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[post_content] => Frances Ruane served as Director of the ESRI from 2006 to 2015. She previously taught in the Dept of Economics at TCD, and earlier in her career she work at Queens University in Canada and at the Central Bank of Ireland and the IDA. In Ireland, her current activities include chair of the Interdepartmental Group on Making Work Pay for People with Disabilities at the Department of Social Welfare, membership of the Public Interest Committee of KPMG, and an Honorary Professor in the Department of Economics at Trinity College, where she contributes to the MSc in Economic Policy Studies. She is also a Research Affiliate at the ESRI and a member of the Royal Irish Academy.
IMI: Based on your current work – if you only had 6 words of advice to give a business – what would they be?
FR: Look positively beyond the immediate.
IMI: What does this mean?
FR: After a period of rapid growth, the global financial crisis meant that Irish businesses had to concentrate on handling immediate challenges. They managed that disruption well and this contributed to the strength of Ireland’s recovery. But the focus on the immediate has left many businesses with legacy issues (debt burdens, under-investment in innovation, poor staff morale). And now businesses need to prepare for the medium term when we discover what is really meant by ‘Brexit means Brexit’. Forward looking businesses leaders need now to ask: what could Brexit mean for my market and company? Where am I exposed to risk and how can I mitigate it?
[post_title] => "Look positively beyond the immediate" Six Word Wisdom from Frances Ruane
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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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[post_title] => ....“If a lender offers me free money, I do not have to take it”
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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.
Cormac Lucey is an IMI associate on the IMI Diploma in Business Finance.
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A medium-term equity market warning
Ireland – European champions!
Earnings in Ireland were 74% higher than the EU average and 65% higher than the eurozone average.
Economics is often dismissed as the dismal science. So here’s a bit of good news for us to ponder. Guess which euro zone country enjoys the highest real median income levels? Ireland does, according to think tank Publicpolicy.ie.
The Eurostat data shows that median gross hourly earnings in Ireland were the highest in the eurozone and second highest in the EU — just 10 cents an hour behind Denmark — after taking account of differences in purchasing power. Earnings here were 74% higher than the EU average and 65% higher than the eurozone average.
What lies behind this excellent news? A clue can be found in the analysis of 2015 Corporation Tax Returns and 2016 Payments published last month by the Revenue Commissioners. That contains analysis, which splits payroll taxes (PAYE, USC and PRSI) received from foreign-owned multinationals and those received from other, domestically owned, firms. In 2015, the average income per employee of someone employed at a multinational subsidiary exceeded that of a person working in a domestic firm by more than 70%. Furthermore, in that year the total employment income for those working for multinationals was almost 40% of total income paid by all companies.
Our economic prosperity is heavily dependent on Ireland’s success in attracting foreign — mainly US-owned — multinationals to locate here. We should, therefore, look with great suspicion at proposals which might threaten that, such as the EU’s plans for a CCTB.
Cormac Lucey is an IMI associate on 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.
