Monday 24 November 2008

Western Banking Sells Out?

Barclays faces vote on £7bn stake sale

By Jane Croft and Kate Burgess of the FT

Published: November 23 2008 23:59 | Last updated: November 23 2008 23:59

Investors will today confront Barclays executives at a potentially stormy meeting called to approve a controversial £7bn capital raising that will result in Middle Eastern investors controlling about a third of the bank.

Barclays is holding an extraordinary meeting in London at which it hopes to gain approval to raise capital from the Qatar Investment Authority and Sheikh Mansour Bin Zayed Al Nahyan, a member of Abu Dhabi’s royal family.

However, the encounter promises to be one of the most contentious votes of the year because existing investors are furious that the bank did not observe pre-emption rights to allow them to participate in the capital raising and offered preferential terms to the two Gulf investors.

In addition, Barclays has faced mounting criticism that it is paying more for its capital infusion than if it had accepted help from the UK government to raise the money. The government, which is helping recapitalise banks including RBS and Lloyds TSB, has insisted that its involvement comes with strings attached such as limits on executive pay and bonuses.


Full article at the FT

Shopping Beats Working?

In case you hadn’t noticed, Chancellor Alistair Darling’s giving a bit of a speech this afternoon.

He’ll be laying out the Government’s plans for saving the economy from an even worse recession than it’s already facing.

It’s quite a clever way to sell it. Regardless of how bad things get in the future, you can always say: “Well, it would have been even worse had it not been for the quick-thinking actions of the dynamic Brown Government.” That’ll be the spin anyway.

But can the pre-Budget Report really make much difference to our economic plight? Of course it can. It can make things a lot worse…

This government encourages shopping and discourages working

The main thrust of the pre-Budget Report seems likely to be a 2.5 percentage point cut in VAT, which will fall to 15%. There’s plenty of other stuff being mulled over by the papers, and no doubt a few nasty surprises as well. But we’ll find out what he’s really got in store for us in a few hours, so no point running through all the eventualities here.

Let’s just focus on this VAT cut. I’m not going to complain about tax cuts. Lord knows, we’ve seen too few of them in the past decade. But it’s interesting to have a look at the thought process behind what’s being done here.

VAT is a tax on consumption. As taxes go, it’s not the worst one. It treats everyone equally and fairly - you pay according to the quantity of resources you consume. You could even describe it as a green tax.

Income tax, on the other hand, is a tax on production. The harder you work, the more you earn. The more you earn, the more the state takes out of your pay packet. And oddly enough, this effect is felt most strongly among the least-well off in British society. Because of the way the ridiculous tax credits system works, certain workers face a marginal tax rate of 70% once they earn above a certain amount. In other words, there’s a point at which they only end up getting an extra 30p for every £1-worth of work they do. For an apparently dour Presbyterian, Mr Brown sure doesn’t believe in encouraging the work ethic.

So effectively, the Government heavily favours consumers over producers. And the pre-Budget Report makes this very clear. Because it’s tomorrow’s producers who will pay for today’s consumer boost. According to The Daily Telegraph this morning, Labour plans to introduce a 45% tax rate on those earning above £150,000 after the next election.

Yet Britain’s big problem is that we’ve been doing too much consuming and not enough producing. How does encouraging more consumption, and discouraging production, help us get any further forward? The answer is simple enough. It doesn’t.

A recession is nature’s way of telling you that your economy is heading down the wrong path. A depression is nature’s way of saying the same thing – only a lot louder.

Britain needs a new set of economic props

As a nation, we’ve become too dependent on three things, all of which have been fuelled by the credit bubble. First there’s the financial sector. The finance sector is meant to allocate capital efficiently. It gets money from the people who have it, to the people who need it, with a minimum of fuss. That’s the nature of the value that it adds to the economy. But it’s not performed that role anywhere near as efficiently as we’d like to pretend. Were all those new-build buy-to-let properties an efficient use of capital? No, I don’t think so either.

The financial system’s ability to allocate capital efficiently has been badly undermined by central banks making it much harder to gauge risk clearly – more on that in the future. In any case, the end of the credit bubble also spells the end for the consumption bubble.

People used easy money and grossly inflated house prices to boost their consumption of everything from household furniture to shoes to computer games. That in turn meant more jobs in the services sector. But now that economic prop is being kicked away too.

The third prop has been rampant government spending. Fuelled by cheap borrowing and extremely healthy tax revenues, the government has splashed our money all over the public sector. But it’s not been spent on useful jobs, but on increasing the range of administrative and management roles in health, policing and education.

What will replace finance as our 'specialism'?

What can we do about all this? We need to consider what will replace the financial sector as our ‘specialism’. If we want to maintain a developed world standard of living, we need to contribute something to the global economy that can sustainably generate high-paying jobs. That means we need to have well-educated, skilled employees. But given the Government’s propensity to view any institution that promotes academic excellence with suspicion and hostility, the chances of turning around our education system any time soon is a major challenge.

And right now, this is a debate for another day, argues the “something must be done!” brigade. So will the VAT cut be effective? Well, it’ll make goods in the shops cheaper. But then, so will deflation. Shops are already slashing prices ahead of what they fear will be a miserable Christmas. And consumers are – rightly - already in ‘cut-back’ mode. It’ll take a lot more than a couple of percentage points off prices to make them blow their budgets this year.

So Mr Darling will have to have a lot more in his box of tricks if he wants to make a dent in this recession. We’ll find out soon enough – and give you the reaction on the MoneyWeek website later this afternoon.

Big Thank you to John Stepek

Friday 14 November 2008

Lower Interst Rates and Recession - Time for Gold

In its quarterly Inflation Report, the Bank forecast that national income could shrink by one to two percentage points over the next few quarters and growth would probably be flat by the end of next year. Consumer price inflation, which at its last reading registered an annualised rate of 5.2 per cent, will fall to its target rate of 2 per cent by the middle of 2009.

In remarks at a press briefing Mervyn King, Bank of England governor, said interest rates could fall much lower than their current 3 per cent and declined to rule out cutting rates to zero.

“We are certainly prepared to cut Bank rates again if that proves necessary,” Mr King said.

The Enemy of the State - You and Me!

Great article in Money Week

Governments love capitalism. As long as asset prices are rising, that is.


When prices are rising, governments will do anything to keep them up there. You want free money? We’ll keep interest rates low. You want light-touch regulation? We’ll give you off-balance sheet finance.

The deal between banks and governments in the past decade or so has been simple. “You lot keep the voters happy and feeling rich,” says the government. “And we’ll give you a nice cosy, risk-free world to play in.” Of course, capitalism without risk, is not capitalism at all. What we’ve had is sugar-daddy socialism, with the financial industry frolicking freely, safe in the knowledge that there’s always a bail-out around the corner.

But you can’t buck the market forever. And even though there have been plenty of bail-outs, prices just keep on falling. Yet governments don’t seem to learn…



Chaos in emerging markets

Yesterday I pointed out how Hank Paulson’s U-turn on the Tarp highlighted the dangers of government interference in the markets (to read about this click here: The pound has nowhere to go but down) . But you can get a much clearer idea of how the state can make a bad situation worse by looking at the havoc in emerging markets.

Like Western investors, investors in emerging markets came to believe that asset prices could only ever go up. And so when they fall, they start looking around for someone to blame.

That’s why Kuwait’s stock market (which has fallen by more than 40% since late June) was shut down yesterday. According to The Telegraph, an investor had filed a claim “over the heavy losses he had suffered on the exchange.” So the court stopped it from trading until Monday, finding that “the bourse management failed to take any measures to boost a flagging market.”

I imagine that the management didn’t realise that this was part of their remit, any more than the owner of a fruit and veg stall’s pitch would expect to have to keep the price of apples high.

The dangers of too much government intervention

But the plight of Russia probably demonstrates best the dangers of too much government intervention. The Russian Micex market has been the worst performing in the second half of this year so far, reports The Telegraph. Stocks have fallen by 75% since May.

A key problem for Russia is that it is massively dependent on oil. Its 2009 budget only balances if oil is trading at an average $95 a barrel. I can’t see that happening. So its markets, and the rouble, have come under pressure with falling oil prices. And of course, as an emerging market, it has taken a hit as investors pull their money out and repatriate it to the “safe haven” of the US.

But the state’s attempts to prevent the crisis with brute force, have only made things worse. The central bank has already had to spend $120bn of its reserves on defending the rouble, which analysts reckon is now 30% over-valued. This is just a waste of money. When a country, particularly a politically risky country like Russia, starts defending its currency, it’s a sure sign to the market that said currency is over-valued. No central bank in the world has enough reserves to defend against a forex market set on helping a currency to find its “real” worth.

Let's hope our governments learn to accept falling prices

The state is also making the stock market plunge worse than it has to be. They keep shutting the market because it keeps falling so hard. But a big part of the reason that it keeps falling so hard is because every time they open it, investors think “Quick! Let’s sell before they shut it again!”

If you limit the trading that can be done, you increase the liquidity risk. Anyone who is scared they might need cash at short notice, isn’t going to be happy to hold stocks that can only be easily traded as and when the government says it’s OK to do so.

All these measures rattle investor confidence further, and make it even harder to price genuine risk. At some point, most assets of any real value at all will reach a price at which fundamentals suggest they are worth buying. But if you have to worry about the government’s random reactions to such falls as well, it becomes impossible to make any kind of judgement based on these fundamentals.

So we’d better get used to falling prices – and let’s hope our governments learn to accept them as well.

Thursday 6 November 2008

Should we Bail out the Banks or Have a Recession?

As the Banks sit there wringing their hands in anguish at the problems they are in, let's step back to see what they are actually causing in the rest of the economy.

First we have to understand about the "paradox of thrift", the concept introduced by that great British economist John Maynard Keynes, who has been very much misrepresented over the years. This concept states that if we all start saving too much, then we are not spending. This will then causes a slow down in the economy as goods and services are not being purchased in the same volumes.

Now lets consider what the banks are doing right now in their misguided attempts to correct the real problems that they have caused and with their desperate need for refinancing from Governments and Sovereign Wealth Funds. Yes, they are taking money out of the production cycle for debt re-financing. And as they are reducing the amount of lending, they are deflating global economies.

Are they mad? They are only concerned with their own survival, but it seems at the expense of the rest of the economy. Because they have got everybody's bank accounts online they are now indispensable/compulsory [just try to do without one, your tax office will go ape]. Worst luck. We need an alternative to bank accounts. An alternative that will not try and gear up your money to fund their profits and then pocket your cash when they screw up. How else can we interpret their actions.

At best a bank is only a marginal business. How can it possibly make money from holding our money? They do it by using our money for their own gain. But when their assumptions and their miscalculations mean that they have lost our money, its only natural that we the customers are going to feel a bit angry. No wonder there are "runs on the bank". No bank can survive a loss of confidence in the system. That's why we have problems now - we have lost confidence in "the system".

The only solution is to re-build that confidence, hence massive inter-governmental support, or to come up with alternatives. Well Governments are doing their bit but....

So lets as responsible business folk with creative minds come up with some alternatives to the traditional banks.

First is the internet concept of ZORPA

Next is anybody's best guess. Please lets come up with some solutions.

Over to you.


John Burke, Ecadamist, and International Worrier!

BOE Cuts Rates by 1.50%

After one of the most hotly debated rate decisions in recent times, the Bank of England delivered its largest interest rate cut in 15 years today, slashing the UK base rate by a full 1.50% to 3.00%, in an effort to shield the ailing British economy from the fallout of the global credit crisis. The move follows on from last month’s coordinated 0.50% cut with other major Central Banks, as the credit crisis increased its stranglehold on the global economy.

Faced with mounting evidence that the UK economy is headed for recession, the Monetary Policy Committee has come under increased pressure to take more decisive action. Earlier this week Britain’s service sector, the backbone of the UK economy, was seen contracting at its sharpest rate on record while factory output posted its longest decline since the 1980’s recession, heralding further job losses. However, the most influential of recent developments was the sharp contraction in third quarter GDP, confirming the UK economy is on the brink of a recession, sharply reducing consumer and business confidence for the coming year.

Recent comments by Governor Mervyn King stating that “it now seems likely that the UK economy is entering a recession” signals further monetary easing is in the pipeline.

Major Interest Rates


Major Interest Rates
US Fed Fund Rate 1.00% 29th Oct 2008
EU Min. Bid Rate 3.75% 8th Oct 2008
UK Base Rate 3.00% 6th Nov 2008

Source: HIFX Financial Services Ltd