A Contrarian Bets Ireland and Hungary Will Rebound

The NY Times profiles Michael Hasenstab here.  (HT BEB).

103 replies on “A Contrarian Bets Ireland and Hungary Will Rebound”

Well, good luck to him. He obviously hasn’t looked too closely at the Irish economy. If or when he does, let’s hope he has an exit strategy that won’t drive yields in to the stratosphere.

According to Merrill Lynch indices – sorry I can’t post a link, but they’re available to those with access to a Bloomberg terminal – the performance of the various Eurosovereign bond markets in 2011 was as follows:
Country Return %
Austria 6.01
Belgium 3.99
Cyprus -14.3
Germany 9.69
Spain 7.03
Finland 6.75
France 4.53
Ireland 13.05
Italy -5.66
L’bourg 7.15
N’lands 8.94
Portugal -21.7 (to end-July – ejected from index after downgrade)
Slovenia -8.18
Slovakia -0.65

Index +3.34%

So now we know two things – it wasn’t, as often claimed, just the Irish banks buying; we also know that if the Irish banks did buy, it has turned out to be one of the best decisions they’ve made in recent years. (Actually, it’s probably the only one.)

@ Aiman

and thats for the FULL year 2011. If you started in mind year, as both Franklin and the Irish banks are alleged to have, then the returns are even bigger.

If the country ever defaults on anything in the next 5-10 years it will be bank debt – not Government bonds.

@Mr Bond,

Since you brought this up – and received a star from the teacher for doing so, how high do you think yields would go if he were to take a closer look, take fright and cash in his chips?

@ Paul Hunt

these guys aren’t stupid. This was a long term, committed position they took on. They’re in for the long haul. You could argue they have shown more committment for an Irish recovery than many of our alleged Eurozone allies.

@Paul Hunt – “He obviously hasn’t looked too closely at the Irish economy.”


one of the cleverest bond managers on the planet know less about the Irish economy than an occassional blogger on interweb. Are you dissing him because he does not value your opinion?

The bulk of the “talking tickers” on here would of lost their jobs had they been bond managers in 2011 as they thought we were going to default at 15% GRY.

“If you started in mind year, as both Franklin and the Irish banks are alleged to have, then the returns are even bigger.”

For some reason that reminded me of the RTE Six one news gushing whenever Bank of Ireland shares outperform the European market, neglecting to mention that they are still several eons away from returning long term buy to hold investors anything approaching capital invested .


YOu are correct but this is one of the savvy investors who bought Irish bonds last summer. He was buying them when everybody else was selling them. Everybody else included long term European bond managers who probably read this and other blogs and thought that we were going to defualt. Sure he was helped by the Irish banks with their co-co money & other Americans.

Right – a bond rebound doesn’t mean the country rebounds. He’s betting on his bonds doing well but it’s not a long term bet is it? He can sell whenever he wants? This could all be to lead the fool further?
But I am not sure. I’ve been to Hungary – solid fundamentals there in terms of market access etc it seems to me. Ireland also a great country. I think neither can properly recover without default.
Is he betting on the bonds or the country if you know what I mean?

@seafóid – it might remind you of that irritating habit of RTE, but it’sd be a mistake to see it as analogous.

Again courtesy of ML indices, annualised returns to 7th Feb 2012 from Jan 2007/2011 start dates are below:
Jan 2007- Feb 2012 3.01
Jan 2008- Feb 2012 3.365
Jan 2009- Feb 2012 2.53
Jan 2010- Feb 2012 2.167
Jan 2011- Feb 2012 20.883

“Obviously” a chunk of the positive annualised returns for each of the periods has come in the last 12 (or more accurately 7) months.

By comparison the S&P 500 index has given a negative return in the period Jan 2007 to date, at -0.975% annualised.

I know, Tull, and they have come in and it is a good return but they are still a good way off par. And it could be much worse – see Portugal. Same yield as Ireland back in July .

Fingers crossed that the mood holds.

How come no body is buying Portugese Government Bonds, Not even The Portugese banks?

“This was a long term, committed position they took on. They’re in for the long haul.”
Are you saying that Hasenstab cant sell?
Since he was buying on the secondary market do we know the redeemable dates are for the bonds he purchased?
What would the range be roughly?

Should’ve made clear those returns 2007 to date are on the Irish Gov’t Bond index (G0R0 to those in Bloomberg-land).

OK. I’ll take it on the chin. It was a sprat that might have lured a mackeral. But I didn’t expect to be whacked around the chops with such a little fish.

I can’t figure out if it’s respect for a savvy investor who’s probably well diversified and well-covered in any event or if it’s a flash of the ‘green jersey’ now that there are indications that the general populace’s patience with austerity without any sign of relief is wearing a tad thin.

Why does everyone always focus on outcomes?

Isnt it possible that the yield on Irish gov Bonds accurately reflected the default probabilities and recovery rates? Or underestimated them (in which case he may have made a bad bet that turned out well?)

What does seem clear (to me anyway) is that Irish bonds are an extremely inefficient asset class (inefficient as in the oppisite of efficient assets in the efficient market theory).

There does not seem to have been sufficient information coming in over the past 6 months to fully justifiy the change in yields – therefore something other than information appears to be changing the yields.

It also seems obvious that if this one investor started to sell, there are not loads of buyers at 99% or 98% of the price – there would in all probability be a significant fall in price / rise in yields.

Therefore it would appear that the bond price / yield is actually a reflecting of a small number of market participants rather than the collective “wisdom of the crowds” view of the market as a whole.

Just shows you how some overseas investors get taken in by Kenny/Noonan/Gilmore frolicksome quotes on our capacity to rebound under debt tsunami. He’s not only betting on the survival of the euro, he’s making one of those Seanie Quinn Anglo bets as well. Ah well, Enron did well for a time; even Anglo did well, for a while. As regards the survival of the euro:

” 14.53 But, Capital Economics notes: The financial links between the US and the euro-zone represent the much bigger threat. At first glance, the direct exposure of US banks to the peripheral euro-zone countries is still pretty limited. Admittedly, it is a bit higher than the exposure to Mexico at the time of the peso crisis in 1994, but is not as high as the exposure to Asia at the time of the financial crisis in 1997. Even if US banks had to write off all of their loans to the peripheral countries, their Tier 1 capital ratio would only fall to 10%.The risks become much greater, however, if we consider the exposure of US banks to the wider euro-zone. A sovereign default by Greece might not be a big deal, but if that default led to a string of European bank failures, then the indirect effects on US banks would be far greater. US banks are also indirectly exposed through their links with the UK and the UK’s very close ties with Europe.”

Even If Papademos makes a deal, the euro is still not home and dry, its been further weakened, with lots more mess ahead.


Also I am shocked that there is apparent surprise that somebody was buying Irish governement bonds!

How can you have sellers without buyers?

There was also somebody buying Greek and Portugeuse bonds – shockingly they havent made it into the NYT yet.

@ Actuary – “Isnt it possible that the yield on Irish gov Bonds accurately reflected the default probabilities and recovery rates? Or underestimated them (in which case he may have made a bad bet that turned out well?)”

Are you not leaving out a third possibility, i.e. that the default probabilities and recovery rates were hugely overstated by the (inefficient) market by last July?

Correction – default probabilities hugely overstated, and recovery rates understated last July.

@Paul h

“A Contrarian Bets Ireland and Hungary Will Rebound”

The bet is that from purchase, sentiment in the Gilt market will rebound.

I can tell you that at the market lows people who barely knew the difference between Northern Ireland and “southern Ireland”, knew nothing about its economy or politics, were also buying Irish Gilts – because they thought sentiment had to be too low, there were forced sellers, and there could be a big bounce.

This particular investor was more sophisticated than that, but the trade is in bond prices not the economy per se.

On the subject of inefficient markets, AIB, with its shares at current dealing level of 12.2c, is capitalised at €62.65bn.

Quick – ring Eurostat. Problems over.


I left that one out because it appeared that (most) commentators had already decided that was the case and he made a good bet and deserved profit.

Probably should have put it in for completeness but I fully agree this is possible.

I would love to see what everyone who thinks bonds are fairly/over/under priced actually thinks these recovery rates and default probabilities are!

For what its worth (zero – as its totally off the top of my head) I predict that sometime in the next 5 years the debt will be written down by about (€50bn – Savings on promissory notes) with about a 80% probability.

I would guess that the savings on promissory notes will be small (if any) so lets say 40bn debt write down on total debt of 200bn which seems about right so recovery rate of 160/200 = 80% (approx)

By my simple calculations that gives an implied 10 year rate of around 5.9%. Add in a risk premuim and you get to 6.5%.

I swear I didnt know the answer before I started!

Contrarians are fine. But its why they behave that way that matters. Perhaps the chap has very good insights, perhaps not. Not obvious from the piece. And what is his definition of ‘recovery’ anyway? Not obvious either.

What is obvious, is that our economic situation is precarious – and that’s the good news. If you accidently slip on the pavement (and you are not injured) you can get back up immediately. However, if you fall into an excavation – things are not so easy. Before you can ‘recover’ you have to clamber out of that excavation, back to pavement level. That needs a significant burst of physical effort.

Our economy has gone into a Regression (aka: an excavation). To get out, and return to 2008 and then catch up to where we would wish to be, will require a +7% annual growth rate, for the next decade. Think we will achieve that? We will in our glue! We will be fortunate if we manage to ‘bottom out’ at mid-1990s level. Incidently, what ARE the assumptions underlying the prognosis of ‘resumed growth’? Initiatives?

Hope he has cashed out any investment he has already made. And all he is doing is skimming his commission.

@Brian Woods Snr

Dont think it is quite as simple as that – lots of unknown unknowns abound – in particular in relation treatment of governement debt by troika going forward (and promissory notes).

For one source of growth – if the troika eased their deleveraging targets for the banks it would make a huge difference.

Here’s one of the known unknowns


“A quarter of all Irish mortgage debt is susceptible to a write-down under proposals contained in the Personal Insolvency bill, it was claimed today.
Ratings agency Moody’s has rated the Government-proposed mortgage arrears Bill as credit negative for banks because many mortgage loans will be written down while borrowers may become discouraged from maintaining payments”

It has the potential to flow through the Heath Robinson contraption that is the economy where all problems are the sovereign’s…

the question is whether or not the stress test mortgage losses from Blackrock assume losses of the magnitude of 7-8% of the mortgage book- say 20% of mortgages default by 40% loss on each default. Others can answer. BTW the worse mortgages are not neccessarily on the books of the Irish banks. Thank God for the Queen and the King of the Belgians!!!


The other question is whether or not it will be a controlled explosion. Fingers crossed.
Hester won’t even get a bonus for Ulster Bank. That is very magnanimous of him.

@ seafóid / Tull,

afaik Blackrock didn’t factor in debt forgiveness. I might be wrong but I think a portion of ‘losses’ were for portfolio sales to get the loan to deposit ratio down. From a credit perspective, some of the proposals are a bit mad (though this depends on what actually gets implemented). Will any foreign lender offer new mortgages?

I read the Moody’s report earlier today. Here’s a bit of their reasoning:

“The proposed legislation would weaken the ‘full recourse’
nature of Irish mortgage lending. A weaker recourse
market would lead to a rise in arrears and losses. Under
current Irish Law, a borrower defaulting on their mortgage
loan faces the prospect of not only losing their home but
also remaining liable for the debt in full for at least 12 years.
Such ‘full recourse’ arrangements provide a strong incentive
for financially distressed borrowers to meet their mortgage
loan repayments. Under the proposed legislation, a
struggling borrower, if able to use a PIA would be able to
stay in their home while also seeing part of their mortgage
loan written off. We therefore see a reduced incentive for
performing borrowers to maintain, and delinquent
borrowers to resume, mortgage loan repayments when they
meet the requirements of a PIA.
Debt forgiveness will disincentivise some borrowers and
not provide upside for lenders. As we stated last
September, such debt forgiveness arrangements would
create a disincentive for borrowers to prioritise their
mortgage debt, if they see that a significant proportion of
the debt of those in negative equity is being discharged.
Most borrowers would be inclined to reduce today’s real
debt given the amount of negative equity and the amount
of time expected for house prices to increase, leading to
debt forgiveness contagion. Our expectation is that house
prices will not increase materially in the next five years.”


I take your point about price and economy, but any failure by the Government to bite the bullet on privatisation – which looks extremely likely – could send sentiment plummeting. I’m just wondering aloud about how Mr. Contrarian might take that.

Big balls on Mike. Good luck to him, he’s put other people’s money where our mouths are. But with an estimated 2.49Bn worth of Irish government debt, he is now a player in a relatively thin market. So changing expectations about the value of that debt really matters. If some well circulated paper of record were to, I don’t know, hear somehow of his boldness, and readers of that paper were to, I don’t know, buy some Irish debt in herd fashion, then two things would happen. Mike would get ri-ach (not just rich), perhaps purchasing himself another famous architect-designed house, and Ireland would look much more attractive to foreign investors as the change in investor perception becomes the convention. Soros’ theory of reflexivity in action really.

One of the things I’m keen to teach students in financial economics is the role of market makers in price setting. Here’s a cool reading from a 1977 book on the subject from a physicist’s viewpoint: http://dl.dropbox.com/u/1484382/Osborne.pdf

@ All

As I understand it, Greece is currently in a programme based on bilateral loan arrangements with the other countries of the Euro Area, including Ireland. This a rather inflexible arrangement as any changes, it would appear, require re-submission to national parliaments.

If the new bailout is agreed, it will be under the EFSF and, one assumes, the arrangements will parallel those made for Ireland and Portugal.

If the ECB participates in the bailout of Greece by transferring its bond purchases of Greek debt to the EFSF, as reported by the WSJ, what may be the implications for Ireland and Portugal (and the contrarian purchaser of Irish bonds in the secondary market)?

Re your link, Mario’s

“MOST adolescent boys grow out of playing chicken when they realise the winner of the game is not the bravest, but the one too stupid to be aware of the consequences of continuing to play.”

The only way to stand up to these veiled threats is to adopt the Grimsson position and refuse to be bullied. The longer Papademos & crew hold out for a better deal, the better for them. Its only adolescent boys from Ireland who fall for the threat of Mario’s adolescent version of consequences; not their own clear and distinct goals based on best for those they represent.


“So it did not come as a surprise that on February 7th word emerged that the ECB was considering writing down the value of its Greek bonds to the price it paid for them. The exact mechanism is not yet clear, but it could involve the bank selling the bonds to the European Financial Stability Facility, Europe’s bail-out fund. The step would help Greece by reducing the debt it has to repay. But more important, it sends a powerful signal that the ECB is willing to be flexible to keep the euro zone intact.”

That’s not flexibility, that’s desperation. Now the EFSF is to be used as a cryogenic toxic dump for Greek bonds.

Not that the Greeks can complain about that plan; its a better one than the one we got!

“Without question, the single best trade in the entire euro zone space is the one he’s done,” said Donal O’Mahony, the global strategist for Davy Securities in Dublin, said of Mr. Hasenstab’s purchase of Irish bonds.”

Sure with Donal’s endorsement what could go wrong? The fact that he can sell at any time, shows his real strategy!

@Actuary: Thanks for comment. Simplicity has its uses. 😎

Basically, the economy is ‘growing’ if the workforce is actually increasing. More taxpayers, more state income. The stats about employments cannot be trusted – especially if presented in % values. You need the real numbers. If the state is ‘borrowing’ for day-to-day spending – that’s un-growth, since you are consuming your future income. So, in the future, you have to double-up your income – and that is just not going to occur.

You also need credit – and more importantly, willing and able buyers of that credit. That is buyers who have a productive (making stuff) business. They sell their output and generate a surplus to either re-invest or save. Not services: they’re bloodsuckers. Given the almost zero interest rate – why are there so few buyers of that very cheap credit?

So it will be interesting to see what emerges in terms of ’employment initiatives’ – other than style and storey. Lots of dopey folk have the bizzare idea that a Gov can ‘create’ jobs. Jobs are generated by the re-investment of surplus capital where it will provide a suitable return. Otherwise it is used to pay down debt or hoarded.

So, who is going to provide the ‘stimulus’?

Its the Ninth inning; we’re three down; bases loaded; two strikes against the batter. Batter had better hit a Home Run.

@ Paul Hunt

“I’m just wondering aloud about how Mr. Contrarian might take that”.

He could get very contrary.

@ Robert Browne

I miss Donal from the Oped pages of the IT. He hasn’t been back since the bailout.

I don’t think our hero gives a rat’s posterior about your hobby horse. He took a bet that the state would not default in 2011 when most of the commentariat were blogging to the contrary. No doubt he will weigh the odds and reverse gears at some stage. Maybe he is doing it now while the Market is bid only.
In truth few bond manAgers give a toss about other than receipt of coupon and money back at redemption.

The Blazing Saddles gambit is looking like a winner.

Lightly adapted from IMDB:

[the Johnsons load their guns and point them at Bart. Bart then points his own pistol at his head]
Bart: [low voice] Hold it! Next man makes a move, the paddy gets it!
Olson Johnson: Hold it, men. He’s not bluffing.
Dr. Sam Johnson: Listen to him, men. He’s just crazy enough to do it!
Bart: [low voice] Drop it! Or I swear I’ll blow this paddy’s head all over this town!

This chap probably leaked this so that others would think he was onto a good thing and buy him out of it.
Honestly – I can’t see any recovery without default. It’s not that I’m an ideologue or anything it’s just that it doesn;t make any sense to cut your deficit and appease the sovereign debt crew by paying them their debts. Bottom line – if you cut your deficit they need you more than you need them.

@DOCM – that’s a pretty typical Bloomberg story – no factual errors, and no useful information either. Why, the same organisation had a story last month headlined “Dow Rises as Stocks Advance”. I do so like a reversible headline.

In a 6-week period one market outperformed two others by a small number of decimal points. Hold the front page!

@stephen K

You seem to have missed out the last 250 pages or so – and where are the Feynman diagrams?

Consensus is to a price a bit like an orbital is to an electron imho.

@ Tull McAdoo

‘I don’t think our hero gives a rat’s posterior about your hobby horse. He took a bet that the state would not default in 2011 when most of the commentariat were blogging to the contrary’

Never mind the commentariat. What deal was being done among the bankers ?

‘Torsten Elling, co-head of the European rates syndicate team at Barclays Capital, says that the ECB’s so-called longer-term refinancing operation has convinced investors to look at higher-yielding assets again. “The door is open for covered and senior unsecured bond issues in the periphery. There’s definitely demand from investors and that’s been driven by the LTRO.”


Can anyone explain to me the level of cynicism and at times near-vitriol pouring out on here at the fact that someone has invested a large amount of money in Irish debt, in the belief that we won’t default? Would it be better if he bet a large amount of money that we WOULD default?

I wouldnt say he is betting on an improvement in the Irish economy or that this is some ringing endorsement of our progress….He is just being rational, making note of the fact that consecutive Irish govts have put repaying bonds, either sovereign or those adopted from dead banks, as a priority.

Why wouldnt he assume that this will continue. Add to that the fact that anyone can see we still have plenty of scope to make cuts here, as opposed to Greece, where they are down to bare bones and the blood from a stone analogy pretty much covers the entire issue. Greece cant pay their own nurses, while we can afford to ship off a billion to some dead bank bondholders every few months. Of course he’s going to pick us, the cash cow.


what deal? simple really. Somewhere along the line the ECB and the banks realised that markets for term funding were dead. Banks could therefore not be able to fund themselves so lending to everyone-sovereigns to the man in the street-would collapse. Deleveraging was the polite term. So the ECB opened the taps and lent unlimited amounts of 3 year money at low rates. Now there is a scramble for risk assets-sovereigns, bank bonds, equities and investment property. Will it work….come back in 3 years.

the vitriol is due to the fact that the trade has gond wrong for the communtariat. Effectively they bet their reputations on a default. It has not happened yet.

@ Bond. Eoin Bond…

“Can anyone explain to me the level of cynicism and at times near-vitriol pouring out on here at the fact that someone has invested a large amount of money in Irish debt, in the belief that we won’t default?”

Interesting one – though I’m not sure all the sceptical comments are cynical. I think @grumpy’s comment at 3.35 is sound.

What we could be seeing is Keynes type animal spirits in action. At the moment, generalising widely, Irish animal spirits have taken a hell of a beating, and all news is looked at for a downside. Nothing is taken at face value. On the other hand, during the bubble, it was seen as unpatriotic to question ‘good’ news.

For the record, I now think the chance of an Irish sovereign default is virtually nil – though it would probably better to say that after the whole Greek process has moved on.

This is not to say that I think the government has pursued or is pursuing the best economic policy, but:

(1) The government has said it won’t default, and will do its best not to do so. This commitment is underated.

(2) The EZ/ECB will also do its best not to allow any other sovereign to default. It will do this with the array of sticks and carrots that you have noted previously. Carrots will be delivered through the front and back door (to mix a metaphor). The Oscar Wilde quote, “to lose one country is unfortunate, but to lose two…” springs to mind.

(3) Eventually, and painfully, a more sensible international EZ architecture will be put into place.

I do think that Ireland is heading towards ‘second bailout’ territory, and the Troika bears a heavy responsibility for this, as their forecasts for what would happen if Ireland followed the programme were inaccurate, and stated to be inaccurate by many at the time.

But I think that an actual ‘second bailout’ crisis is unlikely to allowed to emerge, and it will look more like a number of ‘shifts’ within the programme, rather than the ‘running out of cash’ we see in Athens.

Straws in the wind: I was in the newly refurbished Black Church this morning which has been kitted out for small company use and talked to a very nice man in advertising (company of 14), and asked how things were – the surprising answer was ‘picking up’. Also the arts group who have taken over the Complex, Smithfield are being kicked out by NAMA (boo), but a local group of businesspeople are looking to buy them an empty space to lease out, because empty spaces are ‘so cheap’.

So a deep pocketed fund manager has investeed a large sum on a relatively illiquid asset and the price in the market has risen as a consequence. Hardly stunning news to a bunch of economists?

To be fair while you can be cynical about about his motives- the price rise will boost his AUM and fees- he will only make a long term return if the market as a whole expect the bonds to continue to be serviced by the Goverment. This should be interpreted as a sign of confidence. Although it is, at this stage, but a single swallow.

How much has been invested in Irish bonds to fuel the yield turnaround?

I suppose the ECB’s QE is about buying time and not much else. So does Ireland just need time ? Risk is on for now but it’ll presumably be off again as soon as the markets tear the ar*e out of it.

In what sense is that guy a “Contrarian” other than the fact that he made a bet on Irish and Hungarian bonds? Diagnosis, poor journalism.

The default or no-default thing is a bit like religion. People have different beliefs. Nobody knows who’s right. And people defend those very uncertain beliefs with great conviction

@Mr. Bond,

“Can anyone explain to me the level of cynicism and at times near-vitriol pouring out on here at the fact that someone has invested a large amount of money in Irish debt, in the belief that we won’t default? Would it be better if he bet a large amount of money that we WOULD default?”

I see Tull has his blunderbuss out spraying grapeshot at all and sundry, but I have absolutely no desire to see a default. I was just speculating about the nature of his play and what his reaction might be in certain eventualities. You have convinced me that he is likely to be a hold to redemption player on the basis of no default.

As I said at the beginning, good luck to him, But I doubt he will be a bidder in the auction of paper rolling these bonds over.

@Paul Hunt – “But I doubt he will be a bidder in the auction of paper rolling these bonds over.”

Why? Will he “obviously” have looked too closely at the Irish economy by then?

God, dontcha just love the pseudonymous snipers. I think we might have established by now that this canny chap is a super-arbitrage player (exploiting the huge gap between the pricing of a strong perception of a possible default and the full redemption plus coupon associated with the very high probability of there not being one) rather than a yield player.

When it comes to sovereign bonds or infrastructure assets I have this strange preference for yield players – even if, assuming they are doing their jobs properly, they tend to be quite nosy and ask awkward questions.

I just can’t understand how we won’t default. Our growth is anaemic and the rates of our loans far exceeds our growth rate.
Can somebody come up with a model (based on 1-2% growth) where this stuff is payable (and lets assume zero deficit and interest rate on bonds at 3.5% for a most benign scenario.
And let’s just borrow to roll over debt – no day to day spending.
So for example how much do we need to borrow next year to roll over our debt. And how much the year after. Maybe split maturity of bonds into 1/3 2 yr, 1/3 5 yr and 1/3 10 year (with a small spread on the interest rate between 2-4% for those)
I’m not an expert but I think it’s not possible to come up with a model where we have a sustainable picture – i.e. reducing debt burden with reducing interest repayments

@Paul Hunt – “they tend to be quite nosy and ask awkward questions.”

Afraid not. In practice the majority tend instead to have a slavish addiction to indices/credit ratings. Not saying this to be contradictory, it’s just a simple fact.


I did insert the caveat “assuming they are doing their jobs properly”. You seem to be suggesting that little has been learned from recent experience when risk was totally mis-priced – if not ignored completely. I have no grounds to contest your assertion.

I’m just a little surprised.

@paul h

Fund managers’ clients tend to ask awkward questions like “I know you think risk is being under-priced, but as a result of that, the fund’s returns have been below that which could have been achieved via your competitors. Why should we leave the business with you?”

What do you think happens after trustees have asked that one a couple of times?

Factor into your reasoning the observation that bull markets ate long and gradual and bear markets are the opposite.

I feel I’m getting the ‘idiot’s guide to investing’. But, hey, I’m not proud. I thought it was only journalists that had the attention span of a gnat, but, since the funds that lost their clients’ money in the last bear market are not around during the new bull market, it seems fund managers are in the same category. This time it’s different, eh?

Shades of Keynes on markets remaining irrational for a lot longer than you can remain solvent, I suppose. Is there nothing new under the sun?

Paul you have to put in a lot of time and attention, and have at least a bit of talent to really hold views that are worth holding. You will find a fair amount of that in the asset management industry, but very much less in the universe of Trustees. It is the Trustees (or equivalent) who determine the length of “short term”ism in the industry.

Trustees are not usually in a position to fail to react to short term underperformance. The fund manager who is contrarian may ‘know’ he is right, but the Trustees can only take his word for it.

The investment business asymmetrical and it reinforces market characteristics. You could almost say that away from the margins, the ideal time for any strategy would be exactly when it would be almost impossible to persuade Trustees to go along with it.

@Paul Hunt – check the 5-year managed fund performances on P2 of http://www.towerswatson.com/assets/pdf/3788/Jan-11.pdf.

15 funds, and only 3 have made positive returns over the last five years. Why? Firstly, they all track, and attempt to match, each others’ asset allocations, with minor trimming of the consensus to reflect their own in-house views on markets. Secondly, having decided their asset allocations, these are then managed in line with the underlying indices. Five years ago, BoI, AIB, Anglo and ILP would have represented a major proportion of the ISEQ – up around 40%.

Therefore, regardless of view, the average fund would have held 40% of their Irish equity exposure in these stocks/sector. If they were bearish on the outlook, they might “only” have held 35%, were they bullish they may have held 45%. These would be deemed to be big positions, and equally risky. Hindsight has told us what the real, as opposed to risk-model calculated, risk was.

The homogeneity of returns over the 5-year period is pretty much a QED on the herd behaviour of asset allocators and fund managers. And, yes, trustees, who have fallen for the dressed-up moving average calculators known as risk models.

Your insinuation that this guy has not looked under the hood is someway wide of the mark. All through last year these guys were in Dublin, meeting anybody who matters in public and private sector. I am sure they have spotted some of the risks/ flaws. I surmise that they do not agree with your pessimism about governance or maybe they conclude on a relative basis it is not that bad. I also surmise that these guys thought double digit yields a steal.
It is just possible that they are right and the blinkered commentariat is as wrong as it was at the peak of the boom.
Grumpy ,
I think you should also point the finger at the pension consultants. In particular, I have seen proposals to de risk pension funds by selling equities at last years prices to buy Bunds. Warren B does not agree.

http://www.towerswatson.com/assets/pdf/3788/Jan-11.pdf is even more damning than I thought. On P3 it shows that only 2 funds managed a positive return on their fixed income funds in the 12 months to end-January, out of the 11 funds shown, and those positive returns are just 1.2% and 1.3%.

The index against which these funds benchmark themselves produced a positive return of 3.34% for calendar 2011. Ireland alone produced over 13% in the same period. What in god’s name were they at?

@ Tull

‘what deal? simple really. Somewhere along the line the ECB and the banks realised that markets for term funding were dead. Banks could therefore not be able to fund themselves so lending to everyone-sovereigns to the man in the street-would collapse. Deleveraging was the polite term. So the ECB opened the taps and lent unlimited amounts of 3 year money at low rates. Now there is a scramble for risk assets-sovereigns, bank bonds, equities and investment property. Will it work….come back in 3 year’

What I mean by a deal is the kind of practices which are outlined niiiice-and’sloooww in this clip.


Now this is what people have been proven to get up to in the financial services ‘industry’. Does a leopard change his spots when he gets appointed to a statutory body ? Deals go on all the time behind closed doors, and spin is part of the game.
The bond play is the bond play. No more and no less, as has already been pointed out.

@ Grumpy

I think that point about bull markets being long and gradual counts as wishful thinking now , in the same sort of league as equities delivering higher returns than bonds over the long term.


“…the S&P 500 jumped 1.5 per cent and entered a bull market, having risen 20 per cent from its nadir in October, only to slide back under…”

There have been at least 4 bull markets since Lehmans went down and there would have been a similar number of bear markets on the risk on/risk off /risk on/risk off continuum of investment purgatory

Try printing out a load of long term price charts for different indices, then turn them upside down. If you get away from stuff that is too short term to influence clients, trustees and as pointed out above, pension fund consultants, you will see that typically bear markets are brief and steep whereas bull markets are shallow and last many quarters. Bullish fund managers attend far fewer awkward meetings with trustees. I doubt that this time it’s different…..

@ Grumpy

It’ll be back to normal once things settle down again. Are we there yet ?

I feel sorry for pension fund consultants. What discount rate would you suggest these days?


Don’t worry. I’m not going to join government ministers defending their optical illusions from justified attacks that they find increasingly difficult to fend off or ignore.

It’s just that i offered myself up for some education in public, but I’m not sure by whom or for what purpose.

Eeep! Insincere apols to Irish fund management industry re my post at 6.50pm yesterday – the fund returns are for the year to Jan 2011, not 2012, and my post should be ignored/ridiculed.

I’ll try to get some more recent data to back up my prejudice.

@Paul Hunt – if somebody pseudonymous on the web told you the sun rose in the east, and somebody else, giving their real name, told you it rose in the west, whom would you believe?


I could turn that the other way around and say that it is highly unlikely that anyone using their own name would take the risk of exposing themselves to total ridicule – not to forget, in some cases, the possibility of the attention of m’learned friends.

But it is possible in most cases, fairly quickly and easily, to separate the pseudonymous wheat from the pseudonymous chaff.

I can understand there are often very valid reasons for pseudonymity, but the extent to which it is used by purveyors of wheat and not chaff (the pseudonymous chaff is the irritating price we have to pay to have this freedom to engage) suggests to me a society where thoughts and expression are being excessively controlled and whose members are too prone to self-censorship and adept at at dissimulation and concealment.

I could take serious offence with that last comment. Alas, I have not the faintest idea what you are on about.

For the record, most of the time, I agree with you on governance and gougers. However, while this place may be absolutely on the wrong side of the line, I am beginning to wonder whether any of the exemplars are well governed at all. Is good governance really an oxymoron.


Aha! You had a quick shifty at the size of the cap and cast it aside promptly lest it fit 🙂

Very few of us here, I suspect, have the honour or responsibility to govern anything. I refer to those who toil in the ‘industry’ in the government-machine that manufactures the policy-based evidence it requires and in the parallel ‘industry’ that engages with this and manufactures the special pleading and self-serving analysis for the various influential, but narrow, sectional economic interests.

The vast majority of practising economists in this country is employed in one or other of these industries (and some consultants and academics switch between the two). I’m pretty sure that many read this blog. And I’m also pretty sure that quite a few comment pseudonymously from time to time.

All I’m looking for is open, robust adversarial disputation based on facts, evidence and analysis on key sectoral issues that ranges a bit more widely than the PNs/ELA, the evil works of the ECB and the imminence of the Fourth Reich.


I fail to see how any comparison can be made between Hungary and Ireland other than we belong to the same continent and are members of the European Union.

Unless ,of course , one is a “contrarian” writing in a American newspaper.

However IMHO even that is “stretching it a bit” as New York is in a part of the USA which is comparatively well informed about Ireland.:)

@Paul Hunt

I have endeavoured to provide facts on this thread. You have not. You have provided varying, but equally trenchantly expressed, opinions. My anonymity should not invalidate any independently verifiable fact I’ve posted.

(I have also, in the odd post, used the word “obviously”, in a doffing of my cap to your certitude in one of the opening posts on the thread. If you want to call this pseudonymous sniping, carry on.)

BTW, I’ve no way of verifying that your user name is your own – but I’ll take your word for it. Obviously!

ys, I wish I was as certain about anything as you appear to be about so many things,

All I know for certain is that policy and regulation is dysfunctional to varying extents, in most of the sheltered sectors and the system of parliamentary democracy has long since ceased to function in any meaningful sense between general elections.

Now if people can convince me that there is no potential for structural reforms in these sectors that would benefit the vast majority of citizens as consumers and taxpayers – and that our process of parliamentary democracy functions as well as, if not better than, that in the better-governed northern EU state – then I’ll shut up.

@ Paul Hunt

“It is interesting that this never provoked a post here.” Umm, but Colm McCarthy posts here. Are you suggesting he publishes in the national press but refrains when it comes to the irisheconomy?

To my knowledge Colm doesn’t post here on his Sindo pieces, but there have been a number of posts on these pieces by others here – though mostly when they’re in tune with what’s flavour of the month – e.g., bashing the ECB, the stupidity of burdening taxpayers with the Anglo/INBS legacy costs, closing the fiscal deficit, etc.

But when it comes to structural reforms that are in Ireland’s hands almost completely……silence.

Make of it what you will.

@ Paul Hunt
Hang in there. We have a right few stationary bandits on this little isle, but it can’t last 🙂

Olson argued that a “roving bandit” (under anarchy) has an incentive only to steal and destroy, whilst a “stationary bandit” (a tyrant) has an incentive to encourage a degree of economic success, since he will expect to be in power long enough to take a share of it. The stationary bandit thereby takes on the primordial function of government – protection of his citizens and property against roving bandits. Olson saw in the move from roving bandits to stationary bandits the seeds of civilization, paving the way for democracy, which improves incentives for good government by more closely aligning it with the wishes of the population’


@ Paul Hunt
The Irish are small time!
The rest of them are woeful!
The real world (not just Ireland) is a tough place. Look around at Syria etc. You’re like a child that thinks his parents are the worst in the world. They’re not perfect but there’s a helluvalot worse.
Stop being so blind to the failings of the entire world – Ireland’s actually not a bad place in relative terms

@Paul Quigley,

Indeed. It would be good to bring Olson’s insights into the broader debate – particularly his ideas on collective action (and indeed those of John R Commons).


Agree. But doesn’t that make it all the more necessary to pursue the structural reforms to counteract the baleful impact of fiscal adjustment?


I just don’t buy this relatively morality stuff: “Their lot are a lot worse than ours, so we’re not too badly off”. The focus should be on pulling ourselves out of the mire rather than sinking deeper while smugly deeming that, how ever deep we sink, there will always be others who are deeper in the mire.

And please don’t use Syria as a comparator. I’ve worked in Syria over the years and I know many Syrian people. I’ve worked in Homs on a number of occasions. What is happening to the people of Syria tears my heart out.

@ Paul
Look I agree with a lot of what you say. Only difference is that I believe the system must be changed at an international level.
Syria is an example of why.

@ Paul
People are the same wherever you go. We need to think bigger. National boundaries are facilitating the “divide and conquer” by the financial markets. Broaden your attack


I agree, but it is changing and Ireland must do what it can to get back on the right side of history. My argument is with those who say Ireland can do and should do nothing until everyone else steps up to the plate.

The EU began to lose the plot a little from the late 1990s, but any developments, such as the objectively, at the time, and, certainly, in hindsight, badly-designed EMU project were based on the individual members discharging their responsibilities to themselves and to each other. Inevitably the bigger and more powerful members exercised some licence, but that, unfortunately, is how things are and the EU is always a struggle to curtail these instincts. However, that did not grant any right to smaller members to exercise similar – or even more – licence. In fact the more the bigger states did this the more the smaller members should have moved back from the edge of the cliff. Finland, for example, did. Unfortunately Ireland collectively decided to dance along the edge of the cliff. And fell off.

The EU had enough in place to prevent a crash to the bottom – an inadequate rope ladder has been lowered and some footholds have been secured to allow the beginning of a climb back – but the climb-back is primarily Ireland’s responsibility.

The best thing Ireland can do for Syria is to restore its system of democratic governance to boost economic recovery and general well-being and to work with its EU partners to demonstate the benefits of democratic governance and the rule of law and to provide whatever support the Syrian people require.

And, to get back to the topic that kicked off this thread, I have absolutely no problem with people making lots of money by making what is, in essence, an optimistic bet on Ireland. I just want to see Ireland speed to a position where investors in its sovereign bonds have an absolute assurance of investment recovery, are prepared to accept a coupon that is only marginally above that on German bunds and are demanding that the NTMA issue more bonds.

But, to reach this happy position, it will require a lot of hard graft – and much more, I fear, than most people sem to realise or, currently, are prepared to accept.

@ Paul
Europe can’t teach anything about democracy to anyone. There are technocratic regimes in place that are proxies for Goldman Sachs and the markets.
Broaden the view. Ireland is small fry here.

@Paul Hunt

“But doesn’t that make it all the more necessary to pursue the structural reforms to counteract the baleful impact of fiscal adjustment?”

I agree. But it’s probably going to be a retreat action until there is no further ground to retreat. And there is so much crap in the system .
This crisis is longer and deeper than any of the other ones people remember and it’s really going to hurt.
But something will have to be done on jobs. There has to be some give.

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