Jill Kerby

Bank Guarantees?  They’ll Do Your Head In

Not only has our bank bail-out proven to be the most expensive of its kind in the world, but we also have the most complicated deposit guarantee system, thanks to the government’s decision back in October 2008 to throw a two year, 100% blanket guarantee over all the deposits and debts of the six main Irish banks: AIB and Bank of Ireland, Permanent TSB and the EBS and Irish Nationwide and Anglo Irish Bank and the now defunct Postbank.

That infamous two year deadline runs out at the end of this month (September) and it should come as no surprise that many ordinary bank users and depositors are completely baffled as to what security provisions exist now for their hard earned savings. 

So here goes. 

First, find a comfortable seat.  Then put on the kettle.  Try to keep the background noise and interruptions to a minimum for the next few minutes.  Break out the aspirin… the tangled web of Irish bank guarantees is enough to do your head in. 

 Guarantee Number 1 

Before all hell broke loose on what was a sunny September morning in 2007, Irish depositors were probably blithely unaware that their savings came under an EU-sponsored Deposit Guarantee Scheme that safeguarded just €20,000 of their money per person, one of the lowest deposit security rates in Europe. 

All the financial institutions that were authorised by the Irish Financial Services Regulatory Authority to operate in Ireland were covered by this guarantee. Up to September 2007, there hadn’t been a bank failure here or in the UK for 150 years and in an ironic sort of way, the €20,000 sum under guarantee here was a vote of confidence in our banking sector. 

And then the unimaginable happened.

The UK deposit taker, Northern Rock went wallop on that sunny September 14th as a consequence of the interbank credit crisis; a bank run then started in Northern Rock branches in the UK and here, and suddenly everyone was interested in the terms and condition of the Bank Guarantee Scheme.  The UK government, meanwhile, stepped in and nationalized Northern Rock, ensuring that ordinary depositors would get their money back.

The excitement was over…for the moment. But Northern Rock was a tipping point and the international banking and financial situation deteriorated throughout the remainder of 2007 and into the Autumn of 2008 with spectacular slides in bank share prices.  Then it was Lehman Brothers’ turn to implode.

Irish savers were now only too aware about how vulnerable the banking system here was to the toxic effect of the US subprime market, overheated property values and the hundreds of billions worth of complicated derivatives investments that were hived off from the mortgage bonds that had been sold on by the banks.

In early September, 2008, the Irish government, conscious of the growing unease about the banks raised the Deposit Guarantee Scheme sum from €20,000 to €100,000. We’ll call it Guarantee Number 2. Once again, all the financial institutions under the regulation of the Irish Financial Regulator plus the credit unions were included.

 

 Guarantee Number 3

 In reality, this rise in the guarantee and the growing awareness of how dependent the Irish banks – and Anglo Irish Bank in particular – were to the fast-freezing inter-bank market stoked up peoples’ fears.  As queues of worried savers started to form outside a number of Irish banks, on September 29th a two year, blanket, 100% deposit guarantee was declared: the Credit Institutions (Financial Support) Scheme (CIFS) was born and it effectively guaranteed over €400 billion worth of loans and deposits in the Irish banks.  The rest, as they say, is history.

 So where do depositors now stand as the 100% CIFS scheme runs out on September 29, 2010?

 First, all deposits up to €100,000 in Irish institutions supervised and regulated by the Financial Regulator remain guaranteed up to that amount with no end date.  The guarantees that apply to deposits in non-Irish banks by their own regulators – the Dutch Financial Regulator in the case of RaboBank’s €100,000 guarantee - also continue to apply.  But after that date, sums over €100,000 in Irish banks are no longer guaranteed under the CIFS scheme.

However…and this is why I suggested you make that nice cup of tea, the Government introduced yet another deposit scheme last December 2009 known as the Credit Institutions Eligible Liabilities Guarantee (ELG) Scheme 2009.

Further amended on June 28th, 2010 and last September 8th, this Guarantee Number 4 now guarantees all retail deposits in the participating Irish banks until December 31st, 2010.  It may also be significant to small and medium sized companies that the September 8th amendment also extended the ELG scheme to short term bank liabilities, including corporate and interbank deposits as well as debt securities, but only until December 31st, 2010.

Meanwhile the balance of personal fixed rate deposits over the €100,000 limit of the main Deposit Guarantee Scheme (DGS) for a period of no more than five years or until 2015, and then, only if the deposit was made after the bank joined the ELG scheme, but before December 31, 2010, when the current six month rolling approval of the ELG scheme by the European Commission is up. (The dates on which the Irish institutions joined the ELG are below.)

You might want to read that again.  Slowly.

In normal English, what this means is that if you have €150,000, for example, which you wish to leave with an ELG participating bank for, say, the next three years, the first €100,000 will be guaranteed under the DGS scheme with no end date.

The entire amount – all €150,000 - is also guaranteed under the CIFS scheme until the end of this month.  Finally, the €50,000 balance over the €100,000 will be guaranteed under the ELG scheme until the deposit term matures in September 2013. (Had you wanted to, the €50,000 could have been under the ELG deposit scheme for up to five years until 2015 when the ELG scheme comes to an end.)

Just keep in mind that if you had put more than €100,000 into a fixed term account before your bank joined the ELG scheme, the amount in excess of that €100,000 is not guaranteed.

So many promises

For what it’s worth, in the real world that most of our fellow Europeans inhabit and conduct their banking, 100% deposit and debt guarantees worth hundreds of billions of euro, just don’t happen, for the simple reason that no one is dumb enough there to believe that such a promise could ever be delivered.

Life is complicated and stressful enough these days.  So here’s a novel thought:  keep your money in a solvent bank.  Then enjoy the reassurance that a plausible deposit guarantee is in place.

Leave the fairy tales to the politicians and central bankers.

 

The dates at which the Irish banks joined the ELG scheme:

Institution	Date of Joining the ELG Scheme
Irish Life and Permanent plc	4/1/2010
Bank of Ireland	11/1/2010
Allied Irish Banks, plc	21/1/2010
Anglo Irish Bank Corporation Limited.	28/1/2010
EBS Building Society.	01/02/2010
Irish Nationwide Building Society.	03/02/2010

Source:  NTMA

 

 

 

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QUALITY, NOT QUANTITY FOR CHRISTMAS ‘09

It is said that Christmas is for children and if you mean by that, the tree, the brightly wrapped toys and parcels, the panto and the general level of excitement, then I suppose it is.  But what I don’t ‘get’ about Christmas is the volume of worthless junk that our children receive, much of it laid out for the nation on the annual Late Late Toy Show. 

This year was no different.  With a few exceptions, practically every toy displayed required batteries or an inexhaustible supply of electricity, and even host Ryan Tubridy noted on more than one occasion that “this should keep them occupied for ten minutes” or comments to that effect. 

“The best toys are dolls for girls and guns for me,” my small son once told me, brandishing an old-fashioned cap gun and holster, but the politically correct can relax:  the child also got lots of Lego and Playmobile stuff – the greatest toys of all time – and zillions of books.  (He reads to this day and his children will hopefully get good use out of his book collection and the Playmobile castle that I packed away so carefully.)

The original present-givers, the Three Wise Men, definitely had the right idea in going for quality rather than quantity.  Gold, frankincense and myrrh were valuable and rare, the ideal gifts for a newborn king.  You might want to keep that in mind before you fork out hundreds of euro for (still) overpriced toys and gifts that will be quickly forgotten and discarded.  

Since I have an aversion to giving cash as a gift other than to a charity, I’m certainly not advocating handing over envelopes of money to anyone this Christmas.  But if you do have the resources to be generous and you want to give someone a money-based present that will last longer than the few weeks of this holiday, let me make a few suggestions that can be stuffed into a loved one’s stocking.  

You may have to make a bit of an effort in arranging some of these, but I can guarantee that your thoughtfulness will be appreciated and might even offset some of the anxiety that has been caused by the December Budget: 

FOR CHILDREN: 

If you’re a parent, grandparent or indulgent relative, open up a savings account for the beloved young child and either pay in a regular contribution that is arranged on-line or by direct debit. As the child gets older (s)he can be encouraged to save as well.  (Pop a little piggybank into the stocking to get them started.)

Open an investment fund for the child.  A regular monthly contribution (as little as €100 a month with Rabo Funds) should smooth out stock market volatility and if you have sufficient time, a well-chosen fund will hopefully, return a long term yield that exceeds the deposit rate and reward the risk you take.  Be careful about the fund you choose – I think gold and precious metals are a good play because of the way the money supply is being inflated, but some commentators believe prices are ready for a correction.  Oil and energy shares should also be a good long term buy and emerging markets, but until you familiarise yourself with the ins and outs and technicalities of the market, you can start them in a low risk cash or bond fund. 

Buy them some physical gold or silver – and then keep it safely stored.  Encourage them with a collection of coins or stamps or other small, affordable antiques.  The great collector and philanthropist Chester Beatty of the Dublin library/museum fame, bought his first rare snuff bottle at an auction in New York for a few dollars when he was ten. 

Stuff their stockings with some Prize Bonds.  You need to buy them in batches of €50 now, but there is a million euro tax free draw every month and every bond remains active until it wins. 

Anyone can ‘gift’ a child – who doesn’t even have to be a blood relative – up to €3,000 a year without it having to be declared to the Revenue.  This is a good way to disperse an estate early to low tax-free categories of beneficiaries without any tax implications and could go some way towards helping pay long term education fees.

FOR GROWNUPS:  

I can’t think of a better non-cash gift to give than gold or silver this Christmas in any form – a fund, an ETF, physical coins or even jewellery, but the latter needs to be pure gold (a la a Dubai souk) to expect a fair encashment value. The price is likely to fall back after reaching its €1,200 peak but goldbugs believe it has far to go over the medium term. 

Offer to pay for an investment course for someone interested in building a share or fund portfolio.  Check out Rory Gillen’s excellent investoRcentre.com for one day seminars and his weekly subscription newsletter. 

Older family members who want to play ‘The Wise Man’ or woman this Christmas could offer to help out younger members with offers to assist with some bill paying this year if they are struggling financially.  How about picking up their heat or electricity bill, a portion of their mortgage, school fees, or private health insurance bill.  A gift like this can go the other direction too. 

A wonderful gift for an older person who lives alone is a taxi-account.  Start a tab for them at your local taxi-company that you can clear every month directly from your own bank account. 

Make a financial donation to the recipient’s favourite charity. Both the home and overseas charities will send out gift cards to donors. 

And finally, how about adding some ‘how to’ finance books and magazines to everyone’s stocking this year? My favourite weekly picks are The Economist and MoneyWeek magazine, subscriptions to the UK financial newsletter, Fleet Street Letter and to DailyWealth, a UK trading letter and other Agora Financial letters like Capital & Crisis, S&A Resources and Daily Wealth.   A great read for the holidays is the updated Empire of Debt by Bill Bonner and Addison Wiggin of www.dailyreckoning.com fame and of course the ‘four angry (Irish) men’ collection from Penguin: Matt Cooper, Shane Ross, Pat Leahy and Fintan O’Toole’s books about the boom and bust years. 

 

And a Happy, Prosperous and Joyful New Year to all. 

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SELF-EMPLOYED?  NEED A PENSION?  DO IT YOURSELF

If I could jump back in time, Star Trek-like, to 1987 when I first became self-employed and began paying some proper attention to my personal finances – an event entirely due to the insistence of my excellent accountant (who is still my excellent accountant) – the one thing I would approach differently is my pension. 

 

Back then, just barely out of my 20s, I was rather alarmed when this mere slip of a girl herself (as she was then too) said she wouldn’t take me on as a client unless I took out a pension.  “I don’t earn enough to save for a pension.  I am too young for a pension,” I pleaded.  “Yes you do, and no, you are not,” was her stern reply. 

 

She was dead right of course and I am hugely grateful that she put me on the road to long(ish) term financial freedom by insisting that I start a pension fund and then put the maximum amount allowable for tax purposes into it each year.  

 

She also forced me to face the hard truths of self-employment early on:  there is no fairy godfather or godmother employer to make pension contributions on your behalf. If I wanted to retire some day on more than what the government might deign to pay me at age 65, I was going to have to make my own financial arrangements. 

 

My first pension, into which I contributed only about the cost of a daily Café Sol cappuccino, but was the equivalent of about 10% of my earnings, is actually worth an awful lot more than I put into it, as one would expect after 22 years.  But still, it was a bog-standard managed fund that was pretty much sold to everyone, regardless of age, income or risk profile and which carried far too high an exposure to Irish equities – a mistake that is being paid for now. 

 

Luckily, I’ve added another 10 different funds and a few more fund managers to my collection of pension plans – diversifying the assets and the managers in the hope that if and when the markets crashed (as they did in 1987, 1991, 2001 and 2007-8) or the managers’ luck ran out (and it always does eventually) my grand plan for an ‘early’ retirement at 60 would still stay on course. 

 

So much for the grand plan.  Over the last year every known asset collapsed in tandem (except perhaps gold.)  Diverse as my pension assets have been, which includes not having overloaded on property, my pension strategy still needs some serious revising. 

 

I’m planning on switching to a self-administered, non-standard PRSA into which an even more diverse, lower cost selection of assets and funds can be put that will include a greater volume of bonds and cash as well as energy and alternative energy shares, emerging markets, gold (as an inflation and currency hedge) and other commodities, bio-tech and pharmaceutical shares.   

 

There will be a place, of course, for more conventional consumer-based equities, especially world dominating companies that have mostly maintained their markets and dividends.  But since I have less time than I did when I was 30, and I don’t think there will be much growth in western economies overwhelmed by personal debt I will be lightening up on consumer-driven assets. 

 

In hindsight, a lower cost, super-diversified, age and risk appropriate investment route is the one I should have taken from the start. That said, back in the late 1980s and early ‘90s, the typical pension contributor had no access to an umbrella product like a self-administered PRSA nor were charges and fees at all transparent and only the very rich had any access to decent investment advice. 

Fortunately, the advent of new technology and the internet has changed all that. 

 

There are only a couple of weeks left before the October 31st pay and file Revenue deadline (November 13 if you file on line) for topping up last year’s pension fund in order to claim maximum tax relief. The tax shouldn’t be the main reason for a pension investment, but if the new Greens/Fianna Fail Programme for Government holds, this will be the last year you’ll get that relief at your top rate of tax and PRSI.

 

Cutting the tax relief to just 30%, when higher earners are likely to be paying well over 50% on retirement income in the coming years doesn’t make much sense, but that’s next year’s headache.  The job at hand now is to work out how much you think you will need – or want – to live on in retirement and build a parcel of assets and funds around that goal.  

 

A well-chosen broad selection of risk-weighted assets in a self-administered pension scheme just might be the way – given enough time – to get there. 

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WHAT YOU REALLY NEED NOW IS TO DO SOME STRAIGHT THINKING

 

You want straight talking?  About your money?   Really?  

 

Don’t you prefer the curlicued talking (and writing) that fills our airwaves and other media from morning ‘til night about how “everything is now being done to reverse the effects of this recession” on the US or global economy?   (As if an economy is just another machine covered in levers and buttons that, if you follow the manual properly, can be adjusted and pushed and tweaked to get it working again.) 

 

There isn’t much straight talking going on at the moment because it’s much easier to report  - and believe -  what politicians and central bankers, to whom we have given a mandate to repair the damage that they inflicted in the first place, are spinning at us. 

 

For this reason you should take what you hear and read with a proverbial grain of salt, and perhaps consider a few economic truths before you run out and buy that first home, or pour all your money back into financial or retail shares, or expect unemployment to reverse anytime soon. 

 

Surely the time has come to challenge the warped thinking that is being endlessly presented on our morning (and evening) news broadcasts, by Keynesian economists and desperate politicians-in-chief and their Merlin-like central bankers.  So here goes:

 

 

The consequences of nearly four decades of cumulative deficit spending by the United States in particular, and pretty much by every other major western economy cannot be halted or reversed.  No matter how much more debt and credit is laid on future generations or cash is printed out of thin air, it will not solve the problem. It will only postpone it.

 

 

An insolvent bank, or motor industry, or sub-prime mortgage holder only stops being so when their debt is paid off or written off.  Shifting this debt to the taxpayer and their grandchildren and great-grandchildren will only make them insolvent too.

 

 

Governments and politicians do not create wealth. They only redistribute our wealth.  When they do try to run businesses or even public services they don’t usually do it very efficiently.  Aside from the bad resources allocation decisions they make (just think of the health service), they lose track of a lot of the money; they don’t account for it very well; they give it to their friends, and they don’t seem too pushed about the lousy return.  That’s why millions and billions and soon, (maybe even trillions) of dollars, and pounds, yen and euro is going to keep disappearing down dark financial holes. 

 

A 5% rise in house sales in the United States and a bear rally on Wall Street are not genuine signs of recover in either the property market or financial markets.  In the former case, it is a consequence of massive foreclosure sales and the auctioning off of the inventory of bankrupt property developers.  In the latter, it is a bear rally by traders who do what they always do – take advantage of any upward movement caused by government interference in the price of money or assets.  The same thing happened  in 1932 and it crushed investors who got sucked in. 

 

 

I could go on, but I hope you are getting the picture.  

 

We are not in the throes of an ordinary business-cycle recession in which, after an overheated economy slows down, the politicians and their creatures, the central bankers step in to yet again manipulate interest rates and pump a bit of extra currency and credit back into the flagging financial and consumer spending markets. 

 

This time the mistakes – the decades of manipulating the money and credit supply to encourage reckless lending, the vast deficit spending on imported goods, the unfunded wars, the uneven tax systems that have favoured the rich and the unfunded social programmes have caught up with the United States and the rest of the world.  

 

‘Things fall apart; the centre cannot hold’, wrote WB Yeats.  No kidding. 

 

 

It is reckoned that about 50 trillion dollars worth of (albeit inflated) private wealth has been lost so far in world-wide property values, pension funds and other assets.  

 

 

The Obama mega-bailouts have one goal – to inflate away the debts of  America, which are too great to pay off in any other way.  But it will be at the cost of anyone holding US bonds, dollars, property and other US dollar denominated assets and who believes that the value of these assets will return to pre-2008 prices in their lifetimes. 

 

 

Once those billions and trillions of new, devalued dollars trickle out into the wider marketplace, you should expect consumer prices to rise. This is because the early money (that is still worth something) will pour into oil shares, precious metals, arable land, commodities (especially food), water shares and essential consumer durable shares represented by companies with huge positive balance sheets and world class management.  

 

This is the stuff that we should all be buying. 

 

*                         *                        *

 

So much for straight talking.  Now you have to do some straight thinking.  

 

 

If I had a crystal ball, I would gladly tell you when, or even if, any of this is going to happen.  The only thing I am certain about in my own head, is that whatever he outcome, it’s going to happen sooner than we expect. 

 

 

And that’s because the law of exponential growth is now in play. 

 

 

This is where an event or an action keeps expanding – like the money supply or credit – at a pace at which it eventually reaches a tipping point, a point of no return.  No matter what you might do to try and stop the expansion, it doesn’t work. 

 

 

For example, it took 350 years – to 1973 - for the United States to produce the first trillion dollars in its money stock, that is, all the money in its bank accounts, money market funds, collaterised debts, etc.  Now, a trillion dollars is literally being created overnight at the touch of a computer key. 

 

The exponentially growing financial system and the economies it corrupted finally hit its immoveable object last year when ordinary consumers were unable to pay off or take on more debt. The hundred of trillions of debt created in the last decade in particular, began to unwind.

 

The current, unprecedented debt inflation effort is expected to result in price inflation…probably hyper-inflation, that will also run its course, despite the central bankers saying they will be able to turn off the tap in time. 

 

Can the centre hold?  Will things fall apart?   

 

I’m not sure WB Yeats knew much about complex recapitalization programmes, but I think I did read somewhere that he led a relatively modest life without much debt hanging over his head.  He owned his house.  Maybe a few decent shares.  He wasn’t a particularly big spender. Mostly, he made do with what he had. 

 

It’s as good a place to start as any.  Just do it quickly. 

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Exactly one year ago, I was warning in this column about the dual dangers of inflation and taxation. The inflation risk was on two fronts – the inflated supply of money, which was running at about 11% for most of the year in the Eurozone, despite productive growth of only about 2%-3% -  and its consequence, price inflation, which was already taking off and much of it pumping up the price of oil. 

 

The taxation risk came in the form of indirect increases in government-controlled driven services like healthcare, education, transportation, energy; then in October, when the Budget was launched early, in the form of income levies, higher DIRT, capital gains and capital acquisition taxes, the  VAT increase and a raft of other cutbacks. 

 

But inflation was the big story in the first half of 2008. By late summer, as the price of a barrel of crude rose above $140, caused by the surge in the money supply and loss of confidence in the US dollar and the impact of diverting fields of corn from food to ethanol, our TV screens were full of people in countries from Italy to Indonesia protesting about the trebling and quadrupling of the price of bread, rice, pasta and meat. 

 

And then it was August.  And inflation began to recede.

 

Lehman Brothers, and its other over-indebted, investment siblings on Wall Street began to topple like a line of dominoes as the impact of 17 interest rate hikes since 2005 finally resulted in massive US sub-prime foreclosures.  

 

Soon all the other lines of interlinked dominoes – the global banks, hedge funds, private equity companies and pension funds that had bought into the seemingly risk free and endlessly profitable collateralised, sub-prime debt instruments began deleveraging their positions to pay margin calls and they too began to fail. Stock markets plummetted; credit disappeared.  People stopped borrowing and spending. 

 

If you thought 2008 was memorable for its jaw dropping financial events, 2009 could be the year that we get ring-side seats to a government-sponsored, spectacular, scary, pyrotechnic, anti-deflation show. 

 

INFLATE AWAY DEBT

The new US president will lead the way, say the US press.

 

In an effort to get credit back into the world’s biggest borrowing and spending economy, Mr Obama has already said that his government will spend at least $775 billion, in addition to the c$8-$10 trillion already created to recapitalise, underpin and save the banks, insurance and motor industries, on major infrastructure, education and health projects. About $310 billion of that new fund will go on tax cuts for businesses and individuals. If none of that works, the dollar printing presses will be turned up even higher. 

 

Given how determined politicians are to avoid the pain of economic correction and to put off the day of reckoning, it could happen in Europe too with further interest rate cuts and then the lighting of the infrastructure spending fuses as unemployment takes hold.  (Tax cuts will be the last resort on this side of the pond.)

 

If that happens – we could be back where we started in January 2008 with more monetary and price inflation…maybe even hyper-inflation. (Higher taxes and fewer social services will come for all of us when it dawns on the money printers and world improvers that there is a very large bill to pay.) 

 

POSITION YOURSELF

 

So what should we do?  How can you best position your own finances in the face of crippling deflation (that includes major wage and job cuts) and the potential dangers of hyper-inflation if the central bankers don’t turn off their printing presses in time?

 

Spend less.  Save more.  Work harder. Skill up. 

 

Deflation, for as long as it lasts, is a disaster for debtors and not much better for savers who will see their yields reduced.  Re-inflation will help debtors but only if they use all that lovely cheap or free money to immediately pay down their loans.  Unfortunately, savers won’t fare as well as they discover their hard earned money buys less and less.

 

If you have savings and have left it with one of the few safe deposit takers in Ireland, (like RaboDirect) you’ve done the right thing so far.  In 2008, the name of the game was the return of your money and less the return on your money. 

 

That probably won’t change for most of 2009, but you should be using the next few months to also research durable, sustainable assets and strong, debt-free, dividend earning shares/funds (like gold, oil, food commodities and giant consumer durables) to both hedge against inflation and to provide a steady stream of dividends.  Look to the long term.

 

Last year I started this column with a quotation from Vladimir Lenin*.  This year I’m going to end it with one from one of the world’s richest men, John Paul Getty: “I buy when other people are selling.” 

 

If you can overcome your fear, you should be doing so too.

 

* ”The surest way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."   

 

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RESISTANCE IS FUTILE:  LEARN TO GO WITH THE RECESSION FLOW

 

 ‘To my American friends I offer these wise words from your perhaps more frugal neighbours north of the border: Use it up. Wear it out. Make it do. Or do without.’ 

                            - An anonymous Canadian  

 

We never seem to do anything by halves here.  

Historically, the Irish didn’t just have a couple of tough years.  We had a famine. 

Over the centuries our young people didn’t just seek work in other countries… they emigrated ‘en masse’.  

Even our good times have been noted for their, well, over-exuberance.  Ireland didn’t just take its place amongst the rank of prosperous nations in the last decade; we allegedly became the second richest people in the world, after the Japanese. 

“A ‘correction’ is equal and opposite to the deception that preceded it,” says one of my favourite literary economists, Bill Bonner.  It looks now like our bust will be even ‘buster’ than others, to paraphrase our ex-Taoiseach’s pithy description of the boom years. Our house prices, pension fund values and stock market values could all end up reaching depths that other countries, if they’re lucky, will only read about. 

That said, we’ve already reacted - in character - to the bad economic news by dramatically slashing our high street spending and by saving like mad again.  And despite what you may hear from politicians and bank economists (this bank excepted), who have become so obsessed by the concept of the ‘growth’ economy that they didn’t recognise the property bubble until it was exploding under their noses, saving is actually a very good thing.

No one ever got rich by just borrowing and spending.  

Real wealth, as we discovered in the early days of the Celtic Tiger, is created by the accumulation of capital over time, and the prudent investing over time of that capital in genuine growth opportunities, like software development; the creation and manufacture of new drugs and high tech medical devices; high end finished food and agriculture products and high value tourism.  Selling ugly, overpriced houses to each other just doesn’t achieve this end. 

Where to start?

Aside from cutting up your credit card and vowing to live in an entirely cash economy again, how about starting with a contingency fund, if you don’t already have one.  

 

As a nation we’ve already increased our volume of savings by a reported €4 billion in the first eight months of 2008; these savings accounts are your first line of defence in any recession and will support the financial rainy days going forward. 

 

Ideally, you should aim to have between three to six months worth of net salary in your contingency or emergency fund, enough to see you over a period of short-term redundancy, illness or the expensive and unexpected household events that can result, for example, in a plumber having to be called out on a freezing New Year’s Eve, 1997 to replace the central heating pump. (Believe me, that’s an expensive call you won’t forget.) 

 

Whatever amount you designate for your fund – if you earn €40,000 net, you want to build it up to at least €9,000 in cash – start with a deposit of a few hundred a month (think the SSIA scheme), and consider adding bonus and commission payments as well. You’ll be surprised how quickly your fund builds up.  

 

If you arrange your salary contribution to be debited directly – and some companies with deduction software programmes will happily do so if you ask nicely, you won’t even notice the shortfall after a short while. 

 

This cash diversion doesn’t have to last forever – just until you reach your target – but it means living well within your means for a while, at least.  Once the fund is in place, you can either stop the salary transfer altogether or re-route it back into your every day budget.  Or better still, it can pay off the mortgage faster, boost a pension of AVC fund or build up a diversified portfolio of assets and shares. 

 

These are volatile times, so make haste slowly, but every downturn throws up investment opportunities in strong, well-run companies and sectors, with low debts and high cash flow.  

 

The bull run in energy, minerals, food, and other essential commodity products (like water, especially) isn’t over yet, say investment gurus like Jim Rogers (George Soros’ old Quantum Fund partner), despite a sharp fall-off in share prices during August.  

 

The developing economies of China and India could very well slow down if this recession goes global, but giant infrastructure companies don’t just build power stations, roads and bridges and sewage facilities in the developing world.  

The developed world’s infrastructure – that’s us too - is aging and clapped out; western government’s don’t have much choice but to keep the drains running. 

 

Ends

SIDEBAR 

Hurray! for Prudence & Thrift! 

 

It may still be early days in the downturn but even the most profligate Celtic Tiger cub should know by now that it really does pay to shop around for big ticket items like housing, food and insurance.  

There’s also no time like the present to rediscover the joys of ‘making do’, as my mother used to say.  Give or take another 20 years when Peak Oil really does kick in, the joys of endless out of town shopping malls, global trotting Caesar salads and tasteless, out-of-season strawberries will be nothing more than a distant memory. So why not, beat the rush and… 

- dump the €600 gym membership that was used twice last February and start walking or use a bike.  

- ditto the monthly €9.99 DVD club subscription. Rediscover your local library instead, where they not only lend out books, but DVDs, CDs and computer games. 

-  bring a thermos cup of home-brewed coffee to work every day to replace the watery €3 cappuccino (and save €700 a year).  Not smoking is a financial no-brainer, but making a packed lunch, even a couple of days a week, can easily save you another €500 a year. 

- learn to manicure your own nails, massage your own feet, exfoliate your own face and even wash and blow dry your own hair again.  Ubergrooming is not just wildly overpriced in this country but is downright scary now that young men are doing it too.

- wear all your clothes for another season without buying any more; it’s always the autumn here anyway.

- takea course this winter and learn some essential DIY.  Bring you kids so they can also learn how to fix a leaky tap, replace broken hinges, hang some shelves or service a car. Teach yourself and them how to grow and plant a vegetable garden or some fruit trees and then - and here’s a real throwback - learn how to cook your own food… from scratch. 

Doom and gloom?  We haven’t seen anything yet!

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EMERGING MARKETS:  INVESTORS NEED AN OPEN MIND

If investing was easy, we’d all be doing it, and we’d all be rich. 

Of course, during the height of the property boom, it was easy, and yes, we all got rich - on paper.  We bought houses with cheap credit that “earned” more each year than we sometimes did ourselves.  We actually thought, like ancient alchemists that we could turn bricks and mortar into gold by buying buy-to-let properties and watch their capital value rise. 

There’s a big difference between ‘getting’ rich and ‘staying’ rich however, and investing during any boom is no guarantee of the latter, especially when you’ve been used mainly borrowed the money to ‘get’ there.

Make no mistake, the global property boom, of which ours was ‘boomier’ than most, as a certain ex-Taoiseach once said, was more about cheap credit and reckless lending practices than it was about any notion that property was the ultimate investment asset that would never succumb to the laws of physics. 

 

Now that the dot.com and property markets have both proved the old axiom that what goes up must come down, are we simply blowing up new balloons by switching our attention to commodities and emerging economies?  They have soared in value in recent years, fallen in recent months are in a volatile up and down stage now.  Have they boomed out, or are they genuine investment opportunities with the potential for solid growth?

 

Commodities like steel, iron, oil, wheat and corn, etc and emerging markets like Brazil, Russia, India and China (the BRIC countries) the Gulf states and south east Asia are really two peas in the investment pod. 

 

These countries have things in common that established western economies no longer have:  billions of young, hard-working, thrifty people who are desperately keen to improve their standards of living and trillions of dollars of earned, mainly western, currencies sitting in their national treasuries and personal bank accounts. 

 

Sounds like a winning combination to me, and one that the Americans in particular had in abundance 100 year ago or so at the beginning of the Great Oil Age.  

 

Every economic (and mililtary) empire eventually gets tired.  They expand their borders of influence too far; they get lazy and arrogant and greedy; they inflate their money and borrow too much. They believe they can do all the thinking and let others do all the sweating.  The United State is no different than the British, the French, Spanish or Romans before them.   The East is rising in its place, along with all the other places that are unburdened (or less burdened) with a culture of debt and entitlement.

 

Which brings me around to the notion of cashing in, if we can, on this global economic shift without being caught up in the boom and bust cycle that unfortunately has also emerged along with these new super-economies. 

 

NO EXPOSURE

 

Just a couple of years ago I wrote an article about Irish pension funds investing in ‘Chindia’ and with the exception of a few Irish fund managers, none of them had any direct exposure to Chinese or Indian companies directly. Instead their funds were represented only by UK or US companies with a presence in the two countries or with established Hong Kong based finance and insurance firms with long links with the West. 

 

Today, not only does every fund manager have some sort of exposure via this model, but many have created their own funds, or linked up with others in which indiginous Chinese, Indian, Brazilian, Russian, Malaysian, Vietnamese, etc global companies are present, often with western interests of their own. 

 

These companies – Baoshan (iron and steel) of China, Gasprom (energy) of Russia, Tata (consultancy, autos) of India, Petrobras of Brazil – are some of the biggest in the world; they’ve helped to drive their surging stock markets. 

 

They too have got caught up in the share mania in which hundreds of millions of people, with lots of earned income in their pockets and lousy deposit rates on their savings – thought they’d get instantly rich if they bought their shares at the pre-credit crunch peak last year.  That stock markets look like pyramid schemes sometimes has nothing to do with the underlying value of the Baoshan, Tata or Petrobras’ of this new economic world. 

 

Despite the volatility, the bubble risk, even the medium to long-term dangers of investing in companies that are fossil fuel dependent dependent (are Indian  motor car companies really a good long term pension bet?) the best emerging market shares should have a place in your investment and pension portfolios. 

 

Finding the right shares or funds is the part that’s going to require effort on your part:

 

Compare the makeup and cost of Irish-based emerging market managed funds, the equivalent passively-managed share indices and ETFs (which you buy directly from a stockbroker).  RaboDirect provides transparent, detailed information about all its funds, including its new emerging markets ones.

Use the internet to dig up background information about the countries, companies and commodity markets.  Check out the excellent free archives that Forbes.com, Bloomberg.com and the MotleyFool.co.uk make available.  

Subcribe to weekly magazines like The Economist and MoneyWeek. 

Only risk money you can afford to lose: a 60 year old speculator in Chinese bank shares has the potential to lose a lot more than a 30 year old investor in Chinese engineering firms that build nuclear power stations. 

 

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GOOD DEBT, BAD DEBT: DON’T GET CAUGHT ON THE WRONG SIDE OF THE DEAL

 

It hasn’t gone away, you know - the global ‘credit crunch’. 

 

OK. It seems to be taking a breather, thanks mainly to sovereign wealth funds and central banks stepping in to bail out the investment banks that were most seriously exposed to US sub-prime debt.  

 

But the smooth lending between banks hasn’t yet been restored and there’s some way to go before they all ‘fess up to how much they owe each other and how they still need to write off. 

 

Meanwhile, back here on planet Ireland Inc., a positive spin has been put on last month’s ECB decision to keep their base interest rate at 4%; this signals that there will be no rate increase this year say the optimists.  

 

This is some consolation, but not much, to anyone still trying to pay off a €300,000 negative equity mortgage, not to mention the fuel, food, transport, health insurance and myriad of other day-to-day expenses that are still going up. 

 

Credit crunch or no credit crunch, life goes on.  Lots of us are still planning to buy new homes (or at least an extra bathroom or upgraded kitchen), cars, furniture and holidays. And some of us have no choice but to replace the banger with another banger or fix the clapped out central heating system.  

 

Anyone looking for credit this year should be prepared to come under a little more scrutiny, so let’s keep the positive spin going:  this is an opportunity to reflect on the true cost of debt, an unfashionable notion during the boom years when it wasn’t so much a matter of how to raise a loan, but how much of a loan to raise.  

 

I mean, who cared how much that €300K mortgage or €40K car loan really cost when the house was rising in tandem with your annual salary and that SUV with the bull bar was… well, it was just soooo cool. 

 

Now that the free bar is closed, the empties are being recycled and everyone’s sobering up, it is time to revisit the concept of ‘good debt’ versus ‘bad debt’. 

 

For example, good debt is the kind you use to pay for third level training or education because you can expect to eventually be rewarded with a higher income. 

 

Good debt buys you the home that not only provides shelter, but, historically, an annual value hedge against inflation. Given enough time, it can also produce a decent capital return.

 

Bad debt, meanwhile, buys liabilities:  expensive, depreciating cars, holidays, furniture, electronics, clothing, etc. These short-term purchases often end up with very long-term interest bills, especially if generated by the most expensive kind of revolving debt – credit cards. 

 

‘A bad loan is a bad loan is a bad loan’, Gertrude Stein would have said, if she was in the credit-seeking market today.  So for debt that smells of roses instead, consider the following: 

 

Only borrow what you need at the most competitive rate. A €300,000 mortgage repaid over 35 years at 5.24% interest will ultimately cost you €20,000 more than the same loan at 5%.

 

Always ask for total repayment costs – in writing.

 

Headline interest rates are… just that. Only a minority of borrowers will be offered that rate, this is because either your credit rating or the amount you are borrowing is insufficient. If your bank doesn’t automatically disclose the true cost of borrowing upfront (as RaboDirect does with its revolving ‘Credit Account’) you could end up with a nasty last minute surprise. Ask to see all borrowing rates and terms and conditions before you make a decision.

 

Aim to keep your loan repayment period as short as possible. The effect of compound interest, especially on a long mortgage or endless credit card debt can have a devastating effect on your long-term wealth. On-line banking can help you keep track of loan repayments.

 

If you haven’t already done so, switch to a 0%, low cost (ie under 10% interest) credit  offer that gives you between five to nine months to reduce your balance. Pay off your credit card balance by monthly direct debit and avoid paying any interest at all. 

 

Ask about fees and charges that apply to fixed rate loans. 

 

Be careful about balloon-end car loan payments.  They are seldom more competitive than a conventional loan. 

 

Beware sub-prime loan offers, or brokers who sell these products.  These toxic loans are only for people who are confident of quickly repairing their credit record so that they can avail again of conventional rate loans. 

 

Don’t bother with expensive payment protection insurance.  It is poor value compared to PHI or a serious illness policy that should meet repayments if you fall ill or disabled.  Savings will get you over a short-term income loss.  If the worst happens, you can sell the house and the car. 

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Lenin once said the surest way “to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."   

 

Comrade Vladimir was clearly never the owner of a high carbon-spewing SUV or he would have also added driving one to those petrol guzzlers to his list, but he certainly knew a thing or two about the soul-grinding business.  

 

So if you’re thinking of making any resolutions this New Year, they really should include this one:  finding a safe route between the inflation virus that is going to sap your income and savings of its spending power and the government’s determination to squeeze as much direct and indirect taxation out of you.  

 

I know a few people who’ve already jumped on a plane for overheated tax-havens like Dubai and Panama.  Or you can stay here, stop throwing your over-taxed money around like an eejit and discover that it really doesn’t take a genius to ride out an economic downturn.  You might even make some money.

 

ASK FOR A LADDER

 

But first, if you are in the proverbial hole, ask someone for a ladder. 

 

If you’ve never had someone review your taxes, assess your debts and assets or picked out a decent pension fund for you, 2008 should be your ‘Year of the Advisor’.  

 

The rich didn’t get that way through sheer hard work; they had help. Since most of us are basically just good at our own jobs and not at other peoples’ as well, you should pay money to consult someone who knows about maximising earnings, minimising tax and creating genuine wealth.  

 

If you don’t have the name of a fee-based, independent financial advisor (ask friends and family for a referral) contact the Financial Regulator at 1890 200 469 and get them to check their register to see if there is one listed in your area.  Expect to pay in the region of €150 an hour for the advisor’s service and expertise but don’t waste their time or your own money – go prepared with a concise list of all your financial accounts, contracts and policies so that these can be easily accessed and reviewed. 

 

Then take their advice. 

 

BE A TAX TIGHTWAD

 

The Government has just admitted to being down about €1.6 billion in tax at the start of this year.  This doesn’t auger well for those of us who not only pay income tax, but VAT, CAT, CGT, and all the other little ‘Ts’.    

 

With no obvious tax fraud campaigns on the horizon, the Exchequer will be counting on the Revenue to bring in every tax penny from the tax compliant as well as the evaders.  

 

If you don’t get a professional tax check, at least take the time to claim all your legitimate tax reliefs and allowances in 2008. Go onto the Revenue website www.revenue.ie where they have provided a helpful list of these deductions.  The most obvious ones that are overlooked (to the tune of over a billion euro a year) are for health and dental expenses, private rent payments, bin charges, trade union fees, etc.  Mad as it sounds, there are still stay-at-home mums with small kids who don’t claim the €900 annual per child tax credit to which they are entitled.

 

INFLATION BUSTERS

 

The official inflation rate is 5% at last count, but anyone who eats and drinks, pays a mortgage or rent, travels via public or private transport, pays for health insurance or alas, has an expensive shoe habit, knows it is much, much higher.  

 

So here’s a novel thought:  spend less and save/invest more this year.   

 

Spend less by buying fewer shoes …or cappacino’s, takeaways, dvds, alcohol, cigarettes, electronic gadgets, widescreen tv’s, weekend breaks.  Eat the groceries you buy, rather than throw a third of them away due to spoilage and waste (that’s over €4,000 for the average family). Drive a smaller, fuel-efficient car and save thousands in tax, petrol, insurance and maintenance costs (especially after July when new VRT rules come in.) 

 

On the savings front, open the highest yielding demand and savings accounts you can find (you might want to start on this site) for short-term interest and access.  But realise that inflation and DIRT – just as Vladimir predicted - are going to reduce your nest egg by at least 6% a year if you spend your interest. In just five years a €10,000 stake earning 5% will only have the spending power of about €7,400, a 25% loss in wealth. 

 

Instead, you need to start investing in the stuff that is so in demand, and so short on (and in) the ground -  such as oil and gas, metals, water, foodstuffs and the machinery that extracts and produces all these goods and commodities.  

 

Set aside a portion of your salary every month to buy into these sectors through individual shares or funds of shares; ETFs and the RaboDirect investment suite of global commodities are worth a look.  

 

Precious metals like gold, platinum and silver have also surged in price, not just because they’re useful to wear and put into catalytic converters, but because an increasing number of people are concerned not just about getting a return on our money, but of our money. 

 

If you can wind these funds into a tax-efficient pension, all the better. 

 

Without the benefit of a crystal ball, I’ve no idea if the optimists who say that everything will be wonderful again in Ireland Inc in 2009 are right or not. I look across the pond to America and I have my doubts.

 

All I know, dear comrades, is that bracing yourself for a bumpy ride sounds like a better option than standing in front of what might turn out to be a runaway train. 

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