Of Bangers & Mash

31st August 09 – Of bangers & mash

France, Germany and then Italy were the first off the blocks closely followed by the US. Indeed, it is putting bangers & mash on the menu that has been a major contributory factor to the easing of their economies out of recession. Bangers in this sense are of course old cars and mash is what has happened to them.

For the UK, albeit late to the party, sales of new cars increased in July 09 for the first time in 15 months. Also, the average price of a used car has recovered to levels not seen since the start of 2008. Underpinning the turn-around has been the European style scrapping scheme which the Americans, with their knack of capturing events with a memorable turn of phrase, call “cash for clunkers.” A car of more than 10 years clunking (7 in Germany) and that has been owned by the person trading in for at least 12 months can be exchanged for a new one at a discount of £2,000.

Trevor Finn, the chief executive of Pendragon – one of the largest car dealerships in the UK, said with some magnanimity “I started off being sceptical about it but was proven wrong. I didn’t think that the amount of money being offered would be enough to tempt people.” And then the second surprise “I thought the target audience for us was students. But it is not – it has been mature, retired people saying I’ll buy a small car.”

The funding of £2k comes from the motor industry and the Government 50/50. With £300m in the state pot, 300,000 sales can be funded and as at today, 155,000 orders have been taken nationwide and it looks like the quota will be used up by Christmas 09.

And now for the clever bit. Taking an average car in the programme (a small hatchback diesel) the Government gets a VAT recoup of about £1k on every sale. Self funding can’t be bad at a time when tax revenue on a broad front is dropping like a stone. Or a mashed-up banger.

Sleight Of (Japanese) Hand

28th August 09 – Sleight of (Japanese) hand

On the (ever smiling) face of it, Japan as the world’s second biggest economy has joined Germany and France as the third of the G7 nations to climb out of recession. But we should be cautious in drawing the conclusion that this news heralds the worst of the crisis as past.

First up is the issue of arithmetic. Like Germany and France, Japan measures “nominal” GDP. This measure allows for the prices of goods as well as quantum and on that score a negative was still produced. In the second quarter of 2009, prices fell by 1.1% giving a nominal GDP of -0.2% compared to the headline growth figure of 0.9% on which the principal announcement of the end of recession was based.

Then there is the question of fluke. Japan’s bounce in the second quarter was due mainly to a huge programme of fiscal stimulus where Government spending and tax cuts cost about 4% of GDP. This programme is hardly sustainable in other than the short-term.

Finally, we should think about definition. The widely used definition of a recession and also of its end is two or more quarters of contraction and then pick-up. In the US, the National Bureau for Economic Research (NBER) has a far broader definition of what constitutes a recession and an end to that recession. Stephen Lewis of Monument Securities said on this subject, “We should note that, of the 10 recessions that the NBER has identified in the US economy since 1945, six included quarters when GDP had been higher than in the preceding quarter. It should be no surprise that occasionally, during broadly-based economic downturns, GDP should be higher in one thirteen-week period than in was in the thirteen weeks previously.”

Not wishing to over egg the pudding, it is also a fact that Japan’s economic activity is still 7.8% below the pre-crisis peak. If we care to smooth or de-sleight (something like the 200 day moving average chartist apply to shares), it is doubtful if the 3 “growers” are much different in practical terms from their counterparts in the US, UK, Italy and Canada.

Pearl of the week

“The investment returns on your funds may be less or the investment charges may be higher than those shown in any illustrations you may receive from us, or obtain yourself using our illustrations.”

Sippcentre - keyfacts

Further Imbalance

27th August 09 – Further imbalance

The entry dated yesterday described how the gap between rich and poor has been exacerbated by debt and deflation. Another startling imbalance has occurred.

For the UK and in the year to March 09, 683,000 jobs were lost to the private sector. Concurrently, 285,000 more employees joined the public payroll. The principal reasons for the swelling of the public sector were as follows:-

• Banks that were nationalised as a consequence of the credit crisis have officially been reclassified as public corporations. These are Northern Rock, Bradford & Bingley, RBS and Lloyds Banking Group.

• Jobcentres have taken on more staff to handle the fall-out from the private sector.

• A claimed “culture of waste”. Jorg Radeke, economist at the Centre for Economics and Business Research said “This is part of a trend. Over the past couple of years there have been many more layers of government introduced – particularly in local government agencies – without having a great impact on the volume of public services received by the public.”

• Public sector productivity has fallen for much of the past decade.

• The public sector is less able to react to a recession quickly and efficiently.

The reasons for the employment imbalance as quoted above are taken from think tanks and professional economists. My view is that first, the employees of the erstwhile private banks and building societies are not public employees, to classify them as such is to play semantics. The comparison should be drawn by putting them back. Secondly, the heart of the matter is the management of public sector workers. Not its quality but its very presence. There is no management. Just watch for one day to know this is true. Technological tools abound and training levels are farcically high: none of this has produced greater productivity because there is no management of resources. And as for holiday and sickness entitlement ……

The Gap Widens

Credit crunch diary – 26th August 09 – The gap widens

Yesterday we talked about deflation and the disadvantageous affect it has upon debt. This theme can be developed. A recently published analysis by the Institute for Fiscal Studies shows that lower income households (broadly those in the bottom one fifth of income levels) are still experiencing personal inflation of up to 5%. This means that while prices generally are falling (deflation) and their debts are increasing in real terms, spending on the things they are wrapped up in, such as debt servicing, in rising. Contrasting this to the top fifth of economic cases, these people are enjoying lower prices coupled to not being burdened with debt or having lower priced debt.

What is happening, and not least in the UK, is that the rich are getting richer and the poor are getting poorer. The age-old economic gap is widening and ironically under basically socialistic administrations. Sandy Chen, a director of Panmure Gordon, makes the point that unlike in previous downturns, this credit crisis stands out as one in which the poor were allowed to rack up debt to unprecedented levels.

To me, this analysis goes far in explaining the dichotomy to which this diary has eluded in the past. Namely that the UK high street is still buzzing, the restaurants are full and the booze still flows. What we are looking at (the queue for tables at our favourite Indian restaurant last Saturday night) is those on the right side of the fence. In other words, the ever-so-slight recovery being recorded, and with Japan now joining the party, is a “narrow” and a “privileged” one.

Having tracked this crisis from more or less a beginning, it seems to me that what history will record as a salient factor is the differing position of the poor. In the past, the poor lived within their means simply since there was largely no option. Remember HP deposit requirements, remember credit purchase terms, remember strict multiple-of-salary loans? Throw this bath water away and the baby really is in trouble.

The crisis of the widening gap has arrived.

Deflation Not Inflation, Stupid!

25th August 09 – Deflation not inflation, stupid

Notwithstanding a plethora of favourable economic indicators (see a previous diary entry) and the recent news that both France and Germany have technically pulled out of their recession (just), it is the dreaded word “deflation” and not the widely anticipated inflation that predominates in the mind of serious commentators.

Gabriel Stein of Lombard Street Research said “Ultimately, US consumer prices will not rise on a sustained basis until the negative output gap has closed and a positive output gap opened up instead. At some stage, this will happen. But not for some time.” What triggered this observation was a figure showing that US consumer prices over the past year recorded the biggest drop since January 1950. The world’s greatest economy has been in deflation for the past eight months. America is not alone. Eurostat figures show that the eurozone’s consumer price index fell by 0.7% in the past year.

One would have thought that with prices falling, people would be happy. And of course those with funds are on the right side since what they have will buy more. But the overall message of the credit crisis has been of debt and debts get effectively bigger as prices fall since the quantum of debt does not decrease. That is probably why confidence continues to slide in tandem with worries on the jobs and wages front.

Chris Rupkey of Bank of Tokyo-Mitsubishi UFJ is quoted as saying “If consumers are lacking in confidence, then they will not be able to help us spend our way out of this long, dark recession. Households are still concerned about the jobs outlook, and certainly, Fed policy is also gearing off the labour markets as no Fed has lifted interest rates while the unemployment rate is rising.”

Still, there is always a reason to be cheerful. Pizzas and custard and Shepherd’s Pie are flying off the shelf, or off the delivery van, and “cash-for-clunkers” is working a treat as the old bangers feed the scrap yard men. Indeed that is largely why Germany is back in the black – can you believe it?

More Social Aspects

24th August 09 – More social aspects

In the last diary entry (21st August) certain social aspects of the economic recession were covered, notably the increase in demand for state school places. This diary item turns to the most direct social pain, namely unemployment.

Latest Government data shows that 2.4m people in the UK were out of work at the end of June 09. Vicky Redwood, economist at Capital Economics says that unemployment will continue to rise long after the economy picks up. “Partly it’s because of time lags between firms seeing the economy improving and being certain about the outlook to make the commitment to employ more staff. It’s not just enough for the economy to be expanding again. In the past it had to be growing at around 2.5% for unemployment to come down. And that could be a very long way off.” Capital Economics thinks that the number of jobless will peak at three and a quarter million in the first quarter of 2011. If this were so, it would shadow the post-war peak of 1984.

The office for National Statistics said that 18% of under 25 year olds were out of work and not in full-time education. The number of people in work fell by 271,000 in the quarter to June 09, the biggest quarterly drop since records began in 1971 (7.8% of the workforce). By a strange twist, and a favourable financial one if as is claimed a person out of work costs the exchequer £9k per year, the number of people claiming unemployment benefits is 1.56 million. This is due, it is surmised, to some three quarters of a million people simply not claiming benefits.

The non-spongers come from the ranks of those choosing to live off redundancy payments, savings or other employment benefits. Most of the non-claimers are thought to be middle-class who do not think of themselves as the sort of people who claim benefits.

As good a label as any for the prime social aspect of the credit crunch crisis might be “a white-collar recession” coupled with a “second earner recession.”

Social Aspects

Credit crunch diary – 21st August 09 – Social aspects

On a few occasions in the past, this diary has logged some of the social as distinct from economic aspects of the credit crisis. Not least, social unrest in China and Russia and more recently the prediction in the UK of a summer of strife through national strikes. Actually, a prediction now a reality with the so called “Royal” Mail service. A new phenomenon has now emerged. One which must have come from left-field to this socialistic inclined administration that, by instinct, has always railed against private education.

A report just published by the Audit Commission, which is a Local Authority watchdog, highlights that 34% of local authorities reported increased demand for school places. A further 34% anticipated higher demand in the months ahead. This result compares to a survey in December 08 when only 9% of councils experienced increased demand.

The increasing demand for school places is attributed to parents now priced out of the independent sector as a direct result of the credit crisis. The report concludes that consequently, some state schools will have to teach children in temporary classrooms. As I relate in my book Derbyshire born, we were taught maths in wooden huts over half a century ago. That was the new wave of Secondary Modern Schools. Ironic really.

This latest Audit Commission report also talks of a “second wave” of the recession and forecast a surge in crime, mental health problems, domestic violence, alcoholism and homelessness. Quite a legacy from the bankers who no doubt passed their maths exams at private school. A further prophecy is that while many parts of Britain would recover quickly, the most deprived areas could remain trapped in depression and long-term unemployment for longer.

Pearl of the week

“It was all fictitious. It was wrong and I knew it was wrong at the time.”

Frank DiPascali, chief financial officer for convicted fraudster Bernard Madoff, at a US court hearing.

Of Pious Hopes And Safety First

20th August 09 – Of pious hopes and safety first

I so remember the MD of a Price Waterhouse client (Coopers was a rival then) branding my main recommendation as a “pious hope”. Ironically, his division actually made bank notes but, as far as I ever knew, did not actually issue them (unlike someone we could mention). I also remember thinking his little speech that followed had an element of sanctimonious twaddle about it, but in the interests of client relations, desisted from saying so.

A certain UK national broadsheet, and on the day of their highest circulation, carried one full page in full glorious colour and three three-quarter pages, of advertisements from RBS about their avowed help to customers in this time of stress and specifically in one advertisement the help given to a niche brewer in purchasing more pubs. It did not mention the reason for the pubs being on the market. Such huge publicity spend was spread also over other broadsheet newspapers. All this gelled nicely with the B of E’s QE programme and the dressing-down such banks had been given by the Treasury for not trying harder to help small businesses. The trouble is it was all, in the main, barely camouflaged deception. I have a letter from this same bank to prove it. Safety first until we have our money back – that is the true policy.

The Insolvency Service has just announced that 5,055 companies in England and Wales were liquidated in the second quarter of 2009, a 39.1% year-on-year rise. To compound this, the availability of credit insurance has declined at the fastest rate ever. In terms of financial help, things could well get worse. The big four UK based banks now have over 80% of the market and unless the investment trusts (see an earlier article) get involved, it can only get worse.

The B of E has revealed that collectively the high street banks lent £14.7bn less in the second quarter of 2009 than in the first quarter and interest rates (not to mention rearrangement fees and visit fees) on commercial loans and overdrafts were way above the 0.5% bank rage.

The moral of this diary entry is never, ever come to rely on a high street bank if you are a small to medium sized business. To think you have a proper “relationship” would be to hold a pious hope.

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Rule Of Thumb, Rule Of Pound

19th August 09 – Rule of thumb, rule of pound

Two days ago, entry for 17th August, the stated reason for the extra £50bn of QE money printing was due to the banks still not lending to businesses (dealt with in detail tomorrow). But some informed commentators are muting, or muttering, that this was not the real reason for the great pump-priming or at any rate was certainly not the sole reason. It is to do with rule of thumb. The pound has appreciated against the greenback by 6% in the past quarter and by the famous rule of thumb, this is reckoned to be equivalent to an interest rate rise of 1.5 interest rate points. Given the current base rate of 0.5%, this means a quadrupling of the true cost of money on the exchanges.

The point is that the B of E does not, as an issue of policy, aim at currency rates. This is, for example, in contrast to (say) the Swiss National Bank. But if the rule of thumb about the relationship between the strength of a currency and domestic base rates is about right, then to issue money knowing it will reverse a currency appreciation, amounts to the same thing as intervening in the currency market. Except it is a bit more subtle.

Hans Redeker of BNP Paribas is quoted as saying “Unless the UK is ready to deflate its production costs heavily, it can only achieve required competitiveness by reducing the value of sterling… The BofE knows this and its decision to increase its quantitative easing efforts may well have to be seen in the context of summer sterling strength.”

So there we have it. Rule of thumb to rule the pound, but indirectly. Not that there is as yet much evidence that exports are responding to a relatively weak pound. Part of the reason for this can be found in tomorrow’s diary entry.

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Take Over Bid For UK Treasury

18th August 09 – Take over bid for UK Treasury

Following the news that the Bank of England is to buy a further £50bn’s worth of gilts, this question is starting to arise, is the whole QE programme no more than an elaborate scheme for monetising the UK Treasury’s ballooning debt? In other words is the B of E making a take-over bid for the Treasury.

Danny Gabay of Fathom Consulting said the news of the extra gilt purchases “reflects the fact that the bank has to all intents and purposes cornered the market for certain gilts or bonds, to which market participants may still need to have access.” What he is saying is that the central bank now owns so much of the gilts market that it has agreed to lend gilts, temporarily, through the Debt Management Office to ensure that banks are able to close out positions as necessary. Whirligig or what?

To elaborate, the B of E is to start buying gilts of both shorter and longer maturities than the 5 to 25 year set is was originally planning. In fact, it has suspended its purchase of four particular maturities of gilts once it had emerged that it had acquired as much as 70% of the total issue. What this all amounts to is that the central bank owns the country’s sovereign debt. At any rate, it will soon own almost half of the entire gilts market, currently worth around £400bn.

Coupled to keeping the Bank rate on hold at 0.5%, the extended QE programme sent the pound more than a cent and a half lower against the dollar at $1.6801 but it strengthened against the euro after the ECB left its key rate at 1%. Gilt yields dropped before settling at just above 3.7%.

I was thinking. Why doesn’t the Chancellor (a Scotsman) just say to the Governor (an Englishman) “just give us the dosh mate.” Or is that too Australian?

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To Divine

17th August 09 - To divine

Someone with a special talent can use a rod and if it twitches there is water about. Without any talent one could use a rod around here and it would probably shake your arm off. That is a funny thing since the weather forecast is consistently day-by-day for warm sunny conditions. Of course that error is down to forecasting. Not the most reliable of sciences. Which brings me back to economics, the credit crisis and Sebastian Becker, an economist with Deutsche Bank in Frankfurt.

Mr Becker has a definition of excess liquidity. The definition is money supply that is surplus to the needs of real economic activity and therefore free to be invested in financial assets. He combined monetary growth figures for the US, Japan the eurozone, the UK and Canada and he found excess liquidity – measured as a rising stock of money to GDP - in these economies is now being created more rapidly than in the late 1990’s stock market bubble, or during the subsequent house price boom. The inference of excess money relative to growth is of course inflation.

One could surmise that all the positive statistics noted in this diary of the 14th August represent merely a tentative indicator of a turning point from a low ebb and may even be a temporary phenomenon. One could say that the German based economist is looking at a long-term and global picture and perhaps being unduly alarmist. But even so, the latest announcement from the Bank of England’s Monetary Policy Committee has come as a major surprise to just about every commentator, even a shock.

QE has reached £125bn at this date. The UK Treasury had mandated a ceiling of £150bn. The committee intends to print money to the tune of an extra (not £25bn) £50bn. Shock, horror. Why? The central bank says that despite the indicators, banks are still not lending freely to businesses or consumers – a sign that the credit crunch remained a major problem. "In the United Kingdom, the recession appears to have been deeper than previously thought. GDP fell further in the second quarter of 2009."

Back to the drawing board.

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The Worst Is Over

14th August 09 - The worst is over

According to the National Institute for Economic and Social Research (NIESR), May 09 could prove to have been the trough of economic activity for the UK. “Output is stabilising and, in the absence of further shocks, the period of sharp recession is over." Other optimistic statistics arose simultaneously:-

• The Royal Institute of Chartered Surveyors expects house prices to rise this year (2009) in a reversal of its earlier forecast of a fall of between 10% to 15%

• The Halifax house price index rose by 1.1% in July being the second increase in three months. It halved its forecast for a drop in house prices to 7% or less for 2009

• The purchasing managers’ index for the services sector rose to a 17-month high reaching 53.2. A reading above 50 denotes expansion

• Government data showed a 0.5% increase in industrial production, the strongest figure since October 2007

• Investment banking profits have boomed again at HSBC and Barclays

• The FTSE is reaching the upper plains towards the 4,700 mark

• The value of commercial property has risen for the first time since June 2007 (CB Richard Ellis - property agents)

While these dry statistics might seem a little high-flown and academic, two UK companies that deal with the mass market have both posted upbeat trading statements this week. One was Carpetright whose product is pretty obvious and the second Premier Foods who provide such staple items for the UK palate as Branston pickle and Hovis bread.

It is the end of a muggy and rainy, dull week. Was there a sight of the sun today?

Pearl of the week

"Forecasting, after all, is difficult - especially when we are dealing with the future."

Peter Bickley, Deutsche Bank.

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Lloyds and The Mixed-Up Kid

13th August 09 - Lloyds and the mixed-up kid

Confused or what?

Remember that the major UK retail lending bank called Lloyds/TSB bought, without monopoly authority referral, the Halifax/Bank of Scotland banking group. The latter was already a mixed-up kid in that the Bank of Scotland (not to be confused with the RBS) specialised in high-quality lending to businesses and the former was an erstwhile building society. The amalgam is about as mishmash as it is possible to be in the banking world especially considering its dabbling in private equity and the wholesale funding market. Consequently, reading its first six-monthly accounts was never going to be for the reception class children.

Starting with the bottom line, the pre-tax loss was £3.96bn. Shame it couldn’t have been £4bn, at least some of the arithmetic would have been simple. Deep breath. Originally, the taxpayer invested £14.5bn buying a 43% stake in the new Lloyds Banking Group. The price per share was 122.6p. At the instant of writing, these shares are within a whisker of £1 having risen over 18% in the two days following the results. That leaves a paper loss to date of £2.7bn (my own holding after two averaging down purchases stands at £1.84 a share, so like many private shareholders, the state stands to profit before the small guy).

However, what the accounts reveal is that the taxpayer actually owns 62% of the bank because it has spent in the six month period a further £15.6bn to buy "B" shares as consideration for the Asset Protection Scheme (APS) the bank has been forced to accept. So this Lloyds is now mixed up, like its namesake, in the insurance market. And what do we know of the APS in action? The insurance cover is for £260bn of loans. The policy "excess" is £25bn. Of this, £10bn has been written off already. You and I are now left dangling to the tune of the remaining £15bn out of the £250bn left to assess (6%). How safe are you feeling? Glad I wasn’t the FD taking this lot to the board.

By the way, the APS has yet to be signed but the bank is "confident of securing EU state aid approval to complete the negotiations." And what has the EU to do with it? Let’s not confuse matter even more, one extra mixed-up kid may just be one too many. PS, the £3.96bn loss was struck after crediting £3.73bn "fair value unwind" that would not normally be an above-the-line item. But then, these are not normal times.

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More Predictions

12th August 09 - More predictions

This diary has religiously stuck to reported facts as they have emerged during the year of the credit crunch crisis. Except that is for yesterday when a prediction by the IMF on the US economy was too important to miss. Similarly, the rule of fact will be broken for a second time today.

An august body called the Policy Exchange and that describes itself as a "independent non-partisan educational charity", has predicted that when public spending in the UK is reduced (note, when not if), the crippling strikes of the 1970’s could be repeated. Mass walkouts could be commonplace in a new "age of militancy".

Geoff Martin of the National Union of Rail, Maritime and Transport Workers is reported as saying "People are being expected to pay a heavy price for a recession that they did not create. That’s why we are getting this rise in militancy." What rise? Well apparently we are in for a summer of discontent with a series of strikes already planned or on the drawing board. In the frame is a national postal strike, rail and public transport disruption and staff at power stations and oil refineries are to be balloted following the recent unofficial actions over foreign workers.

It does have to be said that this is not likely to be empty rhetoric. There is much, and largely unreported, social unrest in Russia and China right now and socialistically inclined organisations are baring their teeth elsewhere. It is perhaps surprising that the private sector workers have been remarkably resilient during the pain of part-time working and redundancies. Resilient, or is it just resigned? Without a collective voice, staff from offices and factories alike have simply taken it on the chin.

Those of us that remember the 1970’s know what public service unions are able to harness. It is not nice and it is not helpful and actually everyone that over borrowed and bowed to the god of materialism did help create the recession. Mass strikes will not cause the downturn to go away, will they?

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IMF Predicts

11th August 09 - IMF predicts

Hard on the heels of the International Monetary Fund clocking up the debts of the UK economy (see yesterday’s entry), their latest report is both upbeat and over the pond.

The annual report of the IMF on the US economy says that the severe contraction "seems to be ending" but recovery will be slow. Coinciding with this report came the release by the US Commerce Department of the 2009 second quarter GDP figures. These figures showed that the rate of economic slowdown in America was decreasing. The contraction for the three months to June 09 was at an annualised rate of 1%. While still falling, the rate was slowing markedly and this was attributed to two main aspects. First, increased consumer spending and secondly the federal fiscal stimulus packaged amounting to $787bn.

The measure of improvement can be gauged by the fact that the first quarter’s decline in annualised GDP has been revised downward to 6.4%. This represented the biggest set-back in growth since early 1982. To compound the historical comparative, US GDP has fallen for four consecutive quarters, the first time this has occurred since 1947 when records began.

The IMF report was completed before the GDP figures were published and this makes its statement the more important, "As a result of their increasingly strong and comprehensive policy measures, the sharp fall in economic output seems to be ending, and confidence in financial stability has strengthened."

We could add that Americans are saving harder than they ever have. Looks like the economic score today is USA 1, UK 0.

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10th August 09 - 81.8% full

If the UK economy was a pint of foaming ale, the pot would be 81.8% full, provided that ale and debt was the same thing. Admittedly, the head needs to settle a bit and the man from the Treasury sitting opposite might take a quick swig while you are not looking but even so there is not much fresh air space.

The IMF has been doing its sums again. It reckons that the total amount of financial support handed to the UK’s financial sector is about £1.227bn or equivalent to 81.8% of GDP. Not only is this more than handed to any other major economy but it accounts for one fifth of the grand total spent by all rich (or previously rich) countries. The figure is an amalgam of :-

• Financial support for banks (18.2%)

• Capital injections (3.9%)

• Buying frozen assets (13.8%)

• Government guarantees (49.7%)

• Bank of England liquidity provisions (14.4%)

Qualifications need to be placed on adding up numbers from such diverse sources in that certain aspects are not like-for-like and guarantees may never be called upon. Nevertheless and to pile on the misery, the IMF says that Britain faces the biggest projected budget deficit of any G20 country and amounting to 13.3% of its GDP by 2010. The US deficit is 9.7%.

Before you have a pint too many and throw yourself off Westminster Bridge, Fitch, one of the three major ratings agencies, has just reaffirmed its AAA stance for the UK and given it a "stable outlook." It said it expected the eventual cost of the financial sector bail-out to fall from an initial outlay of £145bn to £40bn due to banks recovering and the Exchequer reclaiming its loans.

Confused? Me too, but the IMF does not have a reputation for getting things wrong.

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7th August 09 - The sense of Footsie

We have five senses (thought it’s the sixth that really matters) and in relation to the stock market performance of the top 100 UK companies since the summer of 07, it has become second nature to watch the falling graph, touch the empty money box, smell that carnage and taste the bitterness. Is now the time to listen?

Anything that has fallen by 47%, as has been the case for the FTSE100 between the middle of 07 and the Easter of 09, is by definition at a low ebb. Any rise from a low point will, in percentage terms, have a magnified edge relative to the zenith. Even so, a rise of 8.5% in one month (July 09) is worth listening to. And I do mean listen. The essential point about the stock market is that it is taking the position as at today and assessing the future. There are technical factors that give skew and bias to specific shares at any time but over 100 big businesses one can expect a smoothing out.

Putting the pretty pictures and the sentiment aside, is the big market saying something to us that we investors ought to be heeding? The answer is yes. Big business has been cutting costs, and cutting in a big way. Big business is global in reach and corporate feelings are pretty much numb. Chinese gentlemen can be seen sipping Johnnie Walker scotch and Chinese ladies like to parade their Burberry handbag. Most importantly, low share prices of big business mean yield and yield means income that deposit accounts do not pay.

If you are listening to what the market is saying, you might think we are at the start of a new bull run. You would be correct.

Pearl of the week

"I wish that, before I was 50, I had known the difference between net and gross profit." - Sir Richard Branson.

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Where Does The M4 Go?

6th August 09 - Where does the M4 go?

The M4 goes from London to Bristol and beyond, is one answer. Another answer is that is goes downhill when it is supposed to be rising. That is to say, the headline M4 that is the money supply measure. The broad measure of money supply in the UK fell 0.2% in June 09, the biggest decrease for almost five years.

The reason that a drop in money supply is such big news is because of our old friend quantitative easing. The B of E has spent its £125bn on buying in gilts and commercial bonds and still money in circulation goes down. The most obvious evidence is provided by potential buyers of property who still struggle to find funds. Howard Archer, chief UK economist at IHS Global Insight, said that there was little hard evidence of the policy’s (QE) success and that was potentially worrying for recovery prospects.

Both consumer credit and new mortgage lending were below forecast levels and a £414m increase in net lending was the weakest since the B of E started collecting this data in 1993. There is some hope that more cash will flow to end-users soon since mortgage approvals totalled 47,584 in June an increase over the previous month of 7.7% and the highest figure for 15 months. However, Bridget O’Leary, senior economist at the Royal Institution of Chartered Surveyors, said that activity was still weak despite the welcome improvements and net lending for house purchases remained 50% below the long-run average while house deals were still falling through due to a lack of finance.

Overall the consensus is that the QE programme has failed in its fundamental objective of increasing the supply of dosh but should you want to take the M4 to London you will find some stronger banking balance sheets. But you will be wasting your breath to ask for readies.

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Bumper US Banking Profits

5th August 09 - Bumper US banking profits

It may seem surprising, even baffling, but the big US investment banks that were in so much trouble last autumn have sprung back into life. First we had Goldman Sachs, then JP Morgan Chase and now it’s the turn of Bank of America and Citi Holdings to hold the torch high.

In the second quarter of 2009, Citi Holdings which was the hardest hit by the credit crisis and had to tap the Treasury for $45bn of state aid, recorded a profit as a result of a $6.7bn gain from merging its Smith Barney brokerage into a joint venture with Morgan Stanley (three hearty cheers for the accountants). This windfall raised net income (profit) to $4.28bn compared to the $2.5bn loss recorded in the equivalent period last year. Even without this one-off gain, the 26 cents-a-share loss was less than had been expected. The investment banking and trading division increased its operating income by 16% to $2.84bn whilst the brokerage and asset management gains more than offset losses from consume finance and the winding down of toxic debt. The overall favourable outcome at Citi came despite an increase in bad debt provisions of $3.9bn.

Meantime, over at B of A, a quarterly profit of $2.42bn was reported and this in the face of a whopping bad debt provision of $13.4bn. The exceptional item for this bank was a $5.3bn gain from selling part of its stake in China Construction Bank. Trading at B of A enjoyed a bumper crop (of spreads) helped much by the acquisition of Merrill Lynch.

It all goes to show how things can turn around given a liberal dose of state aid and less competition and an instinctive willingness to fight back.

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The Bellwether

4th August 09 - The Bellwether

Notwithstanding China and all the other economic upstarts, it is the US economy that dominates the global scene and if we go back to where this recession began, it was the US housing market that caused the house of cards to collapse. That is why out of the plethora of economic data flowing from all manner of sources currently, one item sticks out as disproportionately important.

The US Commerce Department has produced figures showing that the sale of new homes rose to a seasonally adjusted annual rate of 384,000. This compares with 346,000 in May 09. This may not seem, prima facia, as all that significant. But it is. Just as the US economy is key to world health, so the US housing market is key to US economic health. The practice of selling houses to those who could not afford to pay the attached loans was the root cause of the crisis that first manifested itself in the third quarter of 2007 and the recovery of that market is the indicator of confidence returning to the American consumer.

The 11% increase in the sale of new homes in June 09 was the biggest monthly increase in eight years and has all the hallmarks of a bottoming out of the two year glut. Of course, the main reason for the increase in house sales was falling prices that itself was a symptom of repossessions. The median sale price of a house at the end of June 09 was $206,200 down from $219,000 a month earlier. But that is how free markets work, at some stage the scales tip.

A secondary indicative statistic coming out of the US Commerce Department, and one that is watched closely, is that at the end of June 09 the number of homes up for sale equalled a supply of 8.8 months. At the end of January 09 this figure was 12.4 months. When America sneezed the world really did catch a cold. Dare one even hope to believe that the pandemic has run its awful course?

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Tracking The 1930’s

3rd August 09 - Tracking the 1930’s

It is an amazing thing that according to Martin Weale of the National Institute for Economic and Social Research, the shape of the current recession in the UK is virtually identical to that of output between 1929 and 1931. The economy contracted by 5.6% in the year to end June 09 compared to 5.8% in the year preceding the second quarter of 1931. This means that the recession is far deeper than those of the early 1980’s and early 1990’s.

The fact that the rate of decline slowed markedly in the second quarter of 2009 (0.8% contraction of GDP versus 2.4% in the first quarter) has brought back into focus the issue of whether a return to growth could come sooner rather than later. Such prognostication is strengthened due to the fact that the financial crisis (as distinct from other causal factors) was much greater this time than in the 1930’s and so the fiscal and monetary measures taken ought to pay dividends relatively quickly.

The consensus amongst commentators seems to be against optimism. Michael Saunders, UK economist at Citigroup, said that although he expects growth to return in the third quarter, the recovery will be subdued. "As well as a deep recession, we expect a slow recovery, help back by high private debts and poor credit availability." Citigroup think that it will take until 2013 for the economy to reach the pre-recession peaks of 2008.

Of course, not many thinking people alive today can remember the 1930’s. The comparison of the curve is therefore largely irrelevant. As I write this entry, the FTSE has risen for a tenth straight day and the resultant 10.9% increase is the highest uninterrupted one since the index was set up in 1985. The stock market looks forward - not back. So that is ok then.

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