The Pivot

By October 18, 2017Blog

The Pivot

In November, the Jack & Jill Children’s Foundation will release The Pivot, which I wrote over the summer and finished last month. Exclusively available from Jack & Jill Children’s Foundation who will receive 100% of the revenues, the book can be pre-ordered by email info@jackandjill.ie and each book sold secures over an hour of paediatric nursing care for an Irish family. There are 300 babies and young children at any one time under Jack & Jill nursing care and over 2,000 have benefitted from home help and advocacy since 1997.

For €20 if you’d like a copy of The Pivot, you can donate to the charity, just mark your email for the attention of Jack & Jill’s dynamo Edelle Monaghan and order today tel 045 894538. Jonathan Irwin, the founder of Jack & Jill, is a very close friend over the 12 years that I’ve been privileged to be the patron. After hearing Jonathan speak at an event in 2004, I booked myself into a local hotel and wrote my first book, Short Hands Long Pockets, for Jack & Jill. This is the third book for Jack & Jill, but this time we are bypassing publishers and retailers to distribute from Jack & Jill itself so that the revenues don’t get gobbled up in intermediation costs.

What marks The Pivot as being different, certainly from an Irish book perspective, is that it deals with the topic that has formed the central theme of my blogs ever since Lehmann Bros. collapsed in Sept 2008. It was always the case that the exit from the extraordinary and extreme monetary policies was going to be the trickiest phase, a phase that we are now entering, hence the book’s timing.

The Pivot argues that we are on the cusp of a super cycle in global economic growth but first need to clear out the excessive debt. The book shows why we’re still in the debt bubble, bigger than before the global financial crisis, since which debt has jumped 50% to $215 trillion. In it, I explore some of the toughest questions of our time; is the global recovery fake? Are asset values, including Irish property, artificially inflated? What is likely to happen as the destiny with excessive debt plays out? How did the modern State develop and how will it be forced to reinvent itself to deliver on key social promises like old age pensions? What I hope I’ve done is a bit like in the Rip Off Republic TV series, joining the dots in an accessible way that maps out what you can do to prepare your Plan B, what to sell, what to buy and why. The book shows you how to position yourself now, ready to take advantage of the next big opportunity when everything is for sale. It provides a short-term and long-term plan, showing readers to how to identify strongest banks and countries, how to buy gold, why inflation-linked bonds make so much sense and how to develop the right mindset to buy into great long-term assets next time everyone is heading for the exit. Whether, you’re paying off debt or keeping money in banks, property, pensions, superannuation schemes, the post office or buried under the carpet, you ought to read The Pivot.

All book proceeds donated to The Jack & Jill Children’s Foundation.

The front cover, the Statue of Liberty encased by skyscrapers of debt, is a still from a video here http://demonocracy.info. This short video presents the US national debt in $100 bills and is well worth playing.

Backdrop – Odd Calm

It has been a strange 3 rd Quarter, a sense of expectation is rising as the USA begins to talk tough about moving to the most dangerous phase of the rescue following the Global Financial Crisis. This means increasing interest rates, but there is no sign of it just yet because the US Fed knows that the whole edifice has been propped up by its extreme policies, mirrored in Europe and in Japan. Despite rising risks equity markets and many property markets have been hitting fresh highs, unperturbed by events. This eerie calm hasn’t gone unnoticed. Earlier in October, Bloomberg reported that the President of the Dutch Central Bank, Klaas Knot, who is a member of the ECB Governing Council, said in characteristic Dutch bluntness that financial markets are underpricing global risks, leaving them vulnerable to a major correction. Mr Knot sits on the Financial Security Board (FSB) tasked with monitoring risks to the global financial system and banks.

Klaas Knot
Photographer: Martin Leissl/Bloomberg

“It increasingly feels uncomfortable to have low volatility in the markets on the one hand while on the other hand there are risks in the global economy,” Klaas Knot said.

Bloomberg reported that the Dutch Central Bank said that a sooner-than- expected normalisation of US monetary policy, where financial markets see a slower pace of rate hikes than what the Federal Reserve communicates, would quickly turn investor sentiment. This is in a report on financial stability which was presented by the Dutch Central Bank in Amsterdam on Monday, pointing out that US Fed raising rates makes the “risk of sharp market corrections real”. The Dutch Central Bank is correct to be raising a red flag.

The Excess Debt Trap

In the past decade global debt, in my opinion, has shot up to a level in excess of the tepid growth in the global economy to carry quite impossibly so, if interest rates rise. Rates must rise if inflation is to be curtailed. This means that there are going to be casualties and on the list of the bubble’s most weak parts, US auto-loans, Student Loans and Corporate debt in parts of the USA and throughout Emerging Markets, these are regarded as incapable of servicing higher interest payments. Loan defaults as we know, end up in the sink that is the banking system.

All of this excess debt, including $21 trillion from Central Bank programmes, buying unloved securities, lending to their own Governments and cutting rates to zero has created huge waves of cheap capital, searching for yield. As asset prices rose, yields fell away, but the capital creation continued so more risk is being taken for an increasingly small return. The effect reached its nadir this year – hence the disquiet. Across the board prices for Equities and for Property have reached new highs, everything looks inflated. The Irish property sector, for example, is not unique and forms part of a global story. The IMF has released a long list of overheating property sectors, it is global. The reason is obvious, this is the effect of global QE operations coming home to roost.

There is an iron rule, when you see prices rising purely from the weight of money, but you see no sign at all of real increases in income and prosperity for common or garden variety workers, this rule is that assets are inflated and going to reverse. On both sides of the Atlantic, workers’ earnings are flat and have been for quite some time. This is why Trump is targeting tax cuts to get hard cash directly to the squeezed middle. Until there are clear and visible real gains in workers’ earnings and prosperity, inflated asset prices have just one way to go and that’s down, to reflect gravity, but nobody knows when.

Why I say it is strange is because while property and equity prices are climbing to new highs, gold is rising. It is up 12% this year. Bond yields, which you’d expect to be rising, aren’t. Technically this isn’t sustainable, one or the other signals is very wrong, property and equity prices or gold and bonds.

I’m not saying that a sharp correction is a certainty immediately, because things can still stumble on, but much like before the GFC, the signs of distress are there despite rising prices on property and for shares in quoted companies. Underneath this lies the banking system and questions about its vulnerability to absorb shocks in property and equity markets, which inevitably feeds through to capital reserves, i.e. to bank buffers. It is why I’ve continuously recommended care in where clients hold reserves, in banks, in bonds and in gold.

Geopolitics

We need to talk about North Korea, no commentary would be complete without highlighting some uncomfortable truths. Anyone who has read a history of the Korean War will understand that it is an unresolved quagmire, that North Korea has one of the most inhospitable topographies for military campaigns, that the 1953 Korean Armistice Agreement is a brittle truce and that the short distance to Seoul from the 38 th Parallel puts the South Korean capital within rapid range of the DPRK’s ten thousand artillery pieces trained upon it.

Leaving aside nuclear weapons, North Korea possesses enough firepower to light up the peninsula in a fresh bloodbath if it chooses to do so. But US President Trump, in my opinion, is not bluffing and the risk of a military conflict cannot be diminished by wishful thinking this far removed. China, which buys nearly 90% of DPRK exports and supplies vital goods to the hermit kingdom, has not been prepared to rein it in, making confrontation look inevitable at this point.

 

Other News

Next year you will hear a lot about GDPR, this a huge development in consumer rights to data privacy that has, as its objective, the reversal of power between data processors and those whose data is being processed – you. It means that you will have the right to be forgotten, the right of accessing what data is held, to amend data and the power to report breaches to local authorities who will have the authority to fine companies up to 4% of global turnover. That is not a misprint. The gloves are coming off. Unhappily, it will also bring a blizzard of emails and paperwork your way as businesses seek your consent to do what they’d been doing for years automatically.

This blizzard comes at a very testing time for financial firms who are coping with three major EU Directives covering securities markets (MiFiD II), insurance (IDD) and credit (CMAR), all of which means you can expect a mailbox full of “stuff” for months to come. It will also mean that our own practices will change, becoming more formal, all of which will be driven by compliance that runs into thousands of pages of new rules.

 

Financial Planning for Adult Children

Many of our clients have come to us over the years to ask our help for their adult children to get going. We are set up to help families across generations, so please do contact us for any of the following:

  • Establish tax relievable Income Replacement Cover (PHI) with a credible insurer that can be relied upon to ethically adjudicate on ill-health claims. These covers are vital for young professionals and others who have not yet built a bulwark of assets and whose families could be at risk in the event of a long-term inability to earn income from their occupation or profession. Not every insurer who quotes for this business passes our test, it is not a market that should be shopped on the basis of cheapest quote. Please do pass on.
  • Underpin the family finances with cheapest pure life insurance available, capable of buttressing the family in the event of premature death, but without leaking excessive premiums to insurers to do so. This isn’t just a requirement when effecting a mortgage, but throughout most family life cycles until youngest children reach university.
  • Examine existing insurances most especially Serious Illness covers to test value for money, what can be saved, what can be improved.
  • Start off pension investment, whether it is for self-employed or employees in the private and public sector, but avoid the typically upfront concealed commissions that hurt build up.
  • Examine Corporate Pension Schemes for CEO’s and CFO’s to ensure that management and staff are getting access to decent investment choice, advice and costs and that Trustees are compliant with robust pension legislation, if necessary replacing Employer Trustees with a professional firm to reduce risk.

The Budget

In the Budget Speech from Minister Pascal Donohoe, a number of items may prove to be of benefit, subject to the devil in the detail;

  • Companies may be able to buy owner/directors and other employees electric cars at 0% BIK for one year subject to review then.
  • Land with solar power panels may qualify for relief from CAT and CGT similar to agricultural land.
  • Funding for SMEs, especially those in the food sector affected by Brexit may be available as working capital finance.
  • There is modest relief from USC and a small widening of tax credits.
  • A share option scheme for key employees in unquoted SMEs is to be introduced known as KEEP and run up to the end of 2023. It will mean that CGT will replace income tax + USC + PRSI.
  • Zero CGT on disposals on houses that qualified for this exemption on the basis of holding for 7 years is now reduced to 4 years.  This opens the window to sell today and diversify elsewhere without incurring CGT and without having to wait the full 7 years.

Conclusion

It would be nice to report that the present calm is an accurate reflection of risks in the global financial system, that we are entering a super cycle of rising asset values, increasing prosperity for all, that flooding risk assets now with fresh funds is the way to go. It is not accurate, however, and we are now entering the most difficult period since the GFC.

If you’d like to discuss any aspects of the above please do give us a ring on 045 409364 or email eddie@eddiehobbs.com.

Eddie Hobbs, Oct, 2017

eddie@eddiehobbs.com