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Colonists Cut New Deal

Wed, 22 May 2013 08:30:00 GMT

Look beyond the rhetoric that accompanied the initial rejection of Croke Park 2 and the big theme was that the deal, negotiated by a greying public sector and trade union elite, was family unfriendly. Regular readers will be unsurprised. The recent study by the ESRI of CSO Household data is a timely reminder about who the real winners and losers are throughout the economic and social catastrophe of the past five years. It doesn’t take much brain power to figure out that those servicing jumbo mortgages on upside down property from dwindling income have been most hammered. Bottom of the heap are the young and jobless private sector workers who haven’t yet emigrated, who face into a bank-biased insolvency process and who watch in frustration from the side lines as 15% of the workforce already in secure employment and earning a 16% pay premium over the private sector, flex the power of their cartel.

Eight years ago in RTE’s Rip Off Republic I’d described how the Celtic Tiger was “eating it’s young”. The ESRI study prices the charnel house by cutting the CSO data with the precision of a surgeon revealing a sharp departure in fortunes as between those under 45 and those over. Young families, especially those now aged 30 to 45 have faced a 14% decline in real incomes, slashing their consumption in the economy by a quarter in five years to 2010. Nearly six in ten have mortgages. The huge drop in spending can only be attributed to one thing – no cash savings, no access to credit. What the study doesn’t show is the degree of cross generational cash transfers throughout the economy as parents cross subsidise financially distressed adult children -where they have the means to do so.

Neither does the study reveal the catastrophic collapse in financial strength of the middle classes reliant on savings and investments for lengthening retirements. Older private sector workers have higher earnings and in sharp contrast to younger, have experienced just under 6% job losses compared to over 14% for the young, but longer retirements for those without pensions, will inevitably lead to a reversal of fortunes, when middle aged children end up subsidising elderly parents who’ve run out of money before running out of life.

Despite higher pay than their private sector counterparts, young public sector workers on modest incomes, that’s pay less than the public sector average of €900 per week and who are already squeezed by debt servicing costs and higher taxes are right to be scared and angry. They are faced with longer hours and the crushing of their allowances and have no more to give without tipping into insolvency. What they won’t tip into is unemployment but that’s poor consolation when your outgoings exceed your income, creditors are barking through the letter box and family harmony is in the blender of destructive loops that insolvency stress unleashes. In sharp contrast the real winners are their older colleagues, the managerial elite whose pay and pensions raced ahead after the benchmarking conspiracy, tracked cent for cent by rising pay for trade union leaders. This cohort, now negotiating with one another behind closed doors, typically have no mortgage debt, earn four to six times average wages and are within a whisker of retiring on pensions valued at between €2.5 to €3.5 million each.

Any economic room for improvement must be targeted at those hardest hit first. That, certainly does not mean those earning over €65 grand at the top of the public sector, those clearly least affected by the crisis, yet this is precisely what is built into the current talks which promises to restore pay, beginning in 2017, to Celtic Tiger levels. It’s patently clear to anyone who wishes to lift the scales from their eyes that we continue to remain captive to a power block that conceals itself behind younger front line workers deflecting the spotlight from their nest and now, faced with cuts, are successfully negotiating restoration of the highest pay in Europe from the first of the economic breezes that blows. Some may call that a democracy, others, call it a colony.

Open Letter to Joan Burton TD, Minister for Social Protection

Fri, 03 May 2013 08:28:00 GMT

Dear Joan,

Led by a Labour Government, a set of ethical rules within which to frame thinking, fundamentally altered the Norwegian oil experience from the early 70’s. Those 10 principles, reset the course of Norwegian modern history. They now have a sovereign wealth fund worth hundreds of billions and enjoy a standard of living unparalleled in Europe but they very nearly got it badly wrong, like the Brits did in the North Sea.

In wasting our money to get the OECD to repeat what we already know about our retirement and ageing crisis, there was an absence of principles. Without the right principles there is no courage to drive change, just another expensive tome sitting in your cabinet behind the next Minister for Social Protection. Here’s 10 principles that lead to very different outcome to the OECD report;

All workers are treated equally, there is to be no pension apartheid, that means sharing of resources where surpluses are distributed to those most at risk of poverty.
Tax transfers from private sector workers, most of them non-pensioned to the 15% that make up the public sector workforce, to be redirected to their own pensions. That means the public sector scheme becomes self-funding leading to recurring independent actuarial examinations of contribution levels and benefits.
Simplify, simplify, simplify. One of reasons behind high costs for small schemes is the labyrinthine, arcane and stupidly over-engineered legacy of previous Governments who tampered rather than rebuilt the pensions system. Few understand the poxy thing anymore and even experts have to consult one another to puzzle out the rules. Too many savers are hopelessly dependent on high commission-paid salespeople to tell them the rules rather than discuss the most important thing, investment tactics and contribution levels.
Throw out the asinine rule book whose core objective is to ensure nobody gets a bigger pension than the civil service. It’s dumb and hopelessly out of date. Put no ceiling to what a man or a woman earns from saving and investing. These ceilings create a dislocation in investment allocations by ham-fisted braking on risk taking. Instead put the ceiling on contributions by limiting tax incentives to for example €1m in total contributions throughout a career whether from the worker or employers.
Set up a big administration engine to drive down costs as an alternative to retail pension products, farming out fund management to the best in the business globally by picking horses for courses. This will pull down industry costs.
Smooth out pension income risk when choosing to draw cash down from funds through state-backed pension guarantees as an option. Stop the crazy rule about forcing out 5% to 6% each year that is destroying retirement funds and replace it with drawdowns that use real actuarial numbers linked to extreme mortality like age 100.
Stop using Insiders to decide the shape of the pensions model for outsiders, that means establish a short-lived and radical taskforce made up of independent experts to recast the Irish pension model where everything is on the table, including public sector pensions.
Tell the truth. Produce an annual report that forecasts shortfalls and contribution levels for both the Social Protection fund for old age pensions and Public Sector Pensions so that we all can see the real shape of future social contributions and plan accordingly. Look to Denmark.
Simplify, centralise and lower the cost of regulation by amalgamating it under one Ministry, it is currently split between your Dept and the Dept of Finance. Pull the Pensions Board or its successor under The Central Bank.
Any new central fund should allocate some capital towards establishing the Irish equivalent of Statoil, a public and private partnership to harvest our offshore oil and gas. That’s where the real wealth is buried and we’re giving it away.

- Eddie

The Beginning of the End of the Shadow Government?

Thu, 18 Apr 2013 13:26:00 GMT

The rejection of voluntary pay cuts by public sector workers may, ironically, mark the beginning of the end of the shadow Government, a clouded nexus of relationships between a handful of highly paid union chiefs, senior civil servants and the political establishment. Much now depends on the strategic response of the official Government. It has committed these cuts to the Troika. The question is, does it have the gumption to finally kill off the remnants of the partnership process, a gathering which morphed into a cartel for 15% of the workforce? You recognise and measure cartels by determining the extra price they extract by exercising excessive bargaining power. Despite five years of economic depression, that's still an impressive 17% premium over private sector pay and ignoring pensions.

With Leaving Cert exams imminent you can expect a period of phoney negotiations to June, phoney because workers will simply not vote for token readjustment and phoney because the Government has no choice but to legislate - there is a bigger issue at stake - exiting the bailout end year. Labour, the political arm of public sector unions, whose own leadership has been rebuked by its members, will be crushed. It is the price for obtaining power under false pretences.

Unions Turn to Easter Island Groupthink

Tuesday night on RTE Primetime CPSE and INO union chiefs openly championed SInn Fein policy in a convoluted, illogical and desperate attempt to rewrite national economic policy by assuming that human beings do not behave rationally. These cuts, we were told, are the result of "failed austerity" and would be "deflationary" by reducing spending. The solution is to introduce a new rate of tax of 60% for any couple earning more than three times the average wage - as if this will not be deflationary. Tax higher earners at punitive rates and any reasoned human being, not trapped by high debt repayments, will engage in tax avoidance, hiking pension contributions, slashing effort and cutting payouts from small businesses, keeping the cash in companies instead. Mobile business executives who came to Ireland because of its tax promises will start filling in transfer requests. The IDA will fight the loss of foreign direct investment by stressing the craic but savvy business execs who take their holidays will put their European headquarters elsewhere.

But not content with punishing high performance at work, union chiefs also want to punish entrepreneurial energy with an annual tax on net assets. So, Ireland, desperate for growth, is also expected by the cartel to motivate her high performance workforce by appropriating net assets at a rate of 1% -1.5% each year. This is dangerous Easter Island groupthink.

Off camera I tackled Sinn Fein's engaging Mary Lou mcDonald TD. Take a look the long list of European countries that ditched wealth tax, I suggested, how are you going to police capital flight and with it, jobs and entrepreneurial energy the life force of economic growth? Will you erect exchange controls and police border exits? She cited France but knew little of the detail like the net loss to its economy from capital flight. Isn't coming up with a wheeze that immunises your own core support the essence of political calculation I asked. Mary Lou smiled, the question was a cynical one she said, but it was a calculating smile, classic of the political breed.

The Rapa Nui on Easter Island plundered their assets, stripping the island bare of its natural resources and trees, leaving instead statutes to their Gods, their beliefs and their folly. It was a messy end, a spiral of self destruction and tribal conflict. The Polynesian islanders failed to grasp they were at a tipping point and that, at the precipice, they needed to collectively adopt radical change or else perish. They couldn't and didn't. Listening to the union chiefs I understood why. In the end, they ate one another.

- Eddie

Facing the Truth about Unfunded Debt

Fri, 29 Mar 2013 09:34:00 GMT

Primetime on RTE, Tuesday night concurred with data repeated by guest debater, public sector union chief, Shay Cody of Unite that the average public sector pension is €20 grand a year. It was a blunder. The Comptroller and Auditor General Special Report 68 tells us that the average is nearly half as much again, at €28 grand a year. Recently Minister Brendan Howlin announced the elusive figure at €29 grand plus a tax free lump sum of €87 grand. Price that in the private sector and you’re looking at about €1.2m in a pension pot.

Getting pension data right is tricky in a hotbed of deliberate obfuscation in official reviews and reports mostly because of Government / Union politics, but here are some inconvenient facts you might want to keep handy, next time there is misinformation knocking about;

In the five years before the public sector pay cuts, wages rose 11%, but pensions rose 66%.
In 2000 the total future public sector pension debt was €25bn, by 2009 it had ballooned 6.5 times to €116bn. This happened largely because of a huge swelling in middle and top management pay and numbers.
The average age in the public sector is rising one year every 15 months according to the OECD. The mean age is about 42 which means that most of that €116bn pension debt is just over the horizon.
Contrary to what you’re constantly told, there are not 300,000 on the pay roll, there are 400,000, of which 100,000 are now retired at a current cost of €2.8bn.
The total current cost wasn't supposed to be this size until 2027 based on a Dept of Finance report that preceded benchmarking.
The Social Insurance Fund is now running at a deficit of €1.5 bn per year. The total deficit by 2020 will be nearly €15bn. Over the next five decades the deficit totals €324bn.
There are 1m private sector workers without any pension savings but paying, through tax transfers, for pensions in 15% of the workforce. These private workers are relying on the old age pension. Most face retirement poverty. Others that do have private pension savings can only supplement with about €3 grand a year without destroying their savings.
Guaranteed pensions in the private economy have collapsed. Total numbers have declined by a third in just two years to 2011. These Defined Benefit schemes now cover only 197,000 workers and many of their schemes are upside down and vulnerable to closure.

We are looking at is an apartheid pension system that rewards the few to the cost of the many.It's clear what must be done;

Public Sector pensions must become fully self- funding. That means haircutting unaffordable pensions, probably at somewhere near thirty grand a year.
The haircut should be decided after an independent actuarial study that is open to the public. It must not happen behind closed doors under exclusive oversight by the Insiders and Union Chiefs who stand to lose most.
Once restructured to fit the economy we then proceed to radically simplify pensions and start a Danish-style sovereign wealth fund owned by all of us and which sees no distinction between public and private.

With national debt now €200bn and national income five times lower at €40bn, Ireland simply cannot delay debate and analysis that leads to haircutting these unfunded debts any longer. To do so is to foster an entirely false expectation among public sector management that there’s a big payola as they get older by rotating through a high paid job just before retirement. The money aint there and that old game is well and truly goosed..

- Eddie

Eurogroup Botch Propels Cyprus Towards Moscow

Thu, 21 Mar 2013 10:26:00 GMT

In the 1972 film The Godfather, Don Vito Corleone, promised he'd give an uncooperative producer an offer he couldn't refuse. The Hollywood mogul woke up in bed next to his prize horse's head. In the early hours of last Saturday morning the Eurogroup of Finance Ministers, under the Irish presidency, gave the 1.1 million people of Cyprus an offer they couldn't refuse;

To save yourselves with a €10bn loan you must first raid your banks for nearly €6bn including swiping money from your smallest savers or we will cut off the oxygen supply of the ECB money, collapse your banking system and force you to exit the Euro in chaos.

A horses head might have been more diplomatic.

The Cypriots three main banks took a hiding from the Greek implosion, forcing the Government to face the impossibility of borrowing nearly 100% of GDP to add to its already elevated national debt. With GDP of just about €18bn, the deal instead offered to Cyprus was to increase its national debt by €10bn while raiding deposits for the rest. On Tuesday its new Government could not get that deal past a shell shocked parliament as furious Cypriots demonstrated outside.

Despite rejecting the rescue deal, the Cypriot Government, already creaking under 15% unemployment and economic contraction, cannot stand over its Depositor Guarantee Scheme nor can it avoid the grip of long term austerity from the inevitable ballooning of its national debt. Meanwhile Cypriot consumers will react to threatened tax hikes by cutting consumption and driving up unemployment.

At best Cyprus is facing the destruction of its safe haven status, a severe shock to its economy and a bitter feeling of being shafted by a Europe dominated by Germanic rigidity.
At worst it will exit the Euro, default on its national debt and watch its new currency plummet releasing an inflation beak out as its state services implode.

On Saturday, the Irish Government, which has campaigned in Europe for a fair deal for Ireland by reminding our partners that solidarity was a two way street, grossly misread the international reaction by welcoming the deal. The Irish statement reminded those of us with longer memories, of Noonan's capacity to cruelly misconceive that might equals right. Ireland should have stood up for Cyprus against German hegemony.

Instead Taoiseach Enda Kenny intervened from the US to reassure the home audience that the Cypriot gig was a once off. The Irish leader mustn't have been watching too much US TV, filled with reports of falling markets which were clearly joining the dots to both Italy and Spain. Both Eurozone behemoths are too big to bail should either fail to make their economies rapidly more competitive. After Cyprus and before a properly functioning banking union, deposits in Italy and Spain are at elevated risk of appropriation. So too are private pension funds.

Two years ago, writing here, I campaigned against the Coalition's €2bn raid on small pension savers because the Irish Government, within weeks of election, had chosen to cross the Rubicon into asset appropriation to finance the national deficit - under the camouflage of a mythical Jobs Initiative programme. Minister for Finance Noonan was fast out of the blocks in the Dail to reassure depositors that private pensions were different. Fellow Ministers chimed in unison.

Last Saturday morning Michael Noonan rubber stamped a raid on small savers in the South east corner of the Empire, well away from his Limerick constituency in the far West. In doing so the Limerick TD and his colleagues have grossly overplayed their hand, forcing Putin, of all people, to lecture Europe about private property appropriation and opening up the vestige of a back door deal between Moscow and Nicosia for the Cypriot's seven trillion cubic metres of offshore gas and for bases in its strategic waters for the Russian navy.

Come midweek, there wasn't a Finance Minister to be found in the Eurozone prepared to man up to the earthquake they've caused by fracking under the bedrock of the Eurozone, shaking public trust in deposit guarantees and pushing a fellow EU member towards new masters. In Moscow.

-Eddie

14 Questions Never Asked by RTE Radio News

Fri, 01 Mar 2013 08:23:00 GMT

One by one, union leaders were, this week, given unchallenged interviews by the national radio broadcaster across its news coverage. Rarely over the course of these past four years have union chiefs found themselves presented with the contrarian position on a RTE radio news programme. Instead chiefs get a free run and when comment is sought it is usually from another insider, like a university lecturer in the public pay.

It is self-evident that Ireland has first class frontline personnel, from Gardaí to Firemen, from Nurses to Doctors, but that’s not the issue, the issue is the affordability of pay rates, structures and pensions. In behaving the way it does RTE fails a simple test of journalistic objectivity perhaps because the issue close to home. Here are a few things you have never heard put by a RTE radio news presenter to a public sector lobbyist:

Why should 85% of the workforce continue to cross subsidise 15% with some of the highest public sector pay in Europe?
How come we employ similar public sector numbers as a proportion of the workforce as the rest of Europe but pay them the highest as a percentage of our GDP?
You talk of fairness, how is it fair that, despite security of tenure, public wages are on average 17% higher than the private sector after adjusting for education and experience?
Since the crisis Irish national debt has quadrupled to nearly €200bn, that's 120% of GDP, how can you justify adding ever more debt to maintain your premium pay privileges?
Your economists state that private sector wages have not fallen as a plank to justify your demands, but what of the 350'000 whose wages have fallen to zero?
Time and again you claim that you have taken cuts of 14% but CSO data clearly shows that gross pay is down only by 4.4% after four years of increment top ups - how do you justify continuing to make false claims?
You state that the pension levy is a cut but never define it in terms of its net cost after tax relief, which for many halves its impact - why is that?
Based on OECD data the public sector in Ireland works the second least amount of core hours in Europe, 20 hours more than the Portuguese but 250 hours less than the Germans and 100 hours less than the Brits - why is extending working hours such a big deal?
You campaign against further cuts, but given the scarcity of resources nationally, whom do you think should carry your load for you, who should be cut instead?
The SIPTU President continuously calls for wealth tax in lieu of adjusting public sector pay, but what is the €1bn raid on private pensions and the imposition of property taxes, but a tax on wealth?
The German’s ditched theirs, the French are in difficulty with Hollande’s 75% tax, how could a “rich” tax work here without triggering a flight of scarce job-creating capital to neighbouring economies?
Where, anywhere in the world, have public jobs been ring-fenced after national finances crashed?
You claim 30,000 jobs lost, but can you point to one full time contract that was lost to redundancy? Isn't it more accurate to say these were encouraged into early retirement on lucrative terms and have simply moved from the earned payroll to the unearned one?
The annual cost of public sector pensions now equals the total income tax take from it - how is it equitable to expect a private workforce, (where one in two have no pensions and those that do have one get pensions seven times lower than the public scheme) to continue to cross subsidise an uncapped public scheme?

- Eddie

What's next for Investors?

Fri, 11 Jan 2013 10:12:00 GMT

Strange as it may feel, we are entering year five after the infamous whirlpool year of 2008 that culminated in the Lehmann collapse in Sept. We examine both the supports and the drags on the global economic recovery, or, in sailing parlance the tailwinds and headwinds. Plotting a middle course position through these conflicting forces, the outlook, thanks to Uncle Sam, is brightening for 2013 and 2014 globally as tailwinds pick up and some of the scariest storms are behind – but it’s all relative to the extraordinary weather from which we are emerging, one characterised by real fears about Euro survival, the US fiscal cliff and a bubble burst in China.

The so-called output gap including the overhang of joblessness, poor credit and low confidence continues to dampen economic growth but the risks of another major shock have diminished, only by embarking on a massive fiscal experiment that is without precedent since the Industrial Revolution. This is Quantitative Easing (Q/E) on a herculean scale. At the end of 2012 the Governments of the US, Europe, the UK and Japan accounted for three quarters of all borrowing whilst central banks account for 60% of all lending. The expansion of the balance sheets of the ECB, FED, BOE and BOJ is without measure anywhere in economic history and, as outlined, in our Oct report it’s pretty much fiscal expansion now or bust.

Interestingly, inflation protection has finally begun to emerge in much research and analysis as we head into 2013 with the first round of US fiscal cliff just behind us and seasonal profit taking affecting most asset classes. So what’s this year and next likely to look like, insofar that it is possible to guess?

First the Headwinds

Europe remains moribund. The big question is how much social pressure can countries like Spain absorb from internal devaluation, without unravelling and exiting the Euro. Spanish youth joblessness is 50% and overall unemployment is 25%, yet still Spain remains 30% less competitive than Germany, Europe’s backstop economy where Debt / GDP is 80%. Spanish loans continue to worsen and its property market falls, meanwhile French growth has stalled widening the gap between it and Germany.

Italy’s Debt to GDP has rarely been higher since Garibaldi unified the country in 1860 and with Monti departing, Europe’s third largest economy faces into difficult austerity programmes. Greece’s economic decline matches that of many ex-Soviet states but even after haircuts it’s Debt / GDP is 170%. Portugal continues to contract but with no clear strategic plan to pull itself out of the mire while Ireland, reliant largely on its export economy is set to peak at Debt / GDP of 122% but has household debt of a similar scale and cannot rely upon a domestic economic recovery until there is restructuring of the national debt and relief on households where it looks like 10% will be bad debts.

The decisions to empower the ECB as a single banking regulator for big banks of systemic importance, the establishment of a central fund to separate banking and sovereign debt coinciding with the appointment and quick actions of Draghi has helped calm nerves but, notwithstanding these developments there is a hard road ahead for countries like Spain and France where productivity gains or wage declines of 30% are required to match German competitiveness.

All told Europe, at best, will experience no overall growth this year and its declining imports will impact non-OECD countries. On the opposite side of the Atlantic the USA, narrowly avoiding the fiscal cliff in a last minute deal between Obama and the Republican dominated Congress, has merely delayed the inevitable tax increases and entitlement adjustments required to reduce the US deficit by $4 trillion over the next decade through higher taxes and lower spending. Japan continues to be swamped by a huge national debt sustained only by the willingness of Japanese workers to sustain it with savings and is unlikely to see economic growth in a year when Iran is expected to have enough enrich uranium to build a nuclear weapon, increasing the risk of an Israeli-US-Iranian conflict.

The Strengthening Tailwinds

Interest rates remain remarkably low which helps Governments carrying high debt and are likely to remain so for some time while mute inflationary forces will allow central banks to continue QE operations. But thank heaven for Uncle Sam. The biggest, strongest and most balanced economy in the world is recovering and set to remain the global powerhouse for decades to come as its institutions tackle its debt, bolstered by a remarkable transformation in its domestic oil and gas industries reviving the US as the manufacturing giant.

The US housing market is beginning its recovery, consumer spending is showing signs of returning after several years of deleveraging and repairing balance sheets and the world’s largest economy seems to be adding 200,000 jobs per month while its corporations sit on vast reserves of cash filtering out in dividends and acquisitions. Overall the USA is poised to grow 2.5% to 3% this year, good news for exporters to the USA.

Fears of a bubble burst in China are abating as it enters its tenth year of reform under this Chinese Government with growth forecast at a rude 8% and which will help drive the rest of Asia where interest rates have fallen to support the economic lag created by Europe’s rolling crisis.

What Moves to Consider?

Given this background European equities are 30% cheaper in comparison to the USA which, priced at 12 times forecasted earnings is still reasonably priced. As ever in this part of a recovery cycle from a deep recession, an over-indulgence in pessimism leads many growth investors to remain too cautious despite the clear value in equities. The trend has been towards high dividend-paying PLCs, making undervalued and unloved cyclical growth stocks the likely next winner for those taking fresh long only positions in equities.

In Non-OECD markets prices have come down, reducing multiples since before Lehmann’s and reflecting the general manufacturing slowdown. We continue to rely on Asia excluding Japan and allowing fund managers to take a view on China’s allocation rather than second guessing from a distance.

Despite recent profit taking we continue to recommend a presence in portfolios for precious metals, gold and silver as a hedge against declining fiat currencies from too much QE and to counteract inflation.

At best we are in a sustained period of ultra- low interest rates which means lousy returns on cash deposits but good news for highly indebted nations grappling with deficit reductions. In these conditions returns on Fixed Income Securities, (conventional Government debt) will be flat and expectations for returns on equities reduced but still capable of outperforming cash by 4% to 6%.

Today we’d strongly favour European equities which are trading at a deep discount to the US and capable of giving higher returns over the next five years but any portfolio without a heavy allocation to the US would be most unwise given the huge advantages the US has in R&D, Education, Institutions and the world reserve currency. Asia Pacific still remains a favourite but at lower multiples and expectations.

Inflation – the next big cycle?

Keynesians, comfortable with massive expansionary policies at a time of deep recession have confidence in central banks to reverse QE as growth returns without triggering high inflationary forces. So far the theory is working, buts that’s only because of huge output gaps depressing inflation. We expect historically low bond yields to continue but, ultimately, the fixed income bond market will sour as interest rates follow inflation, albeit delayed by central bank nervousness over strangling recoveries. That’s why we continue to emphasise global inflation-linked Government bonds protected with a Euro hedge for defensive investors.

So what to do?

Growth investors comfortable with long only equities and commodities could now consider moving fully back into unprotected funds, with a strong emphasis on Europe High Yield and USA and Asia ex Japan growth funds. Global Natural Resources, combined investment across precious metal, oil, gas and coal miners is also recommended.
For those with shorter horizons and lower risk we suggest taking the second step back into carefully selected growth funds and some absolute return funds. These target returns typically 3% to 5% above Euribor using highly diversified range of investments including derivatives and can make money in falling markets.

We are advising those who took defensive steps in 2011 to now begin the second tranche back to growth funds. Last year the first of these was taken by many shifting 1/3rd out of defensive funds. We are now recommending that half the remainder follows suit.
Highly defensive investors should stick to global inflation linked bonds protected with a Euro hedge as an alternative to cash deposits.

Finally on property we remain unconvinced that the floor has yet been found in the Irish market and favour distressed property in fast recovering economies like the USA. We are currently investing heavily for clients in Metro Detroit at rental yields of 15% and scope for capital uplift as the remarkable Midwest recovery continues with the US manufacturing rebound. There is no leverage required and minimum investment is €1m.

For more information on suggested switches within fund ranges or to better performing asset managers, whether for personal funds, lottery wins, inheritances, charities or retirement schemes, contact Eddie at 045 409364 or email eddie@eddiehobbs.com

Eddie Hobbs
January, 2013.

Financial Development & Marketing Limited is regulated by the Central Bank of Ireland
Unit W9A1, Tougher’s Business Park,
Newhall, Naas, Co. Kildare.
Tel: +353 45 409364
Fax: +353 45 409196
Email: eddie@eddiehobbs.com

Tick Tock

Thu, 22 Nov 2012 16:39:00 GMT

Tick Tock

Tick Tock. Led by a former INTO activist Minister Brendan Howlin, secret talks begin among the insider officer class on the continued oppression of the Irish people, those not on the Croke Park deal payroll. Tick Tock.

Political antennas twitching in the flux of shifting public opinion are detecting a savage change of mood as all the low hanging fruit is gone and with it the blustering rhetoric from this parody of a "reform" Coalition. Tick tock. Young politicians, those who cannot cruise into obscene pension entitlements over the next few years, fear what comes after. Tick Tock. Minister Simon Coveney publicly refuses to adopt dodgy accounting practices for phantom non payroll savings. Tick Tock.

Fianna Fail the architects, Fine Gael the turncoats and Labour the apologists, will shortly find themselves facing middle class wrath, a rage against the conventional political class itself.

RTÉ

This week I resigned as a presenter on RTE's Consumer Show but remain on good terms even though I despair at the direction of some of its current affairs. Watch out for My Civil War Monday night December 3rd 9.30 as I take three young adults on a time machine back to the chaos and it's effect on their families. The hour long programme is a gem from RTE's hidden diamond, its documentary unit.

12 Ways to Reform Ireland

A new centrist political movement is an inevitable response to the hegemony of the tired, failed and old mainstream parties and the recklessness of socialist economics espoused by Sinn Fein and the ULA. Expect a raft of new lines of thinking like;

The Prime Objective to be a relentless lifting of the Minimum Basic Income for all citizens and the eventual elimination of poverty and inequality.
Government policy and infrastructure is robustly tested against the Prime Objective which means a transformation into a lean State, intolerant of waste so that there is maximum pass through to those most at risk.
Public jobs are interlocked with and expressed as a multiple of the Minimum Basic Income (MBI) and cannot be lifted without first lifting the MBI.
Nothing survives if it is an obstacle to achieving the prime objective, that includes anti-competitive agreements and practices in the private economy and public cartels designed to reward the few at the expense of the many.
Power is reversed, citizens use cash and credits to drive competition and efficiency in protection services delivered by competing state and private agencies
All debates about privatisation versus public ownership of non-essential services is framed within the Prime Objective and less at risk to being hijacked by pressure groups
Income taxes begin above the MBI, everyone pays in a simplified tax code that moves towards flat taxes, where success is not punished and where rates are set to support the Prime Objective and not an ideology.
Public pensions are capped at what is affordable and a new universal pension scheme replaces both private and public schemes with equality of treatment.
Government in sunshine laws are enacted to outlaw unrecorded and unpublished lobbying of Government or officials. Everything is reported on websites.
No one gets privileged access and freedom of information becomes the benchmark of liberty.
New technologies are deployed to engage citizen debate in parliamentary choices and as a fast track to frequent referendums on key decisions.
Minimum competency standards are introduced for all parliamentarians covering economics, finance, administration and ethics with annual continuous professional development.

RTÉ Current Affairs and The Broken Pensions Model

First published Daily Star Nov 8th

On Monday night November 5th RTÉ completed two hours of TV “specials” on pensions. The first special was a year ago and was presented by George Lee. It was billed as dealing with the viability of the Irish pension model. Instead it went on a tangent to pursue the daft charges in parts of private pensions. Monday night told the story of retirement poverty, and notably, all within the private economy. Primetime, Tuesday night Nov 6th, covered obscene pensions to AIB’s officer class but did not venture near the lavish pots of those of the permanent government and its political officer class, where vast numbers of them run €4m to €6m each. Newstalk’s Breakfast show made the obvious link the following morning.

In over two hours of broadcasting on pensions, RTÉ has not scoped out the problem, highlighted the gross inequality of massive tax transfers to an insider elite and offered possible solutions. By doing so it has not served public debate perhaps for fear of fomenting anger by threading through the social injustice swamp of the apartheid Irish worker remuneration model.

RTÉ is big and bold enough to take criticism and, heaven knows, it is not short of razor sharp and talented journalists but it, itself, is a microcosm of the gross inequity in retirement provisioning as many of its older and more senior staff enjoy the protection of a defined benefit scheme while it's youngsters travel second class, in a hybrid. This is reflected across Irish pension provisioning but why should a better paid and privileged minority continue to reap wealth transfers from everyone else, simply because of the date on their birth certs?

In the private economy the injustice is much worse with one in four workers barreling towards retirement poverty without a cent saved, because they can't afford to. Most of those who can save will end up with pensions worth no more than three or four grand a year while public workers, already enjoying a 50% salary premium, expect on average to get seven times more - at least on paper.

The truth is that the €120bn public sector pension liability mountain can never be paid and neither can the old age pension. The model is shattered and in case you're wondering nobody bothered ringing to ask me why. Indeed in some weaker parts of RTÉ, my guess is that Rip Off Republic in 2005 which challenged how Ireland was run, has been buried with a headstone inscribed “partial, unbalanced, never again”. Perhaps so, but RTÉ itself has sown its own legacy in this crisis, a legacy for its best journalists to start asking some probing questions before it is too late;

Why, in four years of this economic and social crisis has there been no RTÉ special benchmarking managerial public sector remuneration against EU peer groups?

Why has there been no RTÉ special highlighting the public sector ponzi scheme and it's obscene manipulation to enrich a small few at the expense of the majority?

And why will there be no RTÉ “special” drawing the clear link between the pillaging of scarce resources under a public cartel and the savagery of the next budget?

If advocating for equal treatment and solidarity between private and public sector workers is wrong, then isn’t it better to be guilty of it? If it is seen as revolutionary to call for the tearing down of the walls between insiders and outsiders, then isn’t it better to be so? And if, as I suspect, that middle Ireland shortly moves into open revolt against the establishment, the conventional political parties and the public sector elite, doesn’t it make more sense to be part of it?

- Eddie Hobbs

The Wall Street Journal Today

Fri, 19 Oct 2012 14:19:00 GMT

Seven years ago I wrote and presented Rip Off Republic for RTE. Since, it’s been hard to get back in to the topic of how Ireland is run. On Friday Oct 19th The Wall Street Journal published my analysis, highlighting it on their front cover on the morning EU leaders and Civil servants breakfast. It has not been yet mentioned by RTE. It is here; click to view.

It’s Fiscal Expansion or Bust

This commentary can be read with detailed supporting graphs. If you’d like to have these to hand just pop us an email and ask for the market guide graphs, to eddie@eddiehobbs.com.

Having increased exposure into “risky” funds for clients as the second half of 2012 opened, I continue to remain cautious about going further until there is more certainty about the direction of the global economy. Well, we are truly on a journey into the unknown now. The best minds in economics cannot un-wrap the puzzle and are split into two opposing camps; the Austrian’s who decry artificial money expansion and believe that it will end in a heap of hyperinflation and the Keynesians who believe in stimulus almost at any price, determining that canny Central Bankers can reverse the worse effects as economies carry forward under their own steam.

The debate seems to be settled now. The IMF has thrown in the towel on over-aggressive austerity, determining that every Euro extra in taxes and spending cuts is not having the effect of taking 50 cents out of the economy but maybe as high as nearly two Euros! That’s a whopper of a strategic u-turn. So looks like the dye is cast, it’s more fiscal expansion. You’ll see the rate of expansion in the US, UK and EZ monetary base among the graphs.

Hold on for the ride. On both sides of the Atlantic both the FED and the ECB under Draghi are committed to open-ended, almost unlimited money printing as developed economic regions battle with the headwinds of high unemployment, poor consumer sentiment and high debts, both private and national. Meanwhile The Bank of Japan has come to the party as has the Chinese Government, determined to plateau its slowdown at about 7% GDP growth.

The Inflation/Deflation Fight

The big global arm wrestle fight between downward deflationary forces from excess unemployment, tepid consumer demand and poor credit markets and upward inflationary forces from money printing and higher commodity prices has created a hiatus. On both sides of the Atlantic inflation, which is currently mute, at least on official measures, remains range bound between 2% and 3%, but watch this space because repairing credit markets and rebounding consumer sentiment and property values especially in the US, will tip the balance towards an inflation break out. Remember Central Banks and Governments caught between heading inflation off at the pass by rising interest rates and reversing quantitative easing too early will risk a big double dip recession. That might partially explain the continued rise of precious metal prices especially gold, which when looked at as a currency or store of value, continues not to disappoint those fleeing holding cash purely in fiat currencies.

Right now the USA is showing increasing strength, pockmarked occasionally by reversals in early economic indicators. But rising car sales, which are also mirrored in China is a good indicator, as is an improving property market after several years of deleveraging by US consumers. Europe remains in much worse shape badly damaged by the lethargic and confused policy from its leaders but with Merkel, now supporting Draghi, there are grounds for some optimism that the Eurozone will find a way, even if over very bumpy waters and slowed by domestic German political concerns until its next general election.

And so we maintain a watching brief as we head towards the Winter but a watch with cautious optimism that a 2008 reversal or worse can be avoided, albeit at the price of inflation much higher than the current consensus.

Will it Work?

Is it working? Will it work? If it does, just what kind of inflation will we be left with? Well we’ll know in time. In these early days it’s pretty damn well impossible to tell if positives are sustainable or purely driven by stimulus. The stock market, although, loving the sustained low borrowing rates and increased easing by Central Banks is, itself, uncertain. The US stock market is selling at 13 times earnings well below historical peaks, meanwhile the European stock market is nearly 40% below its former peaks representing a juicy buying opportunity if you’re convinced that Europe will rebound.

Notwithstanding the backsliding by the German, Dutch and Finnish finance ministers, there is certainly much better hope for the Eurozone. The decision by Prime Minister’s in July to move to a banking union and to break the link between the Sovereign and its banks by ESM intervention and OMT is a big step forward. European bond yields have come down, Spain awaits calling for assistance and even the Greeks now look less likely to jump overboard. Still, while these steps will steady the ship it’s impossible to see how excessive national and private debt can be carried forward indefinitely without relief in the form of haircuts or, which may be more likely now, by inflation.

- Eddie Hobbs

IMF Cut Through Bull

Fri, 14 Sep 2012 10:19:00 GMT

Want to really grasp the Irish economy through all the BS? Set aside two hours, a glass of water and a vase of anti-depressants because it’s all contained in the latest tome by the IMF who clearly understand the gaffe better than many of our mouthiest politicians. Here’s some sobering takeaways;

The debt overhang is a shocking 210% of disposable income, double the USA. Spain's is 130%, UK 150%. Even ten years into the crisis, by 2017, Ireland will still be at 185%- way above the starting point of other stressed economies.
Net Wealth has collapsed by a third and continues to fall while taxes have risen steeply. GDP per capita in 1985 at €17k rose to €40k by 2007 but has fallen back to €36k.
Getting your income chewed alive at 52% happens in Ireland now at just once the average wage for a single PAYE worker, that’s a little under €33 grand. In the UK where the top bite is also 52% you need to be earning 4.4 times the average wage and 8.3 times in the US where the top bite is 43%. Even in socially-minded Sweden where the top is 57%, it kicks in at 1.5 times average wage and at 1.8 times in Finland.
Nearly half of our combined savings is being directed to paying off debt, taking cash out of the domestic economy which can't recover without new lending. The estimated real growth in income is just 0.2% pa. Without intense debt restructuring and some debt relief, how can consumer spending recover to create jobs?
During the madness, the entry level before you entered the tax net, doubled to 50% per capita GDP meanwhile day to day Government spending jumped from 27% to 38% of GDP. For example social welfare doubled, child benefit trebled and health and education combined, leapt 118% mostly on pay.
The IMF who state they believe in equal sharing of the burden while protecting the weakest, did not prescribe Property Tax at 0.5%, but suggested that it would be pointless below 0.2% of value. Evidently the recent headlines are Government spin, painting the IMF as the bogeyman to bind up coalition divisions.
Home affordability is back to 2001 levels relative to per capita income but the damn debt overhang is as dampening as the lack of credit.
Finally, just in case you thought I was making it up, the IMF tell us that Public pay in Ireland is 3% of GNP higher than the EU average and named as especially high are Secondary Teachers, Nurses and Hospital Consultants - much of the payroll. No need to take a pill for that one.

- Eddie Hobbs

Accountants won't want to act as Bank Patsies

Fri, 14 Sep 2012 10:17:00 GMT

Joan Burton should really ring Matt Elderfield at The Central Bank where they take defining advice seriously. The Minister is setting up a panel of Accountants who are to explain bank mortgage restructuring proposals to distressed homeowners. Funny thing though, the terms of engagement preclude Accountants from, well, actually giving advice. They may only give information and for the privilege Joan’s new breed of bank clerks are to get €250 plus Vat a pop. Now call me picky but surely that doubles the problem?

First the Accountants can't give advice, then they get paid by the bank, and so are acting as the banks agent. Now I know lots of Accountants, folk who take their profession, independence and integrity quite seriously and I can't see many, except the cash-starved, happy to act as bank patsies in political theatre orchestrated a Minister who, evidently, has gone native.

Self -Serving Cowards Left Us All Down

Fri, 07 Sep 2012 17:07:00 GMT

Judgement day. It's arrived. In the early stages of the crisis as incremental austerity wrapped itself stealthily around the economy, mostly it was noise, warnings about Christmas future. Now it's deeply personal. Budget 2013 will be nothing like what has gone before. Home care services for patients or pay at among Europe's top rates for HSE brass? That's the question disability groups should have on their placards outside Leinster House because it's the truth. Minister O’Reilly’s assertion on RTE’s Primetime Thursday night that disability services should never have been on the list tells us all we need to know about the HSE top brass, cocooned within the Public Cartel that is Croke Park.

Union godfathers and their political lackeys, terrified to confront them, will twist on the hook. Broadcasting academics employed by the State will tip toe past. Every trick in the propaganda manual will be repeated to defend the cartel, especially hiding behind bewildered low paid public workers, the old don't hit me while I'm holding the baby lark. But be clear, average pay over the crisis has hardly changed and at nearly a grand a week sits 50% above the private sector. Even adjusting for older ages, higher education and skills, the gap is indefensible. The HSE brass attempted to shaft the disabled to protect overtime, premium rates and allowances, it’s as simple as that and the Government retreat this week is tactical, nothing more.

Blame the banks, we'll be told but don't be fooled. Stephen Donnelly Independent TD points out that Ireland's bank bailout at nearly €14 grand per capita, , is three times Iceland, four times Greece, ten times Spain, 23 times Portugal and 198 times Italy, all in distress. But even if ongoing attempts to offload the €64 billion we piled into the banks to the new EU central fund succeeds, the gulf between income and expenses will be largely unchanged - because of economic shrinkage. Simply put, Ireland is a much smaller economy but with a grossly oversized pay bill.

Draghi’s ECB council by introducing the new unlimited OMT programme together with conditionality and outflanking the Bundesbank as the dissenter, is welcome news and may mark the beginning of the end of the crisis asthe ECB takes on speculators – but it does not change the Irish deficit or the fact that the State has an inability to deliver on Croke Park and the Alpine public service pension liabilities

Globally many countries are struggling with debt in the red zone. The world total is running at $48.8 trillion and growing by a million every three seconds. But nowhere in the developed world has any parliament allowed itself to be cowed by a labour cartel into immunising its insiders from the effects of economic shrinkage.

Until now the bitter reality of what went down behind closed doors in Dublin 2 hasn't sunk in. But it's judgment day as the public get it, it’s them or us, our fundamental services or excessive pay in large parts of the public sector elite.

Mainstream political parties will be shifting nervously as public opinion swells from distaste to palatable anger, because Croke Park is defended by the Labour party, its political arm, by Fianna Fail its laboratory birth mother and by Fine Gael, who hopelessly compromised principle for power. All are on the wrong side together with the public broadcaster RTE which, in my opinion continues to give apologists soft interviews and whose current affairs programming has studiously avoided tackling the issue with ruthlessness and impartiality.

The Croke Park Agreement is and always was a surrender of power by the political establishment to a powerful insider tribe. At the outset few wanted to listen. On a radio panel discussion, Olivia O’Leary disapproved my prediction of what would happen – we are all in this together, Olivia pleaded. It was an understandable and common human plea for unity, for solidarity, for community. But we were all never in this together, just ask the disabled protesting outside Leinster House for their version of the Croke Park agreement.

With 70% of the HSE budget spent on labour, cuts to the core was always on the cards but no political leader chose to fight Croke Park. When the history of the crisis is written, let it contain a damning epitaph for the timid and self- serving cowards that let us down. There is no O’ Connell here.

Don't Forget Your Shovel

Wed, 18 Jul 2012 23:00:00 GMT

The only way Ireland is going to get a Government-inspired stimulus that creates long term sustainable jobs is if there's an Alien landing on St Stephens Green with a cure for stupidity.

Nothing much has changed since Christie Moore first sang about Ireland's lost generation in London, "Don't Forget Your Shovel if you Want to go to Work" . Yesterday, as feared, the Irish political establishment returned to to dig the hole to Annascaul, promising to spend €2.25 bn on the national credit card to build "shovel ready" stuff. This time it's different? Hardly considering the motorway through Minister Howlin's constituency.

The forever earnest Minister-teacher, reckons the package will deliver 13,000 jobs that's a return of one temporary job per €173,000 spent of our money, well actually our lenders money. Meanwhile a fresh sign has appeared at the cabinet rooms Leinster House; "Quiet Please Politicians at Work - Voter Sums Tricky". What kind of crash does it take for an Irish Government to learn that you do not prime an economy with one off construction? What happens to workers thereafter?

Motorways, bypasses, medical clinics, schools, buildings all, monuments to the Ministers that built them as former John the Bull O'Donoghue reminded his fickle constituents from the Sports Hall in which he lost access to his lavish expenses. Once again, when tested, politicians demonstrate how economic incompetence, combined with the electoral cycle, creates a vicious feedback loop of failure by those we corpulently overpay to grasp how prosperity works. The political truth is that, ultimately, it doesn't matter that the stimulus won't work, just as the theft of billions in private pension assets hasn't worked. The trick is to give the appearance that it might work to the gullible, then spend the next cycle making excuses with replacement policies that won't work either.

Here's what the economic council of three teachers and a union rep, aren't prepared to grasp; Sustainable full time jobs comes from creating the conditions within which productivity and prosperity can blossom, that means from within the private sector. You don't improve productivity by subsidising more digging, instead, save for education investment, you create temporary work, no different to famine roads. If you want to prime the domestic economic pump, you do so through consumers and businesses.

The stimulus would be far better focused on long term growth sectors, jeez even targeted spending vouchers for consumers would be better, anything but the "shovel ready" big visual photo-favourites of the political class or in stunts like unsustainable social subsidies. But politicians don't get that which is why they've already robbed €457million out of pension schemes to keep jobs in restaurants. This latest stimulus is no different. Long term expansion should be in energy, bio-tech, gaming, services etc but not a sausage for these because it would require us to do something Irish politicians don't trust us to do - to think long term, like the Germans do. Things that might work are high risk, not "shovel ready" you see, wont give the immediate appearance that the Government is "doing something". The cost of hiring in the private sector which is the net contributor to the economy is to remain punishing. There isn't a word said about lowering the tax cost of working harder, instead more taxes are promised. Course, not a sausage about repealing the Public Cartel at the heart of all this economic nonsense which would help lower the cost of the State on the private sector.

So you can safely put the headstone up now. This time is no different , the FG -Lab Government is a carbon copy of what's gone before. When in trouble, reach for the shovel. Paddy is happiest when he's digging.

Real Hope Now

Thu, 05 Jul 2012 23:00:00 GMT

There is real hope now. The Brussels Summit, has taken the bold decision to move away from national banking systems towards a banking union regulated by the ECB with it’s unlimited liquidity and to bypass the sovereigns and recapitalize banks from the central fund ( EFSF and ESM). Off the table is the risk of Eurozone rupture for the time being.

You won't wake up some morning to find banks closed, Ireland out of the Eurozone and Europe balkanised. That is worth celebrating. During a TV interview at Punchestown Races recently ( Interview ). I asked Taoiseach Enda Kenny if he was a "lucky general", something Napoleon sought in his commanders. At first he mistook it as criticism before grasping the notion. Kenny is lucky, he's played the right hand and the breakthrough is real thanks to the combined fear of France Italy and Spain finally mirroring Ireland's two year old diplomatic strategy. That's also worth celebrating.

Europe has finally grasped, from the Greek electorate to the German Bundestag, that there is no going back. Its forward or ruin. But huge tasks and risks remain;

What France Italy & Spain Face

France, Italy and Spain, just like Ireland cannot afford to meet all the liabilities both on and off the national balance sheet, from future tax receipts. That means painful structural reform, shrinking the relative size and cost of the State. In the meantime the excess debt built up from decades of deficit funding will have to come down. That, for many economies, will act as a drag on growth for the next twenty years probably in the order of 1% to 1.5% pa of GDP. It is going to take herculean efforts to resolve these structural problems and, arguably, a new generation of politicians will be needed to do so. Similar problems face the United States which reaches its Congress-imposed borrowing ceiling at the end of the year and Britain which is in hock for over £1 trillion. Both economies however benefit from running their own currencies and have the wit to cut costs and adjust taxes without creating a negative feedback loop

How Ireland can take off

Ireland, once the excess banking debt is finally removed through successful renegotiation of the detail, has the capacity to take off, at the rate of a newly industrialised economy. That's not pie in the sky. With continued consumer debt deleveraging and proper application of the new insolvency regime, consumer confidence can return and spending can recommence especially if the expectation shifts towards higher rather than lower prices next year.

How Pessimists May Be Wrong-Footed

Pessimists, locked into past positions still point to the potential for the perfect storm; Eurozone failure, US recession, Chinese bubble burst and a new regional conflict in the Middle East. They forecast a return to a 1930s style depression. But there is another scenario now supported by the initial steps Eurozone policymakers made last week towards a federal Europe. This is further progress in Europe as skilled diplomacy surmounts differences, further recovery in US consumer spending and housing is helped along by the massive US cheap gas glut, Chinese growth flattens to 7% and war with Iran is sidestepped.

It’s OK to Start Dreaming Again

Put those together and the global economy could hit a genuine purple patch of 4% pa growth for the next decade giving Ireland much cause for optimism. So while you shouldn't put your life jackets away just yet, cautious optimism could be very well rewarded. There are lots of under-priced assets out there. Now is the time to tip toe out back to taking risks again. Watch as property prices stabilise, mergers and takeovers dominate headlines, stock markets strengthen and a new cycle begins. We will still be grappling with the legacy of debt, huge structural reforms and global imbalances but the future is worth betting on. So if you've got the cash but have been putting off splashing out on a new kitchen, extra bedroom or an extension, now is the time to ring the architect! It’s okay to start dreaming again.

Time to Move Back to Growth Funds

Now is the time to begin a careful but phased return to growth funds. We’ve identified well positioned funds across most fund ranges which you can transact usually at zero switching costs. If you’d like some help with yours just drop us an email through the website and we can take things from there for you.

The bottom of the market is impossible to call which is why I suggest a phasing back approach, repositioning no more than one third of monies, currently held in defensive funds, back into growth funds. It has been an extremely challenging time with every asset class under pressure and the stability of the banking system and the Euro in a genuine existential crisis. Stock markets climb on a wall of worry and while there are still many really big problems to resolve, the elevated risk of a banking collapse and Euro rupture has lessened considerably following last weekend’s Summit, to a point where the case can now be made to ease back into unprotected growth funds.

Treat this as phase 1. I’d suggest three tranches of movement back in order to lessen timing risk while benefitting from may prove to be undervalued assets, especially European equities. Later this year or next I hope to follow with suggestions on phase 2 and 3.

Inflation – the next cycle

The current cycle of saving and paying off excess debt is a natural human reaction when it is felt that products and services are likely to be cheaper next year. But that psychology changes when feelings shift to fears that prices could go higher next year. That’s when inflationary pressures mount, the game changes and inflation becomes a self- fulfilling prophesy. When inflation does hit, it can come quickly which has been the experience at the foot of other major inflationary turns in economic history, Germany 1923, the USA in 1946 and again in the early 70’s which started a ten year inflationary spiral with deeply negative real returns on fixed income bonds and cash deposits.

The next long economic cycle, starting in the early 80’s and characterised by downward inflationary pressure due to globalisation, ended with an almighty credit bubble burst. It is safe to say, we are at the end of that low inflation and low interest rate cycle, where money was cheap, leveraging got out of control and sovereign bonds were king. Throughout this period many Western Governments financed their promises by running uninterrupted annual deficits. Fixed Income bond yields are at historical lows, German bunds are negative, interest rates are on the floor, the ECB is set to cut rates again to less than 1% and a stimulus equal 1% of Eurozone GDP is promised.

What to Choose

In this scenario with equity markets, especially Europe trading at very cheap prices, all indicators point to the logic of loading up on global companies with strong balance sheets sitting on pots of cash and enjoying market dominance with muscular brands. It also points to commodities which have heavily peeled off in price in recent months in expectation of lower demand growth from the developing world. Equities and Commodities look like good value and potentially are on the cusp of a long term bull – but nobody can say for certain if a trapdoor event couldn’t reopen and trigger another Lehmann-style rout. It is still fragile ground but that’s when it time to move, not when everyone else is doing so and prices are higher.

Still I urge caution and suggest the beginning of a phased movement back to funds that gives your money exposure to Europe, USA, Asia / Pacific and Commodities, beginning now with a 33% shift back into “risky” funds. Remember if you need a steer on your own funds, whether personal or pension just get in touch here: Contact Eddie.

Eddie Hobbs July 6th.

Lifeboats Ready?

Thu, 21 Jun 2012 10:46:00 GMT

Honey I'm home! The Eurozone crisis has returned with increased venom, shrouded by the events in Poland and whether Mick “Wallets” would make it! As luck would have it Mick did make Poznan via the Aer Lingus staff car park, Ireland lost 9-1 after 270 minutes of football and Greece stayed in the Euro - but only just.

Monday morning, markets rallied after the Greek election gave pro-European parties the nod, but by 8.45am, the party ended, the air was left out of the bouncy castle and someone unplugged the amplifiers. The crowd filtered home to gawk at Spanish borrowing costs rise beyond 7%. Spain is accelerating towards bailout, not helped by the decision to delay releasing the results of its audit of bank losses to September. The stench of political choreography fouling the air is driving confidence lower.

So where is it all going to end? The G20 in Mexico is hinting that major steps are imminent but the language of its agreement to “support the intention to consider..blah blah blah” is nothing short of a classic Sir Humphrey political fudge that relies purely on the appearance of action - but takes none.

The unspoken risk is that the political blocks, playing chicken with each other, will accidentally manufacture a rupture. Nobody wants to go there because it leads to the balkanisation of Europe, exchange controls, banking nationalization and a global depression. It could also lead, ultimately, to war. You have to be realistic and assume that such extreme outcomes are highly unlikely.

That leaves three main scenarios.

Scenario One – Mega Bailout

There is a huge bailout for Spain, likely to be followed by Italy whose yields are rising just behind. That would mean a bailout of at least €1 trillion. Hard as it is to contemplate, Scenario One still doesn't solve the underlying issue of too much debt and economic stagnation. Conclusion; it would fail

Scenario Two - Muddle

There is another muddle through with a half-hearted attempt to create the illusion of solidarity but still save the Germans from heavy lifting. Included in the muddle is the notion of a long term common Eurobond which would carry debt in excess of 60% GDP and include a Eurozone banking guarantee and banking union. That would certainly help firewall sovereigns from bank losses but it still doesn't address the underlying issue. Conclusion; It would buy time but ultimately fail.

Scenario Three- Federalisation

Surpluses are smoothly moved to deficit areas throughout the Eurozone but this requires deep fiscal and banking union, depositor guarantees, budget control from the centre through a common Minister for Finance, financial transaction taxes and clear path to a United States of Europe with a common federal taxation system. Conclusion; Together with limited debt write offs it stops the crisis but neither European citizens or their national Governments are yet sufficiently informed, frightened and ready to leap together into a union that nobody really trusts because of the gaping democratic deficit at its imperial heart in Brussels.

Never waste a crisis. Europe is attempting to radically reinvent itself in the middle of one. Ironically it is only at the precipice we see the best from human invention, reform and evolution. The bad news is what happens if they screw it up.

So how do you protect yourself?

You can forget the politically correct brigade lining up in print and radio telling you that there are local safe havens. There are none. Ideally you should have a lifeboat ready. That means (a) having some money outside the Republic of Ireland and (b) outside of the banking system altogether which includes Germany and Switzerland.

That’s why I continue to favour a Luxembourg fund with zero entry and exit costs and a running cost of 1% pa that holds Inflation-Linked securities guaranteed 44% by the USA, 23% Britain with the remainder Sweden, Australia and Japan, limiting the European exposure to 17% comprised of France, Germany and Italy. Hedged to Euro, the fund, managed by Standard Life Edinburgh, continues to produce results. The minimum is €50k and the custodian is Bank of New York Mellon.

But, buying on the dips, I continue to recommend a modest and limited holding in the ultimate world reserve currency, gold, which will rally if, as expected, more quantitative easing is released from the Fed. Gold will respond strongly to expectations of further inflationary policies which are the mainstay of policymakers response to the deflationary threats of economic contraction. Gold also responds to higher oil prices and we suggest holding it in the form of certificates directly from the Perth Mint in Australia, removing counterparty risk and avoiding derivatives. The minimum is €7.5k

Taken together both these can provide a lifeboat if the crisis metastasizes into something very nasty. If you’d like to learn more send an email through; www.eddiehobbs.com

Eddie

You can get a lot farther with a kind word and a gun than with a kind word alone

Thu, 07 Jun 2012 09:59:00 GMT

Al Capone’s advice on how to negotiate what you want under stressful conditions was ignored by the Government and the 60% of the electorate who listened to them and backed an already defunct fiscal treaty. No sooner was the Irish result in but German policymakers, far more fearful about the impact of a Euro blow out from Spain’s rapidly petrifying banking system, dismissed any restructuring of Irish debt. Kindness alone won’t do it, see, and neither will acting the poster boy for yesterday’s crisis.

Here’s what Lucinda won’t tell you. The Irish phase is over. The next phase of the Eurozone crisis involves Spain, Italy and potentially France. Ireland was merely an Hors D’oeuvre on the starter menu. That we offered ourselves up for the Euro in the opening phase is appreciated and remembered especially in Berlin. They’ll erect a cross someday, maybe even a few toasts in Brussels with the claret; three cheers for the Irish, remember all the French and German bondholders they saved, remember all the Treaties they recklessly put to referendums , remember 1745 at Fontenoy, hip hip hooray for the plucky Irish always ready to fill the breach!

When we voted for the treaty we played our last card. What remains is pure hope value that we can rewrite the contract we signed in 2009 during the extreme events and chaos to come this year and next.

But The Fiscal Compact Treaty was last year’s cure. It’s already failed, just look at the tanking Euro and the extraordinary German and US bond yields which are a measure of extreme risk aversion. The Treaty was never going to work anyway. The notion that every member of the Eurozone should simultaneously engage in cost cutting over many years in one Germanic act of self-discipline could only have been brewed up by civil servants and politicians desperate for compromise in the early hours of the morning and running out of hot coffee and croissants – but the Irish Government swallowed it cold anyway.

Take the latest kite flying; that all Eurozone debt above 60% of GDP might accumulate in a European Redemption Fund guaranteed by all and cleared down over 25 years by attacking the balance with surpluses. Looks good on paper, especially for us by halving the weight we are expected to carry, but is it just more nonsense from policymakers desperate to avoid the inevitability of proper fiscal union or chaotic rupture?

Unified by Garibaldi in 1861, Italy has exceeded 60% debt / GDP for 105 years of its existence as an independent country while Greece has gone burst seven times over the same period. The Italians, to achieve the 60% target would have to hit the brakes hard to deliver a primary surplus of 4% every year for 25 years. Since the 1960’s Italy briefly touched surpluses but only in the early 90’s. That means Italy has been running the show on deficit borrowing 90% of the time since Brian Cowen and Bono were born!

Markets aren’t stupid. If as I suspect the June summit fails to deliver the goods, expect the crisis to return with mounting ferocity, maybe even enough to shake the mainstream Irish media off the teat of deluded establishment propaganda that things are going to get better. The truth is that the dominos are lining up horribly and, unless there is dramatic and radical change shortly, the Eurozone will rupture. Journalists should now be asking the Government for Ireland’s contingency plan because not having one is as reckless as the policies that caused the crisis. If Fine Gael and Labour wish to avoid the odious legacy enjoyed by Fianna Fail, they ought to start planning one fast.

- Eddie Hobbs

Shark in the Water- news from the Global Financial Correction

Tue, 05 Jun 2012 15:07:00 GMT

While the Boys in Green bring welcome distraction in Poland, the great global financial correction which began in earnest four years ago reachs a crescendo. If it were a Hollywood movie, about now, we'd see our first sight of the shark. The stuff is head wrecking but it's important to understand how to prepare as events we once thought the most unlikely, move from the extreme to the centre.

What's next up?
There's a race on between Cyprus and Spain for the next bailout, the former for the sovereign and the latter for its banks, either of which could happen before the Greek elections on June 17th which are likely to put Syriza in power, (the Greek equivalent of Sinn Fein) to be followed by nationalisation of their banks and unilateral default on their restructured debt. The result will be Greek exit and bank runs as cash leaves peripheral economies. International humanitarian aid may follow if Syriza, a 4% left wing fringe party until a few months ago, cannot match its rhetoric with competent crisis management.

What does it mean for you?
The global financial system will experience another major shock, accompanied by bank failures and nationalisation. Pension funds and investments will once again fall heavily and a new round of global summits will follow coordinated central bank interventions with fresh rounds of stimulus to prevent deflation and depression. A surge in inflation, which has been kept at bay by downward pressure from debt pay downs, tighter credit and lousy consumer confidence, will get closer as currencies are further debased. The alternative is a decade of economic stagnation in ageing Western economies.

What should you do?

Do not exceed home regulator deposit guarantee levels for deposits regardless of bank credit rating.
Buy some gold, at least equal to 10% of your Euros.
Shift some cash out of Ireland and out of Euros
Expect a tax surge on financial assets to finance debt write downs, eventually

The Fiscal Compact Treaty is past but will it make a blind bit of difference?
The short answer is no. The treaty is designed to deal with future Government debt-financed bubbles. The problem is the hangover from the last bubble which started in the 80's. This is the great misdiagnosis underneath the failing response from deluded policymakers who conclude that there is a fix. There simply is too much debt and not enough growth to finance it.

Why are the responses to the crisis, now in its fourth year, failing?
Because on the one hand the Germans think that you can cure morbid debt obesity by vigorously rationing calories and the Yanks who think you can do so by feeding the patient more hamburgers. Neither can work. The only workable solution is drastic weight reduction through surgery and then a stay healthy programme. In economic terms that means the end game will be major debt liposuction and gastric banding across many Western countries, both national and consumer debt. Ireland, despite our progress, is one of the most morbidly obese patients on the planet when private, corporate and national debt is added.

But why don't politicians say that and get on with it?
You know the answer. Politicians live in short electoral cycles and hate delivering bad news to voters who typically punish them with reduced market share. Everybody wants to hear good news so bad news is kept hidden until the crisis blows up again with escalating ferocity. The can is whimpering in anticipation of the next EU kicking at the end June Summit. Unless there is a clear path to fiscal union supported in the interim by a cross border banking guarantee, debt pooling and debt write downs, the Summit will come nowhere near to out-swimming what’s in the water.

- Eddie Hobbs

Banks hoard while Families fall apart

Thu, 19 Apr 2012 10:05:00 GMT

Exasperated, Pat Kenny asked on Frontline Monday night, why the several billions we've put into the banks to buffer against consumer insolvency, hasn't yet been used? Nobody answered the question. Given that the IMF has been unequivocal in its view that no domestic economic recovery can occur without first tackling consumer insolvency, it remains the burning question of our time.

Four years into the crisis and why do we not have yet a non-judicial and modern insolvency process? The answer is simple and grubby; those at the top simply didn't care. Insolvency doesn't affect them, only the private sector and the low paid in the public sector. Instead they are snuggly quarantined within the ruling pale buttressed by the Croke Park Agreement. This lethargy and lack of urgency at the top is helped enormously when fear and ignorance is spread by the high priests of moral hazard, those who feel threatened by the scale of insolvency that includes banks and their right wing protectorate in the media.

But now that the Insolvency Bill, which is joined at the hip to the Troika bailout, has arrived, the objective of this hard right cluster is to render it toothless, a mere box ticking exercise that releases the minimum amount of funds into the maw of the consumer insolvency crisis. Let's hope they fail.

The key performance indicator for economic recovery will be the number of debt settlement and insolvency agreements that will be lodged with the proposed Insolvency Service attached to the Dept of Justice. But without robust Central Bank adjustment of the Code of Conduct for banks, compelling them to fairly engage with Insolvency Trustees and the creation of an Ombudsman to arbitrate on disputes between debtors and creditors, the Irish economy is directionless, propelled forward by exports but dragging, on the sea floor, a domestic economy deeply anchored in the silt of unresolved consumer debt. Getting it right isn't just about economic recovery, it's also about recovery from trauma.

Nobody is measuring it, but the impact of prolonged exposure to open-ended and overwhelming indebtedness is mauling Irish society by destroying family cohesion and happiness and, in many cases, leading to separation and suicides. Further delay is intolerable because, not only is it economically stupid but because it is inflicting horrendous wounds on thousands of Irish families.

- Eddie

Will Irish Scammed Irish Consumers be treated as fairly as British?

Thu, 19 Apr 2012 10:05:00 GMT

The Central Bank is poised to take enforcement action against most leading Irish lenders for duping vast numbers of Irish borrowers into paying for worthless Payment Protection Insurance (PPI). This cover can temporarily pay your loan and mortgage if you get sick or lose your job. Attaching it to a credit agreement reduces risk to the lender and pays lucrative commissions typically 40% of the premium, usually priced at 6% of annual mortgage repayments. The scam, which is set to cost the UK lending industry £8 billion, is the failure to disclose the sale of the insurance to borrowers many of whom simply don't know they are paying hundreds of Euro per year for it or where it has been disclosed, the failure to explain its exemptions, terms and costs.

But huge compensation payouts for PPI mis-sold in Ireland may be scuppered because the Central Bank cannot legally apply its enforcement powers before it first introduced a detailed Code of Conduct in 2007. That means a deluge of claims will fall to the Financial Services Ombudsman (FSO) when consumers twig they've been scammed.

But unless the FSO seeks a simple adjustment to its six year rule, any claims about PPI unknowingly entered into over six years ago will be repudiated by it. The six year rule can be changed by simple Ministerial order or by a High Court ruling to run the clock from the date that consumers recognise the loss, not from the inception of the mis-sold policy.

So will the FSO fall victim to the classic civil service crisis response of shrinking the scale of the problem to fit its resources or will it gear up and take on the big boys guaranteeing to rule on any PPI mis-selling within three years of consumer knowledge? The moment of truth has arrived for the Ombudsman. How it jumps will determine its legacy.

- Eddie

96 Years Later, We Remain Colonised

Thu, 12 Apr 2012 11:59:00 GMT

A 77 year old man takes the Luas to St Stephens Green, walks to the Dail gates and, in what his daughter would later describe as his final political act, commits a very public suicide. It could, but didn't happen in Dublin but, it did happen in Athens. Dimitris Christoulos suicide has lifted the lid on the excruciating disillusionment and hopelessness of extend and pretend policies that have failed to tackle the personal insolvency crisis. A week after Mr Christoulos finally ended his debt burden in front of the Greek parliament, the IMF singled out excessive personal debt as the brake preventing economic recovery.

Mr Christoulos, a retired pharmacist and anti-drugs activist is an anathema to the let-them-burn brigade, who’d prefer rigid adherence to the failed financial dogma of moral hazard, the policy of avoiding debt restructure and relief at all costs - especially costs to them. But by taking his own life Mr Christoulos has helped to strip away the detachment between those lightly bruised by this economic depression and those overwhelmed by it.

Rage and there has been much of it, has been focused on bankers, developers, bailout rescuers and better off neighbours but, strip away the rhetoric, look past the dumb decision to bail out banks with daft promissory notes and, Ireland ninety six years after The Easter Rising is a failed State, measured harshly by our savage annual deficit. Perhaps it is because of low self- esteem that we think don’t deserve higher standards or perhaps it is a hangover from colonisation where pulling strokes on authorities made some kind of sense but, whatever the cause, we accepted crony capitalism, cheered political corruption, voted Ahern back a third time chuckling at his Tribunal evidence, accepted zero accountability from a vastly expanded and grossly overpaid public service establishment, ignored cartels in the professions and impunity for political leaders - until we were burst. Then it became personal.

Broach this subject and even today, despite everything that has happened, many of us still don't want to consider that the enemy is within. Ireland is unreformed. We are still a society run for the benefit of cosseted insiders. Just look at the Croke Park Agreement and its political support. Look at the Household Charge, money collected to feed into an unreformed and bloated local services network where sickies run at multiples of what would be tolerated elsewhere.

This week we hear from teacher unions who, despite cuts, enjoy among the highest rates of pay and pensions in Europe, openly threatening us if their privileges are reduced. All these, report to a political elite whose own pay and pensions are vastly in excess of what we can afford as a broken State, summed up by the obscene fiction that we can pay over a hundred billion in pensions from an asset pot that's gone down the crapper into failed banks.

Meanwhile at least a quarter of a million Irish people, just like Dimitris Christolous, are behind on utilities and mortgages, practically all of them from the private sector, some from the low paid public sector and all excluded from the economy while the squeezed middle is bled for more money - rather than face the truth.

The truth is that even if we regain a foothold in bond markets next year, we continue to feed an economy that is run, primarily, to maintain the lifestyles to which the insiders have become accustomed in a democracy that maintains the delusion that its centre of power is its parliament.

You want to learn how this broken State operates, seek out the untouchables, those who get paid most for the least effort and decide the fate of the rest of us. That is real power. The rest is mere window dressing. When the Brits left we merely swapped an oppressive foreign occupier for an internal one and when the Trioka leaves, we will remain colonised.

- Eddie Hobbs

Open Letter to NAMA

Thu, 15 Mar 2012 17:29:00 GMT

NAMA, which isn’t covered by the Freedom of Information Act is in the news for its appearance at a Dail Committee briefing yesterday. I’ve written an open letter today March 15th in my column to Chairman Frank Daly giving NAMA a list of important questions it hasn’t been asked. These questions and, the answers to them, matter. You can read them here - use the magnify tool for clarity.

Eddie Hobbs

Why I'm suing the Irish Independent

Fri, 02 Mar 2012 12:48:00 GMT

Last Saturday the Irish Independent ran a front page story. Tellingly, that story was taken down from its website by lunchtime and no longer exists on line. Earlier, the Irish Independent failed to show up on The Marian Finucane Show to defend its lead story despite requests from the programme producers to do so. The serious allegations made by the Irish Independent are patently untrue and, unhappily, it's response to my request for a front page retraction has been unsatisfactory. Under the circumstances I have instructed my lawyers to issue proceedings on my behalf against the Irish Independent. I will not be making any further comment.

- Eddie Hobbs

Kenny needs his own Atlanta

Thu, 01 Mar 2012 14:11:00 GMT

1864, and after four years of epic struggle the Union was bone weary. Grant had lost a third of his army in a series of sidling battles with Lee in Northern Virginia while Lincoln, first elected in 1860, was desperately trying to become the first democratically elected president to seek a second term in the middle of a war. His chances looked doomed as a populist anti- war camp was gaining widespread support. Saying no to war, sundering the Union and abandoning millions of slaves was easier than continuing on. But Lincoln caught a break. Sherman took Atlanta, the commercial capital of the South, split the Confederacy in two and guaranteed Lincoln's second term.

If Kenny is to save himself and his Government he needs his own Atlanta. Despite Government attempts to restrict the debate to the substance of the Fiscal Compact we all know what this referendum is really about . As Atlanta fell for Lincoln, so too must Ireland's toxic national debt for Kenny, especially the €31bn created from dust by the Irish Central Bank. We are currently obliged to repay this perversity at a punishing interest rate and schedule. It will then be returned to the dust from whence it came on Dame Street - all to save a dead bank and a principle about not monetizing debt. The resultant debt / GDP is unsustainable at the rates of interest we are expected to pay. All Greece has done is to distract us from this inconvenient truth.

Kenny can win the referendum but only if the ECB board is first persuaded to turn a blind eye to Ireland not burning €31billions. Fear will drive the Yes campaign as assuredly as anger will drive the No one. Politically its that simple. But what of the economics? Pure horse sense tells us to stay out of this Fiscal Compact simply because it cannot work. Ireland's economy cannot carry the national debt, the internal debt like the Public Sector pension liability mountain and the vast scale of private indebtedness. How can increased taxes and further cuts ignite growth when both personal and Government spending are in decline?To believe that exports can carry the day anymore is delusional, not without domestic economic recovery. Austerity isn't designed to create growth, it is designed to bring the fiscal deficit back into balance. That is incompatible with growth. Still Eurozone policymakers talk the language of austerity, not growth and now wish us to vote for it.

The sooner that we collectively face reality the sooner we'll start thinking our way out of this mess. Without a Eurozone growth compact, debt relief is the only route we can take. Every other effort including carrying on the great extend and pretend game, is simply prolonging the agony. Despite rhetoric to the contrary the EU policymaking elite are bricking themselves over the Irish referendum because it threatens to unravel the illusion that Europe can adhere with Germanic discipline to a narrow set of rules. There is no chance of that working by first condemning large parts of the Eurozone to decades of punishing debt serfdom. A common currency cannot function without much closer political union and without surpluses passing freely to deficit economies. Just as the economic power of the Northern states helped to rebuild the South, rich Europe must invest liberally in struggling countries, starting with emancipating them from the yoke of the excess debt they simply cannot carry.

For that reason I find myself reluctantly in the No camp until Europe wakes up and finally gets the message.

- Eddie

Irish Cash Mountain Burns to Death

Thu, 23 Feb 2012 13:00:00 GMT

We’ve had a thirst for burning things that frighten us ever since putting to death upwards of 80,000 witches across Europe over 160 years to about 1660. Rome approved but that didn’t help much. The call to burn the bondholders is equally useless today, largely because they’ve taken their winnings and fled. That leaves us with the infamous €48bn bill we’re repaying on the €31bn ploughed into IBRC, the zombie bank that holds the mortal remains of Fitzpatrick’s and Fingleton’s handiwork. Designed by our BFs at the EU, the schedule is priced at a truly satanic interest rate of 5% and will cost us €3,100 million each year to 2023, €2,100 million in 2024, €900 million to 2030 and finally a cool €100m in 2031.

But since we’re still itching for the type of bonfire the Greeks were allowed, why can’t we burn that lot? Well, the Central Bank of Ireland will put a match to all that capital the instant we pass it over to them in a vanishing spell straight out of Harry Potter. Mind boggling huh? In a perverse summoning spell all those Euros were created out of thin air by wizards at The Central Bank on Dame Street by uttering the magic words, Emergency Liquidity Arrangement. It was quantitative easing by the back door - money printing to you and me and, represents about 0.3% of Eurozone money supply which stands at a gargantuan €10 trillion.

Surely then to help the Irish economy leap from years of listlessness to growth, to reduce our Debt / GDP from an estimated peak of 113% next year to closer to the European average and which would instantly bounce us out of the bailout programme, we should be permitted NOT burn this money? After all there’s no bondholders, no lenders and you’d hardly notice the extra cash in the undulations in Eurozone money supply.

Technically that would only require one third of the board at the ECB to agree and we can point to the effect of money printing in the US which is lifting its economy out of the mire and to the half a trillion created by the ECB itself just before Christmas which was lent to over 500 banks at 1%pa - practically free money.

Since the game has started with de facto money printing by the ECB, how can they hide behind precedent as an argument any longer? As for moral hazard, where’s the logic in forcing Irish taxpayers to own up to the responsibilities of the State by enforcing a policy that rewards speculative bondholders with zero risk investment? Where’s the logic in burning all that cash when there’s no lender just a principle against monetising debt?

How are write offs to the Greeks who’ve breached their covenants squared with continuing punishment for the cooperative Paddies? These are tough questions, but the toughest of all is to ask our European friends how they justify their implicit policy of piecemeal concessions to a country that’s sacrificed itself to save the Euro in light of their own covenant in Article 2 of the Maastricht Treaty? This says quite explicitly that an economic and monetary union is to be based on a harmonious and balanced development of economic activities whose objective is to raise standards of living, quality of life, social cohesion and solidarity among member states.

The tough question for Enda Kenny and his negotiation team is whether they are so enthralled by the prospect of been thrown minor concessions for good behaviour, that they are suffering from Stockholm Syndrome? Remember that’s where hostages are so empathetic with their captors that they end up defending them. Prove you’re not, Enda, take the Maastricht Treaty make them swear upon it. Publicly like in the old days

Eddie

Betrayal of Principle - why the EZ is failing Ireland

Mon, 20 Feb 2012 16:02:00 GMT

Like a shining beacon you know the truth when you stumble across it in through the storm of facts and reports that have marked our relationship with creditors since the crisis stated four years ago. To grasp precisely where we stand on the national debt, the aberration that is the loan for Anglo and how it is constructed, this report from Kevin Barrins of Acass Consulting (and which includes my highlights) is required reading for its sheer clarity of thinking and communication. It will help you understand how much of the media debate about burning bondholders is diametrically opposite to what we should do! I recommend it highly.

Click here to download the PDF

Life After Jaws

Wed, 15 Feb 2012 17:45:00 GMT

In 1975 Peter Benchley's book about a big fish was turned into a Spielberg blockbuster. It scared the living daylights out of audiences worldwide. Jaws stopped people swimming in the sea. Its dramatic technique was to build tension - by not showing the shark, just threatening us with it. By the time we'd caught a glimpse of the Great White munching its way through the middle classes we were simply too frightened to think rationally about taking a dip in the cold waters off Fountainstown, Salthill or Bundoran –every coastal village was Amity, Jaws lurked in shallow waters and we were dinner. But by the time Jaws II hit the screens we were hooting in derision at the burning rubber that marked its ending. The Jaws period had passed. So too is the Greek’s.

Last year Greek default was touted as the Great White, ready to eat our banking system alive and, with it, tear into the fleshy corpse of Europe. The narrative suited Eurozone policymakers, buying time before the fiscal compact and ECB quantitative easing that marked the end of the beginning of the Eurozone crisis. Now Eurozone policy script writers talk fearlessly about Greek default and exit.

The Greek economy has already shrunk -16% and is on track to exceed Argentina's -20% ten years ago. But unlike Argentina, the Greeks, within the Euro, have no positive incentive, merely more poverty for years to come. Greece continues to play chicken with its creditors, refusing to close a €325m gap after already announcing cuts to minimum wage of 22% and slashing 15,000 jobs from its obese public sector. But despite closing its annual deficit, Greece has continuously failed to hit targets, not least of all selling off up to €60bn in state assets. It will require budget surpluses for years to come just to hit its annual interest bill estimated to cost over 6% of GDP. The alternative is default, Euro exit, rapid devaluation of a new Drachma and inflation. The Greek banking system would be wiped and with it much of its citizen’s savings. The choice facing Greeks is either a prolonged series of muggings over many years or a truly savage once off beating in the ghetto. It’s a horrific choice but that is the price when the political elite cook the books and borrow excessively to finance unaffordable lifestyles for a public sector paid three times the private sector, while turning a blind eye to endemic tax evasion.

The tough line being taken with Greece by fellow EU members reflects a huge shift in emphasis. In the early days it seemed that only Greece, Portugal and, Ireland required structural reform through austerity. Since then austerity has clamped its jaws around Spain and Italy and to a lesser degree to most other member countries. The jury is out on how deep or shallow the 2012 economic dip across the Eurozone €9.5 trillion economy will be, but one thing is clear – the Eurozone needs a winner in the internal devaluation game.

That's where Ireland comes in. Ireland must be seen to succeed. Read from that an imminent soft restructuring of Ireland's debt with particular emphasis on the promissory notes for Anglo. But that will not prevent the inevitable ending. Greece has shown that it is the last few billion in cuts that cause the most precious blood to shed. That is precisely what union chiefs have written into the narrative of Irish social solidarity. By pulling the entire public sector to the safety of Croke Park the most vulnerable among the rest are to be offered up as the sacrifice.

Eddie

Tyranny of MARP

Fri, 10 Feb 2012 12:32:00 GMT

Banks are no longer being run by branch staff or local management but instead by faceless credit control tribunals through whom all credit restructuring and applications are being run. The result is a charade at branches desperate to maintain the fiction that somehow there is flexibility and agility. There is none. It has become a zombie banking machine that gives quarter to nothing outside of its narrow rules.

Instead the tyranny of MARP inquisition is being zealously applied to any borrower who dares to consider the heresy of rescheduling their home mortgage. Utter a word that you might like to explore stretching out the term or reverting to interest only loan and you'll be MARP'ed. Designed by a coterie of bankers and civil servants, the Mortgage Arrears Resolution Process, lauded as a consumer protection device, has been defiled into a process designed to give banks intrusive and powerful control over Irish mortgage holders. Each applicant is treated the same, regardless of their different circumstances in an endless stream of bi- annual financial confessionals.

You are required to outline in detail what you spend throughout your life and, in particular justify your family budget, to prove that you have properly sacrificed life's luxuries in your desperate bid to pay back the banks within the existing loan contract. You are then put in a dehumanising six month revolving review process that requires you to come back to the confessional to justify the whole thing all over again and again and again and again. Originally designed to provide a standardised protocol to deal with distressed home loans, MARP has become the standard for everything. Banking these days is no longer about submitting basic financial information to the bank but has warped into a demeaning, dehumanising and humiliating microscopic examination of lifestyle spending. Medieval Dominican friar, Tomas de Torquemada, the Grand Inquisitor would have heartily approved, reasoning that the purifying results of such cruelty justifies them.

Bank Serfdom or a Republic?

The new insolvency laws will be another test of just who is running Ireland, a Dept of Finance determined to enforce policy in favour of banks or her citizen's elected representatives? Under the new structure, guidelines are to be issued to insolvency trustees on what constitutes reasonable family budgets. Where the line is drawn will answer that haunting question. If MARP is anything to go by, the new insolvency process is going to be made as excruciatingly painful as possible to protect banks from losses regardless of the damage caused to families. Whether time already spent in MARP and other arrangements counts towards freedom day, when you'll have earned a fresh start, is another big test of whether we are to have a genuine breakthrough on our hands or just another charade designed to protect capital and not families.

Behind the scenes of the recent Insolvency Bill powerful forces are gathering with the objective of limiting, restricting and eliminating any tilting in the existing imbalance of power between creditors and debtors. Just how well these are fought against will be the crucial yardstick to gauge whether this Government is serious about introducing a modern, balanced and humane insolvency model that treats citizens in difficulty with dignity or whether, despite everything they've inflicted upon us, the banks still hold the Irish Government captive. Which way Cabinet Ministers lean on the new legislation will define them, not just as legislators, but as republicans.

Beginning of the end for Extend & Pretend

Thu, 26 Jan 2012 16:35:00 GMT

There is light at the end of the tunnel for tens of thousands of Irish families and young adults caught in the horrific vice grip of income collapse and runaway debts, left isolated and alone in hugely imbalanced relationships that exist between powerful Irish and International creditors and powerless Irish debtors. For over three years, consumer voices like FLAC, MABS and New Beginning have shouted and advocated while the State fudged and delayed dealing head on with consumer insolvency for fear of upsetting the banks and the let-them-burn brigade whose voices drowned out advocacy by spreading paranoia and fear about moral hazard. But, at last, the end of three years of phoney extend and pretend is in sight as much of the fine work of the Law Reform Commission bears fruit.

This venerable, strained and battered Republic is emerging from the delusion that something will turn up, that sweeping bad debts under the carpet in deals cooked up by bankers who stuffed Government committees for the sole purpose of artificially protecting their balance sheets, cannot and will not work. Ireland is to fast-track the introduction of a humane and modern insolvency process. Yesterday Minister for Finance Michael Noonan and Minister for Justice Alan Shatter delivered the first draft of Irish Personal Insolvency law. It’s still a work in progress and there’s much yet to fight for but damn it - they’ve done it and they’ve done it without capitulating to the banks.

Irish debtors, who’d previously been chased down the corridors of a Dickensian court system should shortly be able to deal with their indebtedness in dignity through licensed and regulated Personal Insolvency Trustees. There will be a choice of routes to a fresh start, none of which will involve a court process;

A simple debt relief certificate for NINAs ( people no income and no assets) for bad debt under twenty grand

Debt Settlement Arrangements for unsecured loans in distress, to be negotiated by Insolvency Trustees leading to a full discharge after five years

Personal Insolvency Arrangements administered by Insolvency Trustees that will include residential and investment mortgages where net repayable debt is cleared over six years

There’s much yet to unfold;

When will the infrastructure, regulations and systems be in place to support what is the birth of a new and diverse financial services industry?

Precisely how will the new profession of Insolvency Trustee be regulated to ensure its quality and integrity when handling the assets and incomes of tens of thousands of Irish borrowers

Is The Central Bank willing to compel the credit institutions it regulates to deal fairly with Insolvency Trustees and then to monitor and regulate their adherence to an adjusted Consumer Protection Code?

Why isn’t there to be an Insolvency Ombudsman to arbitrate on disputes and bind intransigent creditors to insolvency arrangements?

What will the guideline be to shelter modest lifestyle incomes from creditors?

What other schemes are being formulated to help distressed Irish debtors restructure without resorting to insolvency, like for example, long term shelving part of residential mortgage debt while awaiting income recovery?

How close are we to widespread availability of swapping mortgages for rental arrangements?

Bankruptcy discharge is to fall from 12 years to 3yrs, so why are their provisions to attach to income for 8yrs?

Yes, there are still lots of questions but today is a time for thanking all those who’ve committed time and passion into shaping Ireland’s nascent personal insolvency model, from civil servants to social agencies. The trick now is to back that ambition with the cash and resources needed to move at top speed to rescue as many distressed debtors as we can from the nowhereland economy in which we’ve left them.

Eddie

Outlook for 2012 as Cautious Optimism Returns

Wed, 18 Jan 2012 13:06:00 GMT

The year of terror is over and 2012 looks much more hopeful than could have been predicted just a short few weeks ago. Lost by the media focus on Christmas, the ECB, comforted by the European Summit’s fiscal compact which relieved it of its concerns about debt without discipline, finally intervened with a substantial dose of money printing, aka quantitative easing. Abracadabra and nearly a half a trillion Euros were created out of thin air and released across a European banking system tottering on the edge of collapse as overnight ECB deposits hit the roof and banks stopped having any faith in each other. The ultra-soft ECB loans at 1% pa for three years (contrasting sharply to Ireland's 6% on Anglo’s promissory notes), provide banks an irresistible margin to recycle much of the cash into European bonds at yields many notches above borrowing costs.

Is it enough? No is the short answer. The Euro crisis is far from resolved, especially Greece’s continuing toxicity but, as Europe finally finds some direction, the risk of an imminent banking system collapse has gone from DEFCON 1 ( nuclear war imminent) to DEFCON 3 (advanced readiness). As the crisis significantly escalated in the second half of last year following a peak in equity markets in May from their deep trough two years earlier, we issued a special alert to which many of our clients responded, reducing exposure in unprotected funds in favour of more defensive ones.

Although we enter 2012 with some cautious optimism, risk levels are still quite elevated and so, except for my own clients with higher risk appetites, I’m recommending everyone else to maintain defensive positions in funds, many of which give limited exposure to the upside, if, as is quite possible, 2012 results in strong returns on equity and commodity markets, excluding Europe due to the recessionary headwind facing it.

Elsewhere the USA economy is showing early but tentative signs in an election year that its private sector is exceeding the stimulus premium, in other words picking up from the effect of fading stimulus and driving under its own steam. Job growth is the indicator and its strong monthly pick up, is combining with better news from retail sales to hint towards a sustained recovery. That explains why US equity markets have held up well against the misery out of Europe. But US debt, which has exceeded US GDP for the first time since 1944, is unsustainable. Meanwhile fears of overheating and a burst in the Asian region has reduced as fiscal tightening by policymakers, especially the Chinese, appears to be doing the trick although swollen asset values, most particularly in property remain a concern.

EUROPEAN EMPIRE BUILDING AMID CRISIS

Recent downgrades of European sovereign debt including France losing its AAA status, as the USA and Japan has done, shouldn't surprise and has been well flagged. What markets are telling Governments is that they must engage in the reforms necessary to make their economies more competitive and thin out the cost of the State as a percentage of GDP over time, so that growth can return. It's a difficult message to absorb especially for entitlement cultures like the French which, in my view, may yet prove to be the most problematic economy in Europe.

Until the months roll by we simply can't tell how shallow or deep the European recession will be. Political wrangling among the big beasts on the European stage in the latter stages of last year, spikes in Italian and Spanish debt leading to fears of a too-big-to-fail event and, a continuation of the basket case that is Greece, inevitably hit consumer confidence. Better helming by policymakers, at least now rowing in the same direction towards deeper fiscal union, should mean that the recession is short but even if sluggish growth returns, austerity and structural reforms are unavoidable.

The conventional route out of a sovereign debt crisis is a combination of currency devaluation and large scale monetary easing by lowering interest rates and printing money, to trigger the economic lifting power to jump out of the hole with higher growth.

Europe, instead appears to be choosing the most difficult path out, little growth, no devaluation (although the Euro is weakening), structural reforms to improve competitiveness and austerity, while the ECB transforms into a repository for bad loans. The result, unquestionably is a slow recovery from recession and many years of rebuilding and reconstruction of Europe, pockmarked by political impasses as austerity reaps it's bitter historical harvest once again - strikes, riots and social unrest that will ultimately test the heart of the empire, its undemocratic, non-transparent and shadowy Brussels elite.

USA MIRED IN DEBT AND UNCERTAIN LEADERSHIP

As ever the US economy is defying sceptics with many indicators pointing up, manufacturing, consumer spending and reductions in loan default rates as US consumers repair balance sheets and corporates build up vast war chests of cash, estimated to exceed $2 trillion. Since the commencement of the crisis, the domestic US economy, despite very high consumer debt levels has heavily influenced by the spending behaviour of its wealthiest where the top 10% account for nearly 40% of spending. Unlike lower income and younger consumers this sector isn't debt burdened and far more influenced by the feel good factor of recovering equity markets.

But the impasse between the President and the Republican- dominated congress, manifesting itself in the failure of the Super Committee to agree a sustainable debt reduction programme, means that US debt continues to barrel in the wrong direction.

The US is vulnerable and far too reliant on its status as the world reserve currency as outsiders use the dollar as a store of value by buying US debt. This is the weak spot. A heave against the dollar is already underway as Governments like China opt for bi-lateral deals with resource rich countries rather than trade through the greenback and tentative discussions, are no longer the musings of academia and are underway between players on what a new world reserve currency might look like. Time as the reserve currency is not unlimited as the Spanish, Dutch, French and British can testify but, with the Euro in crisis, any short disruption to US plans looks unlikely especially if the next US administration robustly tackles the debt issue, and popular support rows in behind it.

ASIA POWERS AHEAD

Excluding Japan, the Asian region did well last year although this was not reflected in equity markets which were overpriced as fiscal tightening needed to cool down overheating economies and inflation, began to bite. The retreat of inflation and the continued surge in organic growth which should offset lower export revenues to recession-hit Europe, means that Asia, the bellwether of the newly industrialised world, remains the best growth story, built, as it is, on strong fundamental foundations and playing catch up with the developed world as its vast populations benefit from rising middle class wealth. Although growth is likely to be lower, Asia isn't without its own risks particularly the on-going risk of a credit-fuelled asset bubble like Chinese property, a weakness that will need careful handling by Beijing.

Ireland Handicapped.

The Irish economy cannot simply rely on job growth from exports and improved competitiveness. Without resurgence in the domestic economy, unemployment will remain at very high levels, straining public finances already puffing under the weight of rising debt/GDP. While the media and public focus has been on gaining a reduction in our overall borrowing costs, that is not the main challenge. Indeed a restructuring of our debt looks inevitable, if anything because Europe must have a winner in its internal devaluation policy to encourage the others.

The domestic economy is moribund with no chance of recovery without policy changes. Firstly a modern and human insolvency process must start working on the 200,000 inactive and insolvent Irish consumers through customised and phased workouts of excessive debt burdens. Secondly Government policy must shift much more towards cuts and desist from threatening consumers with higher taxes.

As tax revenues decline, which I think is inevitable; politicians will be forced down the road that must be taken, shrinking the State as percentage of economy, lightening the load on the prosperity generating other half. Meanwhile Irish property values and, with it the inverted wealth effect that comes from the devastation of middle Ireland balance sheets, will remain a huge drag on morale. Credit remains restricted, policy flips are destroying property as a leveraged investment asset, and wrong-headed attempts by the Dept of Finance to cocoon NAMA from rent adjustments despite the huge inventory overhang, all point to a prolong winter for Irish property. So despite falling prices, Irish rental yields are not yet at a point necessary to compensate for the extra costs and risks involved in becoming a peripheral player in a market macro-managed by the State to protect its own assets.

THEMES

Saving for increased productivity created by major technological breakthroughs, the developed world is on a low growth trajectory - despite structural reforms and austerity. Most of the fundamental economic growth on the planet looks likely to take place in newly industrialised economies over the decade ahead. The world is integrating at a rate of knots and unlikely to be blown off course by fumbling, politically- inspired attempts to raise trade barriers in a futile attempt to ring fence uncompetitive economies. That means that global top brands, major multinationals, that enjoy high revenue streams from faster developing regions, remain a sound investment concept.

In the short term Europe is to remain a problem as growth struggles against the headwinds of austerity and poor consumer morale while policymakers continue to scare us occasionally by playing chicken with markets. Ironically Europe's crisis is diverting attention from the US where the financial crisis that started with excessive leverage over a decade ago, must end. That end phase has yet to come and, with it, test US resolve and its capacity to hold on to the dollar as the world reserve currency.

I remain convinced that resource scarcity combined with quantitative easing will inevitably lead to higher inflation. That’s I continue to favour assets that are aligned to higher inflationary forces, including Global Inflation-Linked Government Bonds protected with a Euro hedge and benefitting not just from sovereign guarantees but likely Euro weakness until policy implementation catches up with intentions. In this environment and despite the sell off towards the back end of 2011 and continued short term vulnerability to Central Banks selling off reserves, gold is likely to trade higher in 2013 than today.

The historical premium paid for technology funds has substantially changed and is more in keeping with normal stock market valuations, which continue to remain relatively cheap compared to boom periods. So 2012, despite the continuing risks from Europe and rising geopolitical risks from the Iranian nuclear programme, may yet see a strong year for many equity markets, with Europe as the laggard. Commodities, led by oil, are likely to experience a strong year despite the weakness created by Europe and slightly lower growth in developing regions

So for younger, long horizon investors, the worst may be over and 2012 could contrast sharply with 2011 as equity markets price in stronger economic growth and corporate earnings into the future. But for others whose objectives are to maintain the value of their balance sheets in real money terms, the most appropriate tactics are to remain sceptical, sitting in largely defensive investments, biased to higher inflation into the future, with some scope to share in higher economic growth.

Despite the reduction in risk, the banking system still remains on life support from the ECB and vulnerable to a breakdown in European policy cohesion. Cash deposits are likely to continue to face negative real returns for some time to come despite a modest fall in inflation.

Conclusion

As ever with forecasts, you can only grapple to make sense of the known. Each forecast remains at risk to completely unexpected events of national, regional or global significance, so called black swans. These can be positive, such as technological leaps forward or negative, like a catastrophic earthquake. For the time being, except for those chasing high growth over the long term and happy to play the long game which involves reading downturns as buying opportunities, I recommend continued caution, but caution with guarded optimism especially for equities.

After the shock Lehmann collapse in Sept 2008 most investors were best advised to hold position, riding the up cycle from the deepest part of the trough some six months later. That proved the correct tactic as markets rebounded strongly to the summer of 2011, since which and, largely due to the elevated risks from the Euro crisis, switching to more defensive funds made better sense until the extreme risk period past. Staying defensive still looks like the right tactic until Europe follows up its new policy direction with the necessary actions on the ground across its nation states, actions that convince markets that the crisis is coming to an end. In the meantime real growth in asset values remains outside of Europe.

Eddie Hobbs

January, 2012

The People Front of Judea in Irish Poltics

Thu, 22 Dec 2011 08:47:00 GMT

As the year closes there are good reasons to be hopeful for 2012. Despite the white knuckle ride in Europe this year when cumbersome politics played a failed game of catch up with markets, the early signs are that some calm is returning. The Euro isn't going down without a fight and may yet end 2012 in better shape. Spanish borrowing costs have sharply fallen. German business confidence is defying the trend by rising and the US economy is adding jobs at a faster pace than most thought. But it's all very fragile and cannot yet be described as a sustainable trend. The last Summit, despite the massive gaps in policy such as ECB intervention and growth stimulus, has unnerved those betting against the Euro as the European banking system is being more robustly back stopped by the ECB, lessening the risk of a Lehmann-style event. It is a far cry from just a few weeks ago.

At home tactics are also becoming clear. Irish support for the new fiscal compact is contingent on restructuring our bank bailout debt. This is not forgiveness but restructuring that would lessen the burden by lengthening the loan repayments and lowering the borrowing costs. Once again we've learned that all the pre-election guff about unilaterally defaulting was the stuff pure fiction.

Which brings us to the paucity of some of the opposition. It's car crash radio and TV listening to the warped economics of the hard left where jobs can be created out of thin air by expropriating the assets of the wealthy and putting the unemployed to work in fixing the water system. Ten billion Euros a year are up for grabs in extra taxes we are solemnly told but a beginners guide to economics will quickly tell you that human beings adjust their behaviour. Income tax receipts are falling precisely because the top rate is already at a tipping point. Raise the rate and destroy the revenues further. The flight of mobile capital out of Ireland would dwarf many times over whatever could be collected in a crass wealth tax but you can’t tell that to those who simply can’t see or won’t see.

Still the ULA persist. Whenever challenged about how they intend funding state paid jobs, the answer always is to expropriate the assets of the rich. When asked how they intend to sustain new industries the answer never is about encouraging prosperity but rather instead about grabbing OPM – Other People’s Money. Most of us get it –the Irish hard left are pretty harmless but we don’t forget that Trotsky and Lenin understood that the only way their socialist policies could work is by brute force. You can only stop capital flight at the point of a gun and you can only enforce equality of prosperity by cracking down on opposition and suppressing the human instinct to achieve better for oneself and one’s family.

Thankfully our hard left are nothing like the Bolsheviks. The ULA and its leader’s Higgins, Daly and Boyd Barrett are much more like the People's Front of Judea (PFJ), the anti-Roman splinter group at the heart of Jewish resistance in The Life of Brian. They are against everything and seem to despise how the world works, sharing a particular disdain for the middle classes whom they feel, at best are unenlightened and, at worst, have sold out. They offer nothing other than protest as a workable alternative. The real left opposition will coalesce around Sinn Fein as it develops more informed and mature policies helped in no small way by the absurd theatrics from the nearby Dail benches.

Happy Christmas.

- Eddie Hobbs