Irish Mortgage Brokers Blog

I like John Maguire, and a part of me knows that this article is about a bit of spin to make interesting reading, but it also provokes a bit of a laugh too because the quotes are pure gold… (having met the guy I can’t help but suspect it was ghost written).

“At the starting line of the Berlin Marathon, I chain-smoked five cigarettes while rubbing Tiger Balm into my legs.”

“I used to joke that only two things would survive a nuclear winter: cockroaches and me.”

“The smart thing would have been to take my spare cash and move to my mortgage-free place in Dubai with its private beach.”

“I would do things other people were not prepared to do, just to prove a point.”

In between those legendary quotes there is the story of taking a dive into the downturn that so many in this industry have faced, I can tell you from experience it is a painful learning experience, but learn you will whether you want to or not.

John has a book out called ‘Sorted! How to survive and thrive when money is tight’, published by penguin, link here.

For our part we wish him every success in the future, we’ll stay punching it out in mortgage no-mans land and hope that 2012 is a better year than 2011!

Robert H. Frank of Cornell University wrote a great book called ‘The Economic Naturalist, why economics explains almost everything‘, it has been an absolute winner of a read, and kindly Robert (Bob) took a phone call from me to talk about his book (more on that later).

Regarding the book, it is excellent if you are not actually into economics, because it takes everyday things and tries to use economic foundations for explaining them, the questions are simple every day occurrences and the answers are often surprising!

Here are a few simple examples, ‘why are cans of fizzy drinks round and milk bottles are square’, ‘why do animal rights activists throw paint at women in fur but not bikers in leather’, ‘why do taxi drivers stop working early on rainy days’, ‘why are plane tickets purchased at the last minute more expensive’, and many others.

Granted, you’ll know some of the answers [e.g.: I wouldn't throw paint at anybody, but if I did it wouldn't be at a biker who'd likely beat me to a pulp!], however, other answers are really quite exciting and once you get going on this book you’ll whiz through it, because the topics are changing it is also the type of book you can put down for a while then pick up again a few weeks later and get right back into it, mind you, I kind of did it from cover to cover!

One of the most brilliant aspects of this book is that it takes the topic of economics and takes away that ‘it’s only good as a cure for insomnia’ veneer and shows it for what it is, which is the science/art/reasoning behind much of what we do and why we do it, both as individuals and as societies. If I ran the show (show=world) kids in school would have to read this book.

Robert H. Frank is (in my humble opinion) a genius because anybody who can take a specialist topic and make it understandable to the masses is a true educator, mind you, his co-author on a popular university text book was Ben Bernanke, so it is fair to say he was never intellectually ’slumming it’ in his time as an economist.

In making this review I read other reviews and was saddened to see that a person said ‘little new ground is broken and the questions are more brilliant than the answers’, I would wager this is simply not the case, because although I know that nuclear physics exists, nobody ever explained it in a way that made sense to me, and good answers can only come from asking the right questions, so if the questions are good by inference the answers must be too.

One of his ongoing campaigns is to take economics back from the quant’s and the mathematicians, I tend to be a proponent of this as well, not because I don’t think that mathematics is vital, relevant, or useful, but because mathematical modelling has too many pitfalls, Shane Whelan of UCD gave a great talk on this before to the CFA, and LTCM (famously crashed hedge fund) was run by Nobel winning quantitative analysts. I think that we will get greater understanding from the development of the social/behavioural side of economics in the next ten years than we will with the mathematical.

This book is a definite 9/10 in my opinion and certainly worth reading, an eye opening journey through economics told in anecdotes and easy to understand bite size stories, anybody can enjoy this book as it is not designed to test intelligence but rather to seek real-life answers and it does so brilliantly.

I have been quite public about my belief in property tax (caveat being we should have far less income tax/levies etc. perhaps a ‘flat tax’ would be best), and if there is one book that has really helped to shape that opinion quite succinctly it is Fred Harrison’s masterpiece on the topic, and the subject of this review ‘Boom Bust‘.

Fred Harrison saw the property crash in the UK of 1989/90 in 1980, and furthermore, he named a date, he also named a date of specifically 2010 (as a bottom, not as the ’start’ of a crash) in the mid 90’s. How? It is due to his analysis which goes back to the 1500’s of property cycles, and while I am still sceptical about his ‘18 year’ cycle, the one thing that fully convinced me was the basis and need for a more rational and working approach to property and taxation of same, or the ‘democratisation of the tax base’ as he often refers to it.

This book was published in 2005, based on research carried out long before that and naming the time-lines that a crash would occur in, how this book is not more widely known is beyond me, it is almost like a looking glass into what was coming down the line.

The book covers a wide diversity of opinions and areas, one that is slightly overdone is the personal vendetta Harrison seems to have with Gordon Brown, I tried to reach Harrison several times, I like to call the authors of books that I read and talk to them, however, so far I have not even been able to get an email back! Even Peter Schiff responded to me! It’s a pity because I would really relish an opportunity to talk to this guy for a half hour. His knowledge , the breadth and scope of which seems almost unbound, would offer any discerning interviewer an opportunity to look into what is perhaps the ‘right road’ to travel in terms of avoiding painful busts in the future.

One of the messages I took from this book was that perhaps income related tax was only brought about due to the societal mix of the people in power when it was passed to law and that meant that from the very start the system has been flawed. He points out that taxation on property should have been the basis of the system but the House of Lords who prevailed over passing law in the late 1700’s were the very landowners themselves so such an approach would never come to pass. In essence, rent seekers have been protected from the very start.

While there are elements of this book that one may disagree with (it covers so much that it would be hard not to find fault in at least one or two areas), it is, on the whole, a ‘must read’. In particular if you have an ‘against’ opinion when it comes to property taxation. While it doesn’t go on to say we need flat tax on incomes or such, the idea of taxing assets rather than focusing on incomes is well put forward and makes for challenging reading, don’t read this book if you are looking for something to switch off to, it is inherently thought provoking.

The idea of property being central to every historic bust with few exceptions is a compelling one, and it is teased out in no short order with facts and statistics drawn from around the world. The link to speculation in land as well as leverage is clearly drawn out and in that respect it is one of the core correlation to the roaring twenties and the late nineties to now, liquidity and leverage, albeit the two times had very different causes.

Fred Harrisons ‘Boom Bust’ would be on my list of ‘must read’ books, even though you may or not may agree with elements of it such as the 18yr cycle theory that he puts forward. The problems of property are many but the solutions are thankfully pragmatic. Will we actually see any of his solutions used any time soon? Unfortunately, I would wager ‘no’, but that doesn’t mean that the process of rationalising taxation and understanding the shift that needs to take place in revenue raising is not underway on some level.

The question that still remains, is one first asked by perhaps the greatest economist of them all ‘to whom belongs the wealth of nations?’, until we realise that land is a national rather than purely private asset then we are likely to continue the current application of taxation and thus, follow the boom bust path that has lead us here to begin with.

Here is a video of Fred Harrison, talking to the renegade economist.

Hugo Bouleau’s (pseudonym of the author) book was for me, perhaps the most riveting reading of 2008. I like to underline important sentences in books, it’s a habit I picked up from a history teacher in secondary school. Looking back through ‘The Final Crash’ I can safely say I went through a whole pencil!

Bouleau writes the book not only from his practitioner experience as an asset manager for a large private bank in the Channel Islands (he is also a fellow of the Securities & Investment Institute), not only from his educational background from City University in London, but from that of a concerned citizen of the world who realises the core issue of the financial crisis, the one that remains largely uncovered in the day to day reporting, that of debt and leverage, in particular, that of irresponsible debt, and excessive leverage.

Bouleau has since changed careers, having recently started a Sharia compliant Islamic Finance operation. I caught up with him on the phone just as he returned from Saudi Arabia but before he took some time off in France.

I had the opportunity of speaking with Hugo today (I’m such a nerd that I got kind of ‘finance star-struck’!), my own psychosis aside, I found him to be a really affable character with massive dose of what you might call ‘British common sense’, his are pragmatic, not far different than that which an older relative might give you, he talked about the importance of not incurring too much debt and the problems with interest, money creation and other areas.

The conversation we had is outlined below, while it loosely covers many of the topics talked about in the book, the book itself is a wealth of information and poignant commentary, and certainly worth every penny.

Some of the things mentioned in the ‘Final Crash’ (written in 2006, published in 07′) have already come to pass, but it is the breadth of knowledge and tying together discordant worldwide occurrences as well as policy changes then putting them into a meaningful and understandable story that mere mortals can comprehend which is the true genius his work. ‘The Final Crash, addictive debt and the deformation of the world economy‘ is available on Amazon.

Hugo generously gave me a half hour of his time, some of the questions I asked, and his answers to them, are below.

Hugo, if you could take control of the world economy tomorrow what would you change?

‘There three things, first of all, a lot of stability was created in the Victorian era with the gold standard, but there is not enough gold now to go back down that road, gold would need to be trading at $40,000 an ounce to match the creation of money since the Vietnam war (i.e.: the time when the USA de-pegged from gold c.1971), the USD money supply has increased 30 fold since then.’

‘What is possible would be to go for a precious metal standard which would include all precious metals, gold, silver, and platinum (I asked why other nobles such as palladium and rhodium were not in this list and he told me that the ‘basket mix doesn’t matter so much as it being a basket’), basically match the money that is out there with precious metals at current prices that way supply of precious metal could meet demand of fiat currency presently whilst simultaneously deterring further money creation. So first, get a stranglehold on further money creation.

‘Secondly, in order to do that, we have to stop private banks from creating large amounts of money from small deposits, fractional reserve banking certainly has its downsides’. I wanted to know if Sharia compliant financial products were a solution (as he recently moved into this market), ‘Islamic banks try to mimic western ideas but they are not allowed to create money the way western banks do. Interest gets you a return due to asymmetric information, you don’t know as much about a company so you charge a ‘rate’ of return, and we base that on prevailing interest rates. However, a profit share might fix that, it is very grown up, and furthermore it is possible in an electric/digital age. It takes more effort, along with a change in perspective. The idea is that if you are doing work you should get paid for it, nobody has an issue with that, providing liquidity or infrastructure should come with a charge but benchmarking to an interest rate doesn’t have to be the way the charge is incurred.’

That struck me as quite interesting, why do we have to be slaves to prevailing rates? It creates massive peak/trough debt experiences, anybody with a variable rate mortgage knows how much their repayments have come down recently (and we see that as good yet we don’t’ see the disastrous economy which prompted the rate drop as good!), but everybody knows that this will be followed by an increase.

‘So we are stuck in a cycle where money creates money and private banks have a monopoly on money creation, Abraham Lincoln believed that governments should have the responsibility for creating money, and Zimbabwe is touted as the downside of this, but the idea is that if the state are creating money and they receive the tax base then there is no earthly reason why the state should pay interest, they should be the lender, not the borrower. People need help, governments want to help and stuck in the middle of all this is the entire banking system.’

‘You can throw bailouts at banks all you want and they will suck in capital and effectively atomise it, it is feeding the off balance sheet stuff that you cant see. They are trying to squirrel it away to provide a layer of protection. Existing loans that were packaged and sold on (via securitisation) leaving them with what looked like a clean slate, but you have layer upon layer of bad loans, and these are coming back to haunt banks via bond insurance etc. and when people need to sue somebody it comes back to the person with the deepest pockets which will be banks themselves.’

You gave a picture in 2006/07 of what the world would be like in the near future, much of this has come to pass, so what next?

‘I am actually very positive about the future at the moment, what we are going through is highly beneficial, sometimes you go down a path and a door slams in your face and it hurts, but the path we were on was destructive, permanent growth has no equilibrium, the very environment itself and much else was hurting, the high-water mark of the past market is now like a ’scum mark’. You can actually have prosperity without inflation, equilibrium economically is possible, however, the contraction will still happen’.

A depression is by definition a 10% contraction in GDP, so Hugo is waiting to see ‘A period where not only the economy but stock markets stay flat. Almost everything wrong in our current economy seems to get back to the end of the gold standard’.

We talked about the recent equities rally that has taken place since March ‘this big rally is pretty classic, but was during the Great Depression that the biggest rally prior to this occurred’.

Do you believe in the transfer of power and wealth from west to east or is this merely a cyclical high for BRIC nations the same as in the 70’s when some were touting Brazil as the next world super power?

In previous decades it was western institutions lending to developing nations, so they started with shackles, countries with the highest IMF debt, incidentally, have the highest levels of deforestation, there is a correlation between western style lending to developing or emerging economies and destruction of those economies. Now these countries are the actual surplus nations. Lately, commodity rich nations are much less aggressive than they used to be in dealing with each other, the Chinese and Russians are getting along a bit more now, providing infrastructure projects for free effectively, the real wealth of the future is actual ‘thing’s, actual goods, such as commodities, not bonds and paper. The infrastructure approach means you are providing capital and helping provide for the future so you get long term benefits, the Chinese approach is more of a partnership (from a business ethic perspective not a political one).

The Guernsey Experiment - how do we make money that doesn’t cause inflation?

If you keep printing money for projects you add to the money supply, this will inevitably create inflation. The figures in the US stopped being produced (M3) in 2006 so it isn’t easy to measure it correctly any more (money creation) The velocity argument still holds credence, when you see charts of base money there has been a steady rise since the 70’s in the last two years it has gone straight up!

Any exponential chart, irrespective of what it is about is generally a risk, even natural examples show that, cancer cells replicating fast are bad, yeast can replicate rapidly and kill itself off (anybody who enjoys a pint has consumed the reality of that!).

The last time this happened was during the Weimar Republic, interestingly during the first 6 months the Reichmark actually got stronger in value, but is like a tsunami, things go one way then slam into the opposite direction. If you keep producing money it then its like ketchup in a bottle, you shake the bottle trying to get the ketchup out (credit flowing) then suddenly it all pours out at once, the inflation will come thick and fast.

Regarding Guernsey, they had money which rather than having notes saying ‘payable on demand’ they had a sell by date. A government bond has a maturity date, the Guernsey note experiment was done whereby the state or government would create the money for local materials and local people, at the end the debt would have to be cancelled, you create money to do a job then destroy it. When you strip interest out of the equation then it becomes a method of exchange (which is actually the original reason for money existing), and therefore money has no intrinsic value in its own right. It is only when money literally makes money that you have a problem.

But surely when it is coming to the expiration date people spend them like crazy and then cause inflation anyway?

Interestingly they didn’t, the state they would issue more notes on maturity if required, the money supply can be created or destroyed at will. By creating real money to finance real things (eg: town market, town hall) rather than speculative deals then it makes a perpetual income source. The more projects funded, the more rental income and then you have a permanent sinking fund to pay off past debt, you can go on to build harbours, schools etc. (as they did in Guernsey using this system).

During that time there were still private banks, and the local banks complained because they were being sidestepped. Funny enough, Government projects were capped at £40,000 but private banks could print whatever they wanted, but when they were not being used they felt hard done by.

What do you think of alternative currencies: freedom dollars, liberty dollars or other ideas in the USA?

‘In the big picture the use of precious metals is the best, naturally there is downside in the mercantilist effect of everybody going all out to accumulate gold, but as long as the mechanism is there it can work. On local level these things happen by themselves, in Germany during the late 1920’s/early 1930’s people used a local currency, Nazi’s stopped it when they took power. The likes of ‘Liberty dollars’ are a different story, the creators of them got arrested, its a little disturbing, it wasn’t harming anybody, it is clearly the IRS using bully tactics because they can, the founding fathers of america were real hero’s, they would not have agreed to that kind of approach.’
I would like to send a very large ‘Thank you!’ to Hugo Bouleau, not only for what was an epic and insightful read, but also for taking the time out of his day to talk to me and provide this interview.

About ten years ago my sister bought me a book called ‘The Millionaire next door‘. This was when a million still meant something! In todays markets where Governments are throwing billions, and indeed trillions at problematic markets a million doesn’t seem like much!

However, this book is well worth a read, it covers many of the things that are effectively the ‘lifestyle habits’ of people who have more than a million in net worth outside of their primary home. One of the main tenets of the book is that you should spend less than you earn, so simple and yet so hard! It’s like saying ‘consume less calories than you burn’, which is also easy to say but hard to do.

The Millionaire Next Door is a good book for people to read when they are becoming financially independent, it helps to spell out some of the basic home truths about money by looking at the lives of people who have reached a high level of financial success.

Of course, money isn’t everything, it won’t make you happy, but it’s easier to afford the therapy hours when your minted!

The general habits of people who accumulate a high level of wealth are as follows:

1. Wealth is accumulated (by and large) over time, and done so consistently, as a part of the persons life.

2. A high percentage of the people were self employed.

3. Wealth doesn’t have much to do with your IQ or college, it has to do with being frugal enough to put money away faster than you spend it, having said that, this attribute is a form of intelligence! It is also about self discipline.

4. The wealthy are not flash, no flashy cars, most of them drove second hand cars. No trophy homes, or other big worldly signs of wealth.

5. They learned about finance and investing, not to the degree of being an expert but well enough that they understood what they were doing with their money and what their money was doing for them. There is a frightening lack of financial education in our schooling system so perhaps this book would be good for parents to buy for their kids.

6. Nearly all of them (97%) have a home, which for the most part they own outright. Clearing your mortgage is vital, the amount you spend is largely determined by the amount of debt you carry. You can almost imagine debt as being paid today for money you have not yet earned, live too high a lifestyle today and you end up paying for it in the future.

7. 80% are first generation affluent and a high percentage are also immigrants who got no head start.

8. Their spouse plays a vital role, the spending habits of a partner can have a truly massive effect on the household budget.

9. They invest heavily in education, both for themselves and their offspring.

10. Most of them work 45-55 hours a week.

11. Most of them are fastidious investors and they are also savers in the traditional sense.

So it would seem that hard work, planning, keeping debts low, living below your means, putting money aside and other such things are the lifestyle patterns, and habits of those who become very wealthy. There is nothing in this that astounded me, it did however, put in plain black and white the fact that time and planning are also required, hard work is simply not enough and in that respect it was an eye opener to find out that this translates into hard numbers, it’s not just ‘dumb luck’.

I would advise anybody who has wealth on their list of agendas to read this book as it lays out a good foundation on the mindset of people who are not only wealthy, but financially independent, simply replicating this approach would do wonders for most people.