Odd Lots - How a Rural Irish Farmer Became an Expert on the Euro Crisis

Episode Date: February 16, 2016

In theory, anyone with an internet connection can became an expert on just about anything from just about anywhere. In the latest edition of Odd Lots, we speak with Lorcan Roche Kelly, a cattle farmer, and former explosives engineer in rural Ireland who decided in the early days of the euro crisis to figure out what the heck was going on with his nation's banks. Lorcan tells the story of how he went from a farm in Sixmilebridge, Ireland to advising hedge funds on what sovereign bonds they should buy, and ultimately to Bloomberg. He also breaks down why once again, people are getting nervous about the Eurozone financial system.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask Alexa, play the podcast, Odd Lots on Amazon Music. Hello and welcome to another edition of the Odd Lots podcast. I'm Joe Wisenthall, managing editor of Bloomberg Markets. My colleague and co-host, Tracy Elway, is away this week. She's out in the desert and on safari near Abu Dhabi. So we're miss her this week, but we have a special episode this week. Another one of our colleagues is with us. Today we're going to talk to, or me, I guess I should say, today I'm going to talk to Lorken-Rosh-Kelly. He's our handyman social media expert at Bloomberg markets, also an expert on the Eurozone, the ECB. And most extraordinarily, he comes to us from the small town or village. of Six Mile Bridge, Ireland, where he has a farm with cows. And I'm pretty sure he's the only person in Six Mile Bridge who has a Bloomberg terminal. I don't know that for sure, but I'm like

99.9% sure. And we're going to talk a little bit about what's going on in the Eurozone these days. There's a lot of tension once again around government and the banks. But before we get to that conversation, I want to talk to Lorken about how he became a farmer who is also an expert on the ECB. So Lorkin, thank you very much for joining the Outlots podcast. Joe, great to be here. So Lorkin, let's start from the beginning. There are many people who are experts on the ECB and the Eurozone who also live on an operating farm with cows. What's your background? How did you, where does your story start?

Take us from as far back as you'd like to go. I suppose it was part of the bit that people might be interested in, which is how I got to be where I am. I suppose the start of it starts out with a bit of a tragedy in a way that I used to work as an explosive engineer to mine, which just straight up is the best job in the world. At the end of every day, no matter how bad your day is being, you get to blow up a lot of stuff, which is incredibly therapeutic.

I think everybody should get to blow something up at some point. It would solve many of the world's problems. What are the kind of skills that you have to have to be an explosive engineer? What is the job really involved? You have to run really fast. That's the number one skill, I think. Basically what it is with exposes when you're exposing in a mind, you have to design an explosive blast in a way that it'll blast,

what you want to blast, and leave everything else alone. It's very important that you don't blow up to stuff you don't want to blow up. And my background is engineering. So that's kind of spatial development. Something that was kind of what I was doing anyway. So this was in Ireland. What kind of mining is big in Ireland? And it's base metal lead and zinc mines.

We have one of the biggest lead zinc mine in Europe is in Ireland. It's pretty much mined out of the moment it's been there since the 1970s. Got it. All right. So let's take the next step. So then what did you do after? So in 2007, my first wife, died, and so I've left with two children.

So I was in mining, which meant I traveled a lot. So obviously, I got to stop that job, come home, look after the kids, and I phoned up in a position where I was very time-rich and cash-poor. And if you remember 2007-2008, there was one event that was dominating the world at the time. I think I remember that. And that was the financial crisis. So I was, like I said, I was time-rich. So I started looking into this going, okay, I'm naturally curious, I suppose.

So I started looking at this, going, okay, what's causing this? what does it mean? And I found a lot of the coverage I was reading was very samey. As in, that would mean it is like everyone was on the same path, saying the same thing, saying the same, like the euro was going to fall apart, the whole world's going to hell and a handbasket by gold. So you had studied this before. You don't have a background

in economics or finance or anything like that. I did economics in high school. So beyond that, I hadn't done anything with it now. So it was basically you had a lot of time on your hands. Yes. You saw that the world was kind of falling apart. There was a lot of anxiety in Ireland, and in particular,

because of how big the banking sector was. And so you just wanted to sort of scratch an itch and see what the heck was going on. And I think is like with the farm, my father is eight years old this year, the farmish people are very funny about farmland. You never sell land. You never give it away. You've to wait for the generation above you to die before you get it,

which sounds very Machiavellium, but that's just how it is. five children in my family, five wasn't in the family. And my mother always said to us when you're growing up, you have to go to college, you have to get a good degree. The thing that nobody wants to have, because you're kind of stokely you can't ever sell it. You've got an asset that's for money, but you can't liquidate it. It's been the family for 25 generations. You have to hold it for the next generation.

So you didn't go to college, and you ended up with the farm. That's pretty much what happened, yes. I was the black sheep, so the black sheep ended up with the cows. So what was, you said you were curious, what was the first thing you looked into? What was the first question you saw an answer to? I think that the first question I thought that was, how are, everyone saying that the Irish banks, you should throw money from the banks,

everything should be deposit flights. And my first question was, okay, what's the mechanics? I suppose this is my engineering background. What's the mechanics that are keeping the banks open? If everyone is taking their money out, shouldn't the banks fall over? Like, how are they not closing down? Because the one thing we didn't have,

and we weren't having, were bank failures. and I was nosing around asking people because Joe I knew nothing so I was able to ask the really dumb questions

that those other people wouldn't like to ask and I got talking to an Irish economist called David McWilliams who I ended up actually working for after a while

because it ended up being his researcher and as part of that research gig I was doing I was finding I was reading like I said I was time rich I was reading lots of

bank banked annual reports all 145 pages of them just to try and figure out my own head how this machine that is a bank works. And the thing I was finding out with them was like, the banks

are still standing because they're getting liquidity, which is money from somewhere, and it was to find to follow the money, where's this money coming from? And as part of that, in 2009, I think it was, I was reading Anglo-Irish banks, which is probably one of the worst banks that

wherever existed in the entire of humanity, reading there on a report, and there was a footnote number, I think 17 on page 127, which said they were getting 11 billion euros from the Irish Central Bank as part of a master loan re-purchased, Nicol. But I saw that, said, I don't know what that is. So I'll ask somebody. So I got onto some of the IRS's bank who fought his last loaner purchase agreement. And they said this is something we used to use in the 1980s when Ireland had its own currency that floated to balance the currency at the end of the day.

And then the next question asked you was, where have you seen that written down? and I said I saw it on Anglo-Rish Bank's 2009 annual report. And then the next thing they said it was, we didn't have this conversation, and they hung up. Okay, there's definitely something here. So, and through trying to find out about that, I found out what this thing called Emergency Liquidity Assistance, ELA back in 2009 when... So they literally had this thing buried in a footnote deep in an annual report that they didn't really want. anyone to look into, but it was sort of, it answered the mystery of how these banks were staying in flow.

It was a big part of the balance sheet, and they had to put it in their balance sheet, the number, and they had to explain where the number came from. So they explained it in a way that, kind of, Joe, don't look any further. Don't look behind the current. Nobody else was poking around and asking these questions besides you? Not that I know. I remember I wrote about the ELA in 2010. The ELA Emergency Liquidity Assistance. And at the time, because I used the first point of any investigation is to just go to Google and type the words in. Yeah, right.

And see what comes up. And nothing came up. Wow. Like the ECB hadn't even published their rules for ELA in a meaningful way at that stage. So that's where I start from there. So then I, because the guys work for Dave McWilliams, he writes for a broad audience. Yeah. He wasn't particularly interested in, as in his audience who was interested in the intricacies of central bank's balance sheet.

So I started a blog, as I wrote with this thing, just like Joe. It was aimed at. That was nerds like myself. And that became very popular. And through that, becoming popular, then I think the FD picked up in a few. How did people find it? Let's not elide over that step, because I once had a blog, and that's how I got started. But how did people find your blog?

Who was reading it? A lot of this is fortuitous timing. With Paul Murphy at FD Alphaville. I was starting this thing called Market Slide at FTL, and they still run it to this day. Well, they'd start talking about today, and you could comment and say, look, I think this is important.

Right. I think one of the things I was on it one day, and I said, look, I think this, how English Bank is saying open is important, and I pointed towards his blog, and Paul then took my blog and republished it on the Alphaville blog itself. And once you get republished once or twice, like that, the thing just gets the own momentum,

and then you're seen as an expert in... So I think I started, following you on Twitter. It may be late 2009, but you had really made your name by that point, at least among a very sort of narrow influential media set as someone who really knew the ins and outs by that point of the Irish banking system. Okay, so you're on the farm, and through the magic of the internet and blogs and Twitter, you start to establish yourself as someone who's really done the work to figure out what's going on in Ireland. What's next?

What's it? Where did it lead from there? The next thing, I'm an American company, who obviously looking to get some European coverage, tracked me down via Twitter on the end, and offered me a job. Would you like to come to New York? We'll fly you over.

We'd like to sit down and show you, see how we're looking for a view on the whole Eurozone that we're not getting. I think maybe it's an important point that, I made the guy in the Don Luskin, I ended up working for is there are 17, there were at times 17 countries that use the euro area.

They use the euro as a currency. There's only one that speaks English. That's Ireland. A lot of, particularly at the time, this is 2009, 2010, a lot of the media as was feed that was coming into New York, particularly, the Wall Street,

was coming out of London. And at the time, maybe it still exists now, there was a certain bias amongst reportage from London on the euro area. Look at that terrible thing over there. It's falling apart.

It's going to burn to the ground. Aren't we so never not being in the euro? So all I had to do, but once I figured out how the ECB worked and how they were propping up the entire system through ELA when they had to, was things might get bad, but for things to break,

it's going to be a very big jump from where we are. Yeah, I remember, you know, because I was following the Eurozone crisis pretty intently, back then. And I remember how, you know, it would sort of won, there would be the period when everyone was talking about Greece and then everyone was talking about Spain. But I really did appreciate when Ireland was in the spotlight simply because it was the only time when I could read the local press and follow what was happening in the parliament or the Doyle, as you call it, because I could actually understand what the politicians were saying. So I really did appreciate that.

Yeah. I think it's kind of a broader point that. I suppose I've learned a lot is that you if you can ever get to the source of information, get to the source information. Because if you read the reports, especially on the report, say, on the German parliament or the Greek parliament, it's always true a lens. That will always distort it some. And the UK press is not known for its sort of like cool, level-headed lack of hyperbole, is it? Yeah, yeah. They have papers to sell, and they're good at selling papers, I guess.

So let's sort of skip ahead. and how long did you work for the American firm, and what did you do for? I finished and went on start on my own because I developed a few clients in London. And by having my own client-based London, it was just meant I did not have to fly to the United States. Oh, that's nice. Once a month. And what did you do these clients? You told you gave them your view on what was happening in the Eurozone Central?

Yeah, give a view. It's particularly interested in what the European Central Bank, because by 2013, the people looked to Central Bank. I think the big change between 2007 and 2013 is in 2007-2008 to solve the problem. By 2012-2013, nobody looked to governments anymore. Well, that sounds so quaint the idea that any government could do anything. Now we live in this time when central banks really are all where the action is. So it's quite to think that less than 10 years ago we actually might have believed the governments could be competent to fix something.

Yeah, 10 years ago, we were all Kenyans. Look at us now. Yeah, crazy. Now we're all monitors. Now we're all monitors, God love us. All right, so let's jump ahead because now you're our colleague. You work at Bloomberg. You came here, I think, early, just about a year ago. Yes. You do social media. You do some editing.

You do some writing. You sort of do a little bit of everything. What's your day like right now? I think there's a lot of fascination and curiosity. about this person who works for Bloomberg, who lives on a farm with cows, take me through a day in the life of Lorcan. Right now, you're at busy time for Larkin,

because right now is calving season. Cabin season kicked off the end of January beginning of therapy. So right now on my day, I get up around 6 a.m., go out, check the cows, pick out, check in the morning. How many cows do you have? We've only got 30 cows, so we have like 30 cows, 30 cows. And what is checking the cows until? go out, you go up. I suppose I'm talking to a

townie here, so I better take this slowly. The first thing you do is make sure they're feeding water. So I come in, once I'm sure they're fed in water, make sure there's no new cars. I come in for 7 a.m., turn on my, come to my office, turn on the terminal, turn on the web. It's happened in markets, where markets are going for today. I've then got about an hour and a half to get everything updated, get the website updates, get Twitter flowing, get Facebook flowing, and then I go back out to the cows again for 20 minutes,

make sure they're okay, back in again for 9 o'clock, and then I start, every morning I do this five things that are happening in the markets today. Our daily newsletter, right? Post and the news article goes out. So about 9-15, I'll start writing that, get the idea of where we're going, while continuing to make sure that all the social media side is updated.

Once the five things is published, I'll go for lunch for about 20 minutes, lunches actually, going back up to the cows, make sure they get their lunch, because they sweep for a lot. And then come in for the afternoon, work at the office for the afternoon, around 5 p.m. finish up, back out to the couch at then, make sure that everything's okay, come in, have my dinner, and then normally about half at night o'clock go back up to go again,

just check for calves and stuff with that. Check for calves. On a typical day, there's no calves. On a typical day, there's no calves, but at the moment because we're in calving season, on a typical day there's always the possibility of calves. And you live in a town of a six-mile bridge, right? So how many people, where is Six Mile Bridge? How many people live in Six Mile Bridge?

And why is it called that? Sixth Bridge is a town of about 1,500 people. It's in the West of Ireland, a place called County Clare. It's handily enough, it's 10 minutes away from an international airport. There's an airport in the West Farland called Shannon, which means it's quicker for me to get to London. than this for me to get to the capital of Ireland because I can drive to the airport

to get on a plane to London. It's called six-mile bridge because apparently years ago it was six miles from the nearest town of Limerick, which is six miles from the nearest place people actually want to be because six of a bridge is a small little market town. It's got seven pubs, two churches and two shops.

It's back in... Yeah, our colleague Dash visited you in Ireland last summer, and I think if I recall he couldn't find your plays and you didn't have cell service, and you just walked into one of the pubs and asked, like, does anyone know Lorkin? And they were able to figure out who he was talking about, right? Yeah, pretty much immediately.

They know who you're talking about. This is not saying that I'm someone that spent all of my time in the pub. I've just spent 10 minutes outlining how busy I am all day. Clearly, I have no time for me. Clearly. Clearly. In the summer, I remember you told me you have a tractor, right, and you could just be out there on your tractor on your iPad checking the terminal, right?

Yeah, yeah. During the summer, sometimes if I do it, sometimes on a long day, I can bring my iPad out in the tractor and it's got a wireless signal or wireless, but a mobile signal. I think it makes a lot of people here very jealous of your lifestyle. I think whenever, when anyone at the office hears about that, that that's your, I think that immediately seems appealing. All right, let's make the conversation a little more topical because once again, there's a lot of anxiety about Europe, We've seen some of the big European banks. Their stocks have really been getting slammed lately. Deutsche Bank, Credit Suisse. We're starting to see some increases in borrowing costs for some sovereign for some governments.

Again, Portuguese borrowing costs have been on the rise. Italy and Spain ticking up a little bit. What's going on? Why are people suddenly sort of nervous again in Europe? I can give you five reasons if you want. But to pick the one that I most believe, then it would be tricky. I think, first of all, if you look at banks, or if you do like a business, how banks are making money up to 2007, and how banks are trying to make money

now are completely different worlds. It was basically pile them high and sell them cheap was the way you made money in 2000. It was market share and get your margin as much you can, and there's no risk in the world. So you can trip your profit at the end of every year. Things will blow up as they eventually did, but while the going is good, you're making good money. These days, very, very regulated. So I think they're almost afraid to try new things. The model that they used to have is broken. So if I'm an investor and I look at a bank and say, okay, how is this bank that is this large

will mention it? I say a large legacy bank going to make money in the next five years. Where is my dividend yield going to come from? I can't see it. My joke, not myself, I can't see it, so I don't think an investor could see it. And I think that's, but that's not the problem right now. Right now, we're looking at a squeeze 2016, and European banks have got killed this year. Yeah.

And that's not investors, suddenly like these banks aren't going to be profit or are going to have struggle with profit as they were historically. There's something else happening. And what that's something else is, maybe investors are resetting their expectations. there was, like if you looked at 2014, 25, it was very easy to make on it. But there comes a point with those investors where you have to, the investors say, okay, show me the money. And that point, we haven't got to that point. So investors maybe just resetting their ideas.

So do you think that the, I mean, this is a debate that's going on, and a lot of people say the difference between now this bank sell off and say the banks sell off we saw in 2008 is not so much about these banks are going to have these gigantic losses that render them insolvent, or it's not about that they're going to have some liquidity run. It's just that people don't like the business model. And so between the regulation, the lack of robust upside, people are just saying, these aren't very exciting businesses to be invested in. Yeah, I think that's a lot of it. I think that, but there is something more because if you look at the sell-off that's happening in Europe, it's a broad-based sell-off.

Yeah. So it's like we don't like your business model. and also we don't like the expectations for the economy in which you're trying to do business. You've got that double-bally there. You've done on the fringes of all that. You've got other things going on. You've got investors suddenly realizing that cocoa bonds, contingent convertible bonds, are actually convertible if the contingency rises. So this is a sort of a unique class of security that's only been around since the crisis.

It kind of looks like debt. It kind of looks like equity. But the idea is that these are investors who had piled in getting above market yield and are now starting to realize that there's no such thing as a free lunch. And as these banks struggle with profitability that they could get clipped. Yeah, exactly. So I think that anything that makes investors' nerves in a place where they're not particularly keen on being invested. They look to get out.

So if you see these co-co bonds, start look like, they're going to be converted. So the cocoa bond is a bond that pays 7%. So you've got your bond that's trade the power, and you get paid 7%. That's sweet. Absolutely it turns into equity. You're a bond investor.

You don't want to be holding equity in a bank. And also at the point where it converts to the equity, you're holding equity in a bank that's had a massive equity squeeze that needs to raise capital quickly. So you'll get an equity in a bank that you'd never buy. Yeah. But again, that's what Coca-Bondering. That's what they're supposed to do.

But they're new. People didn't have much experience with them, perhaps didn't know how to model them. Perhaps, yes. I'm not buying that one, but perhaps. And the other thing that I think that's important is if you look at commodity assets, oil, metals, they would ignore gold, but oil and metal, they have got hammered. And in the last 14th, 18 months, they've just had a disastrous time. And that is one of these things that just grinds down, earnings, grinds down, profits, and grinds down. profits and grinds down the circulation of, for one of the better phrase, petro dollars in the world.

So if you've got large sovereign wealth funds, and there are a lot of very large sovereign wealth funds that have very large equity holdings. And we saw this, if you look at the Norwegian ex-sovod, it is huge equity holdings. A lot of the Gulf funds have equity holdings. And a lot of those equity holdings are in financial stocks. That there has to be a point where these governments say, okay, rather than put it in our own people under too much pressure by cutting our budget too much, we're going to spend some of a rainy day fund. And that means liquidating assets out of the rainy day fund. So basically,

during the boom times of oil, you had these governments like Norway, Saudi Arabia, and others, they built up tons of cash because oil was so high. They went out and bought all these assets. And among the assets that they owned were financial stocks around the world, now that oil has been plunging, these government budgets are under strength. these governments are then deciding that it might make sense to sell down some of their assets, as you say, liquidate part of their rainy day fund, and this is putting pressure on everything, but because they were so heavy into financials, that could be one aspect driving the selling here. But not even that could be an asset right, but also if I'm a bank investor myself,

and I'm not a sovereign wealth fund, I look at these sovereign wealth funds, and I think, okay, the next thing they're going to do is sell their financial shares. I'm going to sell mine first to get ahead of them. So even if they're not selling yet, people want to get ahead of that. People want to get ahead of that. So, Lorkan, in addition to the tensions at the banks, one thing that we've been seeing lately is some renewed pressure on governments. We've been seeing in the last week, Portuguese borrowing costs have been rising. Is this a return to the same problem, the sort of rebuke of austerity, ongoing political problems that hasn't really been solved in the Eurozone?

I think to an extent it can be seen as that, but I think, like as always, this time it's different. Yeah, right. Differentiating between different European countries, the way it used to be, again, in 2010, 2011 was you bought German sovereign debt, you sickle, Ireland, Italy, Greece, and Spain. Anything on the edge you sold it. If you look at what happened last week, the Portuguese 10-year yield at 4%. and with the Irish government, Irish debt agency, selling 10-year debt at 0.99% yield.

So you've a huge spread between two of the former peripheral countries and that's because the investors say, okay, let's just, it's not a euro problem. It's a problem within these individual countries. In Portugal at the moment, the government there is a socialist government that was elected and there came in on a promise of reversing the spending cuts of the previous administration,

which is how all socialist governments are elected in Europe on promises of reversing what the bad guys did last time round. And then they find a position where they have to implement the policies of the previous government anyway, because as a small open economy in the world, you don't have a huge amount of choice over the policies you implement. You can't go alone. You can't. It's not like you're the United States who can set policy. Sure.

You have to be an economy that can exist as an autarchy in order to set policy. A small peripheral European state doesn't have that autonomy. In Ireland, at the moment, there's an election campaign going on. There's an election June the 26th of February. From the entire width of the spectrum of the major parties, tell their policies apart, is incredibly difficult to an outsider. So there's a lot of consensus. There is not much inclination to change course.

The Socialist Party, should have been in a close thing. Arnda has a Socialist Party have already committed to maintaining Ireland's 12.5% corporate tax rates. So if you're a sociist and you're committing to maintaining a sort of kind of a meeting, we can't really have any large policy changes. Got it. Because we're a small open economy and the market will just wipe the economy out if they don't like what we do. But in other places, like in Portugal, in Spain, in Greece, there's clearly much sharper ideological divisions between the parties.

There are. And if you look at Greece, I think Greece is a great example of you. If you look at Sarisa, have been in the government now over a year, And when they came in, they were going to tear up everything and start in you, and it should be a socialist paradise. A year in, there are strikes in Greece against the policies of the Sarisa government, which are rather bizarrely because of Greece, supported by the Sarisa party against the Sarisa government. But that's Greece. It's a strange place. Well, Lorkin, thank you very much for joining us from Six Mile Bridge, Ireland, and telling us your story and giving us your perspective. on the latest stuff that's been going on.

Thanks for having me, Joe. Absolutely. And thank you. That was another edition of the Odd Lots podcast. I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. And if you want to follow Lorkin, you should follow him on Twitter at Lorkin RK. Thank you very much for listening.

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