By the end of last year, three quarters of all borrowing was undertaken by Developed Market (DM) governments, notably the USA, European, UK and Japan while one Euro in six lent was by their own Central Banks. This gives an insight into the sheer scale of quantitative easing. The world of economics remains divided as to whether this will end in a soft landing, as enunciated by policymakers like Bernanke, head of the US Federal Reserve (Fed) or in a destiny with high inflation which many thought leaders believed inevitable. May and June have been convulsed by this divide ever since Bernanke indicated that the Fed may begin to taper off its huge money printing programme later this year, leading to volatility in the bond market, while equities also pulled back sharply.

So far the soft landing theorists have been right. They can point to lower commodity prices and to disinflation, in other words, very low inflation, tipping along at 1.5% or thereabouts and well under target inflation of 2%. The recent heavy decline in prices for precious metals, gold and silver was, in large part, due to a re-pricing of the risk of a collapse in the real values of fiat currencies on the one hand and the risk of another 2008 style event, on the other.

The Fed’s potential early deceleration of money printing also led to a scale back in the appetite for Inflation-Linked Government Bonds and which are, arguably, heavily oversold, pricing in inflation of 1% for the next decade in both the USA and the UK. I don’t buy that one bit and expect even in the short term, fresh buying from new allocations from Sovereign Wealth funds, Pension Schemes and Financial Institutions to push back up values as these are mandated to buy bonds and buy protection against inflation. Like most of us, I’m deeply sceptical of soft landing promotion as it invariably doesn’t reflect economic cycle transitions which tend to be far more dramatic and violent in nature, like shaking a skyscraper not knowing what’s going to fall down.

In short, in May and June the price of inflation protection was re-priced by markets betting on the soft landing scenario that presupposes the worst of the catastrophic risks are behind, such as a Eurozone rupture, systemic banking collapse or bubble burst in China and that the salad days have arrived where one should bet the house on equities. They presume that all of the excess money creation over the past four years will not lead to high inflation, as Central Bank wizardry is gently rolled back by reverse quantitative easing, gradually increasing interest rates while national governments repair their balance sheets with bigger tax receipts. Everything has to be exactly right for this to happen without calamity, either an inflation break out or a banking collapse. Think of landing the Space Shuttle, the flying brick, at Kerry Airport without engines and into a Force 10 Atlantic south westerly at night during an Irish winter. It’s possible …. But!

The Fed comments lead to a wall of money pushing out of bonds, including corporate bonds into equities, betting that the excess capacity, (also known as the output gap), in the global economy, which includes excess joblessness that depresses wage demands, will lead to a golden era for equities. This is a low inflation and low interest rate scenario, a steady-as-she-goes sustained growth in the global economy – a return to the cycle of the 80’s when markets experienced an uninterrupted bull market for six years before the 1987 crash.

The movement to equities has led to a decline in bond values as long term yields have risen, signalling increased interest rates just around the bend and upping the cost of long term mortgages. The Fed is likely to move against yields rising too far too fast given its reliance on the resurgent US housing market to contribute handsomely to the US consumer recovery story which is characterised by a return to per capita net worth above pre-crisis levels after four years of deleveraging and aided by the bounce back US stocks, the asset across the pond that determines the health of consumer balance sheets and the general feeling of financial well-being.

But all is not as it seems in the short window of the past two months. We remain in between two long term economic cycles. We know the shape of the last, beginning in the early 80’s and characterised by globalisation which aided a long term low inflation environment allowing central banks to keep borrowing rates low and rising them only to cool off over-heating. It worked a treat until everyone got in on the, borrow-for-tomorrow dodge, banks lost the run of themselves egged on by obscene bonus levels and regulation was non-existent. It ended in a heap in 2008. Arguably it ended in 2002 in the infamous Dot.Com bubble burst but was reflated into a gigantic bubble by the big Bush tax back programme and aggressive interest rate cuts.

The policy response to excess debt from the bubble burst has been to add ever more debt. In Ireland’s case we’ve gone from 25% Debt to GDP to 120%. The USA is at 107% and the list goes on. In essence, the huge hole created in the banking system which captured the debt implosion, has been filled by turning on the printing presses and much of the fresh deficit borrowing by Governments has been financed by its own central bank.

So what’s likely to happen next with inflation numbers?

In the short term, expect a continuation of disinflation but as the output gap tightens and money accelerates, watch out for high inflation to arrive almost unexpectedly. In advance, early indicators that the inflation trough in indices is ticking back up will be met by a swing to inflation protection once again. An inflation break out is likely within the next three to five years which is the time it is likely to take for all the excess central bank liquidity to wash through to the real economy. Inflation-linked bonds however will rise, in anticipation. In the short term “linkers” are likely to rally recovering much of their fall from their peak above current values as buyers take the view that inflation is going to be above 1% over the next 10-15 years in the US and UK, the mainstay of global inflation-linked bond funds.

Why excess money printing leads to inflation

An hotelier is working a small Irish hotel, fifty bedrooms and him, stuck in reception. In walks a German tourist, wanting to see each bedroom before deciding if he’ll stay. “Leave a €100 on the counter while you’re off around the hotel” the hotelier suggests. As soon as the German inspection begins, the hotelier nips across the road to pay the electrician €100 for a job he’d done. The spark stops the local plumber in his van and pays him the €100 he owed for a joint gig. The plumber pays the priest €100 for officiating at his daughter’s wedding and the priest slips into the hotel to pay the hotelier for his bar tab, at which point the German tourist arrives down the stairs announcing that he doesn’t want to stay. He gets his money back. The story is important because the velocity of money multiplied by the volume of money created determines the inflation rate. Since the burst, inflation has been a sleeping menace, keeping tracker mortgages low, national borrowing affordable and consumer prices under control.

For five years, bank credit was very tight, consumer spending has been low and a vast tsunami of money has remained moribund in a deeply constipated banking system. But the scale of cash build up from the surge in consumer saving, the huge leap in corporate reserves and vast money printing programmes by Central Banks, has never happened before in human history. The argument is that there is still no sign of inflation so everything is cool. The problem with inflation is that when it comes it can be quick, surprising and potentially potent if a tipping point is reached as it was for the Weimar Republic in 1923.

Policymakers would have us think that their medicine won’t hurt the patient but look around and it’s beginning. A wall of money from speculators and momentum investors has shifted out of safe havens into “risky” assets. Inflation is beginning first in equity markets, where it is evident that punters are paying a lot more for shares that they were buying much more cheaply several weeks ago. Corporate profit forecasts haven’t improved, what’s gone up is the price point, purely from rising demand. That’s inflation.

In the USA and in Britain residential property prices are rising as demand returns and bank lending loosens. That’s inflation. There is already some early evidence that the trough in consumer price indices has been reached. Prices for basics are rising despite raging competition between multiples for every extra Euro consumers are now willing to spend.

Meanwhile back at the Ranch, what’s happening globally?

The noticeable easing of worries about Europe, the USA and China has aided a run up in equities which now exceed the pre-crisis values in the US but remains heavily discounted in Europe, priced nearly a third lower. For this reason we’ve been allocating fresh funds and reweighting portfolios in favour of European equities and in recent months to value stocks as increased buying of high yield stocks has pushed their prices higher. The best case scenario is that Europe is poised to emerge from recession and offers the biggest upside to growth orientated investors comfortable with the wild swings that long term investment in equities requires if one is to capture their ability to outperform inflation in the range 5% to 7%.

The big hunt worldwide is for income, for yield, the avenues for which have narrowed as former lepers, so-called peripheral Government bonds like Ireland’s have much reduced yields. Yields are beginning to rise on long term bonds off floors not seen since records first began in Genoa in 1285. Fixed interest bonds, in particular, especially medium to long duration will continue to suffer over the times ahead. The recent bond turbulence is a useful drill for what is to come as interest rates rise and especially if inflation breaks to the upside.

After 30 years in the sun, Developed Market bond investors will need to forget about gains and look to minimise losses. Investing however in credit can still yield good results if it follows a roaming mandate across all markets and is well managed. For this reason we’ve been utilising the JP Morgan Income Opportunities Fund for fresh bond allocations in portfolios.

USA’s Bellwether is Housing

A sure fire sign of a resurgent US economy is continuing recovery in its property sector, aided by large scale repossessions and refurbishments. New housing starts have doubled, but still at levels 30% below those at the turn of the millennium, there is plenty of scope for further growth. First quarter GDP growth of 2.5% was contributed to handsomely by the crucial US consumer sector at 2.2%, the best result for some time. US companies, sitting on vast amounts of cash, are beginning to dissipate it into capital expenditure, dividends and share buybacks. Thus far historically low interest rates are being recycled to refinance existing debt. There is no sign yet of a surging credit market but its early days and US banks, now adequately recapitalised are keen to lend against property once again for strong customers. Given that long term borrowing costs are lower than rents, the appetite to buy rather than rent, will strengthen as credit becomes more widely available.

Much as in Europe, high yield US companies are pricier and the recent run up which has widened multiples makes the market look more vulnerable to pull backs as the year goes on and especially if good economic data falters. Investors will fresh cash are best advised to sit on the side lines and buy on the dips. That the USA has emerged from recession with strengthening tax receipt leading to lower than expected forecast deficits, is good news for the global economy. Growth in general stock indices in the range 25% to 30% over the past year has helped debt / asset ratios for US consumers, adding to improved consumer spending.

Europe, Ireland leads the Way

The tools announced last summer, ESM to break the link between banks and the sovereign and OMT to support limited bond buying for countries in difficulty in open markets together with Draghi’s promise to “do whatever it takes to save the Euro” has calmed rising bond yields for Spain and Italy. It has also forced austerity hawks to accept that markets will live with a slower pace of reform and restructuring provided countries are on the right path. By this new measure, Ireland sticks out as a country attempting too much too fast, locked as it is into a programme that was set in stone in the earliest days. Across the board European equities have had a strong year with returns ranging 25% to 42%, but still well priced compared to the US. The hunt for income or yield is likely to see Spanish and Italian debt get pricier as these come back into the core but all depends on action following words.

The volatile mix of the politics of the EU and its economics continues to leave scope for heavy setbacks as the battle continues between creditor and debtor nations, between hard and soft austerity. The outstanding question is how much social pain citizens in countries like Spain which has 60% youth unemployment, is prepared to take while its economy struggles at levels 30% less competitive than Germany.

Another Japanese Experiment

For twenty years we haven’t put a cent of client monies either in Irish assets, for pure diversification reasons or into Japan which has been mired in deflation and occasional false dawns in its stock markets. The 60% run up in Japanese stocks and a fall in the Yen over the past year largely a response to Liberal Democratic Prime Minister Abe’s massive quantitative easing experiment. Whether this primes the Japanese pump sufficiently to survive beyond QE is an open question. Previous attempts to break out of its long term joust with deflation following its bubble burst in the 80’s ended in failure, including Prime Minister Koizumi’s rally in the final six months of 2005. We’ll remain on the side lines continuing to recommend Asia Pacific but excluding Japan.

Non-OECD Markets & Commodities

The performance of Emerging Market indices generally lagged well below the USA and Europe over the past year, ranging 13% to 23% overshadowed by the big question about the rate of deceleration in the Chinese economy. China has been engineering an economic growth cool down from double digits growth to just under 8% for 2012. This has largely contributed to a fall in commodity prices, effecting feedstock economies like Australia whose currency has fallen in recent months to the Euro and Dollar. Welcome news from China has been the shift to consumer-led growth and away from capital spending but doubts remain about the legacy of poor lending especially to its municipalities and the potential collateral damage to the Chinese banking system, although China’s massive cash reserve is a welcome comfort should these fears prove well grounded.

We continue to favour regional EM equity funds over country-specific, preferring the international asset managers to decide on-going allocation to countries within the basket. Despite the slowdown in earnings growth across EM, the long term fundamental demographics that herald the emergence of its middle classes, make investment in EM a must in any equity portfolio.

Finally on the question of commodities, there is likely to be continued softening linked to falling EM economic growth forecasts. As ever commodities, although occupying a crucial diversifier in a balanced portfolio for growth investors, requires patience to ride the high peaks and troughs associated with mining stocks.

Property

Property responds to economic turnaround and bank repair, beginning in the most liquid markets. There is ample evidence that US house prices are accelerating and US banks are beginning to lend once again. This is likely to be a continuing trend. Meanwhile UK residential is also showing signs of life. A recovery in Ireland remains some time-off until the glut of repossessions and distressed sales from Buy-To-Lets squeezed by tax relief tightening, is concluded. It has not yet even begun. For this reason we continue to invest client funds in specific locations in the fast recovering Metro Detroit region benefitting from rental yields more than twice those at home and scope for strong capital appreciation. The minimum investment is $0.5m for a portfolio of c.12 houses. For a prospectus on US housing investment contact our offices.

The Traffic Light Question has changed. It used to be “Hey Eddie, should I go tracker or fixed”? Then the lights would go green. Today the Traffic Light Question is “Eddie, will we ever get out of this”? Course what people mean is will the Irish economy recover, will I see my kids come home to work, will I stop dreading the post, when can we expect some relief from the gnawing fear of running short?

Although everything is local the answer has little to do with the Irish economy. What keeps me awake at night is where the global economy is heading driven with the accelerator to the floor, printing money on a scale never seen before in human history.

We are barrelling towards a destiny decided in the duress of an emergency reaction to the credit bubble burst five years ago and we are unlikely to know its shape for a further five years. The year I fear the most is 2019, a decade from the get go. Nobody is certain of the outcome. The economic world is polarised between two opposing camps. Those who hold sway over policy in Japan, Britain, the USA and, to a lesser extent Europe, believe that money printing is the only solution to economic contraction. They believe printing vast new amounts of currency can be reversed in time to avoid leaking too much into the real economy, devaluing purchasing power and triggering inflation. They hope to create just a little bit of inflation to prime economic recovery and then gently reverse the tide by raising interest rates and pairing back spending to reduce deficits. That’s the soft landing theory.

The hard landing theory is the stuff of nightmares. Quantitative easing is a suicidal cure. Pumping out money will lead to its destruction. A tipping point will be reached. Currencies will collapse, including the Dollar. The world economy will switch from no inflation to hyperinflation. The switch will be quick and vicious.

The problem is that nobody knows. This has never been tried before either in scale, in volume or in intensity. Stock markets are inflating, gold is in retreat, but there is no sign yet of general price inflation. So far the money printers are right. But it’s too soon to call. Inflation will remain hidden from view by huge overhangs in stuff, including the cost of hiring the next worker and money is not accelerating through economies because banks continue to operate tight lending policy especially in Europe where banks are hobbled by insufficient capitalisation.

What can you do? Little except position yourself to benefit what may be an inter regnum between two long economic cycles, the first characterised by low inflation and low interest rates ending in a credit bubble burst of epic proportions and the next…well we don’t know the shape yet…but best to prepare for a long period of high inflation even if preceded by the interim decade, in which we are now, of low growth, low interest rates, low inflation and accelerator- brake national policies as politicians grapple with popular resistance to spending cuts and are flip flopping between austerity and more money printing. What the social consequences will be is an open question. Workers pay, as a percentage of the cake, is being squeezed by an anaconda of entitlement cuts and taxes while big corporates are gushing with cash in lopsided taxation systems that appear to give multi-nationals more power than national Governments – left unreformed, that can only end in revolution.

EU – Bank Recovery & Resolution Directive

Divisions remain to be closed but it looks like the long awaited Bank Recovery & Resolution Directive will be winging its way from Brussels sooner rather than later. The Directive will finally break the link to the Sovereign by deciding the rules on who feels most pain when banks go pop. While much yet has to be teased out including how to fund rescue schemes and limit collateral damage to funding for healthy banks and which could have an unwelcome knock on effect on lending margins, most member countries, the EU Commission and the ECB have finally accepted that depositors should not be treated the same as Senior Bondholders and should be afforded the status of last guy in the queue to take a hit. That lesson was funded by Irish taxpayers to the tune of adding 40% extra Debt / GDP to our ballooning national debt which would, otherwise, be closer to German levels.

Once enshrined in EU law, Ireland must finish off the job by insisting that the link to the sovereign is made retrospective and that the ESM stands in to take over our stakes in the covered banks at a price close to what we pumped in and not what the shares are worth today. That’s the biggest diplomatic challenge facing the Government in Europe over the second half of this year. We continue to watch, white knuckled, angry and frustrated at the pace, disunity and hypocrisy of EU politics.

Gold’s Decline

A surging stock market, tepid inflation and the slow release of pent up cash on the side lines following four years of terror has led to a fall in the price of gold since the start of the year as late arrivals, momentum investors and speculators, sell to cover losses and migrate to the next bubble. Is this a harbinger of a new, steady economic cycle or a sharp pull back in a long term trend, marking the exit of short term speculative cash to the latest fast buck assets? Gold acts as a hedge in a mix of assets and shouldn’t exceed 10%. Like an insurance, its purpose is to respond to very sharp falls in conventional assets and currencies, by rising.

Its trend downwards marks growing confidence that the worst is behind however until the massive global experiment in money printing finishes, it is far too premature to say whether it will end in success or calamity. We may see a continued surge in stock market valuations and property in functioning markets over the next year or two but until a decade has past, from the start of quantitative easing, it will be too early to label gold, yesterday’s man. Further falls in the value of gold potentially to below $1000 per ounce ( it is c.$1380 today) should be regarded as a buying opportunity with no end in sight yet of quantitative easing and the continuing risk of an inflation break out once all that money starts accelerating within economies. Gold remains important, buy some once it floors.

- Eddie

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.

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;

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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 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

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

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

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:

1. Why should 85% of the workforce continue to cross subsidise 15% with some of the highest public sector pay in Europe?
2. 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?
3. 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?
4. 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?
5. 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?
6. 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?
7. 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?
8. 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?
9. 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?
10. 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?
11. 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?
12. Where, anywhere in the world, have public jobs been ring-fenced after national finances crashed?
13. 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?
14. 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

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

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;

1. The Prime Objective to be a relentless lifting of the Minimum Basic Income for all citizens and the eventual elimination of poverty and inequality.
2. 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.
3. 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.
4. 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.
5. Power is reversed, citizens use cash and credits to drive competition and efficiency in protection services delivered by competing state and private agencies
6. 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
7. 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.
8. Public pensions are capped at what is affordable and a new universal pension scheme replaces both private and public schemes with equality of treatment.
9. Government in sunshine laws are enacted to outlaw unrecorded and unpublished lobbying of Government or officials. Everything is reported on websites.
10. No one gets privileged access and freedom of information becomes the benchmark of liberty.
11. New technologies are deployed to engage citizen debate in parliamentary choices and as a fast track to frequent referendums on key decisions.
12. 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