Tuesday 30 September 2008

It Tolls For Thee (2) - Yes, This Is Real

A few days ago, Tom P over at Labour and Capital asked me: "is it affecting the real economy ?" and you can see my reply there.

Just to illustrate from my own neck of the woods:

For well-understood reasons, wholesale electricity prices are volatile with a capital V - indeed the most volatile prices ever traded. You and I are not exposed to them in our domestic bills because the utilities hedge them for us. Indeed, most industrial companies tend to prefer to be hedged too, and until now they have been able to obtain fixed-price deals from the suppliers.

Just in the last few days, however, suppliers have been notifying large industrial customers that this hedging may no longer be available to them through their 'physical' electricity purchase contracts. Needless to say, the financial players in the electricity market are withdrawing from long-term hedging products, which means the utilities are increasingly unable to lay off the risk. So they'll be passing the volatility through in the electricity price - and the industrials also won't be able to get financial hedges.

As night follows day, so their industrial customers will be forced to pass this through in turn ... and at the end of this chain, one way or the other, sits the consumer.

Oh yes, this is the Real Economy all right. And that bell you hear tolling in the background ? - never send to know ...


Monday 29 September 2008

US Bail out bill fails; Dow down 750

Now what?

I can't face looking at my portfolio in the morning....

Those pesky short sellers...

UK bank share prices today, post the short selling ban:

Barclays off 9%
Lloyds off 13%
RBS off 17%
HBOS off 12%

Must all have been their fault, closing out those short positions....

Sunday 28 September 2008

All hail the US Cavalry

Many good and sensible people in the US realise the US bailout is a terrible deal for US taxpayers. Nouriel Roubini, previously seen as a nut job and now recognised a very prescient, has a great post showing how there are many ways to tackle a systemic banking crisis.

What the US is doing is a very expensive way and one that saves shareholders over taxpayers ultimately. Our own problems with recognising what is and is not a systemic crisis (B&B, Northern Wreck) with our sporadic and random government interventions (see HBOS, see BOE massive money market operations).

However, for UK taxpayers, what a massive break! If only are stupid Government can keep itself quiet for a few minutes. The US will bail out RBS, Barclay's and HSBC - the last of our real worries (hedge funds and OE firms can go bust without too much effect on non-stock market participants).

With this maybe Robert Peston will be right and there will be no more banking failures in the UK. This is good news, as the recession we are entering and the housing market crash will be pain enough for the next few years as it is.

Sadly, my hunch is that Gordon Brown will want to 'do something' and UK taxpayers will get shafted like those in the US.

Calm Before the Storm

Not much wind over London tonight ...


photo (c) Nick Drew 2008

Saturday 27 September 2008

Bradford & Bingley 'rescue'

The line has to be drawn; this is a small UK lender. There will be no global impact of B&B going bust.

Let someone buy the good bits (i.e. the deposits) and anyone can get the mortgage book on the cheap, which should make up for the default ratio. The administrators can easily sort this out.

Then the rest can be liquidated, shareholders, creditors and bondholders losing out.

Sadly, my hunch is that it may be rolled into Northern Wreck....

SUNDAY UPDATE: So it has come to pass. B&B will be rolled into Northern Wreck. Watching David Cameron on Andrew Marr this morning the Tories have a better plan than the current Government in terms of re-doing the powers of the Bank of England. However, the essential point remains that there is no need for the country to 'save B&B.'
Where is the systemic risk from this relatively small provider going down?
The Government have a taste of nationalisation now and no doubt will be singing the red flag in the commons again when they next get a chance.

Friday 26 September 2008

Friday Joke; It's a belter

Gordon Brown at the UN on World, and therefore by association, UK Government financing:

"The age of irresponsibility must be ended. We must now become that new global order founded on transparency, not opacity."

So, glad he has seen the light as regards PFI off-balance sheet financing and failing to account for Public Sector pension provisions. Also will he demand the EU get its accounts actually signed off this year?

Ho Ho Ho

Thursday 25 September 2008

Watching the Lights Go Out (new series)

So the fat lady has sung (as predicted), and EDF wins BE. Here are a few quick observations before we get down to business:

- you have to be pretty gullible (=G.Brown) (brother of A.Brown) to imagine EDF’s ‘plans’ to spend £10 billion building 4 new nukes add up to a bankable commitment (though hope springs eternal, and even Robert Peston was in danger of falling for this one)

- buying BE is a way of buying the UK’s vote for France’s plan to get everyone else to pay for its decommissioning bill

- how handy that the Competition authorities are being invited to shut their traps this month ! (or they might notice that the ‘hunting party’ of BE, EDF and Centrica between them constitute around a third of the UK electricity market, by some measures)

- and how handy also that today the Environment Agency pronounces that “no new coal-fired power stations should be built unless they can capture and store carbon emissions” (which, of course, they can't, for a long while yet)

* * * * *

However, the real issue is: when will the lights start going out ? – bearing in mind that EDF’s first new UK nuke won’t be online until 2017 at the earliest, and renewables are a bad joke.

This is starting to look more pressing than I and others had previously thought. A while ago I said 2015 was the focus of attention, but that was before (a) the monkey-business of May this year, and (b) National Grid posted three Notices of Inadequate System Margin (NISM’s) this month alone. I realise few C@W readers will know what a NISM is, but suffice to say there’s been nothing like this since the catastrophic heatwave of July 2006. On previous occasions (of which there have been a couple) when as many as 2 NISMs have been posted in a single month, National Grid have felt obliged to explain themselves in detail; and maybe they will do so again.

In the meantime, a summer of record high wholesale electricity prices is being followed by unprecedented forward prices for this coming winter. Even more significantly the wholesale electricity price, for several years a simple pass-through of the gas price, has now taken off on a stratospheric track of its own (oil and gas prices have softened recently), strongly suggesting the entire UK power system is indeed uncomfortably tight.

We shall watch this one closely: indeed, we may even install this handy widget


One of those wretched 419 scams ...

Dear UK taxpayer

I am writing to you because your name has been given to me as someone of impeccable gullibility, and this is a matter of great delicacy.

I am First Lord of the Treasury of Britain in north Europe, a small country with a badly regulated banking system. I am known by all my friends as a man of the utmost probity. Owing to a most unexpected run on several of our banks there is a need to fill a large hole that has suddenly appeared in our budget. To do this we plan to use a tried and trusted method called ‘inflation’ to transfer a huge sum of money from middle class savers and pension holders. If you would assist me in this transfer it will be of great profit to you personally and I will arrange that you are given a warm glow of Satisfaction. This transaction is 100% guaranteed safe.

This is a matter of urgency and unfortunately on this occasion we cannot use the normal PFI channels owing to increased scrutiny. I have obtained your name and address from a laptop computer I found on a train at Waterloo station and am now writing to ask for your kind help. Be assured no disclosure of this transfer will ever be admitted in public.

Please send me immediately all details of your bank account numbers, ISAs, SIPS, insurance policies etc, and also the whereabouts of your children’s piggy-banks. Immediately I receive this information I will arrange for the ‘inflation’ to be started and also give you your Satisfaction.

Yours truly,


Wednesday 24 September 2008

Does LIBOR matter?

Robert Peston has blogged today about the issue in the Interbank market. Peston is doing a good job in these difficult times to trying to keep up with events and explain them to 'the rest of us.'

In this case though, the malaise is much worse than he implies. Effectively it looks like banks won't lend to each other at all. All the current interbank lending is from governments to banks. In fact there should be a huge super-liquidity issue and the LIBOR rate should be low.

But it is not, and why is this?

- Possibly banks do not want to lend as the risk of default or nationalisation has become to high.
- Possibly because now they have more of a handle on their CDS exposure they have voluntarily raised their effective capital ratios.
- Possibly because their internal estimates of bad loans etc are in fact much worse than they are letting on and so the banks need to be prepared for further, bigger writedowns than have been announced thus far. Lehmans went bust with $646 billion of (gross) debt, not the $85 billion (net) it was telling everyone the week before.

None of these are good situations to be in.

Tuesday 23 September 2008

Will they, won't they: US Bail-out up for grabs

Ben Bernanke and Hank Paulson are in front of the US congressmen and Senators today trying to push their emergency rescue package. After huge gains on Friday, the S&P and FTSE are back down heavily as people realise that this is no done deal.

There is a huge dilemma at the centre of this; save the banks and buy off the bankers. or screw the banks and take the Western Economies down too.

Not an easy choice to have to make. Some changes need to be made to the $700 billion package, perhaps enough to get it through the US system.

Meanwhile on planet Brown, he is saying that he is off to Washington to negotiate about the future of the World Financial System! Think he is a day late, the US will be telling him what they already decided to do.

Deluded is not strong enough a word for this....

Monday 22 September 2008

A triumph of no style over no substance

Darling's speech to the 2008 Labour Party Conference.

all words in red are the chancellors own

Firstly, set out the background.
unprecedented economic challenges
..uncertain times...huge rises in oil, food and commodity prices...credit crisis..A twin shock to the global economy

Secondly, its not our fault
extraordinary, turbulent times..rocked the financial institutions around the world..
..Mistakes and problems in the mortgages markets in the United States have spread right across the world.

Thirdly, We have already solved all the problems. Don't panic.
The strength of our economy
...historically low levels of inflation and high levels of employment.. stability {repeat as often as needed. Also say families at least 20 times}...We have taken the right long-term decisions for our country

Fourthly, I may have overstated the good bits. here comes some not quite truths.
Bank of England to inject in excess of £100 billion. Essential for our economy, for business, for mortgage payers, for jobs. {well to stop bank collapse at any rate}...we want to improve ways in which credit rating agencies work {suddenly}..We need to look at the culture of huge bonuses which have distorted the way decisions are made...{the public sector is awash with bonuses and incentives and we have embraced them and PFI bonuses as a new religion.. But lets talk only about the city} the Bank of England believes inflation will peak soon. {but the higher energy and fuel and food prices may well be permanent} On energy costs, we've frozen petrol duty this year and increased the Winter Fuel Allowance.{well we never reduced the highest fuel tax in europe, and winter fuel ONLY kicks in if it gets proper cold. } we were the first major economy to ban the speculative practice of short selling to help bring calm back to the markets.{along with the USA, Germany, France, Belgium and Netherlands and Canada, Taiwan and Australia who also make the first claim}

Things we have already announced made out to look like new ideas.
We are also going to put in place measures to give added protection to savers.{£50,000 safety limit promised since run on Northern Rock} This month 22 million people on low and middle incomes will receive a £60 rebate - with an extra £10 each month until April.{The money we took from the 10p tax disaster and promised to give back. Only now its called 'assistance for families'} Help for families through tax credits and increased child benefit. Help for thousands in work through a minimum wage and guaranteed holidays. {saying same things since 1997. Weren't holidays guaranteed before Labour came to power?}
Help in retirement through improved pensions - and, for the first time, every employer required to contribute to their employees pension fund.
{I think he means the useless stakeholder pension, introduced in 2001, in which case he said "contribute to "when he meant "make available to" To help with housing, we've brought in a stamp duty holiday.{went down like the Glitter Band's reunion tour}
We're introducing measures to reduce heating bills not just this winter but every winter through energy efficiency.{we will let you have half price lagging if you are 70 years old}

Some out right, bare faced, unashamed mispokes ...
Unemployment rose last week. But we still have near record numbers of people in work.{unemployment is going to rise to near or above 2 million} Inflation is higher than we would like but nowhere near past levels - and should fall soon. {But your energy, fuel and food prices are unlikely to fall much, if at all.} Interest rates are at 5%, not the double figures of two decades ago.{we should have put them up months ago, but that would have really killed Gordon} Make no mistake, discipline in public finances is essential. {The real chancellor said I'm not to cut public expenditure by a penny}

Decisions which allowed us to triple public investment whilst at the same time reducing national debt to one of the lowest levels of any major developed country.
{ Must keep straight face, must keep straight face. Remember, the bigger the lie..}

Praise the Boss
we have the right Prime Minister..the right team and the right policies to help the country...A Prime Minister with experience and judgement..we acted decisively to help bring together two of the biggest banks in the country...the experience to make the right long-term decisions.

What he really actually said of note
" I will introduce a new banking reform bill in the Commons in a fortnight."

What on earth would he have said if the big financial meltdown of last week hadn't happened? 10 minutes of bashing Osbourne, 10 minutes of praising PM, 5 minutes on stability, 5 minutes on spin? Let's hope Mr Brown has kept all the real policies for his own speech.

Crisis Over ? Gold Delivers Its Verdict

Back above $900 again. The 'hedge-against-bad-news' thesis seems to be holding.


Those Whom The Gods Would Destroy ...

Always a difficult decision, how to pitch the Party Conference speech, but evidently Brown has decided to go for belly-laughs:

"Brown plans crackdown on world markets - PM wants more regulation in US and Asia"

Thus thunders
the Grauniad front page obligingly today, but no-one, including its own leader-writer ("the truth is that Labour indulged the City of London ...") believes a word.
Like the detonations of huge landmines in WW1 that sounded across the Channel, eruptions of laughter can be heard from over the sea: for the past decade lax British banking regulation has been systematically undercutting the stricter US and European regimes, in order - successfully - to lure business away from Chicago, New York and Frankfurt. All under the presiding genius of 'Golden' Brown.

And eruptions of frank disbelief from Robert Peston - yes, oh-so-helpful Robert Peston, he of the extraordinary running commentary on the HBOS takeover last week. A bit foolish to piss this man off, one might think: no-one commands more air-time right now, or evinces more commentator-cred.

But, as we are perennially forced to ask, where in all this is the Boy Osborne ? Sniping a little from the sidelines perhaps, but hardly a magisterial presence in the public debate. Perhaps his judgement is that silence is the right option when so many others are clamouring to point out the emperor's unappealing nakedness. It is fortunate for the Tories that their poll lead was well-cemented before all this kicked off in earnest. Nothing they are doing right now is building confidence in their alternative offering.

In the meantime we must watch our Cnut of a PM as he instructs farway bankers to mend their ways. He has pitched his throne close to the water's edge: but this is not the tide, it is a tsunami, and he will surely be swept away.


Sunday 21 September 2008

J.K. Rowling donates £1 million AND begins new series of novels

JK Rollo has written a special book to celebrate the wonders of the Labour government years.

Barry Trotter and the Exciseman's Chamber.

Barry Trotter, who comes from a poor part of town, lives just outside the catchment area for the posh Hogwerts. Not exactly an orphan, more a sort of abandoned child he has these endearing specs, but as he can't find an NHS dentist, so he also has wonderfully rotten teeth.
Instead of Hogwert's he goes to the local wizards authority school."The Bernie Ecclestone Foundation Academy for Inner City Wizards"

He achieves all his Magi- SAT passes and attains 95% passes in all his GCSE exams, despite being stabbed.
Unfortunately he is still completely unable to perform any magic except the spells required for the test, but he is fully aware of 'other muggle ' cultures and has an understanding of equality and gender issues in the Dark Realm. He also catches an unfortunate STD from Hermethaley.
However within school Barry is drawn to the central character of "The Exciseman."
The Exciseman shows Barry how to raise taxes stealthily, pick the pockets of the pensioners, creep back the tax thresholds and magically declare "An end to the mighty Boom! And ye, the Mightier Busting"

Barry becomes a powerful acolyte for his master and the protege eventually learns "The Dark Arts" for himself.

Towards the end of the first book the Grand Exciseman's powers are waning and some tragi-comic disasters occur such as when he tries to lock up the council for 42 days and when he turns the kingdom's gold reserves into thin air.

The Alchemy Crunch has occurred, caused by all the Hogwerts boys turning base metal into gold, and now everything is worthless.
The faithful have lost heart and are even calling in the streets of Manchester to "Bring back DumBlairdore."
It is here that the Exciseman explains to Barry about the power of the Grand Council of Wizards of Brussels and Barry's role in shaping the future of the realm and the rewards he will inherit if he will just stand firm with his master. Barry pledges his loyalty openly, but behind the scenes his friends are urging him to fulfill the Prophecy of the Half-Snubbed Prince...

The Author wishes to make clear that all characters and events are fictional and any resemblance to Ed Balls is entirely coincidental

Saturday 20 September 2008

Doggerel from the Last Chance Saloon

... with scansion that may require a moment's, err, decoding. But it's all in your own mind ... (1)

At Party Conference in September
Gordon Brown his fate confronts
He must contain his throbbing ... brain
While he recalls some famous ... foes

He thinks of Blair, who wooed the bankers
Of Kinnock and his way with words
Of Foot and Benn and such great men
From whom poured forth such steaming prose

The party faithful sing of succour
Owing to the working class
The song was writ by some bright wit
Who knew not elbow from his nose

But haunting Brown's the thought of loss
A by-election may fortell
Let him lose sleep, the brooding creep
And may he after rest in Glenrothes (2)


1. first version aired chez Idle: but a year on & suitably updated it still seems to work
2. yes, I know that's not how you pronounce it ...

Friday 19 September 2008

The Bank with no name

After all the turmoil of the HBoS and Lloyds TSB merger and the shocks of the last few days there is now talk of lessons being learned. But at least one lesson already seems to have been learned by the Prime Minister himself.
In the bad periods there is rarely the time for the sober measured reflection that there is in the good times. The luxury of consultations, focus groups, soundings, polls, samples, spin and reappraisals of the situation is unavailable. The job of the leader is to look at the evidence, ask advice of the experts, evaluate the options and decide on a course of action.
At last, after Northern Rock, the 10p tax cut u-turn, Vehicle excise duty flailing, Poca card account, corporation tax limits and the stamp duty holiday/non holiday announcement, the PM finally gets it.

The job of the leader is to lead.
Whether the decision to force a merger through, overriding regulations and precedents, will be judged to have been sound and wise is almost immaterial. If further adjustments or regulation is needed it can be done later.
Prime Minister Brown has learned to take action. Maybe that noose will feel just a little looser around his neck.

As Tuco said in The Good,The Bad and The Ugly
"When you have to shoot- - -Then shoot, don't talk."

Thursday 18 September 2008

GOLDMANS SAVED...and the world too.

Not often we beat the BBC and UK media to a story...

This is THE news of the week, year, maybe even decade. A solution to the credit crisis by long-term management of debt by the US Federal Reserve and others.

Basically, all crappy debt to be given to a pot, small sums paid off over the years =

smaller banks, but no liquidity crisis.

Dow up 617 points, expect a FTSE rally tomorrow.

BUT, the key part. Hank is ex Goldman Sachs. Goldmans will stay independent, unlike Bear Stearns, Merrill Lynch, Lehman Brothers and maybe even Morgan Stanley.

What a coincidence, eh?!

(CU is in NYC, see you next week)

"FSA Bans Short Selling" - Curiouser and Curiouser

The changes to the Code of Market Conduct promised tomorrow morning by the FSA will make interesting reading. As several of our regulars have rightly suggested elsewhere, it may not be as easy as all that.

In particular, it remains to be seen whether they will try to stop share-price swaps (spread-betting can be viewed as a form of this), which are contracts between consenting adults that have nothing whatsoever to do with actual share certificates etc etc, merely the availability of transparent and authoritative prices against which to make the difference-payments. Oh - and the availability of credit, of course - but that's another point.

I know how a lawyer would draft the wording to effect such a ban, but its consequences could in principle be extremely far-reaching. I believe the expression is - WTF ?


++ UPDATE ++

So now we know. In a neat little document (half the length of the accompanying FAQs), the FSA states that short-selling bank shares is

"in the opinion of the FSA ... market abuse"

BUT - only if the short is a big one - greater than a quarter of a percent of the bank's issued share capital.

So - retail punters - carry on ! (if you can find anyone to take your order). Oh, and Market Makers too - they are exempt (which answers one of the anguished practical questions posed yesterday on Newsnight by an interviewee who knew what he was talking about). But for the big boys, note, it does indeed include OTC swaps, CFDs, spread-bets etc.

We shall see, we shall see ...

HSBC Goldmans pair-up

There are many rumours out there today and they are interesting, but like speculating on Fabio Capello's team selection.

However if HSBC, serial failure at Investment banking, serial winner of global retail banking, takes over Goldman's it will be stunning.

Like Aston Villa thrashing Real Madrid. Quite an achievement.

With all the bad news re HBOS etc, there would actually be a good counter story.

Barclay's buying Lehmans, HSBC getting Goldman, LLoyds getting HBOS - half the UK banks becoming even bigger global behemoths - at the expense of the Yanks?

Who would have thought it - even if Financial Services has had its day in the Sun, it would be quite an achievement.

Wednesday 17 September 2008

Blunt Instruments ... in the Hands of Incompetents

Today the remarkably well-informed Robert Peston writes:

"The government will announce that in the interests of financial stability it will legislate to over-ride the powers of the OFT and the Competition Commission to block the [Lloyds / HBOS] deal"

Let us set aside the obvious point that Brown may be lying about this (just as he has failed to legislate the promised extension to the guarantee for bank depositors' money).

The bigger issue is how this hanky-panky is being perpetrated: with a very public admission that something smelly is being contemplated, and the threat - possibly an idle one - to legislate sine die to crush all legitimate impediments in its path, thereby enshrining illegitimacy, demoralising the regulators, and reinforcing the air of anarchy.

Don't get me wrong, I am all for decisive, worldy-wise actions when they are called for, as described here last week. And I am also for giving regulators stern mandates and plenty of backbone, a theme I shall return to. However, in this instance the way it should have been done was a quiet word with the OFT and Competition Commission, along the following lines:

* * *
Chaps, we are all of one mind on the unacceptability of dominant market positions. However, the key objective just now is to keep the bicycle upright. When we all notice in a couple of years that one particular bank has become a little too dominant for all our likings, you'll be set on to write one of your big reports, and we'll slim the Big Boy down in the usual manner, get my drift ?

In the meantime, let's find a form of words to waive this one through, shall we, without prejudice to any of our powers to sort things out properly in quieter times. (Ofgem does this all the time, doncha know, when it's asked to give waivers on third-party access rules in big new energy infrastructure investments.
Let 'em build it first !, that's the motto, and we'll straighten things out later. You won't get them to part with their money otherwise, eh ? Works every time ...)

* * *
But no: we have the most senior government ministers crashing around with blunt instruments in hand, smashing everything in the chinashop, probably falling foul of the EC - see Hatfield Girl here, and bringing the game into disrepute. This is categorically not the way.


Online Dialectics

Several months ago our occasional visitor ToryBoys peeped out from his flak-jacket to recommend we link to Tom P's fairminded-if-lefty blog Labour & Capital. Which we do: our pleasure, we're pretty broad-minded ourselves.

Flatteringly, and with impeccable timing, Mr P has 'interviewed' yours truly ... have a look here.


AIG in Conservatorship

Phew, this is the news alright. AIG is not a US Government backed vehicle, it is a large private company, also it is owned in many US states. The US Federal Government has little legal precedent for suggesting it nationalise the group in return for $100 billion.

On the other hand, they would not do such a thing if they did not think such a thing was utterly needed. Clearly the health of the global financial system is at risk. The fight is now against a Depression, not a recession, led potentially by a real meltdown in financial services worldwide.


This is serious now, the Fed is acting like it did in 1930 and 1931 - let's hope it all works out better this time.

No point owning shares in risky/any US financial stocks now though, with shareholders likely to be wiped out....

Tuesday 16 September 2008

Who is next up for the Footbal sponsor curse?

In just the last week we have seen huge ructions on the world markets caused by the credit crunch, but even those uninterested in high finance and with no savings to care about (a majority of the UK population, worryingly) are impacted by anything that effects their beloved football clubs.

First up, we have Northern Rock sponsoring Newcastle, a weird marriage we have noted to before given the exciting times of the bank and the club.

Next this year was XL, sponsors of West Ham, another club to lose their manager and seemingly stuck on the runway at the beginning of this season.

Now we have Manchester United, the biggest club sponsored by the world biggest, most dependable insurer. However, Man U may have debts of $800 million, but informed speculation is that AIG may have a $1, 000 billion dollar hole in its balance sheet. Ouch, will Man Utd follow West Ham and Newcastle into footballing trouble too? They just lost to Liverpool after all.....

But who will be next, the Belfast Telegraph have a helpful list here, of clubs and main sponsors. those sticking out to me are Britannia Building Society for Stoke City, Karoo for Hull City, Thomas Cook at Manchester City and Mansion.com at Spurs. Which sponsors and clubs will soon be entwined in mutual pain? Wigan have JJB. JJB Sports axed 800 staff and 72 stores in April. Spurs seem keen on things messing things up at the moment, time to seek info on Mansion.com at Companies House.

Perhaps they should all follow, the lead of West Brom, no shirt sponsor and victors over West Ham at the weekend....

Will the BOE cut rates?

Logic would suggest, that faced with a collapse in the credit markets and also in the money markets the right decision to be made would be to cut interest rates. Maybe not by 1% at once, but certainly by a 0.5% by the year end.

Yet in Mervyn King's letter to Alistair Darling today, it appears that the Bank of England has become more hawkish about inflation. Hedging its bet by saying that inflation will soon peak at 5%, but also noting how high above target this is.

There seems to be a determination to keep inflation down, even as we enter a recession. Good news for savers, less good for borrowers. A high risk move, but I do trust the BOE members intelligence and integrity; let's hope they are lucky too.

Monday 15 September 2008

Learnings from a day of chaos

At least I am not clearing my desk like those at Lehman Brothers, however it has been a truly terrible day for the US and UK financial sectors.

To lose 2 major investment banks in a day in the US is more than careless. It also shows the futility of the nationalisation of Bear Stearns, so much US taxpayer money down the drain. By implication the same is true of Northern Rock.

I don't know what the US will do about the request for help from AIG, but it seems sensible to ask them to go away and sell themselves. We will find out tomorrow.

In response markets have fallen, the sky is falling in being the cry. Yet oil fell in price today and gold did not shoot up. Commodity falls are a good thing, they lower future inflation and will allow the Bank of England to cut rates over the next few months as inflationary pressures ease.

But the worry for the UK is our banks, HBOS is heavily exposed given its funding model and mortgage profile. Not surprising, its shares fell heavily today. RBS and Barclays are in the mix too and even HSBC.

Coudl it happen here? Yes.

UPDATE: Looking at things overall, will be interesting if a hedge fund goes down because it was stuck with all the stock it was trying to short...must have hurt George Soros quite a bit.

Melt-down Monday: Midday SitRep

No break-outs yet: FTSE down (natch), pound soft-ish (interesting), gold up (consistent with the "hedge against bad new" thesis)

Watching closely for US opening ...


Sunday 14 September 2008

Lehmans, Darling & Financial Misregulation

Lehman Brothers, the 4th largest US Investment bank, stands on the edge of bankruptcy this weekend. In the last few months, the US Federal Reserve has bailed out Bear Stearns and then the mortgage companies, Fannie Mae and Freddie Mac.

Yet there appears to be no bail out for Lehmans. Structurally the threat to the CDS market (which is insurance bets from financial services companies against each other) is the same, if not worse than Bear Stearns. But after swallowing a $5,000 billion bail out of Fannie and Freddie the US Federal Reserve can't create the funds for another bail out.

So Lehamn's will be a new first for the credit crunch, a huge mega-bank that might actually fail. perhaps A large Private Equity house could risk taking on the bad debt, we will see this week. That HSBC and Barclay's are thinking of doing so should not re-assure UK residents as to the sanity of their respective managements in terms of understanding risks to their business. HSBC has a terrible record in the US and Barclay's has none at all.

However, the Left, in the form of Guardian Commentators, see the US as having had prescient and strong leadership, compared to our poor old Alistair Darling. How wrong they are, bailing out Fannie and Freddie is a very socialistic policy, I am not surprised the Left support this. Bailing out banks full stop is itself crazy. Northern Rock should have been left to die peacefully and order be restored. Markets are a harsh mistress and should be obeyed. Playing with them is likely to burn the surgeon, in this case governments armed with our children's money (i.e. future tax revenues).

This week will be crucial, if Lehmans goes without a world-wrenching destruction of the financial markets (which may NOT be the case) then many of the bail-outs we have seen will be shown to have been Government's panicking to save rich bankers. At the next ballot box opportunity we can decide if we want this sort of behaviour to continue.

UPDATE: Looks like this is going to happen. Barclay's have dodged a bullet; glad to see people reading this stuff at last and taking note.
Merrill's & Bank of America discussing merging too. We said there would be a third leg to the credit crunch, here we go...

Friday 12 September 2008

XL 'Zooms' in part 2

I really tried to warn people of this, 10 days ago. Also Al Italia's talks have also collapsed again today, very predictably. Sooner or later this is just going to fall over as the huge debts are unsustainable with its business model. Also today SAS is in trouble too and a bail out is being worked upon

If you look back to April, just 5 months ago, Oil hit $100 a barrel and has since gone up and come back down to that level. Old planes on competitive roots just can't cut it; hence all the airline failures.

The lesson is be careful who you book with, personally speaking I think in the UK there are Virgin, BA, BMI, Easyjet and Ryanir (who cancel flights anyway) who would be able to survive another 6 months of this. Some of the bigger national carriers, like Air France, AA, Lufthansa are OK too. If you book with anyone else make sure it is through ATOL so that your way home is assured; Otherwise you could end up as another holiday refugee statistic.

If Brown is crazy can a King help?

Gordon's weak policies are doing nothing to help the UK. Perhaps that is too much, as least he realises the credit card is now full and there is to be no more reckless spending.

However the damage is done. In so many areas the Uk is in a parlous economic position. Let's review a few of the things mentioned by a real economic brain, Mervyn King, yesterday:

- The Government want to extend the special liquidity scheme, which Mervyn King wants to stop and replace with something more sensible. Banks have now borrowed about £170 billion (per my good info). Free money is a nice one for them, but is not really the answer long-term.

- He warns the Government off the idea of nationalised mortgages (too late, Northern Rock!).

- Spending his way out of recession is only going to sink our markets, thereby increasing bond prices and further increasing national debt (our children's future deprived, remember). Yet Labour will have to do this to buy back some client votes.

- Asset backed securities will not come back during a falling housing market. Thus banking models need to change. Will Labour let a big bank go to the wall, err..see Northern Wreck.

Sane ideas all of them, hopefully the Government will listen, doubtful though. However, lets hope King can persuade his committee to vote for lower interest rates in the near future. 2009 looks dark enough as it is.

Thursday 11 September 2008

Brown and the Energy Companies: He Hasn't a Clue

Today's non-event of an energy package prompts me to relate how a minister who really understood the workings of capitalism conducted his business with the energy companies.

In the early 90's Tim Eggar, Energy Minister, was seized with the fact that the UK was soon to have a surplus of natural gas - but only for 5-10 years, the data was clear, after which we would revert to net importing (as we were for nearly 20 years before that). The UK gas market was liberalising but continental Europe was not, and it would be highly disadvantageous to import through unliberalised European transit routes (the LNG revival was not forseen).

on: build a large interconnecting pipeline to mainland Europe, initially to be used primarily for exports (with some importing in winter), using these new trading flows to preciptate and stimulate competitive market conditions in Europe. Couple the infrastructure initiative with relentless political pressure for EU energy market liberalisation, and the UK would be well-placed when it needed to resume net importing, as we did in 2004.

Eggar: man of the world

It was no part of a Tory government to build pipelines itself: private enterprise must do the business. But it rapidly became evident that this wasn't going to happen spontane
ously - a typical shortcoming of the real-world capitalist system where forward economic signals, however clear, coupled with diverse ownership, are sometimes insufficient to bring about timely investments - a major cause of extreme cyclical swings and over-corrections.

So Eggar, a man of the world, set about 'persuading' the oil companies, as only a government can. In the most gentlemanly fashion, he lined up the usual suspects and told them in words of one syllable that unless they formed a joint venture to build the Interconnector he had in mind, they could whistle for future North Sea licences. Oh, and for good measure, unless the Norwegian oil co's joined in, they could whistle for a new energy import treaty the Norwegians very much wanted.

Result: in 1998, a timely new pipeline that has been highly successful - and profitable - for all concerned. Regrettably the incoming Labour regime failed to press home the EU energy liberalisation thrust, but that's another story.

Fast-forward to 2008, when any fool (yes, even Brown) can see we need a major new fleet of power stations in the coming decade and more. This state of affairs calls for people in government with a genuine grasp of the ways of the world.

But this, we plainly do not have: instead, a clown called Malcolm Wicks, under a PM whose feeble and incomprehending conversion to market economics embraces no serious understanding of what it's all about.

Will Cameron's front bench include people who know the score ? I am yet to be convinced: but we must hope it will. Otherwise, if the lights are not to go out, there will be a ghastly - and very expensive - scramble, commencing in 5 years time.


Wednesday 10 September 2008

Big Bang machine a triumph. LHC switch-on

Scientists have hailed a successful switch-on for an enormous experiment which will recreate the conditions a few moments after the Big Bust.

The Labour House Crasher (LHC} has succesfully returned the country to conditions in 1978

The £605bn spending machine on the North-South border was designed to smash different political ideologies and economic theories together with cataclysmic force.

Scientists hope it will shed light on fundamental questions of the earliest economic models. Can there be an end to boom and bust? Does PFI debt exist outside of a balance sheet? Can you borrow more than GDP? What price was the pound at the birth of the Euro?

Professor Brown has long held that two plus two is nine. This borrowing experiment will determine if this particular theory is true by allowing economists to study the origins of the massive deficit spending of the early 70's.

"There was some fear that a massive fiscal Black Hole may have been created when we switched on our spending plans in 2001. The New Labour House Crasher is arguably the most complicated, expensive and ambitious experiment ever built; the project has been hit by cost overruns, equipment trouble, data loss and construction problems.There were real fears that when we switched on the machine for the first time that the cost of the electricity to power it would be higher than the project itself."

But today the project leaders were just delighted that the LHC just allows them to recreate conditions from the parties heyday.

"We have discovered what the so called "Dark Mass" actually is. Its pissed off voters and they hate us."

Tuesday 9 September 2008

Alistair Darling warms up the unions for Gordon Brown

"How did your speech go down at the TUC Darling? Good?"
" Darling, Was it good?"

General Gordon 's Last Stand

Gordon of Cartoon

General Gordon had been advised to quit the city of Khartoum and retreat to reform and rethink before he was surrounded by a very hostile group. Pasha Gordon decided, despite the advice of all his subordinates, his military orders and against every rational instinct, to strengthen the defences and organise the troops for a long siege.

It was the Victorian equivalent of "Getting on with job" - "Weathering the storm"- "Taking long term decisions"- "Best placed to lead the country" and "Listening to the people"

This picture by George William Joy is a stylised romanticised painting of the death of General Gordon. It became a Victorian icon demonstrating the popular interpretation of the Great Leader's heroic death at the hands of the masses.

In actuality Gordon was killed fighting the Mahdi's warriors on the steps of the palace, hacked to pieces and beheaded. When Gordon's head was unwrapped at the Mahdi's feet, he ordered the head transfixed between the branches of a tree "....where all who passed it could look in disdain, children could throw stones at it and the hawks of the desert could sweep and circle above."

Tough crowd. Alastair's warmup speech was not just dull and insipid, but totally uninspiring and received a very lukewarm reception. Better have something better than a 2% pay deal, things are brightening up and help with water tank lagging to say at the dinner tonight Mr Brown, or the Madi's armies will be besieging you again.

UK Housing market collapse continues

Here was my prediction for 2008:

"The UK Housing Market will slow much faster than most economists are predicting and the overall rate might touch 20% by the year end. Those viewing the market are not factoring in the role of psychology enough into the falling market. My friends who are estate agents reckon they will all have closed within 3 months - so things are looking pretty bleak."

Well, good as my predictive capacities are, this seems like good foresight to me. If only
I had been able to persuade the missus to sell last year...

In any event the news today is that estate agents are selling one house a week. If we assume this is an average house of £175k with an average 1.5% commission, then agents have a weekly income of £2650. This has to cover staff wages, advertising, bills, taxes, transport etc. Not may businesses are going to make it on £10.5k a month turnover - what profit could be taken out of that annually for the owner?

This demonstrates two things, firstly, there needs to be more retrenchment in this sector as it is over-supplied for the current environment. Secondly, that with such low volume prices may well be hit by a sudden adjustment downwards that will be catalyst for demand. Similar to the 'capitulation' in stock markets.

A key knock-on for this is to the retail property market, already flooded and struggling. Perhaps even a chance for more aggressive retailers to expand and lock-in low rents?

For what its worth, the 20% ish fall we have this year I can see being followed by a 10-15% fall next year until prices flatten out. The market really needs the repossesions to be brought to market to cause the capitulation event. That or Alistair Darling can wave his magic wand this week and make more trouble for us all in the long-term.....

Monday 8 September 2008

LSE fails on day of joy

The London Stock Exchange, fresh from a year of ups and downs, has really managed to blow both its feet off with a shotgun today. Just as the market is reacting to the news from the US, its systems fail under the volumes. Even now, 7 hours after the failure, there is only auction trading and no completions.

The recent new entrant competitors such as turquoise and Chi-X are bouncing around at this gift from heaven. The events overall are not really going to help LSE maintain market share in trading.

However, a key point must be a focus on technology. The LSE has taken a very public route of using Microsoft as its key technology supplier; the same company that is known for its good products that have a problem with scalability and reliability. Nearly all Investment houses use Oracle as their base software provider for reliable, scalable solutions and IBM features highly too.

In IT as in the rest of life, stereotypes exist for a reason; they are based on fact.

Guardian Cat-Fight (2) - Bunting Goes a-Baiting

The Story So Far … in a display of extraordinary self-restraint, Polly Toynbee has declined to respond to Madeleine Bunting’s outrageous goading on the matter of whether the Scandinavian social model represents paradise on earth. But, determined to get a rise out of Tuscan Toynbee, Bad Maddy is not finished … now read on

Faith schools can best generate the common purpose that pupils need” thunders Bunting’s latest salvo in today’s Grauniad. Coincidentally, only last week Toynbee’s big OpEd piece ran “Faith schools may be Blair's most damaging legacy”.

This is great spectator sport, girls, when does the mud-wrestling commence ? And can we get tickets ?


Sunday 7 September 2008

$1 trillion bail-out; Badger cheers!

Robert Peston's reaction to the news that the US government is to bail out mortgage companies Fannie Mae and Freddie Mac by saying that our little problems with Northern Rock pale by comparison.

For all the detail and comment you could want on this story see Barry's blog here.

Sadly the NR comparison is not quite true. NR never had oblique Government guarantees, NR has a worse looking portfolio of loans than either of these two companies. The US estimate is that if 10% of mortgages for bad then the US taxpayer could be $100 billion in the hole. However, we have already 'invested' £3 billion in NR and if 10% of the £40 billion loans go bad then we are on the hook for £7 billion loss. Our economy is 10x smaller than the US and we also have a current exchange rate of $1.75 to the pound.

Therefore US losses estimated at $100 billion / 10 (economic capacity) x exchange rate 1.75 = £5.7 billion.

Northern Rock losses estimated at £7 billion.

Great performance by our Chancellor eh?

My two cents: the markets may rise but this bail out surely will cause foreign investors to think twice about the US. The Dollar rally may continue for a bit, but it seems that the US has decided to inflate its way out of the credit crunch for sure this time.

Saturday 6 September 2008

Google is 10: is Chrome the killer App?

Google host our blog for free and provide the best analytics as well as advertising. I have a lot of admiration for a company that can be so consumer friendly. In fact with customer service and innovation so high on the companies agenda it does not surprise me that this company is 10 years old and yet valued at $140 billion.

To makr its 10th and also to try and out-compete Microsoft Google has launched its new Browser, Chrome. I am not much of a techie but could see little in it for the end user over say Mozilla. What is the master stroke is making the product open-source, the opposite of Microsoft; this enables other companies to benefit from Google's work and then customise and develop the application. Google wins because it is more customer friendly. people tend to use Microsoft because they have to for browsing.

With the continuing focus on innovation and pleasing corporate and personal users, Google is stuck with a winning strategy. It is an excellent business case example, focus on customers happiness and innovation then everything else will fall into place. Happy Birthday Google.

Friday 5 September 2008

News From The Front: Re-Launch, Week 1

A week into Gordon Brown's life-and-death re-launch offensive, and he has lost ground on all fronts. Field-Marshal Cameron and Probationer-General Osborne have not needed to rouse themselves from the comfort of the officers' mess, however, because

(a) behind Brown's lines,
an explosion of honesty from General Darling threw his troops into complete disarray before a shot had been fired.

(b) his flanks were promptly raked by unexpected fire from the International Brigade of the OECD

(c) former General Clarke carried a suspicious-looking briefcase into the map-room, causing a day to be lost while it was being defused.

Early news from the Energy front, widely believed to have been targetted for a further push next week, suggests that it is covered by a large and impenetrable minefield.

Meanwhile, the FX markets continue to deliver their dispassionate verdict ...


Kevin Keegan Quits - The Writing Was On The Wall

... well, on his chest, actually. Another great pick brought to you by C@W ! - ND

Thursday 4 September 2008

Gordon Brown Speech: Tilting at Windfalls

"Fortune is guiding our affairs better than we ourselves could have wished. Do you see over yonder, friend Sancho, thirty or forty hulking giants? I intend to do battle with them and slay them. With their spoils we shall begin to be rich for this is a righteous war and the removal of so foul a brood from off the face of the earth is a service God will bless."

So said Gordon 'Quixote' Brown just last week. Tax the energy companies for windfall monies to distribute to client voters. Win the approval of the Labour backbenches; slay the media and Conservative enemies.

But tonight in his speech to the Scottish CBI Gordon did no such thing. Whilst saying that all will be fine, he also declared there will be a strong economy under his watch.

What he did not say is that he has no energy policy, he can't tax windfall profits that don't really exist as he has already taxed the oil companies to the point at which they stopped exploring the North sea for more oil. per chance next week then a real policy, to announce new nuclear and coal builds? Somehow I feel we will be disappointed.

Whilst I am happy that only small measures are to be made, all his previous sweeping policies have been disastrous, it shows the lack of ability of the Government to control or respond to events.

We are up the creek, we have no paddle and there are still forty giants over there....

Wednesday 3 September 2008

Weak pound forces inflation.

Another consequence of the weak pound is it brings further inflationary pressure from imported items bought in dollars. Not just oil and gas. Clothing in the UK is almost entirely imported. Even companies that manufacture their own ranges mostly do so abroad.

Clothing is mostly bought in dollars from China and India and if the chain stores and supermarkets had not been smart enough to have used their reserves to buy dollars at the high point then the prices would be going up now. However this happy situation can't last and by spring it is expected prices will rise.

Draper's report retailers and suppliers fear that spring 09 prices will be forced up by more than 6% after the pound weakened against both the dollar and the euro this week.

So, no surprise that prices in clothing will rise..except, It IS a surprise!

Fashion wear prices have been deflating continuously at around 3% for two years. And for long periods before that. This was one of the factors which helped sustain that old boast of a 2% inflation rate for 2006-7 .

A 5-10% price hike in March won't help the economy, the consumer, inflation or the MPC. Yet its very likely.

Another reason to doubt that interest rates will fall quite as fast as the optimists are expecting. If the government want the pound to regain some value that will add weight to the voices calling for a rate rise.