Rumors of Irish collapse make for a good case study

Yesterday the financial markets experience a big selloff.  Ostensibly this was due to mounting fears of a collapse of the Irish nation’s financial system and economy.  Apparently the rumors began, interestingly enough, in Germany.  Then the fears spread like wildfire across the world: “The EU is going to have to bail out another nation.  This is just like Greece!”

First, let me address Ireland.  Is Ireland in economic trouble?  Yes.  However, let me enumerate why this supposed “crisis” is so radically different than the Greek crisis that we experienced earlier this year.  To begin, the Irish government is publicly and loudly turning down offers of assistance from the EU.  Are they foolish?  Why would they do this?  They are doing this because unlike Greece the state’s problems are not public abuse of debt.  In Greece the state used debt to fund entitlement problems and has nearly bankrupted itself.  In Ireland the problem is that its banks, private institutions, gorged themselve on debt.  This situation is similar to what happened in the United States.  In Ireland the government, its financial sector, and its private business sector are all functioning well.

For example, the Irish are already two years into a self-imposed austerity plan.  Ireland also has some of the lowest corporate tax rates in Europe.  This has attracted a lot of capital to the little island.  But that policy could also be slightly rolled back to raise the tax base and help make more solvent the Irish state.  But don’t count on that happening.  The reason is that the Irish don’t need to raise that much money to make their banking system more solid.  The amount of money that the Irish are talking about is only €20 billion.  Additionally, the Irish do not have any major re-financings of public debt for many months.   In the Greek crisis they had major refinancings of debt that were just around the corner.  Lastly, Ireland is one of the very few states in europe that does not depend on Germany or France for its economic well-being.  Instead its economy is more closely interlaced with the United Kingdom and with the United States.

So fears of an Irish collapse are MASSIVELY overblown.

But this situation is instructive nontheless.  I first want to focus attention on the tendency of people to rely upon archetypes to do their analysis for them.  The way it works is that a seemingly dramatic situation unfolds that requires an investor to make a seemingly immediate choice.  In this situation of high stress and panic it is very difficult to reign in the relevant and pertinent facts to properly assess a situation.  Instead what happens is that people will evaluate a new situation to the degree that it parallels situations with which they are more familiar.  So the Irish situation becomes:

“It looks like and smells like the Greek situation.  The Greek situation caused financial markets to fall rapidly!  I lost a lot of money then.  Wow!  I should SELL!”

Well the Irish are not going to collapse – that’s a promise!  If you are interested in Ireland or its businesses I would take this as an opportunity to buy in now.  All success in investing boils down to four words, “buy low, sell high.”  Prices are artificially low right now.

The other thing that I wanted to point out that is much more timely and topical is that a goodly proportion of investors out there must be skittish.  Yesterday I highlighted that markets were moving sideways.  Well now they are moving sharply down with the first little, ittle bit of potential bad news.  The curtain has been pulled back and now we see that many investors are quivering.  I will have this state of affairs in the back of my mind as I evaluate the state of things going forward.  Bad news of any kind is likely to lead to a big sell off.  That means that the bias in the equity markets is most likely a negative/selling bias.  Interesting.

Jason