UK Tax Receipts Drop.

27th February 09 - UK tax receipts drop.

January is usually one of the best for tax receipts. All the self-employed (and the way things are going, everyone soon will be) will know why. Not so for January 09. At £53.8bn the tax receipts were £7bn or 13% down on the year before. It meant that the Government paid back only £3.3bn of its borrowings whereas in January 08 it paid back £13.9bn. The small discharge of debt was not merely caused by tax inputs however. There was a sharp increase in public investment. It is a bit like all of your family saving like mad to pay off the mortgage whilst the prodigal son nips down to the casino.

The total UK Government borrowing for this fiscal year to date (it ends in early April 09) is now £67.2bn which is 2.9 times greater than at this stage last year. Of course the payment of benefits to those now out of work adds to the borrowing burden and those in that position is piling up daily. Andrew Goodwin of the Ernst& Young ITEM club "expects Public Sector Net Borrowing to rise above £130bn in 2009-2010"

If you are prepared for another bout of jitters, the Office of National Statistics (ONS) has confirmed that it now considers both Lloyds Banking Group and and RBS to be public sector companies. As such, it will need to add between £1 trillion and £1.5 trillion to the UK’s public sector’s net debt taking the total national debt to an unprecedented £2.2 trillion. To put this sum into some sort of perspective, it would be just under 150% of GDP and the worst position for the UK since the 1950’s when there was the small matter of paying for the debts of the Second World War. A contrast to the 1950’s is relevant in another sense: motoring. A golden age to a lead balloon. This diary will cover the car industry demise in the next entry.

By the way, two groups of shareholders are doing well notwithstanding all else. Those that shoot and those that spread their bets.

Mr Madoff No 2?

26th February 09 - Mr Madoff No 2?

This is a story about a big man, with a big name and who used to have big bucks. Sir Allen Stanford, the styled Texan billionaire, rose to world prominence as the backer of a bizarre cricket series played in the West Indies with just 20 overs for a side to bounce runs to all corners of a ground whilst Mr Stanford himself bounced certain cricketers’ wives on his ample knee. Now though the gentleman has gone to ground (not sure which one) along with about $8bn of other people’s money invested in "certificates of deposits"

The parallels with the antics of Mr Madoff  three months ago (see an earlier entry in this diary) are stark. In both cases of alleged fraud, observers were calling foul (not an expression used in cricket) whilst the regulator stood by watching the runs flow. If the allegations against the Texan prove well founded against a backdrop of savers queuing outside the Stanford Bank in Antigua, we might thank a humble blogger this time. Alex Dalmady (a Venezuelan by the way - it always takes an outsider) wrote "First it looked so simple, so unsophisticated. The language used wasn’t quite right. I downloaded the financial statements and to my surprise the "business model" jumped out at me: investing in stocks, bonds, hedge funds and the like. That’s ok if you’re managing a fund, but not a bank, which is leveraging its balance sheet  15 or 20 to 1… I dug deeper and put some numbers on a spreadsheet (took me about 30 minutes). It just got worse. Where was the portfolio? What were they investing in? 20% plus returns on their hedge funds? No way. Outperforming the S&P is stocks? No way. With 30% deposit growth (i.e. money constantly coming in )? No way"

"As the saying goes, if it looks like a duck, if it waddles like a duck and if it quacks like a duck, it must be a duck". Could not have put it better myself and out in the West Indies right now Freddie Flintoff has just had two consecutive ones (ducks that is)

Is China Cheating?

25th February 09 - Is China cheating?

The Chinese yuan has risen 30% against the pound sterling in the last six months. It is   reported by Western observers on the ground that Chinese exporters are defying their government and offering their customers lower that official exchange rates. If this is happening, it does of course mitigate against an otherwise natural process of slowing down export business. A slowing down that the US in particular has been pushing for. The new US Treasury Secretary, Timothy Geithner has accused China of being a "currency manipulator" which many think is a precursor to the imposition of trade sanctions.

One of the reasons that Chinese traders have been able to offer discounted exchange rates is because their own input costs have fallen. For example, the South Korean won has fallen more than 40% against the yuan. China’s trade surplus was a near-record £29bn in January 09 and Beijing has been accused of pouring an over-supply of goods onto the world market. If this really is happening then it is a case of self-help at the expense of most other nations.

Mark Williams of Capital Economics noted that even though world demand for new goods is falling "Chinese exporters, particularly of low-end manufactured goods, are still picking up global market share". Furthermore, China has increased tax rebates for its exporters some three times and some industries can now claim back 15% tax on their products if they are shipped overseas.

One aspect not normally commented upon is that at least now the West gets to know about these things. It was not always so.

Sovereign Funds & Institutions Learn

24th February 09 - Sovereign funds and institutions learn

According to a survey by Financial Dynamics, sovereign wealth funds are in no hurry to invest in distressed Western companies. This is particularly bad news since such funds are about the only players left with the ability to invest. It is a case of once bitten twice shy in that, for example, the reserve funds of Singapore and Dubai took stakes in US banks in late 2007 only to lose almost 80% in the calamitous events of 2008. One senior executive of a sovereign wealth fund was quoted as saying "Having supported some of the earlier capital raising of distressed banks, we are not planning to make any follow-on investments of a similar nature". There is another hold-back factor namely their home economy. Even super-charged Singapore (see chapter 11 of Violets) is expected to be in recession for most of this year.

Large institutional investors both in the US and UK are mad. Some have collectively hired a firm known as Kroll to go through the asset valuation records of banks to determine whether such valuations were kept up to date and communicated effectively to investors. The forensic investigations will look at the adequacy of disclosure on packaged credit derivatives and pass judgement on whether due diligence on asset valuations was thorough. At last Tuesday’s Select Committee hearing in the House of Commons, the former board of RBS were asked if any of them had been given legal advice on the nature of criminal negligence. Sir Tom McKillop, the former non-executive chairman, said he hadn’t. At the same hearing, Sir Fred Goodwin, former chief executive or RBS, was asked by Nick Ainger "You are saying that you actually did really deep due diligence, knew that there was a substantial element of sub-prime and yet you still carried on dealing with them and ended up with them on your books. Are you not culpable for that?"

Live and learn.

Rock Ya Baby

23rd February 09 - Rock ya baby

The UK Government’s new baby is just one year old. Like the weaning of most babies, there have been some surprises and emergencies along the way such as the nanny, or rather the Financial Director, leaving but the offspring is starting to walk a little although talking is probably still a further year away.

The nationalised Northern Rock is about to reveal the outcome of the third strategic review of its first year under State control. This latest review is most likely to trigger a decision to restart mortgage lending if only to show the non-taxpayer owned banks how things should be done. To have any meaningful effect, the scale will have to be large, perhaps a few billion pounds (of taxpayers’ money)

At the time of writing, the Government is injecting £3bn as equity shares into the former maverick bank but the chatter is that some £5bn more is on its way. With a ratio of about 10:1, new lending by Northern Rock of £50bn is theoretically possible. The gamble would be that at this level the mortgage market as a whole will be kick-started.

In its first year of life, the baby has paid back its daddy about £16bn by way of attracting new deposits (in the old fashioned building society way to savers who see the bank as a safe house) and by chasing mortgage redemptions. But now that the fledgling is teething, the cashflow will be reversed. Funny old world.

Finally, we perhaps ought not to mention that the new funding will need European approval (unless the French route is taken), that Northern Rock accounted for 1 in 10 of all UK home repossessions in its first year or that almost 20% of its mortgage book is believed to be in negative equity territory.

Why can’t someone stop that baby crying?

European Commission Talks Tough

20th February 09 - European Commission talks tough

Gunther Verheugen, the industry commissioner of the European Commission, and as part of a red alert report over the unprecedented collapse of industrial production, said "The credit crunch is a reality, and even member states are having trouble financing their debts. Blind activism in not going to help. EU states and the commission must not take on the role of white knights. We don’t have a single euro in our budget to save companies. The financial options of the EU and member states are reaching their limits". Julian Callow of Barclays Capital said that an over-valued euro had slowly "hollowed out" Europe’s manufacturing core.

Eurozone factory output plunged by a record 12% in December 08 year-on-year. The worst falls were Latvia -21%, Spain -20%, Sweden -18% and Romania -17%. The commission said that sectors such as shipbuilding might never recover as Asian competitors take the next round of orders by offering "unfairly low prices. European yards do not have the means to withstand a price war or to operate at below costs for long". Europe still has 150 shipyards supporting almost 450,000 workers and control 35% of the global market.

The red alert report of the commission went on to confirm that the car and truck industry is in dire straits. Orders for heavy duty vehicles collapsed (that word again) from 38,000 last January to 600 this November. Car sales may fall a further 18% this year so cutting output by 2.5 million vehicles and the principal knock on effect is in flat steel orders that fell 57%, a rate that is twice the global one.

The tough talk and tough currency pricing is in stark contrast to the approach of both the UK and the US. History will judge and meantime France is having none of it in relation to its car industry with a 6bn euro soft loan conditional on no loss of jobs and no migration of plants beyond its borders.

Of City Fraud And Printing Money

19th February 09 - Of City fraud and printing money

We all now know about the whistleblower who was concerned about risk-taking. According to a report by Roland Gribben in the Daily Telegraph, whistleblowers have triggered five or six enquiries by the Serious Fraud Office following allegations of credit-crisis linked illegal activities. SFO lawyers are said to be coordinating their enquiries with the FSA and the City of London Police. Richard Alderman SFO director is said to be hopeful of launching four cases involving allegations of bribery and corruption by British companies by the summer of this year. Let’s hope he has more success this time around.

This week could see the start of the Bank of England’s "unconventional measures" to pump cash into the UK economy. This will involve buying commercial paper and probably securities whilst printing money to do so. Not only that, it is possible that government debt might be purchased. This latter action would represent the most drastic step so far in attempting to get economic activity moving again and something neither the US Federal Reserve nor the ECB has done. Traders have not lost the plot. In anticipation that this buying would occur, they have bought government bonds to sell later on when the Central Bank implement this part of the programme. Proof of this pre-activity was the fall in gilt yields. The one bit of good news for you and me is that the projection for the Consumer Price Index is that it could fall to 0.5% later this year. So continue to hold off those big buys.

IMF Cash Could Dry Up.

18th February 09 - IMF cash could dry up

The International Monetary Fund (IMF) has lent $47.9bn so far in this credit crunch crisis bailing out Hungary, Ukraine, Latvia, Belarus, Iceland and Pakistan and is on standby for the problems of Turkey and Poland. Its reserves of $200bn are running out fast and Managing Director Dominique Strauss-Kahn speaking in Kuala Lumpur said the fund needed an urgent cash infusion. The cavalry so far consists of just Japan offering $100bn. Some commentators think that the IMF (never mind sovereign states) will have to resort to printing money for the world probably using powers to issue Special Drawing Rights. A really big worry comes from tracking what has actually happened to those helped so far. The $16bn rescue of Ukraine has already gone down a black hole due to a 12% contraction of its GDP following the collapse of steel prices. Pakistan is asking for a further $7.6bn whilst Latvia’s central bank governor has declared his economy "clinically dead". Whilst little reported, protesters in Latvia have stormed parliament.

To date Austria has not found a place in this diary: that now changes. Austrian banks have lent 230bn euros to the ex-Soviet block in Eastern Europe. This is equal to 70% of Austria’s GDP. According to Der Standard reporting from Vienna "A failure rate of 10% would lead to the collapse of the Austrian financial sector". That failure rate is not fanciful since the EBRD says bad debts in those states will top 10% and may reach 20%!

Staying with Eastern Europe, Stephen Jen head of currency at Morgan Stanley said that the block had borrowed $1.7 trillion abroad and much of it on short term maturities. It must repay, or roll over, $400bn this year which is equal to a third of the region’s GDP. How? The credit has dried up.

One final tit-bit of fiscal misery. 60% of Polish mortgages are priced in Swiss francs and the zloty has halved in value against the franc. With this and the commodity blockage it is not hard to see why Poland is in the IMF queue. Do you have any spare cash for the drying up IMF?

He Told Them So.

17th February 09 - He told them so

There was a man. A man called Paul Moore. An ex-Partner of one of the big accountancy firms as it happens. This man claims that he repeatedly warned HBOS executives of excessive risk taking. He did have every right to communicate since his job was risk management. For his pains, he was sacked. This of course is just a claim at this stage but already the former Chief Executive of HBOS Sir James Crosby has resigned as deputy chairman of the FSA whilst simultaneously claiming that the allegations had "no substance."

That big risks were taken by HBOS is irrefutable. On Friday 13th (of February 09) Lloyds shares plunged 32% after the bank issued an unexpected statement that it would suffer a £10bn loss for 2008 and mainly due to the dramatic deterioration of the corporate lending book it inherited when it took over HBOS. A takeover done with insufficient due diligence (the process of getting investigating accountants and lawyers to pour over the books and agreements) and by the Government waiving the normal competition clearances. The enlarged Lloyds Banking Group capital tier 1 ratio will now be between 6.0% and 6.5% making the bank "the most thinly capitalised UK bank" according to Alex Potter of Collins Stewart.

After the UK taxpayer effectively bailed out the bank earlier, the 43% ownership could jump to a majority stake if further funds are needed. Worse still, Lloyds could become the second Northern Rock and have to be nationalised and in a legal ruling last week, the nil value placed on ordinary shares could stand. This is a very bad situation for loyal Lloyds TSB shareholders who stand to lose everything for doing nothing more than believing in their long-standing bank. A bank that, as was pointed out in a much earlier entry in this diary, did not need HBOS in the first place

Gluttony and greed are the second and third deadly sins respectively.

How Can $2,000bn Disappoint?

16th February 09 - How can $2,000bn disappoint?

The US stock market expressed disappointment at the new Treasury Secretary’s funding plan to tackle the banking crisis. How could this be when such an eagerly awaited "new" plan had been so heavily backed and joyfully heralded by the new President? Partly it was down to scale. The Secretary, Tim Geithner, said himself at the launch that it "will cost money (sic), involve risk and take time". But mainly it was down to lack of detail and vagueness of implementation.

There is an article on this website called "The $700bn US bail out" written last autumn about the toxic asset programme and pouring scorn on it. In the event, the tranche of $350bn was not used to form a bad bank but rather handed to the big banks to be swallowed up by the big holes in their balance sheets. The new programme known as the "Financial Stability Plan" is an attempt to get at and leverage up the remaining $350bn. No extra funds are to be called for at this stage.

The new programme has four elements. Further capital injections into banks but only after stress testing aimed at avoiding further "public distrust"; no value given to this aspect. Secondly, an expansion to the Federal Reserve Programme to purchase securitised consumer loans ($200bn to $1,000bn), thirdly the creation of a public-private investment fund to buy toxic assets from banks (here we go again!) - initially up to $500bn and fourthly a promised framework to tackle the mortgage crisis "within a few weeks" with $50bn to be spend on foreclosures.

It would be nice to feel bullish about all this but I share the collective view of the Dow Jones index. DOWN.

The Big Four In Surplus

13th February 09 - The big four in surplus

At the start of the financial crisis, there were four nations that ran large foreign reserve surpluses. The current state of the German economy has been covered in this diary along with its somewhat maverick approach to easing its export problems. What is happening to the other three? China had a near 20% rise in tax revenues in 2008 and in the first six months a record surplus of £128bn. But, by the end of the year its overall fiscal deficit was £12bn. Why? Because of massive Government spending in November and December. Spending in December month alone was up 31% compared to the same month in 2007. The capital outlay is on new roads, railways, schools and hospitals. This represents a different and swifter response than elsewhere in the world but then they had built up the financial muscle to afford such huge public works. How long does it take to teach a toy assembler to lay a railway track?

Japan which has been through all this before is taking a novel approach. The central bank is spending £8bn buying shares held by commercial banks. The authorities believe that the biggest risk facing the nation is not one of credit but share price volatility. The Nikkei 225 index has fallen 43% in the past year. Japan has pulled this trick before in 2002 to 2004 and it still holds 1.27 trillion yen’s worth of shares from that time (about £10bn). Will the banks this time around take the loss onto their books? We shall see.

Russia used to be in hurrah territory. Not any more. The main Moscow stock index (RTS) is down 75% in seven months, the worst performance of any major stock market in the world. We have an interest rate of 1% in the UK and lower in the US and Japan. In Russia it is 11%! The idea is to stop capital flight. Reserves have fallen over $200bn since August 08. In a country where 80% of exports consist of energy and metals and where the budget is based on oil at $95 a barrel, a re-draft of oil revenue at $41 a barrel represents a major u-turn. Russia, that erstwhile surplus nation, is having to fall back on its rainy-day funds. It has not stopped six million job losses in 2008 and a free-falling industrial output.

It is time the UK started thinking about what the Victorians did for us. Bring back the engineers, bring back the industrial and manufacturing base for quality goods. Whirligig. 

Thanks For The Lolly!

12th February 09 - Thanks for the lolly

You will recall that the Bank of England set up a Special Liquidity Scheme (SLS) so that individual bank lenders could help fund themselves through the financial crisis. This scheme was closed on 30th January 09. In the nine months is was available, banks and building societies borrowed £185bn and swapped £287bn of mortgage assets for Treasury gilts. These enormous numbers highlight just how deep was the debt of the lenders and the "rescue" how expensive. £102bn of insurance was priced into the loans via a reduction in the swap value know in the trade as a hair-cut. But, the value of the assets pledged has already fallen to £242bn so that the taxpayer’s margin is already down to £57bn (242-185). The swap last for three years. Some 32 banks and building societies used the scheme accounting for more than four-fifths of "the sterling balance sheet of the financial institutions eligible to use the scheme". The SLS has been replaced by a permanent "discount window" at which lenders can exchange a wider range of collateral for Treasury bills. This exchange can only last for three months not three years. The biggest three users were HBOS, RBS and (wait for it) Nationwide Building Society, only the biggest mutual in the land. If, like me, you feel a little sick, it is understandable.

On a more positive note, there are some grounds for mild optimism. Debt markets have started to open up again. Companies issued $246bn in bonds in January 09, which is the most since the credit crunch crisis began, but the relative cost is high. The Baltic Dry Index that this diary has tracked downwards since the start, has started to creep up again and so has the price of copper and lumber. Interest spreads on three-month dollar Libor have come down to 1% from the extreme of above 2% so at least the cost of money is coming down.

The reader must balance the first paragraph with the second, good luck.

Creeping Protectionism

11th February 09 - Creeping protectionism

The diary entry for two days ago ended with a note about the "American clause". This clause, which may or may not enter the US statute book, required American manufacturers to buy steel and heavy machinery from indigenous suppliers and so protect the nation from more import costs. The mere suggestion of such a move caused uproar in first Canada and then Europe with howls of "if you protect your own, it will open the flood gates for everyone else to do the same" sort of thing. The implication is that globalisation will die and nationalism return with a vengeance. Whether the clause appears in the latest begging-bowl for $937bn of funds or not, the idea has already slowed down approval of the legislation.

But levels of protectionism are appearing elsewhere. India has banned all imports of toys from China for six months. This may seem trivial: it is not. China makes three-quarters of the world’s toys and by the end of 2008, the number of firms exporting toys from China had halved to just over 4,000. Tens of thousands of factories have been shut according to toy trade associations in Hong Kong. India imports about half of its toys from China with a market worth around £350m a year. In December 2008, China raised the export tax rebate by 14% and so put Indian manufacturers at a disadvantage.

We have talked about Spain a lot recently. Industry minister Miguel Sebastian has launched a "Made in Spain" campaign telling the nation to buy Spanish clothes and take Sierra Nevada ski holidays rather than go to the Alps. Spain is losing jobs at three times the rate of the US proportionately. Over a million Spanish men under 30 years of age are unemployed. The overall unemployment rate is 14.4%. The current account deficit is 10% of GDP.

For the UK there has been a wildcat strike centred on imported Italian workers at a power station. This is a form of labour protectionism as distinct from a material one. Though the issue is now resolved, the portents are clear. Europe is full of imported foreign labour. Workers are getting angry.

UK Interest Rate At New Low

10th February 09 - UK interest rate at new low

The Bank of England’s Monetary Policy Committee made its fifth cut in interest rates in as many months on 5th February 09 to create, at just 1%, an historic low. The majority of commentators were sceptical of the value of this latest reduction. Whilst, for example, mortgage borrowers on tracker terms will benefit provided their supplier has not imposed a lower limit that is now hit, the majority of home owners are on fixed terms and those on Standard Variable Rates may well be on the wrong end of reluctance to cut further. Still the lack of credit is the main obstacle to liquidity in the system and Tony Dolphin of the Institute of Public Policy Research, amongst others, is baying for our old friend "quantitative easing". Largely because this latest cut was widely expected, the pound did not weaken further but rose by about a cent against the dollar to finish the day at $1.4628.

In stark contrast, the ECB has held interest rates at 2% notwithstanding that industrial orders in Germany crashed 25% in December 08 year-on-year which was about in line with both Japan and Korea. The second really sick man of Europe is Spain whose industrial orders fell 20% in the same period (see the earlier diary entry on housing in Spain). There is such a glut of unsold cars in Europe that they are being left on ships at anchor, clogging up the ports of Northern Europe. For regular readers of this diary who have followed the gradual move to fiscal stimulus outside Europe, it should be noted that the ECB is prohibited from "monetising" the debts of member states. In such a straightjacket, one would have thought logically that European banking leaders would have cut interest rates faster than their counterparts in the US and Japan and in Britain. That they have chosen not to is at the heart of previously robust Germany’s problems. No doubt my next Mercedes will be a bargain.

Down And Down We Go

9th February 09 - Down and down we go

One in every 150 UK companies went bust in 2008. The Insolvency Service disclosed that corporate insolvencies rose by more than 69% in the final quarter of the year, the worst increase in 15 years. It is feared that up to 38,000 small businesses could go under in 2009. Annus mirabilis.

Figures from the Office of National Statistics show that industrial production fell by 4.5% in the now infamous final quarter, the biggest drop since 1974, the year we returned from Singapore - see page 212 of Violets - oil crisis, IRA war and general industrial depression. So up we eventually went and down we now go again. Michael Saunders, an economist at Citigroup says that manufacturing output has now fallen by 10.5% in ten months from February 2008. Furthermore, as if more alarms are needed, the price manufacturers are paying for raw materials has started what could well be a relentless creep upwards as the weak pound makes imports more expensive.

There is no escape by going West young man either. 598,000 Americans lost their jobs in January 2009, the highest monthly total since December 1974 (see above re the UK), and pushing the US unemployment rate up to 7.6% of the working population. A staggering 3.6 million jobs have gone since the recession started in December 2007. These statistics are primarily why the new President is urging Congress to pass his fiscal stimulus package amounting to $937bn. But not everyone sees things this way. Senate Republican leader Mitch McConnell said that his colleagues were ready to support the bill "but we will not support an aimless spending spree that masquerades as a stimulus". There is also the small matter of a "buy America" clause.

The Pension Protection Black Hole

6th February 2009 - The pension protection black hole

Underfunded final-salary pension schemes continue to fall on the government sponsored, but not funded, Pension Protection Fund (PPF). The fund is met by a levy on all solvent pension schemes in the private sector. The public sector keeps its hands clean and its pockets full. The trouble is that as of October 08, the fund had a deficit of £517m. Worse, certain high profile collapses since such as Nortel Networks, Woolworths and Wedgwood will cost the fund another £500m according to John Ralfe an  independent pensions consultant. There is a decided catch 22 in all this since as levies on solvent schemes increase to fund the growing deficit of the PPF, so more final salary schemes may close.

The PPF pays out a maximum of £27,770 a year to qualifying pensioners and so far has 20,750 recipients across 68 schemes. There are pension scheme casualties knocking on the door and not least the vast UK end of Lehman Brothers. In some ways you could call this £1bn and growing deficit a sort of UK Companies Ltd "off-balance sheet entry" (see 99 business definitions on this website)

The accounting firm BDO Stoy Hayward’s Business Trends report says that UK manufacturing contracted by 4.6% in the final quarter of 2008. The trend line would lead to a further 250,000 losing their jobs in the UK over the first quarter of 2009 pushing the unemployment rate up to 6.8%. This trend in activity is not unrelated to the prime subject of this diary entry.

How the UK Treasury Is Missing Out

How the UK Treasury is missing out

The UK Treasury is forecasting that its revenue from stamp duty (that most hated of taxes) will fall from £14.1bn in 07-08 to £8.3bn in 08-09. Stamp duty is levied primarily on two transactions. The biggest is property transfer. Housing transactions have dropped 51% according to the Land Registry and of course the lower price of property will move whole swathes of houses down a band. Some would say it serves them right for imposing the swingeing increases for a non-added-value transaction. The second levy of stamp duty applies to the purchase of shares. 0.5% of the value of purchases attracts the iniquitous tax itself blamed for the rise in sophisticated financial instruments such as CFD’s (contract for difference) that do not carry the burden. In 07-08 the Treasury made £4.17bn from the shares levy but the value of holdings has fallen from £182bn to £109bn by December 08 according to Capita Registrars. This is the lowest level in real terms since 1981 and the first time private investors have owned less than 10% of the UK stock market.

Once capitalism retreats, everyone hurts. The Government is no exception.

US Position, The Latest

4th February 2009 - US position, the latest

The latest indication of how the new US President intends to move on the economic front came from Christina Romer the new chair of the Council of Economic Adivisers who has put forward a case for a further $825bn fiscal stimulus. The biggest factor influencing the need for more pump priming is the virtual halting of capital purchases by big business (as is also the case in the UK). Spending on business equipment and computer software was down 27.8% in the final quarter of 2008. Overall in that period, the US economy contracted at an annualised rate of 3.8% and actually the downward tracking is far worse since a large build up of inventories is included in the numbers.

Another change from the old administration is also in the offing. The plan to buy up all the toxic assets of the major financial institutions could be dropped. Instead, there is likely to be a two-part scheme. Creating a "bad bank" would be limited to mopping up just some of the distressed assets and then guaranteeing the remainder. Why the change? It seems that a wholly bad bank would entail forcing the financial institutions to sell their assets to the Federal Deposit Insurance Corporation at huge markdowns. The worry is that this might set off a new banking collapse and lead to nationalisation. The "guarantee" element would be similar to that already offered to Citibank ($306bn) and Bank of America ($118bn)

The world will have to wait and see if this new thinking pays off. It might have to wait some time.

Voicing The Unspeakable

3rd February 2009 - Voicing the unspeakable

At last someone has dared to say it. Say what this dairy has been mildly mumbling since early October last year. According to the Daily Telegraph’s Ambrose Evans-Pritchard reporting from Davos, Professor Stiglitz the Nobel Prize-winning economist and former chair of the White House Council of Economic Advisers, has said that Britain should let the banks default on their vast foreign operations and start afresh. He said a corrupt edifice should not be propped up but go bankrupt. "The UK has been hit hard because the banks took on enormously large liabilities in foreign currencies. Should the British taxpayers have to lower their standard of living for 20 years to pay off mistakes that benefited a small elite?" "The British Parliament never offered a blanket guarantee for all liabilities and derivative positions of these banks" "Counter-parties entered into voluntary agreements with the banks and they must accept the consequences."

Such a pity Professor Stiglitz wasn’t the Prime Minister back in early October 08. Remember the old adage - act in haste and relent at leisure? 

Bricks And Mortar Reality

02 February 2009 - Bricks and mortar reality

For the last ten days and 2,000 miles from home I have been looking at toxic debt. Not more poisonous words about the consequences of the credit crunch nor figures on a balance sheet but rather a Tenerife hillside. A hillside that in true Spanish fashion has been blasted away to make tiered granite steps large enough to hold apartment sized chunks of breeze blocks. Blocks that just sit there wondering what happened in this isolated corner of the Atlantic just off North Africa. 

Whilst I do not know this as an absolute fact, the gleaming block of residences called majestically "Royal Sun" and perched in their ochre glory high in the Los Gigantes rock together with the skeleton breeze blocks and the blasted out rock face awaiting its development fate, must be one element of our now renowned toxic debt. Twelve to eighteen months ago the first phase of Royal Sun was ready to sell. But the buyers held off. The upfront cost must have been enormous. The developer almost certainly went belly-up and the extended credit will be in some bank’s balance sheet as a debt. When apartment sales start again, will the new development firm take on the old debt? Of course not. Bad luck Mr Big Bank. Bad luck Spanish economy. Bad luck Spanish taxpayer. You are not alone and you exemplify perfectly the great push for human comfort in a world got mad with personal gratification now gone wrong

Who will restore the majestic mountainside of Los Gigantes back to its wild beauty?