“Some of us are looking at the stars”

1. “Some of us are looking at the stars”ACOI Top Economist Round Table Kevin Gardiner, Head of Investment Strategy, EMEABarclays WealthFebruary 25th 2010 The views expressed here are the personal views of the speaker

2. “Some of us are looking at the stars” • The Irish Economy: avoid cliches like the plague • Deregulated capital markets: a richness of embarrassments • Capital markets in context • Financial services in context • Conclusions

3. 1. Avoid cliches like the plague

4. The Irish Economy • Taxes, labour, language, size – not houses & mortgages • An inside job • Not “sleeping” – not anything • World trade is stabilising, FDI will rebound • Competitiveness can be changed

5. 2. A richness of embarrassments

6. Financial analysis after the Panic: context • Since 1998, deregulated capital markets have experienced a succession of embarrassments • Once things stabilise, the immediate implications are clear: re-regulation • Financial analysts face more deep-seated questions

7. Why “Panic” and not “Depression”? • Financial complexity, opacity, interdependence • Leverage – whose? • US consumer behaviour beforehand • Historic parallel: 1907, not 1929

8. A richness of embarrassments • LTCM (1998) – “picking up nickels in front of bulldozers” • TMT and the “new economy” • MBS, CDO, CDS, house prices – the credit bubble • Oil, metals, food, some GEMs – the commodities episode • Banks, brokers, insurers – to the brink • Asset returns and a volatility bubble • Accounting & regulation: good intentions, bad results • Financial analysis – precisely wrong?

9. Financial crisis: bursting the volatility bubble Source: Datastream, Barclays Wealth Strategy

10. Economic crisis: output expectations recover Tactical Asset Allocation Over and Under Weights Our Asset Allocation Committee Thought Leaders from Throughout Barclays PLC Source: Datastream, Barclays Wealth Strategy

11. Accounting & regulation • Good intentions • Accountant’s “fair value” vs PM’s “investment opportunity” • Bad design – elements of pension accounting • Practical impact

12. Financial analysis: precisely wrong? • How useful are those decimal points? • MPT: you may not get “paid” for taking risk • P&L small relative to BS; many assets are intangible • “Beta” and risk • Correlation is not causation – eg: credit supply vs demand • Historical financial data – it’s all we’ve got • “Behavioural finance” does not get us off the hook “Prediction is very difficult, especially if it’s about the future” (Niels Bohr)

13. 3. Capital markets in context

14. Capital markets in context • Big assets, small flows • Investment banking, hedge funds, private equity… • … custody, insurance, retail banking, trade finance

15. 4. Financial services in context

16. Financial services in context • “Financial intermediation” approx 8% of GDP? • How it adds value: exchange; custody; diversification; maturity transformation; risk management • Historic dependency or partnership? "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." (Mark Twain)

17. From “British Imperialism” (Cain & Hopkins, 1993) • “The conventional assumption… is that services were the junior, dependent partner of manufacturing… this belief, together with the somewhat intangible quality of service activities, has led to the view that services are essentially derivative and even parasitic… and do not themselves create “real” value.” • “The Industrial Revolution emerged from an already highly successful capitalist system… Britain was the most advanced economic power in Europe long before the onset of mechanisation or the beginning of the factory system…” • “The most important development outside agriculture… was the financial revolution of the 1690s… Bank of England… national debt… gold standard… merchant banks… market in mortgages… marine and fire insurance… overseas trade… invisible earnings… London’s manufacturers came to reflect the expansion of the financial and service sector…”

18. 5. Conclusions

19. Conclusions? • Deregulation fostered big, seemingly-arbitrary gyrations in discount rates, commodities and (eventually) the economy • Unintentionally, parts of the regulatory and accounting framework likely added to market instability • Financial knowledge is not what we thought it was But… • There is more to financial services than capital markets – and financial services and other sectors are partners

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