Sunday, November 30, 2008

Immoral Hazard

The news on the front of the Sunday Tribune today is that a confidential government briefing estimates Irish private pensions are underfunded to the tune of some €30 billion. The Taoiseach has responded by saying he'll engage with the pension industry "to review funding arrangements". Phew: for a moment there I thought we were facing an insurmountable problem, but no, the Taoiseach will sort it out. Yeah right.

For me the surprise is that anyone is surprised about this. It's not exactly 'news' that Irish stocks have imploded, taking pension and investment funds with them. What on earth did they think was going to happen to the funding liabilities of Irish defined benefit pensions (and defined contribution) in light of the most severe decline in Irish stocks in living memory? As I've noted before: there is disgracefully little information about the performance of Irish pension funds in the public domain - perhaps now this will change? Too late for tens of thousands of Irish workers hoping to retire some time in the next 10 years however.

According to the Tribune's report on the confidential document, it finds that:

"The investment losses will also be serious for members of Defined Contribution schemes who bear all the investment risks. Best practice would dictate that pension administrators should ensure that a person's fund is protected as they near retirement, by switching assets to more conservative investments. However, there is anecdotal evidence that this practice is not generally applied and as a result Defined Contribution members have been exposed to more risk than they might realise."

Translation: the bozos in charge of the pension funds were pumping workers' contributions into Irish and other financial stocks as they bungee jumped off their peak in February 2007. In other words, we are facing the consequences of utterly immoral and irresponsible behaviour that will deny tens of thousands of workers a decent standard of living in their retirement. This makes the property lending ponzi scheme run by the banks during the boom seem like a model of fiscal rectitude by comparison.

Word of advice to the Taoiseach: climb way, way up on the fence on this one - you really don't want to get caught in the tsunami of anger that will explode over the coming months and years as people realise their dreams of a comfortable, early retirement have been turned to dust ...

Saturday, November 29, 2008

Don't Bank On It

All the talk this weekend about the Government sorting out the Irish banks via recapitalisation got me thinking about Nassim Nicholas Taleb. Much of the current thinking about the future of Irish banking foresees greater consolidation among the banks with a view to creating larger, less vulnerable institutions.

The problem is: we might get more than we bargained for. As Taleb points out in this interview alongside his mentor Benoit Mandelbrot, concentration is what got us into this mess in the first place. A healthier system is one characterised by diversity and redundancy: that way, if one part fails then it isn't catastrophic for the rest of the system.

The exact opposite of what is planned for Irish banks. The more I think about it the more I'm convinced we need to let weaker banks fail - though protecting savers - whilst maintaining low barriers to entry for new banks to ensure diversity: and less vulnerability to shocks.

Thursday, November 27, 2008

Retail Therapy

BBC Newsnight had a special feature on the demise of Woolworths in the UK. One of the contributors forecast at least another 10-12 major high street retailer closures over the next 12-18 months. The Newsnight programme posed the question - if we rescue the banks, then why not the retailers?

As they pointed out: retailing accounts for roughly the same share of GDP as financial services in the UK, and a great deal more employment. Here in Ireland, retailing and financial services employ broadly the same numbers - approximately 300,000 employees each (spreadsheet).

Arguably, of course, the 'multiplier' contribution of financial services to the economy is a great deal bigger than that of retailing. All businesses need financial services - but they don't all need retail/wholesale services. I say 'arguably' - when there really shouldn't be an argument - because the continuing evidence of constrained lending by banks and financial institutions might just call their role and wider economic value into question. As Willem Buiter colourfully puts it:
Small and medium enterprises rely overwhelmingly on banks for external finance. Without access to bank loans, credit lines and overdraft facilities, countless SMEs that would be perfectly viable with a functional financial and banking system are threatened with bankruptcy. Without working capital, businesses go out of business. Banks are essential. But they are not lending.

... What is to be done? Banks that don’t lend to the non-financial enterprise sector and to households are completely and utterly useless, like tits on a bull. If they won’t lend spontaneously, it is the job of the government to make them lend. Banks have no other raison d’être.
He's right of course. We only need banks for so long as they're prepared to behave like banks. Otherwise let's use taxpayers' money to support more useful industries (or better still - give it back to the taxpayer to decide what to do with their own money).

Perhaps the credit crunch will lead us to have a more sensible view on the value of financial services to the economy. One in which financial services play a smaller part, not a larger part in future. As noted recently on the blog Naked Capitalism:
The idea that the needs of the financial sector can trump those of the productive sector are dangerous and destructive to our collective well being, and need to be combatted frontally.
Whether retailing counts as 'productive' is another matter (I don't think it does - but that doesn't mean it has no value). Nevertheless, I don't think banking and financial services will ever be held in the same high esteem - or judged so readily to be beneficial to the economy - as before. And that's probably not a bad thing. Though of little consolation to cash-strapped retailers unfortunately.

Wednesday, November 26, 2008

Another Report Away from a Decision

I've just scanned the report of the Task Force on the Public Service called Transforming Public Services: Citizen Centred - Performance Focused. It's a fifty page long essay, mostly comprising management speak. All the buzzwords are there: transformation; integration; performance; engagement; flexibility; platitudes (okay, I made that last one up).

The words I was looking for don't figure as often, words like: cost/s get 15 mentions; or redundancy gets 3 mentions. Recruitment gets 7 mentions by the way. This is out of 21,000 and more words. The image is a tag cloud I created using the text of the report (first converting the pdf to a text file) and then dropped it all into the sublime Wordle facility. The words mentioned most are the largest in the cloud. Nice to see 'service' figure so large.

Still, the bottom line is that a new committee has been set up, to report in June next year, whose recommendations may (or may not) be in the budget for 2010. SO NOTHING WILL HAPPEN IN 2009. Crisis, what crisis - eh? That's assuming, of course, they don't decide to commission another report. Heck, the economy might even be back in recovery by then, in which case they'll be able to park the report along side all the others gathering dust down through the years.

Sir Humphrey would be proud:


Googling the Future

David Carr writes in the New York Times that he was recently invited to Google's headquarters - the Googleplex - in California. But it struck him: he already lives in the Googleplex. So many of the tools he uses every day, all day are Google supplied. He's right - and it's true of most of us. I came across his article using Google Reader, and I'm writing this piece using Google Blogger.

Carr quotes a blogger as observing that “Google has created an ecosystem that perpetuates itself by being useful.” Where will it stop? According to Dan Gould we're heading into a future of personal area networks (PANs) - as illustrated in the diagram - with a thousand things networked (from our office to our car to our fridge to our TV) to meet our individual needs. Our very own private Googleplex.

This has a lot of people worried. The National Intelligence Council has even described The Internet of Things (pdf) as one of six potentially Disruptive Technologies out to 2025. They're right of course: we have simply no idea how far these technologies will go in changing our lives. But I'm alright living on Planet Google for now. The essence of the future that I see unfolding is fundamentally de-centralised, personalised and egalitarian.

And don't take my word for it - just check out how The Machine is Us/ing Us on YouTube (and yes, they're owned by Google as well):

Tuesday, November 25, 2008

Emotional Dublin

I might just bring myself to forgive Dublin City Council if they move quickly to produce a Dublin version of ifeelLondon. It's another great example of emotional mapping - in the widest sense of adding a whole new dimension to traditional, two-dimensional maps.

And for a look at an emotional map of Tallaght, check out stressmapping - a joint effort between the Geary Institute and my own company. I always knew the Red Cow Roundabout was stressful - just didn't think it was that stressful!

The Unbearable Stupidity of Politics

I know in a democracy you're supposed to get the government you deserve, but really: we don't deserve this. The decision by Dublin City Council to increase commercial rates by 3.3% must amount to one of the dumbest decisions by local politicians in recent times. On the same day the UK government announces that VAT rates fifty miles north will fall to 15% next Monday, a majority of our capital city's representatives vote to make things even worse for Dublin's retailers.

The latest press release on the Council's website has the Lord Mayor calling on Dublin's shoppers to buy fairtrade goods this Christmas. Really - what planet do these guys live on? To their credit Fine Gael voted against the increase. But the big surprise was Sinn Féin: creid e no na creid, Ireland's only all-island socialists voted against the increase. Labour voted for the increase - why am I not suprised? There is no greater evidence for the effective capture of ICTU and Labour by public sector unions than their voting for the increase. If Mandate have any sense they'll reconsider their support for Labour in future as their members are not well served by the party that should have their interests at heart.

The bottom line is businesses don't have votes: local politicians assume they are dumb sheep who can be fleeced any time they feel the economic chill. Think Tony Soprano with a cash flow problem. But businesses vote with their feet and investment decisions - and anyone thinking of opening a shop, office or factory right now would be well advised to look at Newry, Enniskillen or Derry rather than Dublin.

Monday, November 24, 2008

Take the Red Pill

I have a soft spot for socialists. Honestly. I used to be one myself - in the tradition of "if you're not a socialist before you're twenty five you haven't got a heart; if you're still a socialist after twenty five you haven't got a head". But ever since I started running my own business (or, if you prefer, expropriating the surplus value of the alienated proletariat) I've had a somewhat different perspective on things.

At some stage for many of us there is a dawning realisation - of the 'take the red pill' variety - that the state is not a benign parent out to guide us on the path to happiness, but rather it is an organisation driven by its own survival with occasional gestures to keep the rest of us happy. Gestures like tax cuts and spending increases (no lobby left behind etc). And yes, The Matrix is one of my all time favourite movies.

But not everybody experiences this realisation. They are victims of what Dan Klein calls The People's Romance (pdf) - the idea that, because we participate in elections, then we all share in the power that goes with government. Socialists are especially vulnerable to this romance. If only 'our guy' is in power then we'll get the policies we want and heaven on earth will be established - guys like Obama (bet all his supporters really wanted Hillary as Secretary of State, right?)

Socialists strike me as being a bit like the character Cypher in The Matrix: he preferred the pleasant illusions of the matrix to the harsh realities of freedom. And for that reason socialism has a big future ahead of it, for as James Buchanan observes (pdf):
If we loosely describe socialism in terms of the range and scope of collectivized controls over individual liberty of actions, then “socialism” will survive and be extended. This result will emerge not because collectivization is judged to be more efficient, in some meaningful economic sense, or even because collectivization more adequately meets agreed upon criteria for distributive justice, but rather because only under the aegis of collective control, under “the state”, can individuals escape, evade and even deny personal responsibilities. In short, persons are afraid to be free.
All that said, I think a lot of socialists are genuinely motivated by compassion for those who are disadvantaged and exploited, as well as by anger at social and economic structures that perpetuate such exploitation. Take, for example, blogger Penny Red ('young feminist left') who would 'like a government with the balls to give us what we want'. And this despite failure after failure after failure after failure of numerous socialist, communist, social democratic, left-centric governments, regimes and coalitions to deliver anything like the nirvana on earth that they so earnestly seek. Obviously the right guy has simply not gotten into power yet ...

However, the more reflective on the left are beginning to realise that the game is up for socialism in one government. Diehard Marxists are making peace with dyed-in-the-wool Anarchists and are exploring the potential for a revolution that isn't so much televised as networked. A kind of Revolution 2.0. It's still mostly motivated more by a rage against capitalism than any clearsighted ideas for an alternative - but socialists losing interest in seizing state power is a step in the right direction in my book.

Away from the redder fringes, more mainstream commentators are beginning to wonder if they have been sold a pup by governments claiming to sort out the mess arising from the credit crunch. Take the issue of taxes on business. The recent Finance Bill adds yet more dead weight to the cost of running a business in Ireland. Now businesses are expected to collect taxes for staff parking spaces, as well as take another 3% income levy off any highly paid employees. The assumption is that there is no 'cost' to business from doing this - a dangerously naive assumption.

As Jamie Whyte points out about demands in the UK for higher taxes on businessses:
Before you can tell whether corporate tax is a good idea, you need to understand who bears the cost and how it affects their behaviour. Once you do, it turns out that taxing companies is a bad idea.

Research shows that the cost of corporate tax falls more or less evenly across a company's shareholders (in lower dividends), employees (in lower wages) and customers (in higher prices). So, in terms of the “social justice” so beloved of the Left, corporate tax is no better than a combination of income and sales taxes.

But, in terms of efficiency, it is worse. Research also shows that corporate tax has a greater “deadweight cost” than both income and sales taxes, because it discourages the allocation of resources to productive uses - in other words, it discourages investment.

To the collective credit of the Irish political class, there has been no rush to go Scandanavian and push up corporate tax rates - so far. But as the Government's revenue situation deteriorates next year then that happy situation cannot be guaranteed to last. It is then that we all need to take the red pill and realise that governments don't create jobs and wealth - they simply use the wealth and incomes of the private sector to appear to do these things. The sooner that realisation hits home then the sooner we can start reducing taxes and wasteful public sector spending, leaving the money in the wallets, purses and bank accounts of those who earned it in the first place.

Sunday, November 23, 2008

Banking on Energy

With all the speculation this weekend about the Government using our money to rescue some or all of the banks here's a thought: why not put the money into the energy sector instead? My sense of the purported bank rescue is that it would be better if one or two of the banks were allowed to fail. Yes: protect the savings of deposit holders - but not the stocks of shareholders nor the jobs of directors.

The result will be a rush of new account openings for those left standing: equivalent to - or more than - any mooted investment by the government. It will also put manners on those that survive to ensure they don't confuse property-backed pawnbroking with real banking again. Perhaps.

As for the energy sector, it has never been cheaper to get into. The chart - from the BBC news site - shows that the price of oil is now a third of its peak just a few months ago. The knock on effect on shares of energy companies has been severe. But there's the thing: the upside from an investment in energy companies - and those supplying specialist services and equipment to them - will be a better long term bet in terms of shareholder value. As argued in Fortune recently, the IEA's report World Energy Outlook 2008 is a 578 page recommendation to buy oil stock.

The work of the folk at Energy Scenarios Ireland shows that the current price falls are but a temporary aberration on the way to a far more expensive energy future. As I've said before - it's a window of opportunity for our country: and ultimately more important than the fate of a few developers and their bankers.

Saturday, November 22, 2008

Northern Eurland

I'm just back from a brief visit to the ancestral home in Dungannon. The same thing struck me as strikes me every time I go North: the day the UK joins the euro is the day the retailers of the Republic may shut up shop (and the car dealers and the publicans). The price differences are not just huge: they're getting bigger. Cross-border economics in an anecdote: I bought the exact same bottle of South African wine in Sainsbury's today for 35% of the price I paid for the same wine here in Dublin two weeks ago.

Sure, some of it the euro/sterling exchange rate - but a lot of it is down to consumer behaviour. Northern consumers simply won't be ripped off like their Southern counterparts: the prices they pay reflect their willingness to shop on price and retailers respond accordingly by keeping them low. Which is why exhortions by the likes of SIPTU for shoppers in the Republic of Ireland to do their patriotic duty and buy 'local' are doomed to failure.

It is only by being willing to shop on price that consumers will send the signal to retailers and others to cut their prices. But businesses can only do so much: the biggest price distortions are created by the Government through its imposition of a panoply of duties, tarrifs and taxes. One reason why petrol and diesel prices are still lower in the Republic of Ireland than in Northern Ireland - it isn't just the Irish Government that distorts prices.

So be sure to fill up your fuel tank before you head out on the road to Newry. And be sure to demand a level playing field of your local politicians by levelling the cost of Government down. That's one 'race to the bottom' I'll be rooting for.

Friday, November 21, 2008

Slow Burning Anger

A lot of businesses will be talking to their bank in the months ahead, seeking extra finance to see them through extraordinary changes. The discussion will be accompanied by the usual 'due diligence' as their bank managers suck their teeth and tut-tut about any unseemly profligacy on the part of small business owners. And if they small business has experienced a loss then their managers might even fret about their balance sheet.

Well the attached chart is for all those SME managers in that position: it shows the value of Irish shares - including all financial stocks - on 21st February 2007. The peak of the peak of the Celtic Tiger boom as far as stock prices were concerned. We will never see the likes of it again (at least not for another generation). Just compare the chart to the latest ISEQ indices to see how far things have fallen. The managers of Irish financial institutions have so far presided over the destruction of some 93% of shareholder wealth in just 21 months. Your turn for teeth sucking and tut-tutting.

What is slowly dawning on people - to gauge from an increasing number of conversations with business folk - is that their nest eggs have been destroyed, and with it a change to get off the treadmill any time in the next decade or two. The destruction of shareholder wealth in Ireland will reverberate for decades - long after angry 70-somethings have got their medical cards back. Just how bad things will be for Irish people in their forties and fifties is seen in a recent US study (pdf) - where things have not been as bad as in Ireland:
This paper extrapolates from data from the 2004 Survey of Consumer Finance to project household wealth, by wealth quintile, for the cohort that will be between the ages of 45-54 in 2009 under three alternative scenarios. The first scenario assumes that real house prices fall no further than their level as of March 2008. The second scenario assumes that real house prices fall an additional 10 percent as a 2009 average. The third scenario assumes that real house prices fall an additional 20 percent for a 2009 average. (Real house prices are currently falling at the rate of approximately 1.5 percent a month.)

The projections show that the vast majority of families in these age cohorts will have little or no wealth by 2009 in any of these scenarios. In the first scenario, families in the 45 to 54 age cohort in 2009, who were in the middle grouping of the wealth distribution in 2004, will have on average just $113,600 of wealth in 2009, 26.2 percent less than families in this age group in 2004. In the second scenario, families in the middle quintile will have $97,600 in wealth, 36.6 percent less than families in 2004. In the third scenario, families will have $81,500, 47.0 percent less than families in the middle quintile for this age cohort in 2004.
My emphasis added. Remember - we've seen even greater collapses in house prices and share prices in Ireland - so the numbers are worse for any Irish family expecting to live on a defined contribution pension. The way I see it, middle class, middle aged folk generally don't do marches and street protests (they're too busy working) but they do vote and something tells me they'll be making their feelings felt next time they're anywhere near a ballot box.

Wednesday, November 19, 2008

Happy Families

All happy families resemble one another, but each unhappy family is unhappy in its own way. Leo Tolstoy
The UK's Centre for Social Justice has launched a campaign today to encourage law reforms to strengthen marriage and combat family breakdown. I think they're right - even if they're swimming against the cultural tide at present. As I've noted before, marriage is a social construct - but that doesn't make it optional. No more than language or money are optional - even if both are cultural creations. At least, that is, if you want to enjoy a standard of living somewhat higher than that of hunter gatherers.

The Catholic Church in Ireland has been in the vanguard of campaigning for the traditional marriage-based family: extraordinary really that the 'case' has to be made for it, but there you go. I guess what they can't say is that marriage is like democracy: a terrible idea - except for all the alternatives. Perhaps the new economic realities might help some appreciate the power of married life as the foundation of healthy families, communities and societies. If only as a reaction against the delusional extremes of 'happyism' which seem to suggest that if you're not happy with your lot in life then you just need to move on and try something different. Doesn't really make sense in theory or in practice.

As Libertarian leaning thinkers like Richard Epstein points out (listen to this wonderful podcast on the subject) - the problem with a lot of the 'happiness economics' is that it assumes happiness is the ultimate priority in life when in fact it is a very secondary feature (welcome and all as it is from time-to-time). But like most libertarians Epstein thinks that the biggest problem facing many of those who support the idea of marriage (including the Catholic Church) is that they end up supporting the state - ultimately the greatest threat to family life.

And that is a pity: because marriage has been around for much longer than the state. So why look to a relatively new institution to protect an older institution? As Epstein suggests, the Catholic Church and other churches should campaign to take the government out of marriage - the better to strengthen it in the eyes of free citizens:
All churches should have the absolute power to decide which unions they will recognize and which not. But no church may invoke state power to block the like liberties of other churches. We need free entry and open competition on divisive cultural issues, as everywhere else. We mustn't let the shape of the law turn on the outcome a moral debate in which neither side can persuade the other. It's best to keep the state out of the marriage business altogether.
For as the Adam Smith Institute observes about the Centre for Social Justice's campaign:
Ever since marriage was institutionalized, it has been a menage a trois: the couple and the government. The government, whichever party happens to be in power, lures the couple into a painful triangular relationship with the come-to-bed-eyes of tax breaks, credits, allowances or benefits as the lubricant. It's time for this hideous, political lover was kicked from the matrimonial bed.
Now that would be something to see: Libertarians and Catholic Bishops campaigning for the same ideals!

Tuesday, November 18, 2008

Consuming Recovery

Will consumers come to the rescue of Ireland's economy? In the short term (excluding the Christmas effect) the answer is probably not. Consumer sentiment is extraordinarily volatile at present - mostly on the negative side. The mood - as far as I can gather it from various surveys and focus groups I've been involved in - is that people expect things to get worse before they get better. So they are battening down the spending hatches.

So there is still a strong psychological influence on consumer spending: even if the 'objective' macroeconomic statistics are starting to support their wariness. One such statistic is the headline unemployment rate. No other factor, in my experience, has the same double-whammy impact at both macro and psychological measures. With unemployment rising then consumers see every justification for holding back and setting aside some savings for the proverbial rainy day. That said, the current unemployment level - whilst back to where it was ten years ago - is still a long, long way away from the extremes of the late 1980s and early 1990s. As illustrated in the chart from yesterday's Ulster Bank quarterly economic report (pdf).

Of course, our economic prospects depend more on US consumers than on Irish consumers for future growth momentum. Which is why Noriel Roubini's analysis of 20 reasons why capitulating consumers will trigger the worst recession in decades is a tad discouraging. Fundamentally, he sees it taking years for American consumers to get out from under the massive debt overhang they built up during the sub-prime years. We had a fairly similar build-up in Ireland, by the way.

That said, it isn't consumer spending that gets the economy going (in the Keynesian sense of things), rather it is investment in productive capacity that correctly anticipates future demand. Or as this essay puts it:
The first thing to realize is that people do not decide to "spend" or not; rather, they decide whether to spend in the present versus in the future.

... The uncertainty isn't phony; people really don't know what's going to happen next month. In this situation, it is entirely appropriate for humans to stop cranking out so many iPods and designer clothes, allowing a temporary build-up of the resources that go into the production of these nonessential items.

... For long-run sustainable output, businesses want to have finished products emerging from the pipeline just when consumers want to buy them. Market prices and the profit-and-loss system provide the best means of allowing entrepreneurs to make these forecasts.
If there is a role for Government in all this it is primarily one of reducing uncertainty by clearly stating what it's going to do/not do and when it will be finished. Otherwise we'll just leave our savings in (run-proof selection) of bank accounts.

Monday, November 17, 2008

The Money Hole

Sometimes satire says it soooo much better:


In The Know: Should The Government Stop Dumping Money Into A Giant Hole?

How come the Americans are so good at this? I thought WE were the ones who got irony: and they didn't?

Sunday, November 16, 2008

Health of the Nation

What I've never quite understood amidst all the huffing and puffing about our health service is: who needs it? Survey after survey shows the Irish to be a remarkably happy and healthy bunch. The latest such study is from the Central Statistics Office and entitled Health Status and Health Service Utilisation (pdf). The chart - from the study - shows self-perceptions of health status by age group. 87% of people aged 18 and over say their health is either good or very good. And get this: 69% of those aged 70 and over report their health as very good or good. Okay, maybe it's 'self-deceptions' rather than self-perceptions, still, it kind of makes you wonder whose filling all those hospital beds?

Maybe the findings are why the Government wanted to remove free medical cards for over 70s? I jest of course: that would imply that the decision had been based on a rational assessment of the evidence relating to the health and financial circumstances of the elderly when plainly the decision was of the 'evidence-free' variety. Like so much else.

I don't doubt, however, that there is considerable room for improvement in health care provision in Ireland. Assuming 'tear it up and start again' isn't an option (a pity really) then we can at least learn from other countries how to do things better. The Health Consumer Powerhouse have published an excellent comparative study of healthcare from the health consumer perspective called The Euro Health Consumer Index 2008. It looks at a range of outcomes from the health service consumer perspective (waiting times, outcomes, drug costs etc) and ranks EU countries accordingly from best to worst using a composite index measure.

Ireland doesn't top the index unfortunately (I know, you're shocked): that honour goes to the Netherlands (we're ranked 15th out of 31 countries studied). But here's the interesting thing: Ireland's healthcare expenditure per capita is only slightly behind Denmark and Sweden (see chart on page 22) though nowhere near as high as the top spender Norway. But the latter doesn't top the overall index either: because on a value-for-money/'bang-for-buck' basis we are ranked 24th whilst Norway is ranked 25th (see page 23). Something to do with waste I reckon.

Mind you, I'm not expecting a rapid improvement in our healthcare rankings any time soon. So I'd better just keep taking the vitamin tablets, like millions of other Europeans, knowing that I'll do more for my own health and wellbeing that way than depending on badly managed public healthcare services. As this report (pdf) on the Health Quality Agenda in Europe from the Stockholm Network points out.

That way hopefully I'll be able to report my own health status as good or very good when I'm in the 70+ age group.

Saturday, November 15, 2008

What if they threw a bond issue and nobody came?

Ask the Germans. This from Friday's FT:

For any government looking to raise money in the capital markets in the next few months, there was an ­ominous development in Germany this week.

A German 10-year bond auction failed – something more or less unheard of until this year – as cash-strapped banks and investors snubbed the government offering.

It is a clear sign of straitened times when a benchmark bond in one of the most liquid markets in the world cannot attract enough bids to reach its target amount.

Crucially, it raises serious doubts about whether governments can raise the vast amounts of debt needed to fund fiscal stimulus packages and bank recapitalisations in the current tough market conditions.

Any sign of waning demand may force up bond yields – putting further pressure on public finances when they are already under strain.

The funding requirements are staggering - the FT again:

US Treasury bond supply is expected to hit record levels, in a range from $1,400bn to $1,750bn in the 2009 financial year, starting in October. In Europe, bond supply is forecast to rise to more €1,000bn ($1,247bn) next year – also a record high, according to Barclays Capital.

And those are just the sovereign bond issues. What about corporate bonds? This from The Economist:

In Europe S&P reckons that some $2.1 trillion of corporate debt will mature between the last quarter of 2008 and the end of 2011. With governments also likely to tap the debt markets heavily, investors may be worried about the prospect of their portfolios being weighed down by fixed-income assets.

A trillion dollars here a trillion dollars there and pretty soon you're talking serious money. And investors are starting to notice. The CDS (Credit Default Swap) spread - a measure of market perceptions of default risks and the consequent premium they charge as 'insurance' - are high and rising for all sovereign debt: including the USA, UK and Germany. Some, such as Willem Buiter, see this as the markets beginning to worry about the next Iceland.

Meanwhile into this gathering storm sails the charming tugboat Ireland Inc, merely looking for a few billion to tide its government and its banks over for the next few years. If we're lucky (and let's face, we've been extremely lucky so far), we might just sail through unnoticed - our requirements a mere rounding error in the global scheme of things. If we're unlucky, we could end up like Iceland. We really don't want to go there.

Finally, if all these three-letter-acronyms (like CDS) are getting to you, here's a truly brilliant piece on how we got into this mess in the first place (HT to Stephen Kinsella for the link). It's almost Steinbeckian in its evocation of an era that ended, er, two months ago. Speaking of Steinbeck, I think it will be the artists not economists (sorry guys) who tell the real story of these extraordinary times. Just as The Grapes of Wrath came to portray the Great Depression for future generations.

Only today's artists won't use novels to weave their art - they'll use YouTube, like this extraordinary piece:


Friday, November 14, 2008

Blogonomics

In the blogosphere, everybody can hear you scream. At least that's the theory - but does the blogosphere's attention economy work in practice? Economists are now studying blogging and beginning to explore the non-monetary interplay of free content, attention and reciprocity that perpetuates it.

A recent paper from MRPA - Blogs and the Economics of Reciprocal Attention - uses archive data from LiveJournal to test two hypotheses:

H1 Bloggers who display higher levels of content production and general blogging activity have a higher number of readers.

H2 Bloggers with less/more friends than readers produce more/less content than others.
The first hypothesis is confirmed (not that surprising) the second is less certain - and requires more research (and more research papers: naturally :) Nevertheless, I found a lot of the insights from the study did make sense in light of my own experience (I know, confirmation bias ...) and it was great to read a serious economic analysis of a subject (and hobby) that I'm very interested in.

But if something can't go on forever it will stop and there is an emerging view that blogging is a waste of time - or that those thinking of blogging have left it too late. Particularly in terms of business/corporate-related blogging. I'm not so sure. I'm inclined to agree with the folks over at Experience Matters (from whom the chart above) when they argue that blogging isn't just about content and attention - it's also about presence. As Geoff Sowrey puts it:
The internet is a noisy place. It’s filled with every type of company and personality, all trying to make themselves heard all at the same time ... Like standing in the middle of a loud party, it’s hard to be heard. That’s why presence is so important — people will pay attention to those they perceive as important. You need to be staking claims in a variety of places, and investing time and effort in key areas to ensure the quality and intensity of your signal can rise to the top.
In Ireland, my own company's research (pdf) shows that 17% of Irish internet users have commented on another blog or written their own at some stage (though three times that percentage have their own bebo/myspace page). So I reckon in economic and commercial terms the blogosphere is here to stay - even if not all the null hypotheses can be rejected.

Thursday, November 13, 2008

The End of Macroeconomics

Question mark? That's the very serious question debated in the latest EconTalk discussion between Russ Roberts and Arnold Kling. Along the way you'll learn more than you ever wanted to know about Credit Default Swaps (other than why anyone thought they were a good idea in the first place).

Their discussion raises an important issue: what we are experiencing in the global economy right now is way outside the parameters of any economic textbook. As Russ puts it: nobody studying economics in third level today will learn that, when confronted with an implosion of the global financial system, then governments should a) buy banks and b) pump trillions of taxpayers dollars into keeping them afloat, no matter what.

So have we thrown out the macroeconomics text book - or macroeconomics in its entirety? It is more than just an academic issue. As Arnold Kling explains: we now have huge disconnection in the form of a concentration of economic power (Fed/Treasury) and dispersal of economic knowledge (businesses/consumers). The same applied to the Bear Stearns and Lehman Brothers of this world, as Kling puts it: the nerds down below were the only ones who understood the real risks that were being taken, but the suits at the top neither understood nor wanted to know.

The point is: there is nothing to say that Bernanke nor Paulson have any more idea about what they are doing than the now discredited CEOs of former investment banks. Consider that the US Government yesterday dropped plans to buy toxic assets - an about face in relation to what Congress approved as part of the $700 trillion rescue plan. The real risk is that the constant meddling of the Fed, the ECB, the G20 and others will simply add to the uncertainty. As Terence Corcoran puts it:
Every time a U.S. treasury secretary, a Canadian finance minister, a British central banker and a Chinese Communist official announces some major new initiative, or changes previous plans, or declares that more action will be taken in future, the people who actually make economic decisions are left deeper in the dark.

Consumers don’t know whether to buy a new car, lenders don’t know whether to lend to car buyers, car makers don’t know whether to make new cars, and investors avoid investing in car companies. The chain of confidence has been shattered.
Uncertainty piles upon uncertainty. So is this the end of macroeconomics as we know it? I doubt it. There is one macroeconomic lesson that still holds true: actions have unforeseen consequences, always. Take Robert Higgs amusing analysis of the much sought-after nirvana of 'stability' - a word on every politicians lips right now. Here's his take:
Lately, we have heard endless claims that the government is seeking to stabilize the financial markets. One might wonder, however, how propping up enterprises that, absent a large, permanent stream of subsidies, are doomed to ultimate failure qualifies as stabilization. (Not that we can expect government decision makers to worry about the long run, of course; if these men and women suffer any disability at all, they suffer extreme myopia, never seeing beyond the next election.)
As he puts it: whenever you hear a politician use the word stability check your purse or wallet as you'll be paying for it. There are lessons here for Ireland of course. The Irish Times leads today with a story that Irish banks rescued by the Government's guarantee scheme will have to raise billions in funding in the coming weeks - a real test of whether the 'rescue' has worked or not.

Yet, as I've pointed out before, the Financial Support Act 2008 governing the banks is extremely onerous. In a desire to secure stability, the Irish Government may well have guaranteed instability if potential investors and lenders decide to give Irish banks a wide berth. Restoring the chain of confidence after it has been shattered is a mighty difficult task.

One key confidence builder is honesty. Telling it as it is: and how you think it will be. To their credit, the Bank of England are doing just that. Their Inflation Report for November 2008 is a model of clarity - even when discussing uncertainty. The chart above is from the section on the inflation outlook. It shows a real risk of deflation for the UK economy for the first time. Hence the speculation yesterday that UK inflation rates could even go as low as zero.

Try finding all that in a macroeconomics textbook. Still, there's always microeconomics.

Wednesday, November 12, 2008

There, But for the Grace of the Euro, Go We

One memory I have of Dublin in the 1990s is walking around the city centre hearing the oddest language being spoken by groups of visitors that was impossible to place. It turned out they were all from Iceland, taking advantage of our low prices (honestly!) to do a bit of pre-Christmas shopping. Then they stopped coming, or maybe their accents were drowned out in the many others that could be heard as the decade ended.

Now it looks like we're going to hear a lot more Icelandic accents in the months and years ahead on the streets of Dublin. The explanation, of course, is the spectacular implosion of their economy, as documented in an extraordinary essay over at VoxEU:
  • Iceland's GDP in euro terms has shrunk by 65%
  • Before the crisis, Iceland's banks had foreign liabilities equal to 10 times GDP
  • A third of Icelanders are considering emigration (what the other two thirds will do is anybody's guess)
The stuff of economic nightmares indeed. It is also a salutary reminder that small open economies on the periphery of larger markets suffer more in economic storms than larger economies with stronger domestic bases. Small economies like Ireland, for example. While we didn't go quite as far out on the debt limb as Iceland, we have witnessed a similar inflation in exposure to foreign liabilities, with a third of all Irish lending funded by overseas borrowing.

Whatever about the advantages and disadvantages of membership of the eurozone, there is no doubt that we would have 'done an Iceland' in recent weeks were it not for the euro. Of course, you could argue - as Davy did in their recent outlook for 2009 - that we wouldn't have gotten into our current debt-fuelled economic mess if we hadn't been in the euro in the first place.

Mind you, apartments in Reykjavik are going to be really cheap next year, hmm.

Tuesday, November 11, 2008

Made on Earth

I'm just back from a meeting of the Ageing Well Network - an interesting and innovative forum for discussing future options for Ireland's ageing population. The discussions are - as always - wide ranging and informative. They are also subject to the Chatham House Rule: so I won't/can't go into any details.

One sidebar, non-AWN conversation that I did have (in the bar, as it happens!) was about cross-border shopping, which I addressed in a recent post. I was leaning towards giving the shoppers choice and letting them spend their money where they get the best value - even across the border in Northern Ireland. However, others felt that people should support their local retailers, even going so far as to encourage people to buy Guaranteed Irish goods.

But I think that a 'Shop Local' strategy is the last thing we need - that way impoverishment lies. I prefer the 'Made on Earth' strategy recommended in this post, and it's focus on the benefits to shoppers, workers and investors everywhere from the true globalisation of trade in goods and services. Which just might get more attention now that casino capitalism is in recovery.

I guess it's down to one's political preferences. Take the World's Smallest Political Quiz and see where you stand in the political scheme of things. My score (image above) clearly puts me in the Libertarian segment. No surprise there - I don't get a 'perfect' Libertarian score for the simple reason that I'm something of a 'minarchist' - I do think there are certain roles that require Government intervention. Like addressing the extreme impoverishment that currently affects certain groups - especially the elderly. Though I hope we will have less need for intervention in future generations of elderly people if we allow the free market to deliver the incomes and wealth that will protect us from poverty in old age.

And of course we shouldn't forget that price cuts are as good as income rises for people on fixed incomes - and if shopping across the border delivers that for otherwise cash-strapped Irish citizens (elderly or otherwise) then they should be free to do so.

Sunday, November 9, 2008

An Outbreak of Carborexia

We're all enjoying the fall in petrol and diesel prices at our local forecourts. My advice: enjoy it while it lasts. Because it won't. The chart is from a gloomy report (pdf) by Barclays Capital (via The Oil Drum - the best energy discussion on the web): it shows the outlook for non-OPEC oil supply growth next year. Non-OPEC oil output peaked last year and is down this year; Barclays expect a further fall next year. Nor is this simply a reaction to falling oil prices since their peak in July (though that is undoubtedly a factor), rather we are seeing a faster onset of the peak in non-OPEC oil production than previously anticipated. It looks like it was 2007, even though projections as recently as last year were going for 2011.

The non-OPEC trend partly explains the International Energy Agency's increasingly alarmist assessment of the medium-term outlook for oil supplies - the IEA doesn't usually do alarmism. As I've noted before, Ireland is horribly vulnerable to adverse developments in global energy trends in general and to adverse UK developments in particular. So it just as well that businesses in the UK, including Shell, Virgin and Scottish & Southern Energy, have come together to map out Britain's response to the oil supply challenge. In a recently release report from The Peak Oil Taskforce called The Oil Crunch: Securing the UK's Energy Future, a number of contributors have mapped out how big and close the challenge is; and what has to be done about it.

As the chapter by Shell notes:
It is right to have concerns about the way something as important as our global energy system will develop, and to recognise that urgent steps are required to shape better outcomes over the decades ahead. Given the natural timescales of energy-using and energyproducing facilities, it takes time to increase energy efficiency, boost complementary energy sources and deploy capture and storage technology.

To give us that time, we must keep supplies of oil and natural gas at a high level in the coming decades. Our scenario outlooks indicate that the maximum production of easily accessible oil could come as early as the coming decade. And maintaining a production plateau for all oil and natural gas will become a serious challenge in the 2020s.
The energy issue hasn't gone away, even if oil prices are down more than 50% from their peak just a few months ago. At the same time there is still time: we can still champion open markets for energy exploration, production and distribution; as well as supporting innovators and entrepreneurs focused on the post-carbon opportunities that lie ahead. But we don't have to go overboard either - becoming 'carborexic', as hilariously described by Ruth Tierney in today's Sunday Times. Lifestyle changes that flie in the face of economic and ecological sense might salve the consciences of overwrought greenies, but the rest of us can still make more sensible adjustments. Like on the issue of food miles: if you really want to reduce the food miles in your shopping basket just walk to the supermarket - it's driving your groceries home that adds by far the largest component to any food miles calculations.

An outbreak of carborexia is the last thing our economy needs right now.

Saturday, November 8, 2008

Giant Sucking Sound

If I was a retailer in Dublin I would be lobbying hard to close the border with Northern Ireland - quickly. I spoke recently to a retailer in South County Dublin about the outlook for the Christmas shopping season. In her view her biggest competitive threat is not the nearby Dundrum Shopping Centre but rather the Sprucefield Shopping Centre nearly 100 miles away across the border.

Over the past few weeks I've spoken to a large number of consumers and they are all saying the same thing: 'Go North for Christmas'. This is a disaster, of course, for the Republic's already battered retailers. Our political leaders (I know, don't laugh, it's rude) have called on consumers to be more patriotic and shop 'local'. Nevertheless the same geniuses have decided to increase the vat rate in December to 21.5% because [ ]. Sorry, I meant to write in a rational explanation at the end of that sentence but for the life of me I can't think of one.

Irish retailers are heading into a perfect storm: not only is the economy in a deepening recession, on most measures their costs of doing business are rising (thanks to local authority rates among other burdens); and even worse, the euro is stronger than ever against sterling. This time last year a shopper heading North would have got £7 worth of goods for €10; today they will get £8 worth for €10. Expect to hear a giant sucking sound this Christmas as shoppers surge across the border.

Can it get any worse? Unfortunately yes. As the graph shows - from the excellent Nationwide Consumer Confidence Index - Northern Irish consumers have seen the steepest falls in consumer confidence of any region in the UK. That means only one thing: consumer spending by Northern consumers will fall because of the measurable relationship (pdf) between bad economic news, consumer confidence and subsequent spending up to 12 months later.

Northern Irish retailers will have only one option: cut their prices (even) further in order to attract more bargain-hungry, euro-bearing Southern shoppers. The South Dublin retailer I spoke to is now seriously thinking about opening a store in Newry. I don't blame her.

Friday, November 7, 2008

Earth Might Be Fair

I'm a big fan of Mad Men - a wonderful series set in the New York advertising scene in the early 1960s. There is something utterly fascinating about the world that it portrays: one at the cusp of extraordinary cultural change - a decade that started with men still wearing hats and suits, and ended with men wearing beads and sandals. It also portrays the heyday of mass media and mass markets - the likes of which we will never see again.

What we are now seeing is the emergence of what futurist James Ogilvy called "advertising dividend" in a memorable essay entitled Earth Might Be Fair, first published in 1995. This is what he envisaged:
Imagine a world where all the resources now devoted to advertising were instead devoted to quality improvements in products. Just as we are now learning to live in a world where the cold war is over and we can entertain the distribution of a peace dividend, imagine a time when we could entertain the distribution of ... an advertising dividend.

But what would all the ... advertising and copywriters do? ... Let them play. I'm serious. ... At risk of gross over simplification I wan to say that our most vexing problems today are not problems that can be solved by science and technology; they are problems that call for a degree of social invention that we have not seen since the creation of democracy ... We don't yet know how to organize or human interactions.

Despite the wonders of modern science there never seems to be enough: enough love, enough attention, enough respect, enough dignity. ... I know of no law of the constant conservation of laughter, or any limitation on joy. I see no reason to limit our sense of what is possible for the distribution of delight. ... Quite the contrary, there might be a virtuous circle of mutual reinforcement in the spread of sublime delight, like a ripple of laughter that gains momentum in a crowd. According to the economics of the sublime, there can be enough for all.
I love his turn of phrase and sense of the future's potential. The essay was written thirteen years ago and I believe a lot of what he foresaw is coming to pass. The emergence of Web 2.0 and social networking has found a way to free up the advertising dividend, to better 'organize our human interactions'. It is wonderful to behold.

The current recession will accelerate these trends, and then some. Already concepts like JungleSmash are cutting out the advertising agency planner and copywriter and letting the YouTube generation make their own advertising. And I think there's a lot more of this sort of thing to come as we get to spend the advertising dividend not on mass marketing but on a one-to-one dialogue that we will all (advertisers and consumers) find more meaningful and rewarding.

Thursday, November 6, 2008

An Accountant's Recession

The thought struck me reading the latest NCB Services PMI that we are in the grips of an accountant's recession. The NCB study shows more and more service companies experiencing rising input costs and falling output prices: falling profits are the inevitable outcome. I have never before seen so many businesses totally focused on credit control: my own included.

A recent study (by my own company) for the Institute of Certified Public Accountants in Ireland (CPA) confirms the extent to which financial control is centre stage in the current downturn. But it isn't just the accontants in the companies that are focused on cash: so are the banks. Half of the accountants we surveyed reported that a lack of availability of credit from Irish banks was the main pressure facing their clients.

We will have to wait and see whether the rescue of banks in the United States, UK and Ireland (and elsewhere) will have the desired effect of channelling credit to viable business borrowers. The evidence so far is not very encouraging.

Tuesday, November 4, 2008

The Politics of Scarcity

I had an interesting discussion over lunch with a group of Irish business people (and one American). On the day that's in it we got to discussing the US Presidential election and the likelihood that Obama will win. What I found curious about the discussion was the assumption that the election of a particular individual to the position of President would herald extraordinary change brought about by the will of one individual. I don't buy it.

I do share the more-or-less universal desire to see the end of the Bush era and its horrors - foreign and domestic. But while I can buy the idea that a President can do enormous harm, evil even, I'm not so convinced about the converse. I think part of the great narrative fallacy that drives the United States is the idea that one individual as President can bring about extraordinary, positive change. We've been told the story so often by Hollywood (wasn't Morgan Freeman the first black President?) that many of us believe it. But it isn't true.

Which is why there is an interesting debate about whether to vote or not in today's election. Mostly among economists with a libertarian bias it seems. Arguments against voting range from the 'one vote won't make a difference' school of public choice economics (politics without romance as they call it). Others go further, and argue 'why vote when it will be taken as consent for whatever the next president does': not so much anti-democratic as anti-statist. I'm not so convinced myself: I think by voting you get to have your say (sort of) and to demand better of those you elect when they (inevitably) screw up.

But most people will vote, and the likelihood as I write is that Obama will be the first post-baby boomer President (he's two years younger than I am: a sobering thought!). But (relative) youth creates its own challenges, as David Brooks observes:
And the irony is that they will be confronted by the problem for which they have the least experience and for which they are the least prepared: the problem of scarcity.

Raised in prosperity, favored by genetics, these young meritocrats will have to govern in a period when the demands on the nation’s wealth outstrip the supply. They will grapple with the growing burdens of an aging society, rising health care costs and high energy prices. They will have to make up for the trillion-plus dollars the government will spend to avoid a deep recession. They will have to struggle to keep their promises to cut taxes, create an energy revolution, pass an expensive health care plan and all the rest.

... In the next few years, the nation’s wealth will either stagnate or shrink. The fiscal squeeze will grow severe. There will be fiercer struggles over scarce resources, starker divisions along factional lines ...

... We’re probably entering a period, in other words, in which smart young liberals meet a stone-cold scarcity that they do not seem to recognize or have a plan for.
The sins of the fathers, indeed. Which makes me think that whomever is elected President faces only two prospects: dissapointment or disaster. I hope for all our sakes its just the former.

Monday, November 3, 2008

In Praise of the Middleman (& woman)

The usually good Econtalk podcast series has excelled itself in the latest interview with Mike Munger on the economics of the middleman. Middlemen have been generally despised down through the ages, all they do - to quote Munger - is buy cheap and sell dear without changing or adding to the products they sell. Profit for nothing surely?

But just as there's no such thing as a free lunch, there's no such thing as pure profit. Everyone has their costs, even middlemen - who down through the ages have been the backbone of trade and exchange between tribes, nations and continents. We're all a lot better off for their 'useless' activities. The interview is a great primer by the way on the economist's way of thinking: which often flies in the face of 'commonsense' and 'conventional wisdom'.

Russ Roberts' interview with Munger takes an interesting segue into the recent financial turmoil and the role of middlemen in the credit crunch. Not all middlemen, and not all of their activities, are by themselves necessarily benign. Though they are usually. That hasn't stopped the development of an entire business practice dedicated to cutting out the middleman, it's called disintermediation. Yet often businesses that try to cut out the middle man discover that they underestimated the importance of the middleman - especially when it comes to superior knowledge about the factors influencing the supply of and demand for the products they 'mediate'. The podcast gives several examples of such failures, including dotcom failures such WebVan.

Curiously, it seems to me that the web may well herald the triumph of the middleman rather than his demise. Or should I say her demise. You only have to look at Japan (where else?) where interesting new web innovations provide intermediary services previously provided directly: such as virtual wives. No, not what you think - rather a virtual wife (or 'metabo' fighter) who nags you about that spare tyre around your belly and who reminds you (four times a day by email) to eat the right things and do more exercise. It might just be too much to bear, but at least you do get to choose from one of four wives.

Perhaps it is finally time for the middleman to make way for the middlewoman. And why not?

Sunday, November 2, 2008

Teenage Economics

Charlie McCreevy's notorious approach to managing the state's finances - if you've got it, spend it - is now coming back to haunt us. Like a profligate teenager who can't get any more money from the ATM, this Government is now back to tap the 'parents' (aka: the taxpayer) for more money to keep them in the style they've become accustomed to.

More and more we read nonsense about how Ireland is a low tax country that now has to grow up and pay more taxes just like everyone else (i.e: the Scandinavians). Marc Coleman does an excellent job today in showing just how ridiculous the accusation of low taxes is when you use GNP not GDP as a comparative measure, and you allow for the fact that we have a young population.

It is also worth remembering that taxes are incentives that influence behaviour - usually negative incentives at that. The chart is from a comprehensive analysis of global trends in income taxation (pdf) by Deutsche Bank Research showing the association between contribution rates (i.e.: income taxes and social security contributions as % of income from employment) and average growth rates over the past twelve years. Ireland stands out as a high growth, low contribution economy. The Scandinavian countries that Left-leaning commentators like to compare us with are all down at the other end. The report is well worth reading in full, if only to prepare you for the onslaught on taxpayers that now awaits us.

And onslaught it will be. With the Government capitulating to one interest group after another they will come back to that one group that never quite gets around to protesting: the income taxpayer. Once again we will be told that a) the politicians know how to fix the problems and that b) the taxes they will take from the citizens to facilitate the fix will be temporary. Don't believe them. As Daniel Larison put it recently about the American experience:
Incompetence and corruption do not inspire greater skepticism and doubt about politicians promising to change a broken system, but they seem instead to fuel our desire for these figures even more. Rather than intensifying our doubts about the efficacy of government action, failures by government are treated as shocking and bewildering aberrations that need some explanation ...

This optimistic attitude does not lead to institutional reform or political transformation, despite the frequent use of these themes in campaigns, but actually resigns people to the failed status quo by replacing the hard work of renovation with superficial nods to the latest political fads. At the same time, based in the conviction that every problem has a solution, politicians conclude that there are government solutions for whatever ails a nation, which necessarily means that the scope and role of government will have to increase and each new election will entail adding more and more indebtedness.
The same is now true of Ireland. Like profligate teenagers whose parents are a 'call me' text message away every time they run low on cash, the Government is prepared to do everything but change their lifestyle and make the hard choices. Including living within their means. Time for the parents/taxpayers to be firm methinks.

Saturday, November 1, 2008

Tales Told By Idiots

To-morrow, and to-morrow, and to-morrow,
Creeps in this petty pace from day to day,
To the last syllable of recorded time;
And all our yesterdays have lighted fools
The way to dusty death. Out, out, brief candle!
Life's but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more. It is a tale
Told by an idiot, full of sound and fury
Signifying nothing.

Shakespeare of course (Macbeth - Act 5, Scene 5, lines 17-28). He understood the narrative fallacy - a tale told by an idiot - long before Nassim Nicholas Taleb. Shakespeare's acerbic attitude towards life's storytellers came to mind as I read a commentary from one of the pension fund providers we invest with. It came with an annual benefit statement and included an analysis of the fund's performance. The prose was not exactly Shakespearean, though it showed some of the same capacity for the playful manipulation of words and their meaning.

Amidst the usual turgid obfuscation there was one chart that stood out in particular. It showed average annualised returns (1st July 1999 to 30th June 2008) for the fund we invested in compared with others. It turns out the geniuses we gave our money to had not only underperformed the average for all managed funds over the same period, they had even underperformed the average return to cash. In other words, we would have been better off a) not contributing to a pension since 1999 and b) sticking the contributions in the post office instead. For all the utter waffle in the commentary on the fund's performance, for some reason this dismal comparison was neither referred to nor explained. But at least it was there for all to see in a chart.

Nevertheless the really galling thing about the dismal performance of our pension fund is the 5% 'administration charge' levied on contributions to the pension fund regardless of the performance of the fund. That post office deposit account is starting to look more and more attractive ...

Just over half (52%) of all employees have pension coverage in Ireland (pdf) - mostly in the form of occupational pensions. By definition, nearly half don't. I very much doubt if most pension contributors take the time to read the details about their pension fund's performance (you don't have to, of course, if you are in a defined benefit scheme or employed in the public service - but I'm referring to the rest of us mere mortals here). It is also remarkably difficult to get comprehensive and up-to-date comparative information about the performance of Irish pension funds. Finfacts provides some, the Irish Association of Pension Funds provides little and the Irish Pensions Board provides none whatsoever.

The fundamental problem is that we entrust pension fund managers to invest our pension contributions for us. That's their job: they follow market trends, identify opportunities and seek to maximise returns. In theory, anyway. After all, most of us are too busy with the day job to be second guessing financial markets and adjusting our portfolio accordingly - we leave that to the experts (and pay them 5% of our contributions for their troubles).

But what if they're not up to the job: what if they are all victims of narrative fallacies - nothing but tales told by idiots? There is a premium on prescience right now as forecasters and prognosticators seek to call the bottom of the market, the best time to pile in with your investments (and pension contributions) to maximise long term returns. But they're probably wasting their time. As 'Undercover Economist' Tim Harford explains:

The efficient market hypothesis states that historical information provides no help in forecasting share prices. That would mean that examining graphs of a share’s performance, even reading this morning’s FT, would not produce a reliable strategy for judging the price of a share tomorrow or next year. That is because all useful information would already have been assimilated in today’s price ...

If the efficient markets hypothesis is true, then sensible economists will admit that they simply do not know what the outlook is for the stock market. How dull! It is much more fun to have somebody predict the future ...

Belief in efficient financial markets suggests a three-pronged investment strategy. First, ignore advertisements (and newspaper articles) that tout the past performance of particular sectors or funds. In an efficient market, past performance is not only no guarantee of future performance, it offers no clue whatsoever. Second, don’t try to pick stocks and don’t ask others to pick stocks for you: in other words, choose a low-cost index tracker. Third, don’t try to time the market: get in and out gradually.

All of which suggests that we may be paying our pension fund managers too much - way too much. Maybe we need to employ those with a better grasp of economics to look after our future welfare. People like Peter Schiff who is similarly inspired by the Bard:

When inexplicable events perplexed our early forbears, village wise men concocted elaborate and colorful explanations to soothe the populace. Earthquakes, hailstorms, and solar eclipses were all ascribed to root causes that made sense to the villagers and increased the esteem of the story tellers. The recent, unexpected surge of the U.S. dollar has led many Wall Street witch doctors to conjure a series of logic-defying tales to give reason to what is surely the random scramble of a confused herd. Wall Street spun similar yarns during the dot.com and real estate bubbles as investors groped for reasons to justify sky high prices ...

Earthquakes are caused by the fundamental shifts of tectonic plates beneath the Earth’s surface. A similar move is underway in the global economy. Describing either event without a basic understanding of either geology or economics will simply result in a tale being told by an idiot.

I expect a growing number of Irish pension contributors to weary of the tall tales spun by overpaid fund managers. Which may lead us down the road of Pensions 2.0: more of a do-it-yourself approach along the lines of Wikinvest. It will certainly be a lot more responsible than the passivity encouraged by the present system, and maybe more rewarding as well.

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