A Different Perspective
Asking the Right Questions
Monetary Policy: All Talk!
“When I was at the Federal Reserve, I occasionally observed that monetary policy is 98 percent talk and only two percent action”
The above is the catchy opening line from Ben Bernanke, previous Chairman of the US Federal Reserve, on the inauguration of his new blog. In essence, what he is saying is that central bank governors largely affect market expectations of future policy through their public statements. Think Mario Draghi and his “do whatever it takes” speech. Read More
Beggar-my-neighbour policies
There seems to be an increasing sense of uncertainty developing on how the US Federal Reserve will manage policy over the next six months. The narrative emerging is that the Fed have backed themselves into a corner on a rate hike, something that is creating unease among investors. The reality is that there will never be a right time to raise rates, but they may have to proceed with a rate hike to stave off another financial asset bubble, if we’re not already in one. Read More
Weekly Market Recap: 30th March 2015
Global equity markets were in the red last week, as cracks are starting to widen in the consensus view that the global economy is on an upward trajectory. The spate of data from China last week suggests that the economic slowdown is deepening, the impact of which may not yet be fully appreciated in financial markets. At the same time, the economic data from the US, the so-called shining light of the global recovery, has been less than inspiring recently. Read More
Being the Designated Driver
Annual IAPF Investment Conference, 26/03/2015
A look at the impact of quantitative easing on pension schemes.
Link to my presentation: Being the Designated Driver
Football, People and Decision Making
For any of the football fans who read my commentary, you may have been wondering if I took a convenient sick day yesterday after Sunday’s defeat to Manchester United. Thankfully, my client meeting in Kerry spared me the smugness (deserved) of the Manchester United fans that work alongside me at Invesco. In early February, I likened Liverpool to a momentum hedge fund riding the wave higher. Well, on Sunday, we got a nasty margin call! And on the other end of the line was an arrogant Dutchman. Every run comes to an end, but losing to Manchester United is never easy to take. Read More
Rising Inequality: The Side Effect of Monetary Policy
The wealth effect theory – where rising asset prices makes consumers feel wealthier, causing them to spend more – has been the prime driver behind the expansionary monetary policy pursued by the world’s major central banks in their efforts to stimulate an economic recovery. The flaw in this theory is that real wealth is held by the wealthy, thereby intensifying an already dangerous side effect of capitalism, where the earth’s wealth becomes concentrated among the few. Read More
Weekly Market Recap: 23rd March 2015
Global equity markets moved higher last week, buoyed by the statement from the US Federal Reserve. While the Fed removed the word “patient” in terms of their stance on interest rate hikes, the downgrading of economic projections was a sign for investors that the punchbowl won’t be taken away any time soon. Read More
The Marriage Effect
“By all means marry; if you get a good wife, you’ll become happy; if you get a bad one, you’ll become a philosopher.” Socrates (469 BC – 399 BC) Greek Philosopher
Who should be allowed marry? That is the question currently being debated in Ireland ahead of the Marriage Equality Referendum in May. I am indifferent when it comes to the institution of marriage. However, if people will feel more secure and equal under the blanket of this institution then why leave them out in the cold? While it is easy to get philosophical on the idea of marriage, it is something that has relevance when analysing the custodians of your wealth, investment managers. Read More
Thoughts on the mortgage arrears crisis; the great contradiction
Last Friday the Central Bank of Ireland released the Residential Mortgage Arrears and Repossessions Statistics, updated to December 31st 2014. The report is particularly timely given the huge increase in repossession orders being lodged with the courts and as more high profile cases garner media attention.
“Lies, damned lies, and statistics”
Statistics can be interpreted and presented in different ways, by different people, with different agendas. Those who have talked about the easing of the mortgage crisis point to the continued drop in the total number of mortgage accounts in arrears, the decline in early arrears and the increase in the number of mortgages restructured.
However, when you look behind the numbers objectively, the reality is that the mortgage arrears crisis, an economic and social crisis, remains unresolved. There are two key takeaways from the report:
- The mortgage accounts in arrears over 720 days still constitute a significant portion of all accounts in arrears and the volume of arrears outstanding.
- The restructuring techniques utilised to date do not adequately address the fundamental issue of over-indebtedness and the need for sustainable debt solutions.
The Central Bank report splits out the residential mortgage accounts by principal dwelling houses (PDH) and buy-to-let properties (BTL). As shown in Figure 1, of the 758,988 PDH mortgage accounts with an outstanding balance of €104.9 billion, 110,366 (14.5%) accounts were in arrears with a balance of €20.2 billion (19.3%). Of the 140,995 BTL mortgage accounts with an outstanding balance of €28 billion, 35,583 (25.2%) of these accounts were in arrears, with a balance of €9.6 billion (34.3%).
The outstanding balance of accounts in arrears is €29.8 billion, 22.4% of the overall mortgage book of €132.9 billion. If we break down arrears by days, as shown in Figure 2, the majority of this €29.2 billion is in arrears for a period of greater than 360 days, roughly €18.5 billion (62%).
Restructured, but may not be sustainable
114,674 PDH mortgage accounts were classified as “restructured”, 78,418 of which were not in arrears. This represents a 36% increase, from a year earlier, in the number of restructured PDH accounts and a 72% increase in those categorised as restructured but not in arrears.
Judging by the restructuring arrangements it hard to be full of confidence on the longer-term sustainability. While they are referred to as “forbearance techniques” there doesn’t seem to be a huge amount of forbearance involved. As shown in Figure 3, the three main techniques – capitalise the arrears, split the mortgage or extend the term – account for 58% of restructured PDH mortgage accounts.
The mortgage crisis in Ireland is a microcosm of the wider global debt bubble that has been addressed in the same way: kick the can down the road. Record low interest rates from the world’s major central banks have brought reprieve, for now. What is required is a fresh approach to dealing with over-indebtedness and greater effort on pursuing sustainable solutions. Transparency on the restructuring policy is needed along with revisions to the personal bankruptcy law to help people get free of debt. We must remember that irresponsible borrowing was fed by irresponsible lending.
Most of all, a clear long term policy on residential real estate needs to be devised, addressing some of the bigger issues that got us to where we are today. In Ireland, there is an ingrained belief that the family home is sacrosanct, that this asset is relatively untouchable in situations of financial distress. This belief reflects a shared history with our English friends across the water, and one that has been borne out in the low level of repossessions since the crisis. Why then, if we apply such importance to the family home, is speculation in residential real estate permitted? How much property should one individual be allowed to accumulate? Is a house a home or an investment?
Recent developments in the Irish property market suggest that even before we have dealt with the mess of the last crisis, the seeds are being sown for another.
This article featured in the Journal.ie on March 19th 2015 as: Why is speculation on residential homes allowed?
Thoughts from Japan
Last week, Japan’s Nikkei 225 equity index hit a 15-year high. As I received the usual mobile Bloomberg update about this development, it was interesting to actually be in the country since the world of economics and finance has really been the context for how I have viewed Japan. Read More
