There are now about two million people who are in work in Ireland. Of these, about half a million work in the public sector in areas such as administration, teaching and health. The rest are employed in the private sector.
Considering its centrality to our everyday prosperity, the private sector is oddly depicted in our culture. The big businessman is always the baddie. Just think: Mr Burns in The Simpsons, Michael Douglas’s Gordon Gekko in Wall Street, or Leonardo DiCaprio in The Wolf of Wall Street.
Source: www.axiomcommunications.com
On that basis, it’s good to see that a movie has just come out that portrays financiers in a more realistic light: as intelligent people who take risks to make money in a complex financial world in which there are winners, but, by extension, plenty of losers.
The Big Short, released on January 22 2016, is based on an adaptation of the adage of “buy low, sell high” among stock market traders. Going “short” simply reverses the sequence by aiming to “sell high, buy low”. To put it simply, you sell a stock that you don’t own and think is overvalued and undertake to close the transaction by buying it back later.
The protagonists of The Big Short, based on the book of the same name by Michael Lewis, realise in the mid-2000s that the US housing market is an accident waiting to happen and that it is a big candidate to be “shorted”.
It examines several different individuals who independently reached such a conclusion and who had the guts to back that insight with their own cash. As one Bloomberg View writer put it: “It isn’t a spoiler alert to say that the financial world collapses, the protagonists get rich and no one lives happily ever after.”
The most compelling story was that of Michael Burry. He was the founder of the Scion Capital hedge fund which he operated from 2000 to 2008. Mr Burry initially qualified as a medical doctor and left work as a neurologist to pursue his hobby and become a full-time investor. In 2001, Mr Burry’s first full year at the hedge fund, the S&P 500 index fell 11.88 per cent but Scion was up 55 per cent, according to Lewis.
The next year, the index fell again, by 22.1 per cent, and yet Scion was up again: 16 per cent.
In 2003, the stock market finally turned around and rose 28.69 per cent, but Mr Burry beat it again — his investments rose by 50 per cent. By the end of 2004, he was managing $600 million and, as Mr Lewis put it, was “turning money away”.
It was at this point that Mr Burry focused on the US housing market. As the market collapsed spectacularly and others lost lots of money, he was still in profit because he had correctly predicted what would happen.
He later said he shorted mortgages because he had to. “Every bit of logic had led me to this trade and I had to do it,” is how he put it. He has also pointed out that he did not benefit from taxpayer-funded bailouts as he liquidated his shorted positions by April 2008.
One thing is clear from all of this. Mr Burry is worth listening to, especially when it comes to issues relating to the financial markets. In a recent interview with New York magazine, he gave some hints about where the next big-short trading opportunities may come from. He said that he had hoped after the crash that the world would enter a new era of personal responsibility, but instead we “doubled down on blaming others and this is longterm tragic”.
On this basis, the Irish response might not impress Mr Burry. Our reaction to our own banking crisis has been to blame bankers for lending to us rather than to reflect on whether we were wise to borrow and to invest in overvalued property.
Instead of learning lessons, it would appear that we have simply sought out scapegoats to evade personal responsibility. Mr Burry’s comment that “if a lender offers me free money, I do not have to take it” is not one that sits easily in Irish public debate even if it is little more than a statement of the obvious.
The hedge fund manager is not happy either with the current state of global financial markets, which he believes are once again trying to stimulate growth through easy money. “It hasn’t worked, but it’s the only tool the Fed’s got,” he said.
Mr Burry is worried that the markets are using interest rates to “price-risk”, but that mechanism is broken as the interest rates of central banks have been kept for many years at close to zero.
Worse still, he thinks that by using low interest rates to fight the aftermath of one bubble going bust, central banks may just support the development of more bubbles. That’s the big risk today, but it’s also how the US housing market developed into a bubble a decade ago.
In combating the economic decline after the internet bubble went bust in 2000, Mr Burry argues that the Fed kept US interest rates too low for too long.
He argues that we are building up “terrific stresses in the system” and any fault lines will harm the outlook.
The problem with this conclusion is that, despite our progress, Ireland remains one of the most heavily indebted countries in the world. We would face a heavy cost if they were to rise again.
Let us be grateful then that Mario Draghi, the head of the European Central Bank, doesn’t agree with Mr Burry and that eurozone interest rates are likely to remain low for several years to come.
Cormac Lucey is the Programme Director of the IMI Diploma in Business Finance. Cormac is also a Financial Services Consultant and Contractor who has previously worked with PricewaterhouseCoopers, Rabobank Frankfurt and the Department of Justice.
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Leadership teams can start the creation of high performance cultures by implementing the following 6 steps:
1. Establish a sense of urgency
They need to make it clear that the current culture needs to change, articulate the vision and business case, and describe the opportunity (as John P. Kotter states in his book The 8-Step Process for Leading Change) in a way that appeals to the hearts and minds of people.
2. Develop a set of strategic beliefs
These are the beliefs senior executives have about their organisation’s environment that enables shaping business strategy e.g. Dell believed that customers would, if the price was right, buy computers from a catalogue rather than go to computer stores as the conventional wisdom dictated they would. They created a $7 billion business.
3. Develop a set of values
Values enable the organisation to act on its strategic beliefs and implement their strategy the right way. Values shape the culture of an organisation, define its character and serve as a foundation in how people act and make decisions. Dell’s values supporting its strategy and strategic beliefs include: Delivering results that make a positive difference; leading with openness and optimism and winning with integrity.
4. Capitalise on quick wins
Capitalize on and honour your cultural strengths and act quickly on any critical behaviour changes required.
5. Challenge those norms that get on the way of high performance
Norms are informal guidelines about what is considered normal (what is correct or incorrect) behaviour in a particular situation. Peer pressure to conform to team norms is a powerful influencer on people’s behaviour, and it is often a major barrier affecting change. It is always easier to go along with the norm than trying to change it…. Common samples of negative norms in some organisations: Perception that it is ok to yell at people, ignore people’s opinions, etc.
6. Role model and recognise the desired behaviours
As Gandhi wonderfully put it “Be the change you want to see in the world”. This empowers action and helps embed the desired culture you are trying to create.
Behaviour is a function of its consequences. Behaviour that results in pleasant consequences is more likely to be repeated, and behaviour that results in unpleasant consequences is less likely to be repeated.
According to B. F. Skinner and reinforcement theory “future behavioural choices are affected by the consequences of earlier behaviours”. The argument is clear; if you want people to be brave and challenge the status quo, you shouldn’t make them feel awkward or like difficult employees when they do. Furthermore, if want people to contribute at meetings make sure you actively listen to them and act on their suggestions and ideas.
Caution:
On his famous article “On the folly of rewarding A while hoping for B” Steven Kerr argues that the way in which we reward and recognise people doesn’t always deliver the desired results. We all have being in situations where we are told to plan for long-term growth yet we are rewarded purely on quarterly earnings; we are asked to be a team player and are rewarded solely on our individual efforts; we are told that the way in which results are achieved is important and yet we promote people who achieve results the wrong / in a Machiavellian way.
A friend of mine was recently at a hospital and he complained to the ward manager about the doctor’s bad manners and rudeness. The answer he got was “do you want to be treated by the best heart doctor in the country or a not so good doctor but with a really nice bed manner?”.
My argument is why can’t we have both?
Pedro Angulo is the Programme Director of the IMI Diploma in Strategic HR Management starting on 16th November 2016.
Pedro is an Organisational Effectiveness Business Partner in AIB and Chairperson of the Irish EMCC (European Mentoring and Coaching Council).
He is a motivational speaker and regular presenter at HR, coaching, change and business conferences / events._____________________________________
[post_title] => 6 Steps to start the creation of high performance cultures
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The American economist Robert Shiller is a Nobel laureate for several reasons.
One of them is the cyclically adjusted price earnings (Cape) ratio. Shiller’s device overcomes a serious defect in the more conventionally used price to earnings (PE) ratio which is often used to measure quickly whether a share is relatively expensive or cheap.The problem with the conventional PE ratio is that if earnings or profits are cyclically inflated, then even an inflated share price can be made to look reasonable.
Shiller’s elegant answer to this problem was to discard annual earnings as the “E” or earnings figure and to replace it with a measure of cyclically adjusted earnings. In order to generate a measure of corporate earnings that reflected the whole cycle, rather than risk being deceived by using cyclical peak earnings, Shiller opted to use average earnings from the previous decade instead.
By comparing today’s share price to average earnings over the previous decade — rather than just the earnings of the past 12 months — the risk that one may be misled by a temporarily elevated level of earnings is significantly reduced.
The advantage of using Cape as a measure of value is that it provides a useful predictor of future equity returns, at least when one uses it to measure value across an entire national stock market.
The best returns from investing in the US stock market were made in the past after its Cape had sunk to levels of 10 or lower. This happened, for example, in the 15 years after 1932, when the Cape hit 6, and 1982, when it hit 8.
Conversely, the worst returns have been made after the Cape has peaked above 25. That happened after 1929, when the Cape reached 30, and 2000, when it hit 44.
Today the US Cape is 25.5 and falling. That’s a medium-term equity market warning. So is Ireland’s elevated Cape of 27.4. Those looking for long-term equity bargains might look at the markets in Brazil (Cape of 7.4), Poland (9.1) or the Czech Republic (9.4).
And, if you want a bargain and have a stomach for risk, you can try Russia, where the Cape is a measly 4.6.
Cormac Lucey is the Programme Director of the IMI Diploma in Business Finance. Cormac is a Financial Services Consultant and Contractor who has previously worked with PricewaterhouseCoopers, Rabobank Frankfurt and the Department of Justice.
Economic growth expectations have been revised sharply downwards since the UK voted to exit the European Union. The asset manager Fulcrum has revised its 2017 British growth forecast down by 1.7% and for the eurozone down by 0.6% of GDP. Note that these are just 2017 forecasts. We are likely to see downward revisions in growth expectations for following years, too.
Source: cormaclucey.blogspot.ie
If the UK serves formal article 50 notice on the EU that it intends to exit by the end of this calendar year, we are unlikely to see the final contours of its future arrangements until late 2018 at the very earliest. And the EU trade commissioner Cecilia Malmstrom says Britain cannot begin negotiating trade terms with the bloc until after it has left. “First you exit, then you negotiate,” she told the BBC’s Newsnight.
If the UK must wait for its divorce arrangements to be finalised before it can negotiate its new trade arrangements, it may be the middle of the next decade before the fog of uncertainty finally clears.
At this stage, we are only in the foothills of danger, but we have perilous political mountains to traverse at a time when global economic storms are gathering. A fortnight ago, as he reclined in foothills pose, finance minister Michael Noonan sought to reassure voters that Brexit would not affect Ireland’s 2017 budget.
Last week, in mountainous pose, he was forced to admit that the situation was “evolving” and was “hard to get a fix on”.
The investment bank Morgan Stanley sees two possible scenarios for the UK’s conscious uncoupling from the EU. In the civilised divorce outcome, the relationship with the EU is progressively resolved, capping the negative hit to demand and keeping the British economy out of recession. In an acrimonious divorce scenario, “the sources of uncertainty interact with, and amplify, each other”.
Unfortunately, there is no shortage of acute uncertainties and dangers afflicting the EU right now. Will the pragmatic Angela Merkel or the doctrinaire Jean-Claude Juncker control the EU negotiators? Will Merkel remain German chancellor after next autumn’s federal elections? Will the Italian banking system — and Italy’s membership of the euro — remain intact? Will a gigantic economic crash in China plunge the global economy into recession?
The reality is that nobody knows for sure how Brexit will pan out. There are too many known unknowns never mind unknown unknowns. This uncertainty is already taking its economic toll.
European private equity transactions — the purchase and sale of private companies — slowed dramatically between the second half of 2015 and the first half of this year. The total deal value almost halved from €48.5bn to €25.6bn according to the Centre for Management Buyout Research. “The market is cooling off, with the EU referendum one of a number of challenges currently facing deal-doers,” it noted.
“There is evidence that some risks have begun to crystallise,” the Bank of England said in its latest financial stability report, published in London last Tuesday before concluding that the “current outlook for financial stability is challenging.”
The bank then facilitated increased lending by cutting its capital requirements for UK banks and pledged to implement any other measures needed to shore up their financial stability following the Brexit decision.
The Bank of England will do what it can to prevent the UK entering into recession. So will the British government, starting with chancellor George Osborne’s commitment to reduce corporation tax rate to 15% or lower. “What’s done is done,” Osborne stated. “The British public have spoken. We should accept their verdict instead of moping around or trying to unpick it. We must focus on the horizon and the journey ahead and make the most of the hand we’ve been dealt.”
The challenge for Osborne and his successor is that, while a reduction in the corporation tax rate is likely to have a positive long-term effect, it may have only a limited effect in the short term when Britain most badly needs a policy boost. The problem for policy-makers is that the cupboard is pretty bare when it comes to the most conventional form of short-term economic boost: fiscal stimulus.
The UK is only just getting its public finances back in order following the convulsion of the global financial crisis. But Osborne has now abandoned his target to get government finances back into balance by 2020. So if it has little or no room for manoeuvre on fiscal policy, how can Britain avoid a recession?
It has two remaining policy levers. It can run a stimulative monetary policy. That would mean relaxing some bank regulations, keeping interest rates lower for longer and more aggressive quantitative easing, aka money printing. The Bank of England governor has already signalled his readiness to consider all this.
The second policy lever that the UK has is its exchange rate. This will be heavily influenced by its monetary policy. Suppose, theoretically, that the Bank of England proposed to use quantitative easing to double the quantity of sterling issue. And suppose that markets expected the quantity of other currencies to remain fixed. Then, all other things being equal, we would expect sterling to halve in value against other currencies.
This simple theoretical example shows why the suggestions that UK monetary policy might be eased further has coincided with a significant drop in sterling. Since the evening of the Brexit vote, it has dropped 10% against the euro and 12% against the dollar. I expect sterling to fall still further over the coming months.
Allowing the pound to drop sharply against other currencies is a relatively low-cost way for Britain to adjust to weaker economic output and to its extremely large balance of payments of deficit, or excess of imports over exports. As the IMF recently commented: “The current account deficit has risen substantially in recent years, reaching 5.2% of GDP in 2015 . . . the widest deficit among advanced economies.”
Letting sterling take the strain of economic adjustment is something that the British have done before. Between 1972 and 1976, the pound fell by 40% against the dollar. Between 1980 and 1985, it dropped 55%. And between 2007 and 2009, it fell 35%. Since it peaked in 2014, sterling has already dropped by over 20%. So don’t be surprised over the next few years to see sterling fall by another 20%-30% from current levels.
But there is a problem in letting sterling slide in order to export recession and import economic stimulus. Other countries and currency blocs simultaneously want to do the same thing. Like the UK, the eurozone and China have an excess of debt and limited room for fiscal manoeuvre. They too want to see their currencies drop.
And it is a simple impossibility for everybody to drop their currencies against everybody else.
Cormac Lucey is the Programme Director of the IMI Diploma in Business Finance.
Cormac is also a Financial Services Consultant and Contractor who has previously worked with PricewaterhouseCoopers, Rabobank Frankfurt and the Department of Justice.
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[post_title] => Only in the foothills of currency danger
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Cormac Lucey
18th May 2017
Cormac Lucey is an IMI associate on the Senior Executive Programme.
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....“If a lender offers me free money, I do not have to take it”
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A medium-term equity market warning
Only in the foothills of currency danger
After The Boom Comes The Bust
Professor Frank Barry recently presented an interesting paper looking back at the debate in the 1990s on Ireland joining the euro single currency project. He presented his paper at a recent meeting of the Statistical and Social Inquiry Society of Ireland. The presentation was made piquant as Barry had been a member of a cabal of UCD economists that had questioned the merits of Ireland joining the euro while his paper was responded to by Professor Patrick Honohan, one of the euro’s key champions back then (and later when he was governor of the central bank).
Barry unearthed one great quote from the Belgian economist Paul de Grauwe in an article in the Financial Times of 20 February 1998 entitled “The Euro and Financial Crises”. De Grauwe wrote “Suppose a country, which we arbitrarily call Spain, experiences a boom which is stronger than in the rest of the euro-area. As a result of the boom, output and prices grow faster in Spain than in the other euro-countries. This also leads to a real estate boom and a general asset inflation in Spain. Since the ECB looks at euro-wide data, it cannot do anything to restrain the booming conditions in Spain… Unhindered by exchange risk vast amounts of capital are attracted from the rest of the euro-area. Spanish banks, that still dominate the Spanish markets, are pulled into the game and increase their lending. They are driven by the high rates of return produced by ever increasing Spanish asset prices, and by the fact that in a monetary union, they can borrow funds at the same interest rate as banks in Germany, France etc. After the boom comes the bust. Asset prices collapse, creating a crisis in the Spanish banking system.” That quote pretty much described what happened to the Irish banking system a decade later.
Responding, Honohan warned that, even outside the euro, Ireland would have been affected the wall of cheap credit that sloshed around the globe after 2000. He contended that, even outside the euro area, Ireland would have experienced a credit bubble. But Colm McCarthy argued that if we had retained our own currency and interest rate regime, these would have acted as canaries to warn us of the bubble and to limit its extent. He concluded that Ireland should campaign aggressively for completion of European Economic and Monetary Union (EMU).
Cormac is also a Financial Services Consultant and Contractor who has previously worked with PricewaterhouseCoopers, Rabobank Frankfurt and the Department of Justice.
Source: www.clubsolutionsmagazine.com
Barry unearthed one great quote from the Belgian economist Paul de Grauwe in an article in the Financial Times of 20 February 1998 entitled “The Euro and Financial Crises”. De Grauwe wrote “Suppose a country, which we arbitrarily call Spain, experiences a boom which is stronger than in the rest of the euro-area. As a result of the boom, output and prices grow faster in Spain than in the other euro-countries. This also leads to a real estate boom and a general asset inflation in Spain. Since the ECB looks at euro-wide data, it cannot do anything to restrain the booming conditions in Spain… Unhindered by exchange risk vast amounts of capital are attracted from the rest of the euro-area. Spanish banks, that still dominate the Spanish markets, are pulled into the game and increase their lending. They are driven by the high rates of return produced by ever increasing Spanish asset prices, and by the fact that in a monetary union, they can borrow funds at the same interest rate as banks in Germany, France etc. After the boom comes the bust. Asset prices collapse, creating a crisis in the Spanish banking system.” That quote pretty much described what happened to the Irish banking system a decade later.