterling and finally to the biggest debtor in the world the reserve currency the Dollar. While I expect the Dollar to strengthen in the short term against the Euro this has more to do with the perceived weakness of Europe's main currency and less to do with Dollar strength. When the extra US Government spending is stripped out of its GDP which, for the calendar year 2009 was just 0.1%, the US economy contracted by 7%.

But as regular readers will know I still expect that the strength of the US recovery will surprise. Its economy grew 5% in the last quarter but its Government debt is unlikely to be cleared by raising taxes on economic resurgence. You simply can't massively increase money supply without debasing your currency despite what central banking alchemists tell you about reversing the effect in time to avoid inflation. That's why prices remain strong for precious metals, especially gold, trading yesterday at $1080 per ounce (that's about €788) and silver trading at $15.30 (a little over €11) per ounce. Of the two popular metals, silver appears best positioned in the short term. So why have gold and silver have done better than shares over the past three to ten years?

Each acts as a store of value, a reserve currency that is bought on fears of inflation, uncertainty and international tensions
Silver mining is under pressure to keep up with demand including for industrial uses in photography, solar panels etc.
Both should act as a partial hedge against high inflation on the one hand and a depression on the other. In the last high inflation decade silver rose 25 times from a floor of $1.50 in 1970 to fifty bucks an ounce ten years later.
The world endowment of silver estimated at 12 billion ounces in 1900 is thought to have declined to less than two billion ounces today.
Since the collapse from silver's previous high in 1980 as the world entered a prolonged low inflation phase, silver has traded on average at 40 to 1 compared to gold –that's a price of $27 based on yesterday's gold price. Instead, at $15.30 per ounce it looks undervalued since it takes 70 ounces of silver to equal to one ounce of gold.

But be warned taking a position in gold or silver is not for the faint-hearted or for money you can't afford to see plummet in value. Both are well positioned to respond to either another depression or very high inflation, but the price of gold and silver could fall sharply if we experience the perfect economic landing – steady growth, a strengthening dollar ,a reducing US deficit, little price inflation and affordable commodity costs.

You can get into either gold or silver by purchasing a minimum of $10,000 (that's about €7,300) Perth Mint Certificates from Dublin-based GoldCorp or you can simply invest in gold and silver funds that trade on the London Stock Exchange through any stockbroker like on-line, TD Waterhouse, who charge just €20 per trade.

This is not a green light to dash to your jewelers – that's called shopping!

Forget your 5 A DAY

Thu, 04 Feb 2010 15:17:00 GMT

Grocery shoppers beware. Tanaiste Mary Coughlan TD, it seems, has embarked on a solo run at the behest of food suppliers and farmers that will reverse the gains made by consumers in the Irish grocery market. This means higher prices for you. Despite a custom-built section for the grocery sector in the Competition Act 2006 that deals head-on with abuse of dominance, hello money, price fixing and coercion, Mary Coughlan wants to reward her agri-pals with a special code of conduct that is heavily skewed in favour of suppliers and comes with its very own police force.

In a brazen move, the former Minister for Agriculture, whose own border constituency twice rejected the Lisbon Treaty, launched her plans without any consultation with The Competition Authority despite its clear expertise in the area. Neither is it believed she consulted the NCA. Both agencies report to her and are responsible for consumer welfare. Tellingly the surprise news of the Tanaiste's plans was broken by The Minister for Agriculture.

The Irish Competition Authority is thought to be deeply unhappy. Anecdotal media reports that powerfully positioned retailers are breaking Irish law has not been supported by evidence to the Competition Authority which has, diplomatically, suggested her proposals are anti-competitive and recommended instead that punitive damages should be used as a deterrent and awarded to any Irish food supplier who takes a successful civil action against retailers under Competition Law.

Lobbyists claim that suppliers won't come forward because of fears of being delisted by retailers. Perhaps so, but a much bigger fear is these unsubstantiated claims of breaches of competition law is being used as a smoke screen for good old fashioned protectionism to artificially cocoon suppliers from the competitive threat posed by Sterling's devaluation. The only sustainable response is more efficiency, more competition, less protectionism and robust Government action on the sources of Ireland's high business costs – rates, waste, utilities, energy and now a credit drought. But The Competition Authority isn't the only agency to believe the Minister's move is protectionist. The ESRI, which is not hampered by relying on the Minister's largesse for its annual budget, has been scathing in its criticism, stating bluntly that Coughlan will increase prices and damage the economy. After all if Irish suppliers increase costs, retailers will simply respond by increasing food imports to meet consumer demand for low prices.

Despite the galling consumer rhetoric contained in the Tanaiste's code, it contains no consumer welfare test or competition test and in further evidence of the food lobby's reach, the main opposition party, Fine Gael, has a broadly similar bill in its pre-election armoury. Consumers, finally benefitting from the removal of the Groceries Order, increased competition, falling prices and competition from Northern Ireland are to be punished for exercising freedom of choice. Irish food prices are to go up not down in the shops if Mary gets her way.

This won't do at all. Both the Competition Authority and the NCA must be as freely outspoken as the ESRI and not hid behind coded language in alternative proposals because they fear open confrontation with their paymaster. Minister Coughlan must be told bluntly that nobody is fooled - her proposals for the grocery market is protectionist, self-defeating and short-sighted.

The sooner this ill conceived gambit is defeated, the better, ideally, by removing Minister Mary Coughlan from Enterprise, Trade and Employment and replacing her with a minister prepared to first consult with its competition and consumer agencies before bending to lobbyists. In the meantime, listen out for food lobbyists and their political lackeys as they argue that their snazzy new code of conduct is really for your benefit. Don't believe a word of it.

Mary's Mad Manifesto

Shops to be banned from;

Varying terms without supplier agreement
Seeking contribution to marketing costs
Getting paid for shrinkage, wastage or better positioning
Must pay compensation for forecasting errors

The Big Sqeeze

Fri, 29 Jan 2010 04:05:00 GMT

The phoney holiday, when Irish banks pulled in their claws during the great rescue, is nearly over. As predicted the big bank squeeze on ordinary customers is about to begin as banks turn on the taxpayers that bailed them out to fatten margins in an effort to repair their ruined balance sheets - and make their NAMA repayments.

It is the worst result for ordinary Irish depositors and borrowers that, having driven the ambulance to the scene of the accident and saved the banks from certain death, their response now is to charge us for it. Of course the butcher's bill has been delayed while banks engaged with Government and, cut off from capital markets, desperately sought new deposits, but don't let that fool you.

Last year that meant offering gravity defying deposit rates despite historic lows in the ECB base rate but as soon as the first tranche of NAMA loan capital is in place in a few weeks, all bets are off, as banks ruthlessly pursue every trick in the book to grow their profits. So get ready to be mugged by;

Variable deposit rates that quickly drift closer to 1%, more than halving the interest currently paid.
Fixed rates that will similarly decline and settle closer to 1.5% over one year, 2.75% over two and 4% over five years
Non-NAMA banks, detecting less competition, that drop their offers, further squeezing depositors, especially retired people reliant on interest income to pay the bills.
Inevitably capital will be eroded to pay for lifestyle costs hitting the most vulnerable hardest
A flight of money will commence with Life Offices and Intermediaries puffing up arcane product constructions like tracker bonds that lock in your capital for at least two years.
Smart money will drift to European Government Bonds especially inflation-linked bonds but ensure that the mix is carefully managed to avoid losing heavily on distressed sovereign debt, like the Greece's.
Mortgage rates will continue to go up as margins are widened to whatever the market can bear without toppling over.
Tracker mortgage customers will be eyed with particular greed hoping to entice them into fatter fixed rate deals at the earliest warning of ECB rate rises.
Rolling credit agreements like overdrafts and certain term loans will be culled to get rid of perceived higher risk customers.
Loan renewal dates will be particularly targeted to demand higher interest rates despite clean service histories from small businesses
A new breed of predator will prowl the bank customer base looking for any excuse to charge more. Negotiation won't be tolerated whenever they can get away with it.
Despite bank spin to the contrary and the NAMA capital, the credit ghetto will expand, populated by former customers the banks now see as too high risk in the economic depression they helped create.
Fork-tongued Government Ministers will publicly condemn the banks but implicitly support them and do nothing.
Opposition spokespeople will harvest the anger for more market share but come up with no explicit policies on how they'd fix it.
Bertie, desperate to repair his brand will continue to blame Lehmann Brothers a bit like the plumber blaming Climate Change for not burying his burst water pipes deep enough.

Great Expectations: 2010 Special

Thu, 21 Jan 2010 12:08:00 GMT

Let's be honest, at midnight December 31st most of us were singing “Happy End Year” and looking forward to better things this year but is that justified when you look at the economics? Last summer it seemed that financial markets had simply ran too far ahead of economic indicators. Roll forward to 2010 and while it's still too early to call absolutely, as each month goes by and indicators continue to improve, the risk of a second recession diminishes. That explains why last year saw a huge rally in equities, commodities (and gold) from the lows of March as we'd suggested.

This year expect continued economic recovery but much less growth from equities. Don't be surprised if another run up in markets the first half is followed by a claw back to modest gains for the year as a whole. Still the 2009 rallies have been remarkable as markets, being forward looking, re-priced PLCs throughout the world and especially those of fast growing economies like China.

Even nearby property markets are showing signs of rallying, especially prime commercial in top locations like central London. Confidence is returning, but not yet the enormous wall of cash built up on the sidelines that dwarfs that built up in the run up to WWII. Provided interest rates remain at historical lows throughout this year and into 2011 as Governments and Central Banks remain nervous of removing stimulus too early, equities, commodities and gold are likely to move ahead again this year, but what happens then?

Understandably after the fright from this economic crisis, views are sharply divided. Sceptics believe that gravity will catch up with the great bailout (NAMA-like projects worldwide) that socialised toxic bank loans by passing them on to taxpayers and that a great deleveraging takes place over several years accompanied by further leaps in unemployment, deflation and economic contraction. They don't buy that growth in GDP, followed by spending cuts and increased taxes, will finance the extra national borrowing. The opposing view is that a second leg down will be avoided, that deleveraging is already taking place, that the damage inflicted on the US economy is overstated and that growth in developing economies is picking up the slack.

Whichever way you slice and dice it, you keep coming back to the strength or fragility of the USA to understand what will happen to the rest of us. It's pretty important because, bearing in mind that stock markets globally are now remarkably synchronised, there had been 16 ten-year periods where US stock markets underperformed inflation since 1871, so what happened next? Over the subsequent decade the average real return was 11% yearly (a range from 6.2% above inflation to 17%). My own conclusion as we move into 2010 is that, while it's only commonsense for Irish investors to hedge against a declining dollar over the long term, (though it may rally this year) and limit US asset exposure, it is very premature to predict the economic demise of the world's superpower. That doesn't mean that the US faces very serious challenges and risks including runaway inflation but betting against its continuance as the world's predominant economic power in the first quarter of this century ignores some key facts.

Remember armageddonists forecasting an imminent US decline have been around before, first during the rise of The Soviet Union in the Fifties and then during the rise of Japan in the Eighties. These views strike an easy cord with investors still rattled by the aftershocks of the crisis and with the financial media still, overwhelmingly, concentrating on the outcomes of the crisis, like unemployment, collapsed developers and court skirmishes, so it's easy to get distracted by the noise and lose valuable opportunities to make money. But when you distil it all down, the key question is whether or not the US is strong enough to prevent a double dip recession?

The facts below, some of them distilled from Goldman Sachs, might help you decide to continue to put faith in growth assets for the next decade if you're worried about Uncle Sam.

There is a great deal of attention on the scale of US public debt. It jumped from 40% in 2008 to 53% last year. That's an increase of 13% created by a 3% fall in the economy and a 10% budgetary deficit. However with modest economic growth, the annual deficit is expected to decline over the next few years to 3%, closer to the US long term experience (and equivalent to Ireland's target for 2014). That would put US public debt at 70% of GDP for the next ten years but what's often forgotten is the room to increase taxes which are at their lowest level since the Korean War. Federal tax increases, likely to begin in 2011, coupled with economic growth and despite increased spending on health care, should help reduce the deficit. So just how strong is the US economy relative to the competition?

The US economy accounts for a quarter of global GDP. It is nearly three times larger than the next two, Japan and China and nearly five times that of Germany. Per capita GDP at €32.2k is well ahead of all large economies like France €29.4k Germany €27.5k and is 13 times greater than China's at €2.5k

The US spends more on R&D maintaining its economic edge, than any other country at €265 billion compared to Japan at €103bn, Germany at €59bn, France at €38bn and China at €34bn. A new technology device may have its manufacturing outsourced to a low cost Asian factory but most of the wealth created by it will go elsewhere to patents, designers, retailers etc.

Since its foundation the US has proven to be a flexible and resilient economy, ranking number one amongst major economies across key characteristics like entrepreneurship, innovation, democratic institutions, education etc.

In terms of military power the US spends just over 4% of GDP, that's over €431 billion annually, that's equal to the combined spend of the next 14 countries, including China which spends about 1.4% of GDP or €47 billion and is poised to build an aircraft carrier, 88 years after the US built its first.

The US economic decline during the crisis is not out of synch with previous reversals and the 4% bounce in the last quarter may yet signal that US economic growth this year will positively surprise sceptics who remain focused on muted consumption, expecting a collapse after the stimulus wears off. But US growth could yet be above consensus forecasts of 2% and perhaps closer to 3%.

Unemployment may soon peak, house prices are stabilising and set to rebound 10% to 15% with sales activity up 60% from the bottom in the four key States that represent most of the national decline, California, Arizona, Nevada and Florida. Most importantly for the top third of consumers whose debts represents just 6% of their assets but who represent 60% of spending, the US stock market rally has repaired much of their wealth heralding a quicker return to spending than most sceptics think as the feel good factor returns.

As ever everything depends on consumer confidence that the recovery is real but, culturally, if there is one thing Americans do best its confidence in their country and in their favourite leisure activity - visiting the mall!

Conclusion

So what can we expect from the US economy this year? Based on the above perspective, US economic growth will be 3%, consumption will improve, house prices will begin to recover and the Dollar, which looks over- sold, will rally against the Euro. So what would this mean for you and how do you balance the risk of a second leg down against the increasing probability that this is, indeed, a real recovery, one that will help boost Irish exports and surprise cynics by beginning to reverse Ireland's economic contraction much earlier than generally expected?

Think about fixing mortgages now. Long term rates will rise as fears of inflation grows
Invest at least 10% of your liquid assets in Gold and Silver if you haven't done so already
Maintain strong exposure to natural resource stocks
Continue to build a diversified mix of uncorrelated assets across Europe and Asia in particular
Start building up holdings in Inflation-Linked European Bonds as you near retirement.
Be ready to get back into property as the market turns and lending slowly normalises
Continue to pay down lifestyle debt, credit cards, terms loans ideally to zero.
Haggle to get best prices and discounts wherever you can.
Expect more shocks but on a diminishing scale. Most of the toxic debt has been revealed and Governments now operate to a common template in dealing with it.

Sounds of Greek Bagpipes

Thu, 21 Jan 2010 12:20:00 GMT

Well we're off, into the first of a series of crises in 2010. This time the Euro is the casualty as markets focus on the weakest member, Greece, downgrading its borrowings to BBB+. That might mean little to you on first reading but its below the normally acceptable quality of collateral for borrowing money from the European Central Bank, a pretty significant development you might say for a country badly in need of funds to pay for public services. The Hellenic Socialists that is the Greek Left was elected in October on the platform of taxing the rich to help the poor. Sound familiar? It should because that's precisely the mantra we heard in the run up to the Budget from public sector union chiefs now threatening to disrupt public services in Ireland.

Forgetting the lessons learned from their ancestor's successful siege of Troy, the Greeks public took the bait and elected a Socialist Government which has run headlong into an economic maelstrom. Their deficit is much like our own at 12.7% of GDP but could be as high as 14.5% due to collapsing tax receipts at end of last year. The key difference is that their plan to address the crisis is based on gimmicks. The Socialists lacked the courage to significantly cut public sector pay and take on Greek unions despite growing public support for harsh medicine. Instead the Government is relying on softer steps like hitting the black market, selling assets and a populist 90% levy on bank bonuses.

It simply isn't going to work and while Greece totters on the brink, squeezed on the one hand by potential EU sanctions and on the other by bond investors demanding an extra 2.35% per year above German debt, left-wing die hards within the ruling party have resorted to blaming local and international right-wing forces for their dilemma. Now where have we heard that mood music before?

Lacking a strong hand at the tiller prepared to take on those whipping up chaos and paralysed by the fear of dealing with unrest, the Greek Socialist Government is in danger of succumbing to vested interest groups, weakening the Euro and potentially damaging EU cohesion. While its crisis worsens Greek farmers have grabbed the opportunity and blockaded roads throughout the country and border crossings from fellow EU member, Bulgaria resulting in a daily loss of €3 million to one of Europe's poorest countries. The Greek Prime Minister George Papandreou, responding by promising Greek farmers state aid over coming weeks may be opening the floodgates to others prepared to put on the squeeze despite its hugely damaging effect on Greek national interests.

So what lessons for Ireland? The only thing separating us from Greece has been the resilient manner with which the Irish public has greeted the harsh medicine dished out by the Irish Minister for Finance. But everything depends on Ireland continuing to hold it together and the public refusing to let the country be torn apart by public strikes, vested interests and political cowardice. We may not have far to look to see how it could have all gone horribly wrong.

Tightening the Irish Belt

Thu, 14 Jan 2010 10:24:00 GMT

The start of the year feels different, much more hopeful. Globally the economy is improving even though the risk remains of a second recession. The longer the recovery kicks in the greater the likelihood that consumers will switch from saving and debt reduction to spending again, taking up the slack from fading government stimuli. That's the script and if commodity prices especially oil doesn't strangle the recovery, globally, we could be out of the woods in two years. Given the huge degree to which the Irish economy is leveraged to exports, lifts elsewhere are of crucial importance to us but most of Ireland's difficulties stem, not from a cyclical downturn in the global economy or the collapse of Lehmann Brothers as Bertie's Book of Economic Fairytales would have us believe, but from home grown gaffes. A return to global economic growth this year and next of 4% should, eventually, lead to even stronger performance by the Irish economy but it still will not generate the taxes needed to bridge the yawning deficit.

Brian Lenihan gets it. His December budget was a clear statement that he is stubbornly opposed to further income tax increases and that the burden has to, largely, fall to spending cuts.

That means trimming fat wherever it can be found from Government spending, while widening the tax base. That's why Brian Lenihan's illness couldn't come at a worse time for his country and he knows it. Lenihan has fought hand to hand at the cabinet and applied his considerable intellectual prowess to win the arguments. Let's not kid ourselves many in the cabinet have rubber in their spines and share, neither his insights, his vision or his courage.

Brian Lenihan has us on the right track which is precisely why sovereign bond investors are beginning to see Ireland in a different light than other distressed economies. But as a pragmatist Brian Lenihan will also know that Ireland can't afford to continue into 2010 dependent entirely on the next set of medical results he will get. Contingency plans must be made now. Any successor, even a temporary one, cannot deviate from the template and must be prepared to fight it out at Cabinet and with powerful vested interest groups including public sector unions committed to putting the Government under maximum pressure despite the clear lack of public support for strikes and disruption to services. The job needs a lion with a commanding understanding of the brief and prepared to put country before short term political gain.

Looking around the cabinet who fits the picture? Unlike Brian Lenihan, most of the seasoned Ministers, much like most senior bankers, are relics of Ahern's last economically destructive reign and share Brian Cowen's instinct to avoid culpability. Dermot Ahern certainly comes across as having steel but is it selective? The Minister for Justice sat on his hands while a large proportion of the Irish police force marched in quasi uniform on parliament. Had that happened in the US or in Britain we'd still be reading about how the army was called out. Instead he gave more time to Thierry Henry's foul and only faced off the GRA when it gaffed and announced it was considering breaking the law by balloting members for strike action.

Rather, Brian Cowen might be better advised to use the Seanad backdoor to appoint a top drawer Chief Financial Officer from the private sector as Minster for Finance, someone with experience of managing complex and diverse structures and who can follow in the footsteps of Brian Lenihan without flinching. In the impending reshuffle the job of junior Minister for Finance could be filled in this way helping the country and Brian Lenihan the best way possible.

Top Tips for 2010

Mon, 04 Jan 2010 11:53:00 GMT

The global economy remains on a knife edge but it's in a far better position than this time last year. It's not going to be clear for some time if the big gamble of socialising all of the toxic debt in banks and passing it to future generations of taxpayers will pay off, but it has to be tried. The uncertainty will overhang all financial decisions for some time to come so here's what to do to balance the risks;

Continue to pay down debt. Ideally get all your lifestyle debt down to less than 25% of your annual net earnings and eliminate the use of credit cards if you can.
Fix your mortgage early this year getting the longest rate you can like AIB's ten year 5% deal. Switch banks if you have to because long term rates are going to go through the roof over the times ahead.
Haggle to get best prices right across all aspects of spending, heating up competition within the economy to push prices down even further.
Save now for your summer holidays to avoid having to resort to borrowing midyear.
Sell any surplus stuff you have to generate extra cash whether on e-bay or in a car boot sale.
Run a cash diary for Jan and Feb to zero in on wasteful cash spending over the rest of the year
Do up a spending budget for the year that includes once off costs and try to stick to it each month.
Prepare for inflation. Put a chunk of cash into gold and silver certificates or funds because these will act as a hedge against it.
Switch some of your long term pension and investment funds into assets that respond to high inflation, that means natural resources like oil & gas, metals, alternative energy and water.
Invest in inflation-linked European government bonds through funds that specialise in these sectors from Friends First and Standard Life. Exchange Traded funds are also available.
Support the National recovery Bond but only if it is inflation proofed.
Take the reduced VRT deals on Band A and B cars and hybrids by swapping your old clunker for a new one.
Move to smaller engine cars because petrol and diesel are going to go through the roof. You'll also save on road tax.
Insulate your home to save on home heating costs even if it's just an attic job
Become a member of your local Credit Union just in case you run shy of cash during the year.
Talk to your bank now if you think you might fall into arrears on loans anytime next year.
Hard as it is, try to ditch fags and reduce booze both of which can account for up to 15% of spending.
Keep investing in your future pension fund especially if you're a top rate payer.
Be ready to switch banks to European players like Rabo at the earliest sign of a fresh banking crisis.
Be resilient, expect continued volatility, we're far from out of the woods just yet and don't be slow to get out of the gaffe if you source good work abroad for a while.

A steady recovery in the global economy, feeding into Ireland's nascent upturn is what I'd expect but the real risk of another leg down will remain throughout 2010. That's why it makes sense to position yourself for potential inflation sparked by global growth on the one hand but to eliminate wasteful spending on the other. I wish all our readers the best in 2010. Live long and prosper!

Cooking the Irish Goose

Thu, 24 Dec 2009 10:31:00 GMT

Join me over Christmas, I'll be burning a paper effigy of 2009, burying the remains in the back garden and celebrating its demise with a hot whiskey. The only people who escaped getting mugged by this crisis are in the ground. While much of the focus has understandably been on income lost from unemployment, from huge cuts in pay and pernicious levies, truly gargantuan losses were made in asset values as rising debt met plummeting asset values, wiping out much middle class wealth. Across the board, balance sheets are in tatters from the halving of property values, banks foreclosing on associated debts and the pounding which pension funds have taken. Nobody has been immune and I include myself in that, having faced a wipe out in a central Europe development and a sharp fall in many other assets. Guru my eye. Throughout 2009 anyone who took investment risk in previous years on just about anything went through a meat grinder of fear, lost sleep and bouts of despair that tested even the stoutest heart.

But at least the poxy year is nearly over and next year holds the promise of a bright recovery. It has been an extraordinary turnaround. Remember this time one year ago, with the world economy in ICU, we had just began to realise how much of a mess Ahern's tribe of regulators and bankers had left us. Roll forward a year and the math is still staggering; toxic development debt €54 billion, a current account deficit barrelling towards €100 billion and a large chunk of the €150 billion in private sector credit going south as unemployment and universal falls in income take their toll. Add the public sector pension liabilities of €108 billion to the butcher's bill and ask yourself just how long the Irish economy will be paying off these debts into the future?

Still at least we're no longer in freefall. At the 11th hour a vacillating Government found the will to act. Having scared us with a year of denial, bluff and spin, it should come as no surprise that Irish consumer confidence bounced after the budget – certainty breeds confidence. While the domestic economy as measured by GNP continued to slip at the twilight of the year, the overall economy as measured by GDP that includes foreign firms based here, grew. Meanwhile the USA, Germany, France and many other OECD economies have been registering growth for some months now and the Asian regional economy has taken off. For Ireland, which is hugely leveraged to exports, these turnarounds are of vital importance. But a return to sustained export growth won't solve the permanent deficit created by Ahern's daft economics. At best the next global upturn will eliminate a third of our deficit but the rest is up to us and that means more cuts over coming budgets.

Next year the big unknown is whether the recovery, sparked by massive government stimulus packages and borrowing programmes, will work. Essentially all the toxic debt that crippled banks has been hovered up by Governments and passed through to taxpayers in the hope that future growth in tax revenues from economic recovery will repay what's owed. That's a really big ask and we really won't know until well into 2010 and maybe into 2011 if the global recovery is real or artificial, -that's when consumers pay down excessive debt and come out spending again.

Since the low on March 6th when stock markets hit the floor, the values of quoted companies have been flying back and by year end were up 60% . Watch markets because any second leg down into another global recession will be heralded by a precipitous fall in stock markets, cooking the Irish goose completely. So enjoy the Christmas dinner and let's pray 2010 will be the year the economic pessimists miscalled. Next week, my top tips for the new year.

Reality Bites

Fri, 18 Dec 2009 04:04:00 GMT

This week I met a really sound young Irish family, Sean and Niamh just trying to get by on a net monthly income of €2,200 with their young daughter and another baby on the way. After paying rent and servicing some modest car loans they have just under a grand a month to keep the show on the road. Figure it out, you pay for food, heating and other essentials and that’s pretty damn tight. Last year they pulled off a remarkable feat by financing their wedding day for 60 guests leaving just five grand in outstanding debt. That meant being real clever when spending on an event that typically cost five times more during the good old days.

You couldn’t script a nicer and more careful family – or a proxy for Ireland. With Sean’s earnings depressed from the recession and with their debt approaching 71% of their net annual income, they’ve been taking steep cuts in spending to avoid catastrophe. But unlike Ireland, which is in a similar debt to income trap, they’ve avoided a brawl over what to do and where the cuts should land. Their landline is gone, so too is their pension scheme contribution and their health cover is on the table. In time Niamh may be forced to give up her car. But whatever they do Sean and Niamh stick together, pay their bills and do what’s necessary to avoid further debt and live beyond their means. Adjusting their lifestyle is reality for Sean and Niamh. Pity their clear-headedness hasn’t translated elsewhere;

Public sector union chief, David Begg, this week blamed his colleague’s failure to maintain their member costs at an unaffordable level, on a campaign of incitement to hatred in the media. This is fantasy. Pointing out the hard evidence of bloated pay rates isn’t vilification Mr Begg it’s called the right thing to do when the money is running out also known as the truth. Bad as you may need scapegoats to account for your failure to deal with reality, Mr Begg you won’t easily hang emotive labels on economists and journalists who report the facts.

Just like Sean and Niamh, Ireland is in a fight for her economic survival and cannot reposition herself for growth without first bringing costs down to match earnings. That, amongst other things, means dealing with the crazy pay premium in the public sector. But, despite the agony of pay cuts, the truth I believe has dawned on many independent minded public sector workers. The cuts, which should have been avoided for the low paid, were always inevitable and no sector can rightfully claim immunity from this crisis.

But the reason why the second national day of strike was cancelled, wasn’t because of the talks with Government, it was because it was going to end in catastrophe for union leaders. You can’t win a strike without winning public support with a just cause and Mr Begg and his colleagues didn’t have one. Just ask Sean and Niamh. The shopping surge in Newry and hollow support at the pickets told them that a second national strike was ultra high risk. Just as well because when the country roared after they proposed 12 days holidays, the game was up and power drained out of their hands like a limp garden hose.

So Mr Begg, you’re leading your members on a fantasy and you follow more strikes at your peril. In a contest between Ireland’s economic survival and your agenda there can only be one winner. Time to tell your members the truth and deal with reality. Just like Sean, Niamh and the rest of the country.

The Budget: Harsh Medicine

Thu, 10 Dec 2009 04:55:00 GMT

The ugly paradox of Brian Linehan’s Budget is that he has done the right thing for the country but delivered harsh medicine to a great many of her citizens especially the most vulnerable on disability and carers allowances. These cuts are shocking. He has told the ultra left that there can be no further increase in tax on work and he has nailed his colours to the mast on our international low corporation tax brand, setting the country on a path from which we can recover as tepid economic growth returns next year. There was never any real choice but to attack the structural deficit caused by our loss of competitiveness and the property burst by cutting spending. Increasing income tax would have been suicidal but some of the cuts ranging 3.5% to 4.2% in social welfare should have been less if the crisis was tackled on time.

The other real losers are those experiencing cuts in pay in the public sector which range from 5% for low paid to 15% to those at the top and where the Taoiseach leads the cuts with 20%. Allied to the huge switch towards progressive tax takes for those on higher pay in the last budget, the Minister has made good on his promise. Nevertheless reading the list of cuts in pay is stomach churning even though I campaigned for this route to be taken to avoid more drastic cuts in social welfare or taxing the country into economic oblivion.

What is surprising is the extent to which low paid public sector workers are expected to contribute. Linehan should have cut heavier at the middle and higher pay to protect workers earning under €30,000. This is a potentially fatal mistake because it includes those struggling with jumbo mortgages on homes bought at the top of the cycle. Although home repossession orders are to be extended to 12 months the Government simply must do more for these families. You can’t squeeze blood out of a stone and pushing young homeowners to breaking point will foment conflict.

Other Negatives;

Did not precisely confirm what he will do next year and the year after.
Made no commitment to reducing income tax as soon as practical to increase revenues
Did not accept that FF led Governments are responsible for two thirds of this mess.
Carbon tax will hit the most vulnerable hardest – those reliant on coal rather than kerosene.

Positives;

Income tax, PRSI ceilings and Social Welfare Payments to ages over 66 to remain untouched.
Stimulus packages introduced including car scrappage, energy efficiency and R&D.
A 50% increase in minimum tax take for tax avoiders and cash contributions from tax exiles
Changes to Private Pensions now at last linked to reform of public sector pensions. That pensions relating to grade increases rather than inflation reduces the €108 billion pension liability mountain by 20% sums up the pension ghetto.
A new pension contract to be introduced in the public sector has been long overdue.
The introduction of a National Prosperity Bond – this must be inflation linked otherwise it will be highway robbery as an inflation tsunami hits after 2011.
An independent credit refusal appeal agency for SME’s frozen out by banks.
Investment in mental health, further training and flooding relief.
Reversal of VAT increase madness.
Proposals to widen the tax base to follow.
Income tax to be simplified next year replacing the daft levy and PRSI labyrinth.

The key test is to come;

If high and low earners, public and private workers, social welfare recipients and those overseas who invest in our Government debt buy into Linehan’s grand strategy to pull us out of the bog, this ugly budget will have been a success. But if 2010 brings a repeat of the vested interest brawl that dominated 2009 because of the leadership vacuum in the early stages of this crisis, we’re sunk.

Ten things Brian Linehan must get right

Wed, 09 Dec 2009 06:44:00 GMT

The public reaction to today’s cutting budget, one in a series of at least three to 2013, will determine whether or not Ireland continues as an economically independent state or is forced into a humiliating surrender to the IMF or an EU bail out. Here’s ten things Brian Linehan must get right;

Tell the people the truth, outline a three year programme. Reason; So the misinformation and propaganda that has characterised self- interest group campaigns is diminished by the scale of what we must face together.
Create urgency and a common spirit to act together. Reason; At least a year and several billions have been lost by political cowardice and a failure to lead from the front with clear communication. When there is a leadership vacuum, people in distress will follow just about any clown who steps up to the microphone.
Do not raise Income Tax or PRSI any higher; Reason; It destroys the profit incentive that creates jobs. The system is already tipping over from top rates well above 50%, raise it to over 60% and revenues will collapse from less work, the black market will surge, talent will emigrate and foreign executives will go elsewhere to create jobs.
Deliver a multi-faceted plan that involves targeted stimulus Reason; To create wealth that grows employment. Our deficit can only be made up with real growth in wealth, cutting and taxing won’t work. Focus on energy efficiency, green energy and a cash- for- clunkers scheme for low emission cars. Lots of new 2010 cars on the road will help lift morale and boost consumer spending elsewhere.
Implement the pay cuts but protect public sector workers on low pay and those struggling with repossession. Reason; It’s a simple question of leadership and fairness. The Cabinet has to be seen to take the biggest cut but rates must come down to European competitor levels. Look closely at public sector resistance and the real heat is coming from the combination of levies and mortgage costs for young workers who bought at the top of the market. Implement a scheme of support for any struggling low income family being squeezed by banks that involves equity sharing, refinancing and rent back arrangements.
Address the tax wedge that discourages low paid jobs in favour of the dole. Reason; To avoid the biggest mistake of the 80’s. That means protecting core social welfare benefits like the old age pension but adjusting dole down by part of the deflation rate and cutting employer PRSI for new jobs. It must pay to work.
Do not reform private pensions without first reforming public service pensions. Reason; The pension gap is already astronomic, cut relief to 33% but tax pensions at over 50% and the private pension model will be destroyed.
Clamp down on remaining tax avoidance schemes favoured by the ultra high net worth and tax exiles. Reason; Anything that’s not handsomely repaying its worth must be eliminated to help create a sense of fairness.
Adopt Fine Gael’s insightful strategy to create economic revival by reforming and refocusing semi-states acrossenergy, broadband, water and smart metering. Reason; It’s the best thought-out strategy in town, keeps the extra borrowing needed off the mounting deficit and will create jobs in crucial sectors.
Outline a plan to broaden the tax base. Reason; We can’t afford our State services on Ahern’s dangerously narrow income tax model where 50% pay no income tax and most of the remainder pay the lowest rate. That means gradual widening to include more workers paying income tax but also a broadening into carbon, water and property taxes.

To Public Sector Readers;

I’ve consistently aimed my fire at Ahern and the unions who led workers up the garden path with inflated pay levels that could never be sustained when the property cycle turned. I have close friends and clients among nurses, doctors, teachers and gardai, just as I had family members and clients in the retail sector when campaigning against the Groceries Order. Throughout I have never criticised the excellence of the work done by the best in it, just the system, how much we’ve overpaid and those responsible for it. The cut today is not your fault but their legacy. It’s going to hurt, I wish it wasn’t so but it’s unavoidable now.

A Flood of Litigation

Thu, 03 Dec 2009 04:29:00 GMT

It’s been heart breaking to watch footage of fellow citizens in distress from, what in many instances, may yet prove to be an entirely avoidable network of catastrophe . As the focus moves from the emergency of dealing with widespread flooding of newly constructed housing estates, the stark question of negligence and legal redress arises. So what should homeowners do, especially those not fully covered by insurance due to flooding exclusions or by simple lack of affordability due to financial stress?

The answer for many is to sue local authorities for negligence. Find an independent engineer who can show that local councils granted planning permission knowing that certain zoned lands were prone to a high risk of flooding and you could yet get compensation. God knows you deserve it. New housing estates built on flood plains over the past six years probably stand best chance of getting redress for hundreds of homeowners, quite literally cleaned out by the floods. That’s because the legal action would not be statute barred but even in instances where permissions were granted before 2003, claimants may be able to sue local councils if legal advisers can find a way through that barrier.

The first step is to organise a local group and fully estimate the damage caused, not just to contents but also the structural damage caused to the outer fabric of the building and the loss of value caused as the market heavily discounts the value of your home until schemes are put in place that guarantee it will never happen again. After all would you buy a house or an apartment that could be under five feet of water every few years?

You should appoint a suitably qualified and experienced litigator used to handling large scale compensation claims that involve taking on agencies of the State and be prepared for a long slog. As clear as night follows day, local planners will wring their hands and claim that all these instances were an Act of God or an outcome of so-called global warming. Don’t buy it for an instant.

Much of the damage may be traced back to pure incompetence in zoning lands unfit for habitation, dazzled by the huge development levies that would be generated for the local council and spurred on by competition against neighbouring authorities for plum multi-million Euro construction schemes. The awful irony is that you paid for the council’s work not just by paying your taxes but also by indirectly paying the levy which was padded into the sales price during the rising property market. A good litigator will find evidence that stress testing sites for flooding was either ignored or downplayed by local authorities sucked into the great game of the Celtic Tiger – getting a slice of the action. Don’t be shy about calling The Minster for the Environment, Heritage and Local Government as a key witness – Green leader John Gormley is already compromised by stating that many of these zonings should never have been granted!. Rhetoric and pleas will not pass the test of time as fresh issues knock this catastrophe off the national agenda. You have a case and right on your side so don’t lie down and take it, fight them. Suing is the only way to force local authorities to take the corrective measures needed and restore the normal market value of your home. So don’t just get mad, get organised and get going.

All Fudge, No Bottle

Thu, 03 Dec 2009 12:51:00 GMT

Dear Taoiseach

You told us you had bottle . What bottle? Hard on the heels of your craven capitulation to Rome following the Murphy Report on the cover up of the mass rape of Irish Children comes news of your impending capitulation to public sector unions. What does it require for you to locate your famous bottle? Does it require the threat of the resignation of your Minister for Finance or will it require the arrival of IMF suits knocking on your bedroom doorearly some morning shuffling you off in your dressing gown and slippers to hand over the keys to Ireland’s economic independence? This country is bankrupt mostly thanks to you and your old boss Bertie. You didn’t stand up to them then and you’re not standing up to them now. Instead you fedexcessive awards to a bloated public sector while hollowing out the income tax system. That was about the dumbest thing any sitting Minster for Finance could have done and you did it. Now, faced with ruin, your response is to give them even more holidays! Are you out of your mind?

The Comptroller and Auditor General reports a 50% increase in sickies since the 1980s in the civil service, arguably, the snuggest job in the public sector.
The average sickie over a year is 11 days and let’s talk plainly, most of these are paid holidays.
Just about 60% of all civil servants took sickies that’s right 6 out of every 10 ranging from 5.5 days in your own Department to 16 days in theProperty Registration Authority
A whopping 42% of all absences were unauthorized and not supported by a doctor’s certificate.
Is there any reason to believe that the rest of the public sector other than dedicated frontline services are any different?
The public sector already works 10% less hours than a normal working day in the private sector and enjoys holidays 20% to 30% longer, teachers holidays excluded.
Just tally up the sickies, the corpulent annual leave and now the latest, a further 12 days hols and tell us that this is a sane way to manage theeconomic crisis.

So let’s get the big breakthrough in the talks right. Your solution for cutting public sector pay and pensions to save the economy includes giving them even more days off, these ones unpaid. That’s right no cut in pensions or salary but a cut in services which the rest of us will pay for in delays, longer queues and potentially dangerous response times. This crisis has been characterized by much Government farce and incompetence, but this one takes the biscuit for sheer stupidity. Do you really think that anyone swallows this fudge, that the unions are capable of delivering reform? These are the same guys that erected the restrictive practices that strangled decentralization and created the monster that’s the HSE when it was formed by Health Board mergers. Now we’re being told that their reform agenda is to replace the cuts Minister for Finance Brian Lenihan has insisted upon. Do you think that we’re so stupid we can’t see how this so-called deal is being done under threat and you’ve simply caved in?

Bottle? Taoiseach, you and what remains of your cabinet, if you sign off on this madness will be shown to have about as much bottle as a bunch of sea sponges waiting for some spine to crawl up them. Do this deal and you will go down as the Government who could only rule Bikini Bottom. Head office The Krusty Krab.

Stop the Unions

Thu, 26 Nov 2009 04:57:00 GMT

Try debating with public sector spokespersons and you’ll get a running headache. The mindset is quite extraordinary, one of denial of evidence, facts and consequences. It is almost as if they have become institutionalised, incapable of seeing the world for what it is outside of their segregated box. They deny the huge pay premium over the rest of the economy despite the ESRI reports, they deny the dangerous pay gaps compared to European competitors despite evidence from Eurostat, they deny that they have tax relief on the “pension levy” and continuously talk about a 7% pay cut, which never happened. Then, on Tuesday, they denied that many of their members went shopping over the border despite the clear evidence coming from Newry retailers to the contrary. Worse, they then wrap themselves in the cloak of victimhood when challenged in the media. It’s almost impossible to engage with this mindset as the Government will earn from the current “talks”.

The tax-the-rich slogan has been exposed as a sham as tax revenues plummet and the low threshold favoured by their unions would mean hitting married couples with ordinary jobs amongst their own ranks. This suicidal nonsense is about to be proven dramatically as the Dept for Finance is hit with a huge November refund as Ireland’s self-employed, hammered by massive cuts in earnings this year, reclaim tax overpaid last year.
On Tuesday morning on the Pat Kenny Show two union chiefs proposed that the pay-as-you-go method of accounting for public sector pensions was just fine despite the fact that it’s illegal throughout the pensions world because it hides the truth – extra years of service and ever higher pay driven up by increments is added to the €100 billion mountain of pension debts. This year the 3% pay increase caused by the nonsense of increments added fifteen times that number to the pension mountain.
The final plank from the unions is the lets-spread-the-pain strategy proposed by David Begg. This daft idea means we borrow even more, committing ever higher tax revenues to mounting deficits to protect his overpaid members. Not only is this zombie economic strategy unworkable it has not been agreed by the EU nor will it be supported by bond investors at current prices, kind of important since these are the people financing our public salaries.

What’s clear from this sorry episode is that old style unions have become an anachronism. Gains in worker’s rights from EU law meant hard liners moved into the last redoubt – the public sector where the Partnership Process encouraged a sense of omnipotence as Ahern diverted bumper property and construction revenues to meet demands for corpulent pay, allowances and sickies. Strip away all the guff about protecting those on the dole and social welfare and these people act exclusively as agents of those who pay the piper, their members. They have one sole purpose and that is to protect and increase benefits for members. They don’t care who pays. They care more about shopping in Newry.

Be quite clear the subtext to their campaign is to take the money off social welfare recipients if nothing else works. You don’t negotiate with bullies like these, you fight them and that’s precisely what the Government needs to do despite suffering from collective cowardice in the past by caving into them. At stake is Ireland’s economic independence, her international brand as an entry gate into Europe and the future of many of her children. That’s why the unions must not be let win.

Tsunami of Inflation Building

Thu, 19 Nov 2009 09:31:00 GMT

There is a tsunami of inflation building up on the horizon but still most of us, rattled by the fire sale of assets and collapsing prices last year, languish in deposit accounts. Fear is the overwhelming emotion now, fed ever more by dire statements about the public finances, job losses and the glaring vacuum in political leadership. We’re saving like never before and, on the surface, that’s good because a paltry 1% on deposit is still giving real growth above inflation of 8%. How bad is that?

Well, very bad if you continue to try to hold the real spending power of your stash in cash and very high inflation comes next. That’s because in a short period you could lose a huge chunk of your money to inflation. So why is high inflation looking inevitable despite Ireland’s current deflationary bout and what can you do to prepare?

Oil prices are beginning to rocket again as global production plateaus but demand rises on economic recovery. Oil prices, having risen fivefold since 2000 to their their watermark in 2008 collapsed but are now back to $80 a barrel. Expect prices to breach $100 next year and to rise further thereafter.
Commodity prices across the board are rising, copper, silver and gold. Short of hitting readers with a gold baseball, I’ve been shouting about gold now for four years over which time its risen from $400 per ounce to $1,145 yesterday. Silver’s relative price to gold is at very low levels and responds very strongly to inflation as well so expect silver to follow at some stage.
The world reserve currency, the Dollar has returned to trend, that’s downwards, as the US Government turns on the printing presses to stave off a US depression and continues to follow a weak dollar policy. Meanwhile foreign buyers of US Government debt are beginning to desert the dollar as a store of value. The Indian’s just bought 8% of the world gold reserve from the IMF. It’s just the beginning. More will follow.

Whichever way you look at it, high inflation is coming next, so what should you do to prepare? Social welfare payments will be inflation adjusted if the Government wants to avoid street riots but savers should keep no more in cash deposit than is necessary. That might mean one year’s cost of lifestyle if you’re in work or three years if you’re retired. The rest should be going into inflation-linked European Government bonds with some allocation to precious metals. Unlike common Government bonds these index-linked types move with inflation and their capital values are likely to rise as the language of inflation gains common currency next year. There are two fund providers in Ireland, Standard Life and Friends First. Gold can be acquired by investing in Perth Mint Certificates, by investing in a gold fund through a stockbroker or by investing with a life office like Zurich Life. There’s plenty of options, but, whatever you do don‘t ignore this alert and get caught napping a second time – first by the property collapse and second by inflation.

Eddie’s book ; Energise, how to survive & prosper in the coming age of scarcity, high inflation and peak oil is available as an e-book from www.eddiehobbs.com. All profits go to the Jack & Jill Foundation.