Wednesday 11 March 2020

Emergency measures from Central Banks to support Hedge Funds

Life is strange, here we were thinking 2020 was going to be a good year with Boris on his political honeymoon, then, boom it is all over.

The Bank of England has reduced interest rats by 0.5% to help calm the markets after a start to the week that makes it feel like 2008 again. It is the biggest move by the bank in ten years.

We may wonder, why does moving interest rates down from 0.75% to 0.25% make any real difference to the economy? And we would be right, as this move has next to no impact on the real economy. Unless you happen to be re-mortgaging today (tick for me!) and are able to take advantage of it, it makes no difference. It is not like Amex or Wonga are going to pay any attention  and help their 'customers' and it is not like Banks were paying any interest on deposits anyway - such has been the ruination of our economy since 2008.

So why do it? Well this is all about banks and hedge funds. The hedge funds are borrowing money to play the markets and the ones that are doing well need more cash, the ones that are doing badly are facing huge margin calls. Some of the Asian ones facing margin calls are proving difficult to get hold of I hear.

These huge calls on the banks  to lend or borrow in busy markets mean they themselves can run short of cash very quickly. The key thing for them is to be able to access the central bank Repo markets to get more money very quickly...but this money is not quite free, nearly free, but there is a price. So the banks find the busy markets a very expensive place to be and that can mean they consider limiting the action.

So they could choose to call in the money and not lend, but that runs the risk of further drops in the market, more margin calls and from 2008 we know where that leads. So instead the Central Banks are reducing the rates that they lend money at to keep the markets as liquid as they can and the Banks solvent. Keeping the banks solvent though, now means keeping the Hedgies solvent.

The side effect of all this is that Hedge Fund keep playing and Prime Brokerage banks make some lovely fat margins.

So when you see pictures in the newspapers about the lack of chinese imports or other real world causes like Corona virus, just smile to yourself. This is all about the traders and the trading. As it happens, the US Repo market is 50% busier overnight than it was in September 2008, now partly of course inflation has reduced the value or money and the economy has grown, but it is a sign that things are very awry in the financial markets.

A key week ahead I feel.


Anonymous said...

"The Chancellor pledged a package of measures to benefit the NHS including clamping down on 'aggressive tax avoidance, evasion and non-compliance' with extra funding for the HMRC to secure £4.4billion of extra revenue."

So no chnage with IR35 then... maybe an even tighter screw.

Anonymous said...

But no detail .. I see Dom has gor £x00m for his "BARPA" pure tech research.

Charlie said...

Still not seeing anything wrong with "aggressive tax avoidance".

Anonymous said...

The total tax take is apparently up. Dunno if that's because a projected CT rise an't happening.

I agree re avoidance, which is legal. But the line is very fine and constantly moving.

I'm really glad I didn't go in for those unpayable loan schemes, always too scared of HMRC. If it walks like a duck ...

Charlie said...

I don't really know how to feel about the loan schemes. On the one hand, I chose not to participate myself as it was so clearly a shadowy setup, but on the other hand, HMRC themselves explicitly OK'd it, prior to taking people to court for life changing amounts of unpaid tax.

Anonymous said...

Keeping the IR35 changes was a massive error - yes some contractors, and some employers, take the piss, but this is chucking the baby out with the bathwater.

Quite a few projects have been damaged, many more will be damaged when it is discovered that offshoring isn't always great, or that handing your knowledge base a 35% cut in income doesn't do wonders for productivity or morale.

Corvid-19 has ensured the pharma companies are taking wiser steps, instead of blanketing everyone, but many other places have just done a blanket ban.

Not seeing how tax take will go up either, people going inside means a lot less VAT receipts and corporation tax, plus a lot less discretionary spend.

Add to this hotels and B&Bs who will see money as there is no point working away if you're inside - sure, you can claim expenses if using some 'novel' brolly scheme, but how long before that's a target? So, if you're a company based away from population centres, you're going to find it hard to attract talent, or you're going to have to pay through the nose.

Which means many business will be hamstring compared to their continental competitors, unless they feel like moving to a city and watching their rent triple instead.

Legal fees will go up, as companies declaring their contractors as employees now frequently try to pass their additional costs off to the contractor, which is a no-no now they're an employee. Oh yes, and those Agency Worker regulations...

I've already been approached by some dodgy services, and with the Loan Charge, some were badly advised and forced into using them. Most were taking the piss, and have no sympathy from me.

I'm fortunate to have gotten one of the few outside contracts - I'm a business, I have employees - and will ensure I'll keep outside, even if it takes my skills outside the UK, skills the government keeps moaning we don't have enough of.

Well government, you've inspired a large number to fuck off elsewhere, another set to just retire and ensured that any time served high-skilled IT person knows the government regards them with hostility for wanting a flexible working arrangement.

The coronavirus will cloak a lot of of IR35 issues, but don't doubt it'll have a hefty negative impact on the economy.

On the bright side, I'll now be ensuring that anything firmly legal I can do to reduce my tax bill, shall be done.

This teat is getting turned off.

CityUnslicker said...

I'll do budget post tomorrow. Seems like Shock and awe now but there will be blowback from this in the future.

dearieme said...

'Still not seeing anything wrong with "aggressive tax avoidance".'

What's wrong with it is adopting the mutton-headed American use of "aggressive". Why not find a mot juste and use that instead? Lazy bastards.

Anonymous said...

Seems a Tobin tax is just the thing to sort out these Hedgies ... oh, shit we've just voted to leave ourselves exposed to this sort of thing.

Oh well we'll just have to take it on the chin.