The Celtic Tiger
I just returned from my 11th trip to Ireland and, since my first visit
in 1989, the changes I have witnessed with each succeeding
journey are truly amazing. Quite simply, Ireland is in the midst of
an economic boom of staggering proportions and, yes, in my
humble opinion, there may not be a more deserving nation on
earth.
Over the years I have made great friends in the Emerald Isle,
particularly in a small town in western County Clare, Lahinch. I
always spend part of my trip there, ostensibly to play one of the
best golf courses in the world. And after this week”s
conversations with the locals, you can see they are swimming in
clover. But it wasn”t always so.
I played a few days with Lahinch local Donald Kenny, a man who
was born in the family pub that still bears his name back in 1930.
Times were soon to be tough all over the world, but while many
of us would recover from the twin disasters of Depression and
World War II, in Ireland, most view the 1950s as the hardest
decade of the 20th century and Kenny had some stark tales to tell.
No industry, no jobs, no future. Children who had the
wherewithal continued to flee (as they had been doing for about
the previous 100 years). But on this trip of mine, I talked to
innumerable lads who had emigrated back home from America in
just the past few months. This is a trend that has been in place for
a few years now, but the pace is clearly picking up. And Irish
industry is recruiting for workers, worldwide.
So here are some figures. I have written in this space about 6-7%
GDP projections in the country for 2000. This past week, the
Ministry of Finance announced it could now be anywhere from
10-13%! [There is massive criticism of this ministry because their
economic forecasting has been way off…kind of like our own
Federal Reserve which has underestimated the power of the U.S.
economy for years now by wide margins.]
The housing boom in Ireland also is unprecedented. One of the
primary builders in Lahinch, Paddy Barrett, told me that he has
over a 3-year backlog of projects (about 85% of which are for
Americans…thank you, Nasdaq).
But the growth explosion isn”t coming without a price. Inflation
could reach 7% by year end. Real estate values have soared
about 20% in the past 12-month period. For the nation as a
whole, the rate is 76% for the period 1995-99. But in Dublin it is
more like 125% (including 40% in 1998 alone). At this point,
first-time home buyers need to be extra careful.
Can it last? Inevitably, there is going to be a downturn, the
potential severity of which is the issue. The Central Bank in
Ireland is trying to “stress test” the banks in the event of an
“economic nosedive,” including a scenario that involves a 60%
decline in home values. If the banks are found to be in trouble
under the various cases, then the Central Bank can ask them to
tighten their lending requirements as a way of ensuring the
economy doesn”t go from “boom” to “bust.”
But while the Irish soar, the rest of the European Union is now
projected to grow at about 3.4% this year. And herein lies a
dilemma.
Last week the European Central Bank (ECB) raised interest rates
another quarter of one percent, bringing their key short-term
figure to 4.5%, some 2% higher than just this past November.
The ECB is concerned about inflation as well as the ongoing
weakness in the currency, the euro, a topic I broached in last
week”s review.
But, of course, if you keep raising interest rates to combat
inflation, you run the risk of damaging the economies, thus killing
growth.
And while the ECB has been hiking rates to protect the euro (a
weak currency contributes to inflation by making imports more
expensive), exactly the opposite has happened. Each time they
have raised rates, the euro has finished the day lower. Why is this
so?
The markets believe that the ECB is afraid of economic growth
and every time the ridiculously low inflation target of 2% is
breached by the Euro-11…as is the case today with inflation
running at 2.4%…they raise interest rates. As one commentator
wrote in the Irish Independent this week, this is in marked
contrast to the U.S. where, in investors eyes, the Federal Reserve
is prepared to give growth a chance, even at the expense of an
inflation rate that is creeping up.
But back to Ireland. You can see how economic conditions in the
country are massively out of line with the rest of the euro zone.
And then there is the issue of jealousy. The rest of Europe is
increasingly miffed over Ireland”s success.
The day I arrived there was a story that I imagine didn”t get much
play in the U.S. business press. The largest bank in Luxembourg
admitted they were using Ireland as a tax haven.
You see, what I haven”t mentioned yet in this rambling
businesslogue, written Sunday as I jet back, was that much of
Ireland”s success is owed to government tax policy, for it was
back in the early 1980s that a maximum 10% corporate tax rate
was instituted in an effort to lure industry. This was by far the
lowest rate in Europe and, as we all now know, it worked,
beautifully.
But the bank in Luxembourg was the first to admit that they are
taking advantage of a loophole which allows them to set up a
subsidiary (or shell company, if you will) in Dublin”s International
Financial Services Centre to avoid paying tax on profits made
elsewhere.
Germany, for one, has long suspected its own banks were
diverting profits through Irish operations, depriving its treasury of
tax income. The resentment is spreading across the EU. After
all, when the Irish economy was at death”s door in the 1950s, 60s,
and 70s, it was the European community that began a policy of
subsidizing many of the infrastructure projects (like better roads)
that helped lead to the current boom. I don”t know where it will
all end, but some would say it”s payback time.
Energy Crunch
Staying in Europe for the moment, the big news of the week
involved soaring fuel prices, a topic dear to my heart. There was
total chaos for Irish and British travelers trying to enter French
ports, either by ferry or the channel tunnel.
The French are beautiful. You can be sure that if their workers
become disgruntled over a particular issue (normally involving
agriculture and subsidies), they will strike. And the French strike
like no other. They are masters at shutting down the
transportation system and causing gridlock on a massive scale
that would make a 4-hour commute in Los Angeles or New York
look like a holiday.
So this week French fishermen blockaded the ports and roads
with trawlers and trucks. And, as is always the case, the
government eventually gave in. They will get their fuel subsidy.
But, for once, I can sympathize with some of the French who are
being run out of business by the high cost of fuel. By week”s end,
Irish truckers were looking to do something similar if their
government doesn”t pick up more of the cost of petrol.
[Of course this whole debate goes to the issue of European
government tax policies. Taxes on fuel are huge, compared to
those in the U.S.]
The price of oil itself continued to climb this week, to above the
$33 level, yet financial markets worldwide rallied. Saudi Arabia
talked of increasing production when OPEC meets on September
10 and, this time, the markets ignored them. I stand by what I
wrote last week on this subject. Ignore oil”s impact on world
economic growth at your own risk.
Wall Street
You”ll have to forgive me for being very brief this week. I didn”t
have much time to track down Wall Street stories, but the wealth
effect is clearly being felt worldwide.
While the Dow Jones rallied 0.4% to close at 11238, Nasdaq
continued its remarkable comeback, gaining 4.7% to end the
week at 4234. Nasdaq is now back into positive territory for the
year.
The news on the economic front was good, again, if you are from
the soft landing crowd. Manufacturing activity has slowed
considerably with factory orders in July plummeting. The latest
employment report showed a decline in nonfarm payrolls and
consumer confidence slipped. Most market players are now
convinced the Federal Reserve is finished raising interest rates for
the balance of the year. I say, not too fast, mainly because of
stubbornly high oil. To be fair, however, rising oil does act as a
tax which helps to reduce consumption. And that”s what the Fed
wants.
And suddenly, valuation figures on many Nasdaq issues are
approaching levels last seen in the bubble of this past spring. I
will have to beat this dead horse again next week, in depth. It”s
my calling in life, you see.
I did see that Yahoo! got clipped quite a bit. Seems like some
now aren”t too sure about advertising revenues on the old
Internet. Soo-prize, soo-prize! Well, this is one Netizen who
isn”t.
And then there is the case of Emulex and the hoax of Friday,
August 25. 23-year-old Mark Jakob has been arrested for issuing
a bogus press release saying Emulex”s profits would tumble.
Wire services willingly picked up on the story and the stock fell
60% in a matter of minutes. Jakob was short the stock, sold his
position when it tumbled, and then had the gall to buy on the
upswing, as the SEC reinstated the initial share price when it
discovered the release was fake. Jakob supposedly cleared about
$250,000 for his efforts. Now he could receive up to 15 years in
prison. If guilty, he deserves a lot more.
Finally, Credit Suisse First Boston has acquired Donaldson Lufkin
& Jenrette for a cool $11.5 billion. Most would agree that the
next to go could be JP Morgan, Lehman Brothers and Bear
Stearns.
International News Brief
Russia: The Moscow television tower fire was just the latest in a
long line of national embarrassments. President Putin issued the
following statement:
“The latest accident shows the shape of our vital installations and
the overall state of our country. We should not forget the large-
scale problems or current economic issues here.”
Putin went on to state that only 5% of Russian industry is using
state-of-the-art technology.
But as Russia continues to lose prestige with each mishap, Putin
used the Kursk disaster as a pretext for increasing defense
spending to $8.5 billion from just $5 billion (still a ways from our
own $290 billion defense budget). The first thing he must do is
increase pay. The commander of the Kursk made a whopping
$150 a month…and to think he was in charge of one of the
world”s most formidable weapons.
President Clinton”s Adventures: I didn”t have the best week in
terms of keeping up with the world scene but it certainly appeared
Clinton”s latest African adventure bore little fruit. Nelson
Mandela thought Clinton”s presence at the peace table in Burundi
would lead to a resolution of the conflict that has taken over
200,000 lives and it didn”t (though it wasn”t Clinton”s fault).
In Nigeria, the new democratically-elected government of
Africa”s most populous nation was disappointed to learn that they
would not be receiving debt relief. Clinton told the leadership
that they must first continue to make economic and political
progress. Instead, we are supplying a few hundred military
advisers to help train their armed forces. American business
leaders who accompanied the president were probably
underwhelmed by the prospects of doing business in this nation,
one which has some 123 tribal and religious groups striving for
local power.
Clinton also stopped off in Cairo to pressure Egyptian President
Mubarak into playing a more constructive role in Middle East
peace negotiations. No one knows the mind of Hosni.
Finally, Clinton, clearly seeking Air Force One Elite Gold status,
jetted down to Colombia for a visit with their embattled President
Pastrana. Pastrana”s poll numbers are plummeting as his country
is beset by a disastrous economy with 20% unemployment, and a
guerrilla war largely centered around the drug trade. $1.3 billion
in off-center tens and twenties is now on the way in the form of
helicopters and advisers. The Irish newspapers were loaded with
stories and opinion pieces on the future of the Colombian-U.S.
relationship. The consensus is that we could have another
Vietnam on our hands. I”m optimistic that won”t be the case.
But the bottom line is we still haven”t addressed the demand side
of the drug issue in our country. The Clinton administration has
done a miserable job in this regard.
Travel Alert: Don”t come to New York City this week. The
U.N.”s Millennium Summit runs from Wednesday through Friday
and the gridlock will be severe. The Summit represents the
largest gathering of world leaders in history. So with the likes of
Putin, China”s Jiang Zemin, Castro, President Khatami of Iran,
and Yassir Arafat, to name just a few, it will resemble a gathering
of the characters from the game “Clue.”
National Missile Defense
President Clinton has decided to leave the issue of deployment of
NMD to his successor. Many in the intelligence community
believe that by as early as 2005, the U.S. could be subject to
attack by the likes of North Korea, Iran or Iraq. But 2 of the 3
tests of the main system under consideration failed miserably, thus
giving Clinton cover.
“I simply can not conclude, with the information I have today,
that we have enough confidence in the technology and the
operational effectiveness of the entire NMD system to move
forward to deployment.”
While testing and development will continue on the land-based
system, Clinton”s decision was critical for the initial contracts that
needed to be approved in order to begin stage one of the project
next spring. As it now stands, NMD could not be deployed until
2007 and, yes, there is no guarantee it would be successful.
I gave this topic so much space in this column over the past few
months for the simple reason that there is no more critical issue
for our nation”s security. No one denies this is also an incredibly
complex international issue, involving friends and foes alike. But,
in a nutshell, not one other nation wants the U.S. to have a
defense shield.
A Republican senator I have great respect for, Chuck Hagel of
Nebraska, said of Clinton”s decision, “There will be dangerous
consequences for America and the world if we rush to meet
arbitrary decision deadlines.”
I don”t disagree. But for those who say the $60 billion price tag
is outrageous, particularly when no real threat exists today, I say
“bunk.” The system under consideration is probably not the right
one but we will need something of its kind. What many
Americans fail to understand is we will be increasingly subject to
blackmail. [If you are new to the site, check out the “Hott
Spotts” archives or prior “Week in Reviews” for more details.]
But, at this point, I can”t argue with Clinton”s decision. Testing
will continue and a new president will have a chance to succeed
where this administration failed. It will take commitment and
diplomacy to win over the world. The topic needs to be debated
in Congress, in full view of the American people. And remember,
even President Putin told President Clinton he understood the
threat.
George W. / Politics
Boy, the European press is having a field day over George W.
Bush”s malaprops. And, there is genuine cause for concern. But
first…let”s take a look back at one of the kings of the genre, Dan
Quayle, who once uttered:
“Republicans understand the importance of bondage between
parent and child.”
And this all-time play on the slogan, “A mind is a terrible thing to
waste.”
“What a waste it is to lose one”s mind, or not to have a mind is
being very wasteful. How true that is.”
[Now I actually thought Quayle was much more qualified than he
was portrayed to be.]
But now we have Bush.
“Will the highways on the Internet become more few?” Or…
“We ought to make the pie higher.”
Bush is struggling and, while he doesn”t deserve to be bashed as
much as he has lately, clearly his campaign has not found its
footing since the Democratic Convention. A Newsweek poll now
shows him down 10%, 49-39. So the Bush camp decided to
release the first attack ads in 17 key states, ones which focus on
Vice President Gore”s Buddhist temple fundraising event. While
yours truly is disgusted at Gore”s word games when it comes to
the whole 1996 campaign, I suspect the majority will be turned
off by negative ads this go round.
Elsewhere, the Anti-Defamation League, of all people, urged Joe
Lieberman to tone down his religious fervor. By week”s end he
had. I”ll have more on this next week.
Dick Cheney announced he will forfeit the stock options he
earned as chairman of energy giant Halliburton if elected vice
president. He shouldn”t have to do this but he wants to avoid the
slightest appearance of conflict of interest.
While nothing has been formally decided regarding the
presidential debates (Bush laid out a plan Sunday that Gore won”t
agree to), Gore will appear on “Oprah” September 11th, Bush
September 18th.
Finally, it”s amazing who you meet in Ireland sometimes but in
Lahinch I came across a great gentleman, Tom Ferguson.
Ferguson happens to be the father of one Mike Ferguson, running
for Congress locally here in New Jersey. I promised Mr.
Ferguson I would support his son in any way I can. If Mike is
anything like his father, he would be a great addition to Congress.
Random Musings
I have to tell you, my sense of humor is lacking as I fly across the
Atlantic, eating lousy food, crammed in my little coach seat and
sitting next to a mother and her 13-year-old son, the latter who
needs a reality check, if you know what I mean.
–Researchers in London say a chocolate a day keeps the doctor
away…having the same effect as red wine or tea. But occasional
coffee use can put your heart at risk. Unless you are a regular
drinker, a cup of coffee can jolt it. [I”m not trying to scare
anybody. You”ve all seen myriad studies on this subject…from
both sides of the debate.]
–Kerry Packer, the richest man in Australia (with an estimated
net worth of $4.6 billion) lost $20 million playing baccarat at the
Bellagio Hotel in Las Vegas.
–A shark attack in 5-feet of water in Florida killed a 69-year-old
man. He was just the 5th shark victim in 25 years in that state.
–Osama Bin Laden was behind a plot to blow up a nuclear
reactor in Sydney during the Olympics. Australian police say not
to worry when it comes to security at the Games.
–Britain is having a serious problem with radio hackers who are
posing as air traffic controllers and giving airline pilots bogus
instructions for takeoff and landing. For example, in some cases
the fake instructions are handed out and the real controllers don”t
know until they hear the pilots talking to someone else.
–Ireland will soon be home to the largest car ferry in the world.
You should see this thing…capable of carrying 2,000 people and
1,300 cars. Hopefully, you never hear its name again…Ulysses.
–Man”s Best Friend, Part 87: A woman was walking her
seemingly ordinary dog in a park in Oxfordshire, England when
the dog started digging up the ground under some shrubs. It
turns out our hero uncovered 8 sophisticated bomb devices,
wrapped in plastic.
–Oh, don”t think all of Ireland is in love with Bill Clinton for his
efforts to help along the peace process in the North. My golf club
of Lahinch is extremely jealous of their rival Ballybunion, where
Clinton played a round a few years ago. Ballybunion has erected
a statue in front of their clubhouse in Clinton”s honor. “We don”t
need to use props to promote our course,” say Lahinch officials
with total disdain. And they”re right. Lahinch is a better golfing
experience.
–Dublin is in an uproar over “fake” pubs and storefronts. Only
about 25 genuine ones are left.
–Consumption of Guinness has declined 4% in Ireland while its
sales are booming worldwide. It seems that because of the
soaring economy, many are opting for “classier” drinks. Ahh, but
I stick with Guinness. But I also still laugh at some of the old
billboards I”d seen in my earlier trips…”Guinness is Good Food,”
“Guinness is Good for the Mind.”
–Lancelot Ware, A British barrister, died at 85. He founded
Mensa, the society for gifted people. I didn”t receive my
application yet…but I drank my Guinness!
Gold closed at $277
Nymex Crude Oil, $33.38
Returns for the week, 8/28-9/1
Dow Jones +0.4%
S&P 500 +1.0%
S&P MidCap +3.3%
Russell 2000 +3.2%
Nasdaq +4.7%
Returns for the period, 1/1/00-9/1/00
Dow Jones -2.3%
S&P 500 +3.5%
S&P MidCap +23.4%
Russell 2000 +7.4%
Nasdaq +4.1%
Bulls 47.1%
Bears 33.7% [Source: Investors Intelligence]
Note: We will resume our regular schedule of articles on
Tuesday. And next week”s review will be posted by noon on
Saturday, as usual, barring technical difficulties. Oh, don”t you
know I pray I don”t have any as I”m writing these up.
Thanks for your support and patience with the delay in posting
this piece.
Brian Trumbore
