David McWilliams has been asking difficult questions of some of the most influential and thought provoking characters of recent times, so we thought it would be interesting to turn the tables and invited you to put your questions to him. We were delighted with the response so thank you to everyone who sent in a question. We guessed he wouldn’t be short of a few words and we weren’t disappointed.
Here’s what he had to say to your most popular questions.
Question: In the event of Irish banks being nationalised are they actually any safer in state ownership given our ever increasing exchequer deficits and ailing economy?
David: That’s a good question and goes right to the nub of the issue. There are two views on this. One is that the State can’t just keep co-opting into ownership of every sick, unwanted bank that shows up. Otherwise the State will be on the hook for all the banks’ liabilities, which are likely to be between €40 billion and €60 billion (or 10%-15% of the loan book). This view suggests with some reason that the State will not be able to pay this cash or even finance it. And therefore, the banks contaminate the sovereign. The second view is that we’ve no choice. If there was to be a run on the banks the State would have to pick up the tab anyway. I think we might have escaped that fate for a while at least. Either way, we’re going to be paying for the sins of our banks for a long time.
Question: Will the current economic and financial crisis result in a shift of World trade to Asian countries and could that leave the Western economies struggling to return to growth?
David: Yes, I believe that this process is well and truly irreversible. I spent about a month in Asia in March 2009 and have become increasingly resigned to this. It doesn’t mean that it will all be plain sailing there either as they have to wean themselves off their ‘export fetish’ and start spending some of their cash rather than saving. The whole adjustment from this crisis will be based on the Chinese in particular spending more. We’ll see how they get on. Expect lots of tension between the US and China.
Question: I think this current rally is a bluff in the stock markets. In your opinion, are we facing years of foreclosures?
David: I think we’re going to see a serious debt crisis next year as interest rates start to rise and it becomes apparent that we have been lumbered with a massive debt problem at the long end of the yield curve. The precedents are not good. On the other hand, the stock market is an interesting play at the moment and if you have the stomach to trade, you might do well.
Question: Europe is demographically an ageing continent. With that and Peak Oil, how can the Ponzi Scheme of everlasting growth be possible?
David: The twin issue of energy – peak everything – not just oil and the fact that we are getting older are absolutely the key to everything. Economic growth comes usually from cheap labour, cheap energy and cheap capital. In Europe we have only one of those three, cheap capital; so the limitations of the growth model are evident. But don’t rule out a big technological improvement in green technology. I believe this will be the next big bubble in financial markets and could easily prove to be the beginning of a new industrial revolution.
Question: What would you do now to stabilise the banking sector and specifically the Anglo Irish problem?
David: The Anglo affair is just a mess. It’s of no systemic importance and should be allowed to go. The idea that we, the Irish State, can indefinitely protect bondholders in Anglo is a joke and the bank should be wound down so that when the guarantee lapses, it’s not a problem.
Question: In your opinion is the Irish economy at risk to super inflation in the near future?
David: We’re actually risking the opposite, which is terrifying. The problem for Ireland is deflation and no country has ever tried to do what we are doing, which is to deflate our way to growth. The world ex EMU might well have inflation to deal with which will make the Euro stronger against the dollar and that’s further bad news for us. So all told, inflation would be good for us but we won’t get it.
Question: Both AIB and BOI shares are rallying at present, both passed the €2 mark and are climbing daily, is this sustainable in your opinion given the threat of nationalisation for these banks or are we looking at a slump due to profit taking?
David: The threat of nationalisation comes when the world realises we don’t have the money for NAMA. On that score, there was a big positive last week when Michael Sommers let it slip that the bonds which the banks will issue to cover the hole in their balance sheets will be redeemed for cash by the ECB. This means that I was wrong and the threat of nationalisation is fading. In effect we have secured the services of a ‘Sugardaddy’ in the shape of the ECB.
Question: Are we in the eye of the perfect storm or are those shoots of recovery, of which Mr Cowen speaks of, really visible?
David: There are no green shoots. That lad didn’t see any of this coming, I’m not too sure that he is the best placed to see the recovery. Not for a while yet.
Question: When do you see an upturn in the market, do you think we’ve bottomed out and what in your opinion are the best investments for the next 12 months?
David: I’m very bullish on Green Technology and Rare Earth Stock. What I mean by Rare Earth Stocks are the commodities which will benefit from Green Technology. I’d still be bullish on nuclear stock, but it’s a trade for the brave.
Question: Do you think the property market has bottomed out, I've read your articles saying otherwise but it seems like house prices are down by 40%-50% in Dublin so I can't imagine there is much further to go. I know in Sweden they fell by as much as 80%, would it be wise to wait another year?
David: I think property will continue to fall in Ireland for a few years and that undoubtedly another 30% drop is not only likely but a practical racing certainty. Property will fall until yield hit about 7%. That would imply a fall of more than 30% from here.
Question: I’m interested in hearing your thoughts on how you think NAMA will work out. Do you think it’s a good or bad idea?
David: I was an early advocate of the idea of a ‘financial skip’ on the basis that it was the only way of saving the banks who have behaved appallingly. It’s not ideal in any way. Indeed in my opinion it’s criminal that we are on the hook for their greed, but that’s the way. If they let Anglo go under, I feel that it will help enormously as Anglo’s book will not need to be in NAMA. It will take about ten years to unravel as the State will not be in any hurry to see the banks writing down huge losses, particularly when the banks will still have problems raising private capital. I think it will succeed, but the costs will be very high in terms of banking charges in Ireland for the next few years so it’s not good for growth. NAMA might succeed but the costs will be huge.
Question: I know you don’t have all the answers but I’ve read your work for a long time and have always been interested in your opinion. Any thoughts on how you think the Irish banking landscape will look in two years time?
David: Very tricky. NAMA gives the banks a free lunch particularly now since the ECB will buy the bonds issued by the banks for cash. This means that they’ll have cash but it doesn’t necessarily mean they will lend it out. Without the accelerator of property these banks are just like expensive utilities and therefore low growth stocks.
All of the views expressed in this blog are purely the personal views of David McWilliams and are based on his personal experiences and knowledge at the time of writing. No responsibility will be taken by RaboDirect for any content contained in any post, neither does RaboDirect represent or warrant the content of any post. For more information: Legal
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