(By Samuel Harrison)
The IE Finance Day was held at IE’s central Madrid campus last Thursday, Sep 22 and was designed to offer insight into the current financial climate. Around 140 past, current and prospective IE students were in attendance, apart from many other prospective students from different countries who were following the event via online & mobile streaming.
The macroeconomic master class began with Professor Ignacio de la Torre conducting a lighthearted quiz to engage the room and focus on some on key financial hot topics, such as sovereign default. He followed by offering his insights into financial history; examining how past lessons can offer insight into possible future events. For example, he drew similarities between Philip IV of France and current US Fed chairman Ben Bernanke, to highlight the fact that potential side-effects of Quantitative Easing have not changed since the late 1200’s, such as increased inflation. This topic echoed the rhetoric of legendary investor Warren Buffet, who also favours using historical events to predict and forecast the future.
The masterclass went on to examine how banks and governments defaulting, or indeed, being near to default is certainly nothing new and has happened on thousands of occasions since the 1800’s. This, of course, contrasts what the media would have us believe. However, current equity risk premiums remain well above their usual historical levels at 5.7%, even though base interest rates remain at rock bottom levels, which would usually promote risky assets. We therefore must ask ourselves, does this mean the market is cheap?
Next, Professor de la Torre offered his viewpoint on other industry hot topics, including the ‘yellow metal’. We were shown that gold’s correlation to inflation over the long-term is extremely high, as some investors have recently begun to doubt. Indeed, at these elevated prices ($1800/oz), gold was proven to be priced well above the cost of extraction and refining, which is certainly a worry in economic terms, and serves as an excellent example of how fear and uncertainty are driving today’s financial markets. Another ‘Buffetism’ was offered, summarizing Ignacio’s tentative view on gold investing currently. The popular, thought-provoking quote goes as follows:
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head” Warren Buffet.
Next, Professor de la Torre offered some broad economic summaries, including events to watch out for and potentially take advantage of in the near future. For example, he advocated keeping a close eye on the exact percentage of CPI baskets made up by food (by country), closely observing the emergence of Islamic finance due to surplus oil money, and the rise of microfinance and also behavioral finance. The latter is being increasingly focused upon, as the efficient market hypothesis is increasingly sidelined. In his view, opportunities exist in all of these areas.
The professor concluded by saying that rising inflation may well be the world’s answer to avoiding much feared sovereign default, essentially acting to erode away the value of debt, making repayments more affordable. Insolvency is thereby circumvented. Finally, he argues that the so-called ‘holy grail’ lies in productivity, which comes as a direct result of education. With productivity, we can minimize inflation, increase profitability and hopefully repair and move beyond the recent global economic malaise.
Mr. Isasi of Morgan Stanley closed off IE’s Finance day with his views on finance as an industry. As a Finance graduate himself, Mr. Isasi also advocated the undertaking of a masters degree as a tool for career change and indeed, life change. He spoke about the diversity and flexibility that a Finance masters degree offers a student for their career choice, giving personal example of how his business school experience really did change his life.
About the author: Samuel Harrison
“I landed in Madrid on Friday last week, having temporarily left Morgan Stanley in the UK to study Finance at IE. For the next 10 months I will be writing for the IE Finance blog. I plan to write my thoughts on particularly intriguing industry topics, broad equity strategy and also highlight some of the activities we are undertaking as part of the IE Master in Finance course. Please stay tuned!”
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