Sunday, January 10, 2010

Economics 10/01/2010: A desperate state of economic analysis

This week has been marked by some remarkable statements on the prospects for Irish economy in 2010 that simply cannot be ignored.

Firstly, yesterday, Irish Times (here) decided to devote substantial space to the musing of one of the stock brokerage houses. Bloxham's chief came out to tell us that things are going to be brilliant in 2010: 10% growth in house prices and commercial real estate valuation, and ca 100% increase in banks shares prices to €3 per share for BofI and AIB. So:
  1. Pramit Ghose thinks that there is little to Irish economy other than demand for property and banks shares. The implication of this is that the only way that prosperity and growth will be achieved once again in Ireland is through another construction and lending boom. Have our stockbrokers learned anything new from the crisis? Doesn't look like it.
  2. Mr Ghose also seem to have little time for the fundamentals of Irish consumers and domestic economy. Massively heavy debts loaded onto Ireland Inc don't matter for growth to him. Neither are sky-high marginal taxation and the prospect for more tax hikes in Budget 2011, nor even high unemployment mar his optimism.
Banks shares will rise, you see, because investors will become optimistic. Optimistic about what, Mr Ghose? Low profitability of our zombie banks? Their over-stretched customers who cannot be squeezed for higher margins without triggering massive defaults? High default rates on already stressed loans and high proportion of negative equity mortgages on the books? Exporting sectors suffering from the lack of credit and overvalued currency? The reversion of the interest rate curve upward due to expected ECB policy changes and margins rebuilding efforts by the banks? Double-digit deficits on the Exchequer side?

All in, Mr Ghose thinks that the banks shares might reach €3 per share sometime in 2010. He might be wrong, he might be right. I have no prediction on a specific price target. But here is a thought:

The two banks need some €5-6 billion in capital post Nama. At €3 per share two banks market cap will be around €4.5 billion. So with recapitalization - whether by the state or by the international dupes (oh, sorry - investors) - the market value of the two banks will be €9.5-10.5 billion or close to their 2006-2007 valuations. What sort of expectations curve does Mr Ghose have to get there?

A glimpse into his thinking can be provided by his July 22, 2008 note reproduced below:
You judge the merits of this prediction for yourself, but here are the facts
85-142% wrong?

Oh, and do note that in his July 2008 note, Mr Ghose doesn't do any better in historical analysis either. He completely failed to take into the account real (as in inflation-adjusted) returns to equities. If that little inconvenient fact is considered, the '2/3rds of the 1996 price offer' paid on Mr Ghose's family house 8 years after the crisis would represent just 33-40% of the 1996 offer real price. Markets did come back for Thailand, but once inflation (see IMF) is factored in, Mr Ghose's analysis yields a real loss on the 1996 offer of 50%! Ouch...

Mr Ghose's Chief Economist seems to have little time for Mr Ghose's optimism for 2010. Writing an intro to Daft Report this week he states (here): "in overall terms, I would expect house prices to drop another 10-15% on average this year, with Dublin again seeing the biggest decline [now, Mr Ghose thinks prime real estate will lead in growth, which means Dublin]. ...Looking further ahead, I expect house prices to be higher on average in 2011 than in 2010, and should rise on a five-year view as the labour market returns to normal. That said, the level of any increase in house prices over the next few years is likely to be only in single digits, with three factors - the banks' adoption of a more cautious stance to lending than in the 'Celtic Tiger' era, the return of interest rates to 'normal' and the possible introduction of a property tax for 'principal' homes of residence - all weighing negatively on the market."

The second comment, courtesy of today's Sunday Tribune (page 1, Business), comes from Prof John Fitzgerald of ESRI. After largely staying off the topic of Nama and banks recapitalization for the entire duration of the public debate, Prof Fitzgerald decided to offer an opinion on Ireland's 'financial rescue'.

Now that the stakes in the game are low, credit must be claimed for the future 'I too was critical' position, should things go spectacularly wrong on the Nama side.

Prof Fitzgerald thinks that state-injected funds into INBS and Anglo are totally worthless and will be lost. Who could have thought such a radical thingy!?

Some 4 months ago I provided my estimates showing the demand for recapitalization post-Nama totaling €9.7-12.4 billion (here and here). Having spent the entire 2009-long debate on Nama on the sidelines, Ireland's ESRI macroeconomics chief is now telling us that €10-12 billion will be required to complete recapitalization of the banks. This, according to the Tribune is news!

I am delighted to know that Prof Fitzgerald belatedly decided to agree with myself, Brian Lucey, Karl Whelan, Peter Mathews and Ronan Lyons. One only wishes that next time a matter of economic urgency, like Nama, comes up for a public discussion, he joins the debate when it matters - not four months after the fact.


Cearbhall O'Dalaigh said...

Failed by Fianna -
The Irish government rejected fiscal stimulus and slashed public spending instead. The result is economic meltdown.
Corruption Sank Ireland
Ireland has surpassed the worst expectations of its grandest begrudgers. Begrudgery, for those unfamiliar with terms such as "the hurler on the ditch", has long acted as the Irish brake on irrational exuberance. It is the local voice at the back of the choir which warns that this party will have consequences and all the bright things will turn to dust.
A cash nexus has been forged, with Fianna Fáil facilitating the developers who hog the land and sell it to the builders for vastly overpriced houses, financed by bankers who operate with minimal oversight, and then collude to hide the "political donations" made to Fianna Fáil by the developers and builders. The latest addition to the nexus is the taxpayer, who is picking up the tab for someone else's binge.

Anonymous said...

The Poor Poet, a funny old painting
is apparently one piece of art
that fits into the present times
for individuals in the crisis.
(A sense of humor presuming, of