Thursday, 27 May 2010

Are markets missing the elephant in the room?

Greece is in dire fiscal straights, most would agree. A public budget and debt problem larger than they were willing to reveal to the world and now an inability to raise money to fund the growing debt pile and shortfall in government revenues with borrowings without an explicit guarrantee from fellow EU members.

The silly squabbling in Ireland is all about how we are in much better shape than Greece, or even Portgual or Spain. We have less government debt and are making "draconian" cuts in the public deficit.

If we have learnt anything from our recent economic history it should be to shun such ill judged hubris. We have proven to be a poor judge of our own policies or performance.

Let's have a more complete look at the problem.

First, nearly every measure of public indebtedness or annual borrowing I see is expressed as a percentage of GDP - a percentage of our national output. This is bad for Ireland. It should be expressed as a percentage of our National Income better appoximated by GNP or GNI. That increases all the figure by up to 25% (ie. 80% of GDP turns into 100% of GNP)

Secondly, we are being far too self congratulatory on fiscal initiatives to date. We have hardly made a scratch in the public sector imbalance between revenue and spending.

Third, while we have inadvisedly laughed at Greece hiding pile of government debt, Ireland has simply been doing the same in plain view. All the borrowing for NAMA related activities and bank recapitilisation is debt, but attempts are made to keep it "off balance sheet" without crudely hiding it.

But the final point is the big kicker. The problem isn't about public indebtedness, even though that is where all the focus has been. The problem is total indebtedness. How much debt in the public and private sector and consequently how much indebtedness to the rest of the world. It is pretty stupid to tihnk that an economy that has a reasonable large public debt stock and public deficit is in a more precarious state than one with slightly less debt and lower public deficit, but much more debt in the private sector.

When we borrow we are bringing forward future consumption. We then spend the subsequent years generating income to pay for the debt and pay it off. More debt (as a percentage of our income) means a large cut of our future income has to go to service and repay the debt. We also have reduced ability to serve our government debt obligations - which, let's face it, are just an extention of our collective private debt obligations as a nation.

That means reduced future standards of living. This trade-off is better for us if the we borrow to invest in assets that will reap income in the future (be that occupied housing, plant, infrastructure etc.). It is worse for us if we use it for final consumption (cars, furniture, holidays) or excessive investment (ghost estates etc.). Which of those sounds more like Ireland?

So to the data. The following shows the more comprehensive pciture of relative indebtedness across some European countries, including our fellow "PIGS". Now think about whether you would rather be exposed to Greek debt or Irish debt?

I wouldn't be so smug and probably wouldn't swap Greek bonds for Irish bonds, despite the contrary view that market is placing on the relative credit worthiness of the two countries at the moment.

Wednesday, 26 May 2010

Just how is that "climate change" investment getting on?

Remember, being told that the HSBC climate Change Index had been underperforming global equity returns because some beastly sceptics were hacking emails and other such nasty things like calling honest hard working grant farmer, I mean climate scientists horrid names?

And remember, that now we had most of those unsavoury events behind us, we could all glory and profit in the wonder that is the Green Economic Revolution(TM)? Yes? A do you remember me saying that you probably want to be a little bit more conerned about how the shareholders of such wonders as windfarms and solar panels and other economically destructive industries, companies and interest groups would manage to get the massive subsidies they need to produce any sort of return at all?

Well, it is certianly the case that the overriding investment theme this year is "we have bled taxpayers dry and will need to squeeze some more, so your stupid windfarms can live or die on their own". Well, the relative returns of the HSBC Climate Change Index this year look pretty much as you would expect under such circumstances.

Returns relative to global equities this year to 30 April -5.5%

Crimes against the sales descriptions act

And today's is:

The "growth and stability pact"

One of the greatest problems with a common currency area is that it could leave constituent regions exposed to assymetric shocks. To the lay person that means, in effect, an even that pushes one or more countries into recession, but not others.

The "growth and stability pact" in general and the more recent "stability measures" announced by the European Commission force those countries mired in the worst recessions to impose the most pro-cyclical (recession exacerbating) fiscal policies.

How that enhances prospects for either growth or stability, I don't think I am clever enough to understand.

But. The big news is that we knew this a long long time ago...


Saturday, 1 May 2010

Get rich quick, the green way

An interesting blog here at the FT on recent comparative returns from Climate Change related stocks relative to the general market. The general thesis is that businesses that operate in climate change related areas, like wind, solar or nuclear energy companies have produced lower relative returns to investors over a period during which the market has been slightly rattled by questions over the integrity of those producing the "science". They go on to say that everything will be hunky dory once the final whitewashes, sorry, I mean independent expert inquiries report and a full and completely clean bill of health is awarded to this shower of chancers and charlatons that call themselves a scientific discipline.

Here is the supporting chart with all the relevant dates and events as exhibit A.

Well, guess what. I think this is spurious anlaysis, that HSBC are producing this"research" to convince punters to buy into their index now and Kate Mackenzie at the FT has fallen for it hook line and sinker.

Here are the salient points this HSBC report fails to mention and Ms Mackenzie fails to spot. The majority of constituents of this index are companies who will only produce a return to shareholders if they get lots of taxpayers money. That i how the wind energy industry has got to where it is today. Taken from our pockets by politicians and placed into those who own and run these companies. People like Al Gore.

And what has been happening recently in Europe? Well, there has been a collective realisation that the finances of governments across Europe are in such a parlous state that bankruptcy is a very realistic possibility for places like Greece, Portugal, Italy, Spain and Ireland. Money for businesses that add no economic value like wind energy or solar energy companies just isn't there and investors awakening to the fact that the "Pig at the Taxpayer Filled Trough" business model has no immediate future until we get ourselves out of hock.

This is the type of event that was occurring in January, just at the time the HSBC CC Index started to hit trouble. Kate should have spotted a report on it. This one came from her newspaper:

There will be no bail-out of Greece by other European Union countries, a top European Central Bank official has said. “The markets are deluding themselves when they think at a certain point the other member states will put their hands on their wallets to save Greece,” J├╝rgen Stark, an executive board member, told Italian newspaper Il Sole 24 Ore.
Put that event on the chart above and it starts to take on a different meaning. In fact 7 January has a much better coincidence with the actual decline in relative performance than the "Himalayan Blunder" used on the chart, which clearly comes after the gap between the red and black lines closes.

Let's face it, markets really couldn't give a lambs whatsit for CRU whitewashes or an other irrelevant political shenanigans (they see through it as being completely political shenanigans).

And that is what the markets really think of this game - a pork barrel free for all. And that is why returns have been under-performing the wider equity market. And that is why would be mad to put money into these companies now.