Wednesday 30 September 2009

Dysfunctional Bonuses - It's Not Just the Bankers

There's something about bonus that becomes a fetish, frequently invested with more significance than its actual financial value - more, say, than a pay-rise of equivalent value.

This runs deep in human psychology: I've elaborated it a little
here. The thought of being awarded that discretionary
something extra really grabs the attention of mortal beings, who will do almost anything to be acknowledged and treated thus.

We hear a lot about how this has led bankers to misbehave: but through the era of NuLab the cult of
bonus has spread far and wide, including to the public sector. Now public sector occupations typically lack the objective financial metrics against which profit-seeking organisation can (at least in theory) construct rational bonus schemes. So they invent metrics, generally based on ill-judged targets and poorly-quantified assessments of 'output' or, even worse, of input.

Result: the beneficiaries of the bonus scheme are incentivised to fiddle the less-than-objective figures which, such is the fixation on
bonus, becomes a pre-occuptation. Every Police commander, every PCT boss, has a vested interest in massaging the data. With the grotesque consequence that, as Andrew Neil skewered a gibbering Jackie Smith with yesterday, none of the 33 desperate 'phonecalls made by Fiona Pilkington were logged as a crime: so no-one believes NuLab's rosy crime figures.

When the best brains in the Treasury are being bent to curb dysfunctional incentives for bankers, could they therefore broaden their scope ? We do indeed want to incentivise purposeful behaviours. There is a real conundrum here and it badly needs sorting.


Gordon Brown addicted to stimulants

He really is you know, financial stimulants, the IMF say so. Forget all the gossip about Andrew Marr and his sudden desire to keep his BBC programme under a new Tory Government.

This is out from the IMF today and very damning it is too. Effectively, as Brown decided not to say in his speech yesterday, 2010 will be a horrendous year for the UK; in many ways even worse than 2009. Deflation, Public Debt Fiscal Disaster, Increasing Unemployment - the legacy of a scorched earth policy by Labour.

The Government banks of RBS and Lloyds face such huge losses that they will have to raise capital, possibly from the government. Certainly they will not be paying any back to the UK coffers. Plus of course the Asset Protection Scheme, where the taxpayers suffer 90% of the losses on bad loans, will mean that the loan losses will be another £10 billion or so drain on the public finances.

In his speech yesterday, Brown said nothing really about cutting Government expenditure. So we will have another huge budget deficit. the car scheme for supporting European manufacturing was also extended, another piece of stimulus for the Unions.

I can see no way the Government can raise another extra £180 billion next year in the gilt market without interest rates having to go up to say 3% from where they are now. This will nail any Property or Private sector recovery as lending collapses in a deflationary environment.

So the answer will be more Quantitative Easing (QE). John Redwood has an excellent post showing that as I have always said, QE in the UK is about propping up Government spending. I think QE is a great tool for increasing money supply and velocity - but it has not been used this way.

So Brown will have another £180 billion or so of Stimulus next year. He and is Government have left themselves with no alternative. Pucker up Public Sector, you are going to be buzzing with all the stimulus headed your way.

(Post on how to trade this to follow shortly).

Tuesday 29 September 2009

Message in a bottle

Gordon Brown delivered his leader's speech to the faithful today.
Despite some of the media saying it would be a make or break speech it clearly was never going to be. Knowing that it is far too late to change leaders, Gordon was only really planning to do his usual thing. A plodding speech with tractor stats galore, promises without details, claims which are unsubstantiated, chorus of achievement, talk about what the opposition would do and a few jack-in-the-box policies to try and trip up the Tories. Plus a few sly 'Mandies' aimed at winning back the core and pulling back voters lost to the Lib Dems.

However, technically, as a speech, despite some lukewarm reception from the conference I thought it was his best. We know that Obama could read a tax return and engage more people than Brown will ever manage but compared to Nick Clegg's speech last week it was sparkling . The whips had learnt the lessons of the half empty hall from Monday and ensured that it was packed for the leaders speech.

Sarah Brown went down very well. I don't know why. I think it makes him look like a little boy being taken to primary school for the first time, who won't let go of mummy's hand. As a PR device its obvious why she is used.
'Gordon is messy, Gordon is a good husband. Gordon is kind to children and furry animals'
Or - 'Gordon is normal. No really , he is.' I can't imagine Samantha Cameron even having to say
"Dave gets a few beers in at the weekend. Dave likes watching DIY SOS ."
To me it just reinforces Gordon's strangeness and its so obvious I can't believe it works, but it seemed to work in Brighton.

After the tearful intro it was a workmanlike start - a bit clunky, but he managed the right pitch and delivery of the tractor stats of Labour achievement. Its his strong point, and his speechwriters were wise to use this device. Basically its just reading out a selection of phrases and soundbites, but Gordon has always managed that well. He got the pacing, and the volume right, so that once the crowd were applauding, he managed to make them cheer and clap louder, as he lengthened the list. Good TV that. I thought better than Mandleson who went a bit squeaky with his crescendos.

Then came the detail.
Or lack of detail, a normal Gordon device.
Here the speech fell back into one of his old budget statements. A litany of vague achievements, aspirations, fantasy promises and traps. Plenty for the comrades to agree with but shockingly short of detail.
More bank regulation - end to bonus culture - more free childcare - the ability to recall bad MPs -Improved health care for the elderly - Schools, hospitals,kidney machines as Jim Hacker used to say. And, just as in his chancellor days, a lot of it doesn't add up.

The health care at home for the elderly seemed to have unraveled by the 6pm news with a price tag of 1.5 billion more pounds needed or only half as many people as claimed being eligible.
No discussion of cuts of any sort except I.D. cards and that it is such a white elephant its a miracle he didn't dump it at last years speech.

The speech felt like an opposition speech. It would not have been out of place in 1997.
Tough on crime - anti social behaviour,- educasion/ejudkain/ edukasion- more money for schools, - save the NHS- more spending on health care, a people's Postbank at the post offices, reform of the Lords, minimum wage.. What has he been doing for the last 12 years? Has all the parliamentary time been spent on hunting with dogs, stopping smoking in pubs and fighting foreign wars? All these things were promised long ago. Now , that he is about to lose power, its all promised again.

Three things did stand out. The PR kite flyer, dormitories for teenage mothers and the law about debt.

The Proportional Representation 'lite' is a tempter for Nick Clegg. I doubt it will work. Paddy Ashdown fell for it and was then shown the door when the power sharing was no longer needed. Now Gordon tries to tempt Lib Dem voters back to Labour with the promise they desire. Thinking about a hung parliament is a good, if unlikely to succeed, tactic. But you play the hand you have and at least its going to spark some debate, especially on the yellow blogs.
The teenage mother thing is just so odd. Its a right wing Tory favourite and gives Dave the opportunity to embrace something that he would have been as likely to go near as a strange device by the roadside in Afghanistan. He can now say , we'll look at it and claim some needed tough on benefits brownie points from the blue rinse.

The trap though, was the piece barely even being reported. Legislation to enshrine in law that the budget defecit must be halved within 4 years. The Tories might not like being committed to paying down debt at a rate that means huge, huge tax rises and Cleggian 'savage' cuts to public services. Anymore poison for this chalice?

Overall I think those that wanted to believe will be able to believe and those that didn't believe won't be swayed. A good effort from the PM even though it wasn't outstanding.
But then the aim was only ever to put some fight back into the troops and wrong foot the Tories. Only Cameron/Osborne have a good record in wrong footing Team Brown at conference time. Maybe he has only succeeded in giving George a few extra targets to shoot at next week.

Easy on the Theatricals, Mandy

... as Father Ted could tell you, there are dangers galore.

October Market Correction due?

I was very convinced the markets were not going to rally through September and October; although some of the information coming out was good enough to mean there should be no repeat of the crash of 2008.

However, here we are 29th September and the rally has continued. From 4819 on September 1st to 5150 today.

I received an email this morning warning that the Elliot Wave analysts are predicting that this is really still a huge bear market rally ready to come crashing back down again. I am not so sure about that, but there is huge risk in the market going up with no corrections when the economic situation is so poor.

One bright light for shares is the collapse of the Pound Sterling. The pound is down over 10% this month, which tracks the rally up - so in global terms the FTSE is going sideways. Perhaps the current devaluation trend will continue to push money into shares.

Now though I have withdrawn some money from the markets and am looking into safer havens for it. Euro Bonds are featuring high on this list if I can find an easy and liquid way to invest.

Monday 28 September 2009

Labour reduced to one policy for Coneference: Envy

Really, the theme of the Labour Conference this week seems to be how very important it is to bash the bankers. I agree, the Bank of England, treasury offical and ex-Banker Shriti Vadera and the FSA (mainly ex-bankers) have a lot to answer for in terms of creating the economic mess in which we find ourselves.

Oddly, it is not to these well paid mandarins with their final salary pensions that the aim of Gordon Brown is falling. No it is on the private (and public bank) sector. Rows about how much to pay people who are doing jobs are beyond the comprehension of the average Labour back-bencher.

It is not that pay and rations do not need restraining and that some tweaks to stop people gambling others money for their own gain is not sensible. it is just that the concentration on it is such a huge sideshow to the real events now needing policy. The banks are last year's story and the market has taken care of the excessive pay in short-order for the underperfomers who now line the unemployment statistics.

Instead of discussions about how to really reduce the dependence on public services in Britian, on how to fix the many social ills created in recent years, of how to reform the tax and benefits systems; we just have bash the bankers.

What next Estate agents and journalists?

It is both populist and poor, the sign of a weak and clueless government. At least in Germany they have had their successful election over the weekend and have been able to wave goodbye to the poor performing socialists. Roll on May 2010.

Sunday 27 September 2009

Watching The Lights Go Out - part 194

Here's something I didn't know.

Back in June, little Ed Miliband set out his
cunning plan for getting the putative power-station Carbon Capture & Storage (CCS) industry underway in the UK: the first 4 full-size 'demon- strator' plants are to be funded by a levy on all our electricity bills, if he gets his way. This is 'necessary' because nobody has any intention of spending their own money on such a thing when (a) the whole idea has a lot of hair on it, and (b) it's obvious anyhow that fat subsidies are in the air.

But according to
this piece from earlier in the week:

"the Treasury needs to approve any [such] levies because they amount to a tax, and the proceeds are treated as public spending"

Perhaps everyone else knew this all along, in which case,
pardon my ignorance. But it really puts the cat among the pigeons. Because all the government's favoured means of ensuring the lights stay on - wind farms (esp. the monstrously uneconomic offshore variety), nukes and new CCS-equipped coal plants - depend on subsidies; and if these are to be labelled public spending ...

I realise, of course, that governments of whatever hue are rarely averse to changing the accounting rules to suit themselves. If this is a Euro-rule (
anyone know ??) then doubtless Peter (or the Boy George next year) will have a little word in the right Brussels ear.

But if it's a more generally accepted international principle, it's nigh impossible to carry off such multi-bn £££ schemes without being spotted.

It'll all come down to another dash-for-gas, mark my words.


Saturday 26 September 2009

Final Cabaret

After the can't make up their minds if they are sinister or dexter mess of the Liberal Democrat conference comes the Labour Conference. Here's a video preview of what to expect next week from the old Variety, end of the pier show. Or after Shriti Vadera took one of the early Saigon helicopters maybe its the end of the Peers show?

Having been 'modernised' by Tony Blair there are unlikely to be any internal splits or dodgy policy announcements here. A stage managed circus, Managed by the greatest Master of Ceremonies of them all, rather than the church fete feeling of the Dems.
Everyone back on message here.

"Where are your troubles now.
Forgotten!....... I told you so.
We have no troubles here.
Here life is beautiful - the girls are beautiful - even the orchestra is beautiful. Leave your troubles outside! Life is disappointing? Forget it!

"Willkomenn" to the new "Money"
"Maybe this time?"

Friday 25 September 2009

King Gord's Conference: AA Milne Had Him Nailed

With the usual grovelling apologies - this time to AA Milne

King Gord was not a good man
A coward to his bones

He hurled abuse at all his staff

And often mobile ‘phones
But every year at Conference
They’d let him out to speak

He’d give them tractor stats galore

He’d be applauded from the floor

Ovations too (the whip
s made sure)
How he loved Conference Week !

King Gord was not a good man
He lived his l
ife aloof
He’d thought of stepping ‘neath a bus
Or jumping from the roof

A Conference speech
he had to make
But naught to say of note

He couldn’t get to sleep at night
Till Sarah, pityin
g his plight
“To Santa Claus, you’d better write”
And this is what he wrote.

“I want to meet Obama,
And I want g
ood news
And victory in Afghanistan
Would help to cure the blues
I don’t min
d lying
So it needn’t all be true
And it SHOULD make me look better
Than Tony you-know-who
And, oh! Father Christmas, if you want to help me sleep
A photo please of Cameron, in congress with a sheep!”


Thursday 24 September 2009

Chinese Checkers: Behind the Climate-Change Diplomacy

The Chinese have played an interesting hand on climate change this week, disappointing some but enthusing others. And, aside from a rather large forestation plan, at no incremental cost to themselves.

China was always going to clean up its emissions - which is not the same as CO2 reduction - because they are poisoning their own people and. while they are willing to accept casualties in the battle for growth (see their stats on mining deaths) they'd rather not.

And their 'carbon intensity' - the measure by which they are offering to improve their CO2 performance, i.e. tonnes of CO2 per unit GDP growth - was also always going to improve. This is because the marginal unit of output in a fast-growing economy always comes from newer, more efficient plant: the old plant is already flat-out or actually being replaced.

So the improvement they are touting essentially comes for free - rather like the UK's improvement 1990-2000, which came from the dash for gas, as a by-product, not a primary objective.

Aside from scoring points on the world stage (always gratifying), the higher Chinese goal as a major energy importer is fuel security. This alone will drive them towards geater energy efficiency, from which reduced CO2 intensity follows, as night follows day.

For an excellent insight into China's current priorities, have a look at any of their official news sites (if your firewall will let you, they seem to be riddled with dodgy stuff) and the answers are plain enough:

- "food security, energy and resource security, and public health security" are top of the list with climate change;

- then comes the important matter that the July 5 riot in Xinjiang Uygur Autonomus Region is recognised by Russia as "entirely China's internal affair and that no outside forces should interfere"

- finally, a heavy-duty snub to North Korea by bigging-up China's relationship with S.Korea

Well that's what China's thinking; and we should probably all pay attention.


Gordon Brown gets given the bird!

Did I see this right?
Gordon Brown seems to have presented with an award that looks suspiciously familiar.

Seems Henry Kissinger has rewarded Mr Brown for services to the Liberal Democrats.
Probably for turning so many former Labour supporters into Lib Dems.
But you have to feel a little sorry for the Prime Minister. He was given a world statesman award and Bono got more headlines for turning up to watch.

Wednesday 23 September 2009

MNR.L - A sign of the times

Things have been quite easy on the stock market of late. The index is up from its March of 3500 odd 5200 - the biggest rise ever seen in such a short time. And this has been repeated the world over.

One stock I have tracked all year in this regard is Minerva plc. I bought in at 10p, a company that was in trouble with its finances and a property developer; yet a developer of blue chip London space. I walk past its Walbrook development 9and very cool it is too,) every day and so can see how things are progressing.

I have mentioned it non-stop on blog posts and twitter because of its obvious story. Firstly, the banks would not be so silly as to take it out prior to its buildings being finished, secondly its prime London real estate would only recover in value and finally foreign buyers have been buying into the company for over a year.

It was only ever going to fly and today the shareprice is 44p after new of re-financing yesterday. Having sold down most of my holding at 100% up a month ago I got back in with some funds again when the price was down to 22p. Happy days.

But there are some important reasons behind this lucky strike:

1 - Banks need to lend and have been given QE money to do so, so the chance of a co like Minerva falling over was always less than the market perceived.

2- QE is causing a new asset bubble in property and commodities, so the Real Estate market is picking up a lot more quickly than anyone thought it would, which is helping companies like Minerva.

3. Therefore alot of this gains are down to QE and the mess this is making with the real economy. It saved us from depression, but is going to cause huge mis-allocation unless it is halted in short order; I perceive no chance of that. Which is why I am not selling my share in Minerva today as the backstory has further to run.

P.S. Off to the Bear on business for the rest of this week, back next

Tuesday 22 September 2009

Can the world change?

The latest pre-G20 report has same merit in that it at least speaks the truth. the stimulus being applied to a sickly world must continue for a short while yet and then a concrete plan must be made to phase it out.

Then and more importantly, deficit countries like the UK and US must rein in their spending and save more; whilst purely export driven companies like China and Germany will be pushed to develop their own internal consumption to a higher level.

The difficulty is to see how this will be enforced. The Germans love their beggar-thy-neighbour policy which has helped to crush Italy and Spain as economic powers. China will find it hard to increase demand in such an impoverished society; meanwhile the UK and US have addicted consumer societies that will also find it hard to accept was is in effect a lower standard of living today for the benefit of developing longer term prosperity.

Also I do not see how the actions of the Climate Change are bound into this. The vast reductions in CO2 emmissions being put forward will require slower economic growth all over the world in order to allow the technologies time to be developed and deployed.

The world faces some challenges which are structural in nature; we don't have a very good history of dealing with these without major wars, perhaps though the resolution of the cold war gives us hope.

Monday 21 September 2009

Brown to Save the World - Again !

Not content with saving the world once, the PM is limbering up to do so again ! Or so says the BBC.

"The climate deal planned for Copen- hagen in 10 weeks' time is in grave danger of failure, the prime minister has said. Gordon Brown has become the first world leader to offer to go to the Danish capital to help seal the deal. The annual climate negotiations are normally done by environment ministers, but they lack the political muscle to make the big spending decisions which underpin the talks."

Mankind shall forever be in his debt. But only on his dreams. Hint to Beeb: no need to publish these No.10 briefings any more - Mandelson has told everyone it's OK to ignore him.


UPDATE - PODCAST ALERT: steering carefully away from another YouTube fiasco, Brown has podcasted for us. It's all going so well in a characterless, Vallium-induced monotone - until 1 min30, when you can clearly hear him do that smile thing !

Sunday 20 September 2009


How to balance the books, reduce government debt, strengthen sterling and hedge against inflation.
Gordon Brown's masterful new Youtube video ready for launch during the leader's speech at the Labour Party conference.

Osborne right on tax; Wrong on sentiment

Watching the news today and the spin from both Labour and Tories you can tell both parties in the UK are scenting blood and what to generate some headlines for their upcoming conferences.

All you see on the TV news and in the papers is pure spin. The truth is the numbers released by the treasury are accurate. In 3 years time to try and balance the budget there needs to be a 30% increase in income tax under current plans.

Whether this comes to pass or not is not the point, the point is the budget reduction is going to require some very, very painful sacrifices; it seems the politicians are warming to this theme.

However, an election will not be won on negativity and promises of scrapping jobs and services. A vision of a better country, with lower cost services and happier people needs to be sold. None of the UK political Parties have grasped this yet; the one to do so may win the election.

Saturday 19 September 2009

Public Sector borrowing out of control?

That has been the story this past two days. On the Labour side they are saying the analysts' expected more, so that is all right then.

On the Tory side they show the Government has lost control.

You can't really argue this one, the Government has lost control, but the truth is they lost control of public spending 5 years ago, not last month. This latest catastrophic number is just the end game of the lunatic policy of spending more than we earn even in the good times.

Friday 18 September 2009

UK Spending cuts: The fun fest begins

I am beginning to gain some little respect for Alistair 'The badger' Darling, having grown a pair and both stuck as Chancellor and then forced Gordon Brown to partially roll back the Scorched Earth policy, he is now in the news again.

Today he is asking cabinet ministers for help in identifying spending cuts. Well, this should be fun. i seem to remember a labour cabinet minister picketing the NHS a few years ago when cuts were forced on her department. I don't think the current jelly-like formations that are excuses for Ministers are going to give very much.

Not only that, but it is hard decisions that have to be made. Aligning public sector pension provision with that of the private sector would make a huge dent in the structural deficit. As would giving up much defence spending and our habit of constantly staying at war under Labour Governments. A swift trip into privatising the BBC would raise a few billion too and lower taxes.

All these things are near impossible for a Government, which is why Vince Cable says them all the time; nice sticks to beat Ministers with who don't have the ability or authority to enact any serious change.

We have many years of this discussion to come, I guess in no time it will turn from fun fest to bore fest.

Wednesday 16 September 2009

Winter of discontent

The communications workers union, CWU, is balloting its members on calling for a full national postal strike. A few single days of strikes have led to between 10 and 20 million items stranded in the system. A full strike will strand many, many millions more, some for months and some will be lost forever as happened during the last strike in 2007.

The reasons for the dispute are many and varied and both sides claim the other won't 'modernise' Modernise is a good word for Lord Mandelson to discover. Its a euphemism for cuts.

Royal mail need to cut hours and staff and want postal workers to take up the slack of their axed comrades. In the private sector this is normal and happens all the time. In the Public sector it is a relatively new experience and is unwelcome.

In the last strike both sides managed to end up losers. RM observed migration of ever more of the profitable business post to royal Mail's rivals, while CWU did not manage to protect pensions for NEW memebers, cuts to hours or get a substantial pay rise.

Royal Mail are asking too much of their workers all in one go. As managers of change, facing one of the most intransigent unions around their methods leave a lot to be desired. And CWU are fighting to keep the impossible. End of salary final salary pension schemes, shorter working week, manageable workloads...?? yeah, right. We'd all like that.

A strike will further damage the business and will increase the damage to Royal Mail and its workers. RM should be doing everything in their power to avoid a strike, including government involvement. They aren't, as they do not believe CWU, after its failure to win any meaningful concessions from its last strike, can muster enough support outside of its militant mail centers for a national strike.
The government won't be drawn, having only just sighed with relief at putting their 'back of the envelope' unworkable, mail privatisation scheme into touch. The ballot, timed to coincide with the TUC conference was a reminder to the Labour Party of how much it needs the unions.
Well, the Labour Party have created the problem by deregulating the mail market five years in advance of the rest of Europe, not having a coherent strategy, incomprehensible policies {VAT advantages for Royal Mail but not other operators, but then insisting that RM deliver its rivals letters for them even at a loss,} lack of investment and insisting on unrealistic targets.
Labour have nothing to offer and do not want to get involved, despite being the only shareholder.
But they should do something. A strike that spreads to other Public sector unions will bring them down. But CWU should think long and hard about a strike. A Tory government, looking to make serious public spending cuts, and no friend of the unions could easily revive the dead privatisation plan and would likely have more than enough MPs to push through any version of it they want.

No winners in this dispute, but plenty of losers.

Thatcher and German Reunification: Straightening Out a Bit of History

After the release of papers under the 20-year rule there has been much rehearsing of Margaret Thatcher’s initial opposition to German reunification until she was eventually edged into a more realistic stance.

If she was as hostile as it appears, she was staggeringly ill-advised – just as some historians are ill-informed on the same matter. This, for example, from the much lauded (and often rather good) Mark Mazower:

“The reunification of Germany … was as unforeseen as partition had been forty years before.”**

In fact, as soon as it became clear that Russia didn’t have the stomach to hold the ring in Eastern Europe any longer, the Deutsche Einheit was both inevitable, and well-signposted for anyone in the Tory senior echelons who needed to know and could be bothered to pay attention.

In 1985 (sic) I was amongst a group of Conservatives including several MPs, MEPs and soon-to-be MPs, who were invited by the CDU for a lengthy and highly educational visit to both West and East Germany. (There are many amusing stories from this trip but they are for another day.)

We ended up in Berlin where we converged with similar groups from right-of-centre parties across the West. Our CDU hosts – who included some Very Senior politicians – then told us the purpose of the outing. They wished us, as friends and allies, to be in no doubt that their over-riding political priority was reunification, however unlikely we might imagine it to be. We needed to know this because it was vital to understand their frame of mind, and how they would act when the time came.

This seemed deeply implausible to most of those assembled, and someone asked – OK, so when ?

Oh, we’ve no idea when, our hosts replied: but just please be aware that, when the time comes, we shan’t hesitate, or be found wanting.

So - unforeseen it was not. If any of the Tory MPs who attended this event didn’t brief Thatcher’s ministers; or if these in turn failed either to follow it up, or to apprise Herself, then they and she deserved all the unnecessary political grief her ignorant heel-dragging must have caused.


**Dark Continent, 1999 Chapt 11

Tuesday 15 September 2009

Was it right to let Lehman's die?

We were worried this time last year that failing to bail out Lehman's might cause a financial collapse; well we were right. We also said the UK would be in deep trouble in short order because of HBOS and RBS - yup spot on.

We also said Lehman's should have been allowed to go under as Northern Rock should have been. One year on, I still think on balance this is correct. I wanted AIG to go too, but did not understand that if it had done it would have taken several banks and countries with it; good on Paulson for saving them.

Although allowing Lehmans to go was a terrible experience, it was cathartic, people faced up to the true enormity of the crisis and Government's reacted. Without it we would have soldiered on into a prolonged down patch which may have lasted for years and years. Instead we got a short, sharp shock. Plus the unwind from Lehmans is not the end of the world either that many had made it out to be. In fact, it encourages me to think it would still have been right to let Northern Wreck sink; that business is going to cost the taxpayers billions instead of the bondholders and shareholders.

A failure like Lehmans won't happen again though and that is also a good thing; lessons have been learned the hard way. Better than not at all.

Brown speaks the truth at last

He does not acknowledge this of course in his interview with Robert Peston, but he make a damning statement:

"PM [Gordon Brown]: cannot justify in a period of difficulty. We're raising national insurance by half a percent. These things are being done so that we can pay for our public services, while at the same time making sure that the economy continues to reduce the deficit. I think you'll end up with a situation where the debt levels in all major countries are roughly the same - Germany, France, America and Britain - and I think you'll get an agreement amongst all these countries about the right timing for us to take the further action that is, that is necessary..."

the important fact missed out is that our public borrowing was 50% less than that of Germany or France and even about 20% less than the USA on a standardised basis. So the Prime Minister is admitting that we have coped with this crisis half as well as our European neighbours.

That is a pretty bad attempt at 'coping'. Long-term it is a disaster, the only way out is inflation and if we become like Japan,the bond holders won't even allow that. What a terrible Government Brown has presided over.

Monday 14 September 2009

How low will the Dollar go?

The US, which has engaged in a more limited form of quantitative easing than the UK, has seen the value of the US Dollar shrink as the global markets have rallied. Historically, the Dollar has been seen as a safe-haven for money when times are tough and thus as investors want to take more risk, the Dollar can fall in value. So with the rally, the Dollar has fallen in value.

Gold too has been rising, as it often does in Dollar weakness, although the correlation is breaking down somewhat. This though can be a sign that the markets see a lot of risk in the current system.

Also the British Pound Sterling has recovered some of its weight in the world in recent months, today it is at $1.65 to the Pound. Way of the 2-1 ratio of pre-credit crunch, but a long way up from its lows of $1.35 of earlier this year.

As currency movements go in cycles though, this may prove to be a low for the US Dollar, which could well rally until nearly Christmas. This means a worse exchange rate for the Pound if you are looking to travel or invest abroad.

Worse of course is that the Bank of England is intent on printing more money to cover our government's profligate spending, which means the Pound will sink even lower. My guess is that it will re-test the lows of earlier this year and fall below parity with the Euro next year at some point.

Get those travellers cheques in early....

Sunday 13 September 2009

TUC loonies gather in fairy land

The eve of this year's congress. You know things are in a parallel universe when the BBC decide the only person worth speaking to is the odious Kevin Maguire.

I was listening to 5 Live earlier and was close to throwing the dinner over the radio at the bile and nonsense as the BBC reported on the gathering of their fellow travellers of the left.

Apparently all week we are to get a torrent of no cuts in public service. That is OK then, let's have them all in the private sector. No say the Unions, no cuts at all are needed, we need strong services. Who pays? Well that is not important, evil Tories or our childrens' children, some such will be found.

However, they have made me laugh. One of the deputies, metaphorically wringing her hands on the radio said now was not time for cuts. In fact cutting public expenditure now would be awful, as it would reduce the tax take even further. Such a worry is the denuded tax base which cannot cope with our structural deficit.

Elementary maths is clearly beyond them, public sector staff are paid by the taxpayer and then hand some of their wages back again as employment taxes, say 35%. Therefore every public sector job cut does in fact reduce the cost of Government by about 65% per job.

You have to laugh at these sort of comments, made by people living in a world of pure ignorance and self-certainty.

Friday 11 September 2009

Measuring up

Its time to standardise hyperbole measurements. These are such phrases as,
"The middle classes consume enough Pimms each summer to fill the Albert Hall"
"As tall as the Empire State Building"
"...An area the size of Wales"

It is very confusing with each broadcaster or journalist using their own hyperbolic measure and we think the time has come to settle on the definitive measurement. With your help we want to establishment the correct scale of all media measures.
For example it has long been journalistic practice to equate large surface areas to the 'size of Belgium or Wales' and smaller areas seem to be measured in 'Wembley Stadiums.'
With Belgium being only 3,000 km2 larger than Wales one of them needs to be named as the International standard and the other can be safely ignored. Now we just need to find appropriate small and large standards for:

To start off lets have large weight measured by the M1Abrams and smaller weight by The Prescott. {Note - 5 Prescott's = 1 Abrams}

Over to you

Round-up: FTSE, Rover, GM/Vauxhall

Quick round up of C@W views on a few issues of the week, heading into the weekend:

- MG Rover - I can't believe the report cost £16 million. All that money to accountants and lawyers to tell the Government the Directors were a bunch of shysters - exactly the conclusion of the last report! Now Mandy is preparing for the Sunday Newspapers to splash on it and making noises about having them banned a company directors. Boo hoo - how hard is it to get round that, ever heard of nominees etc. In the picture that is Peter Mandelson looking for someone other than himself to blame, as per usual.

- GM/Vauxhall - Lots of panic about GM closing the Luton Van factory which seems overdone to me. Is only 800 jobs when our dole queues are growing at tens of thousands a month. Economically, the vans will be better to be built in Russia. Forward thinking workers should consider going with the plant perhaps? No doubt the Government will hose some more cash at this deal though, copying the German's. Sadly for us, they have the money and we are printing ours still....

FTSE 5000 - Quite a shock to see the FTSE look like it may stay above 5000 at the end of this week. The chances of a retrace grow with such fast upwards movement. However, it does show QE money hitting the economy and being pushed straight into a new asset bubble in shares. House prices are holding much higher than expected too. This is good news all round, it means that we have enough QE for now and the bank should stop its programme.

The FTSE will still have a significant correction in the next 2 months and end the year flat - so 10% down from here is my expectation.

Thursday 10 September 2009

The World Cup Bonus

Congratulations to Fabio Capello and the England football team who have booked their place at the world cup finals after a very convincing 5 - 1 win over Croatia yesterday.

Fabio may well receive a call from Mr Cameron to congratulate him on his success. And with good cause. By the time the World Cup proper gets underway in South Africa from 11th June 2010 there will have just been an election. The new government, increasingly looking likely to be a Conservative one, may gain some very positive advantages from the tournament.

Any England success is a national success and how ever ill deserved the government gains credit just for being English. With none of the other home nations likely to qualify all hopes rest with England, and England are looking good.In qualifying they have played eight - won eight. The best result ever for the national side.

A shellshocked Bilic, when asked about England's prospects, said. "Based on tonight, definitely they can win it. A good run would increase the feel good factor, the new beginning factor, just when it is needed.

Economically its a godsend. The weather this June was a week of hot temperatures until about the 7th, followed by storms, rain, floods and wind. The summer then washed away around mid June after a record high temperature May. In retail terms it means that the FIFA World Cup is being held against some pretty low trading figures. Even Down 1.1% in May '09, which was the high point. Retailers will be facing poor weather, mid recession figures.
Even normal June weather would give an extra 2-5% increase to overall sales but with the addition of replica shirts,footballs, BBQ's, alcohol etc there will be a huge boost to the economy should England do well. Clothing and footwear have been dragging the retail figures down all of 2009. That sector will be main beneficiary of any Team England success.Travel agents will benefit from some 20,000 fans booking flights and traveling abroad. Even the time zone of a later one hour difference is favourable, allowing workers to get home, changed and out again in good time.

When the figures are analyzed David Cameron may well find his very first set of economic indicators are the best he ever gets.

Wednesday 9 September 2009

Dale the Dark Horse

That Iain Dale - dark horse, eh ? But hey, it's politics - gotta get that safe seat somehow ...

Ad Hoc Rules for In-Hock Banks

If stabilising bank finance is important, how near are we to restoration of stable regulatory conditions ? Last week revealed some of the reality of the current vogue for micro-management by European regulators, in ways that are affecting holders of bank bonds, preference shares and other 'hybrids' or forms of subordinated debt.

First the really basic stuff - payment of coupons.
Northern Crock had already 'deferred' some coupon payments (in order to conserve capital), but that wasn't technically default, it was because the Crock actually doesn't have sufficient funds (the wonders of Brown's bail-out) and the bonds in question were subordinate.

there was a sudden flurry when KBC, a bailed-out Belgian institution, said the EU was 'pressuring it' not to honour some of its coupons - even though they were able to, and in the event actually did, notwithstanding the 'pressure'. What's to be the next development on this front, I wonder ?

Then, the FSA instructed RBS and Lloyds not to redeem some of their bonds on the usual date. Again, this isn't default, but it's not what bond holders have come to expect after many years of custom and practice. It may give rise to some (modest) cash flow issues and adds to the overall levels of confusion and financial friction (though
it's fair to note that some recent buyers of hybrids may be the adventurous type anyway).

There are of course many who advocate equity-for-debt swaps but the crisis has been rolling for two years now and that strategy hasn't been formally instituted. Not all bond-holders are going to enjoy an ad hoc regime of will-they, won't they? In consequence, credit ratings on hybrids issued by banks like RBS have been downgraded and yields - which had been slowly creeping down in the right direction - have once more shot up to around 16%. We've looked at RBS prefs before (when yields exceeded 30%) and here's the latest chart.

With base rate at almost zero, 16% is what the market thinks of nationalised UK banks' subordinated debt in these supposedly improving conditions. Does any of this help the UK government unload its unwanted bank shares ? There's a long way to go before it's business-as-usual in the banking sector.


The recession is over

The recession ended in May.

The National Institute of Social and Economic Research has discovered this amazing piece of good fortune amongst all the data that they study.

Growth of 0.2% between June and August = 3 months of positive growth, so that's the end of that chapter. Never mind that the drop in 2008 was 0.8% , which would have required another 0.6% just to level at 2007 figs, the recession is offically over.

Of course in reality the figures do not indicate anything like an end to the recession but merely confirm that we stopped crash diving some while back and are now bumping along the bottom. How long for is the great unknown. Manufacturing was up 0.9% which was well ahead of expectations. Other commentators here recently have pointed out the low inventories and the inevitability of restocking leading to an increase in orders for the Aug/Sept/Oct period. Can this turn around in stock levels can be maintained? The bad news is the boost was largely driven by car production which was 10.4% up.

This is due to the amazing success of the scrappage schemes and clunker cash deals throughout Europe. These schemes are all due to run out within a few months and the increase in Vat in the UK will only depress the manufacturing figures. Retail on the other hand had poor figures. 0.1% down. Doesn't sound like much but those are soft figures the retailers are facing. Last year's summer weather wash out was repeated again. Clothing and footwear are especially weather dependant.

"It's clear the deceptively good sales growth of those months {july/aug} was due to summer sun and price cuts - not any major revival in how customers are feeling."

Its clear the recession is far from over, and the 'fragile recovery' is going to need all the nurturing it can get.
Scrapping VAT on new cars and trucks would increase production in the car factories and would at least keep the momentum going. Many fleets have opted to hold vehicles for five years instead of the more usual three. A VAT cut might persuade them to change their minds. The rest of the EU would probably gladly look at a temporary exemption for all new vehicles. Or certain 'Green' vehicles if they must have a reason other than it makes sense. Its just a more expensive, far easier to administer, version of the scrappage scheme after all.

Tuesday 8 September 2009

Unintended Consequences

When Prime Minister Brown allowed Lloyds TSB and HBOS to merge, he merrily waved UK competition law off in order to secure his 'great deal' (ask Lloyds Shareholders what they think of this deal!).

Now though the EU competition commission is taking a good look at the banks and there is little doubt that many of the HBOS assets will have to be sold off. So in the end it may have just generated investment banking and legal fees for third parties.

But there has been a market impact for other industries. Just today there is news that Orange and T-Mobile are likely to try and merge their UK operations. This will mean we go from 4 big mobile telephony providers in the UK down to 3 (not including 3, if you see what I mean).

This would not have been contemplated even a year ago as the competition commission would have ruled it out altogether; now with the recession and the Lloyds precedent, it may well be waved through in some form.

This will no doubt be bad for UK consumers, as less competition means less offers in the market and . Surely if 3 or Virgin Mobile were the buyers then this would be ok, but not to reduce competition by so much.

As far as the Labour Government are concerned though: you reap what you sow.

Monday 7 September 2009

Why G20 banking regs won't work

the papers that i have read today and this blog piece by Robert Peston all agree that the G20 has been something of a triumph for global co-ordination. Yes, the bankers bonus' make the line in the news, but commentators seem happy with the new proposed rule on capital regulation.

This is the idea that banks have to hold more capital to cover potential risk losses and that they must have lower leverage as a result. This should make banking boring.

The downside to this analysis is what I would expect from Financial analysts; in that they miss the politics. Why will France and Germany ruin their banks and ecnomies now when they see the problem as Anglo-Saxon capitalism. France and Germany already have higher public debt ratios than the UK and US.

There is not a chance this will be agreed to in its current form, whatever proclamations are made by G20 finance ministers. Global regulation will have to wait and in the meantime national governments are going to make up their own rules on banking.

Sunday 6 September 2009

Banker's pay distraction at the G20

Really, what a total diversion this G20 communique on bankers pay really is. Not only has no agreement been reached, but what has been suggested is already being implemented by the banks in any case.

Take RBS, there staff are having bonus' paid over up to 3 years, mainly in shares and with up to 75% clawback.

All this fuss is to cover up some much less happy international co-operation. Basel II is dead and we are moving back to a world where banks will be able to hold as much capital as their national regulator says they have to. In a globalised world this is a dangerous move, which could see big banks move to countries where they are required to hold less capital. A situation not unlike that which we have with tax havens.

But why all the focus on bankers pay anyway? Like Hedge funds, this is a distraction from the true causes of the credit crisis. These were lax monetary policy and in the UK the situation was made worse by the terrible fiscal policy of the Labour Government.

Not much mention or agreement on this at the G20, quelle surprise!

Saturday 5 September 2009

'China Syndrome' Derivatives Meltdown ? Ominous

Not a happy weekend topic, but another cycle of misery appears to be upon us: state-mandated default for reasons of convenience.

The Chinese are reportedly of a mind unilaterally to allow state-owned entities to default on OTC commodities derivatives (presumably out-of-the- money forwards or swaps entered into when prices were high last year).

There is some history here: way back in 1994 a Chinese firm called Minmetals defaulted on derivatives contracts and Lehmans, its US counterparty, tried but failed to get them enforced in the courts (finally only settling out-of-court in 2002).

Since then, China has preferred to be seen playing by Big Boy's Rules and, when in the last few years Chinese companies have made stonking derivatives losses, they have swallowed them. It would be a serious turn of events if they are now to be selective as to which contracts they honour - with geopolitical overtones potentially making the enforecability issues raised by famous cases like Orange County, Gibson's Greetings and Hammersmith & Fulham, appear rather provincial. A China-Syndrome meltdown in derivatives is the last thing the system needs right now.

This one's got our full attention. Next week we'll also take a look at Euro-interference with banks redeeming and paying coupon on their bonds ... or not ...


Friday 4 September 2009

What does Gold at $1000 say?

Gold has had a very interesting week. It has mooched around $950 for the past 6 months, missing the commodity rally, but then not being hurt by the equity rally either.

Then suddenly this week it has gone on a tear and is now approaching the psychologically important $1000 an ounce mark.
Gold normally trades in a relationship with the US dollar; strong dollar weak gold and vice versa. This relationship seems to have broken down this week. Why?

There are many theories about paper gold, china and central bank buying. Almost none of them assume a greater demand for gold in the market for practical use.

Are hedge funds and such like preparing of a market adjustment? If so Gold and cash would be the sensible places to put money whilst shorting the equity markets.

Alternatively, Gold is being set-up for a fall and is itself about to be corrected. With the world coming out of recession, this safe haven should be less attractive.

It is hard to know, but an interesting development. What are your hunches?

Wednesday 2 September 2009

On the Usefulness and Abuses of Bankers

Adair Turner has stimulated a debate on the social usefulness of banks and bankers. This is necessary, timely, and indeed urgent.

The robber-bankers have caused as-yet unmeasured damage to Western society and beyond, and have called in aid the world’s treasure to rescue them from themselves. Now, a mere three months into a period of mild optimism (which is no more than to say the stricken patient has enjoyed a quiet night) and facing modest regulatory changes, they would have us accept that it’s to be business as usual from now on. Not good enough.

Around these parts we do not hesitate to enter the substantial positives in the ledger. Banks and other financial institutions provide many services that are unequivocal social Goods: basic banking services and deposit-taking; liquidity, pricing and market-makin
g for the trade of assets; instruments and markets for insuring and hedging unwanted exposures; and of course credit and clearing. Although rarely remarked upon, the social benefit of the extraordinary global credit-card system (for example) is of great significance for retailers and personal freedoms alike.

Delivering these valuable services effectively and (fairly) efficiently en masse has necessarily entailed the development of an ultra-powerful financial infrastructure. Though we do not follow the excellent Alice of Bubble in her rather flippant damning of the whole edifice of derivatives, it is clear that the abuse of this mighty system for personal gain has been ridiculously easy, prevalent, and largely unpunished.

By abuse we do not mean speculation, which plays a vital role in human affairs, not least in its stimulation of liquidity, innovation and the Darwinian process in business.

Rather, we mean the activities of the one-way bet merchants – the knowledgeable and well-placed players who take risks without paying the appropriate dues for the use of the risk-capital that underpins their gambling, but who stand to profit hugely. Almost all the sub-prime scams, ponzi schemes and derivative pyramids can ultimately be expressed in these terms. This is effectively theft at the expense of ordinary punters, shareholders, pensioners, ultimately whole bodies of tax-payers who are drafted to bail out the failures

All this strongly resembles the behaviour of the 18th century European merchant-expansionists who advanced their ultra-aggressive businesses and private armies across the globe, pocketing the profits when the going was good, but calling on the mother-country for ships, troops and treasure when they became over-extended. A great deal for them, but an expensive proposition for their countrymen.

In Dark Continent, his fine survey of Europe in the 20th century, historian Mark Mazower wrote:

“The real victor in 1989 was not democracy but capitalism, and Europe as a whole now faces the task of establishing a workable relationship between the two.”

No small challenge, and the status quo is unsatisfactory.
2009 is the right time to attack this task with renewed purpose, starting with democracy demanding that – as with any properly-managed capital adequacy scheme - the banks pay for as much of society’s fall-back capital that they tacitly rely upon to underpin their risk-taking. Here at C@W, we continually oppose subsidies and free rides for windfarms and nuclear power plants and the like: the same principles apply to banks and their schemes.

And where they are risking their own and their shareholders’ capital, let their speculating be acknowledged explicitly, and sealed off
hermetically, from their non-speculative businesses and the common weal alike. As bankers are useful and/or self-sufficient, we should encourage them; and as they abuse society's capital, we should cut them off at the knees.


Arsene Wenger points out death-by-taxes

With all the furore around bankers' pay; people have ignored footballers wages. Did you even know that footballers wages when printed in the press are always quoted post-tax? Yes that £150,000 a week John Terry earns is in fact nearly 40% in real money. (2 years ago Labour whined about this, they seem strangely reticent today?)


To the point though, the Premier Leagues had its deadline day fro transfers yesterday and very quiet it was too. Only Manchester City, backed by Oil billions, have spent this summer. Without them, the spending would be nearly 50% down on last year. All the top players are leaving Man Utd and Liverpool and heading for Spain.

Why Spain? Well it often takes an outsider to show a country's folly. Arsene Wenger in this case, an economic graduate, says that in Spain a footballer can pay tax at 25% for 5 years. That is longer than the average contract. They are paid in Euro's too which has been appreciating against the Pound for nearly 2 years now.

The combination of a sickly Pound and impending 50% tax on the rich means that in real money terms, Spanish clubs can pay 70% less to give players the same wages.

Premier League football will be unable to remain the dominant force in Europe when placed at such a disadvantage. German clubs are competing now too. And whilst you may not care much about that, there is a read across to all of our other industries where people are mobile too. In the City it is Hedge Funds, but you can also add IT Contractors and even perhaps Lorry drivers and a myriad of other professions into the mix. High taxes and a weak currency are going to ruin our economy and sadly that is the path the Government is taking us on.