The Credit Crunch Diaries

The second cryptic twister.

2010-03-01T05:52:00.000-08:00

Two days ago, we learned how top investment bankers at Lloyds Banking Group “earn” bonuses out of losses (or rather negative profits). Now we hear that RBS paid its investment bankers £1.3bn after it made £1bn in profit in 2009 and not the reported £5.7bn. This is because £4.7bn of the bank’s worst losses were transferred to a “non-core” division. Two other things to clock are that:-

100 of the investment bankers received more that £1m each
Chief executive Stephen Hester justified the bonus to the parliamentary select committee on the basis of staff retention. Michael Reuther, head of corporates and markets division of Commerzbank the large German bank said that his bank would still be able to attract and retain staff. Commerzbank is not paying any bonuses.

More at www.jgwalkersmith.co.uk

An early candidate.

2010-02-27T09:57:00.000-08:00

An early candidate.

An early candidate has emerged for the 2010 Business & Finance Awards (see main website for 2009 top ten.) A new category may be added “Most cryptic twister.”

Sir Win Bischoff chairman of Lloyds Banking Group has explained that “You set performance criteria in light of what it will be. The “X” may be a minus. You are grading people not by absolute numbers but on a relative basis.”

The state-backed bank made £6.3bn “minus” profit in the year to end December 09 and if he had not foregone it, the chief executive’s bonus would have been £2.25m.

The remuneration rules for Lloyds Bank are worth a second look. “Half the incentive is based on the stretching budget relating to profit before tax and economic profit.” So, one assumes that the definition of profit (and in complete defiance of all the technical tutorials on my website) can include “negative” profit and we are left whimsically guessing at what the other half of the incentive package is based on.

Who remembers Watergate, the explanations of Bill Clinton and the “unknown unknowns” of Donald Runsfeld?

More at www.jgwalkersmith.co.uk

From Chelsea to Yorkshire via losses.

2010-02-26T08:26:00.000-08:00

From Chelsea to Yorkshire via losses.

All of you that laboured through my credit crunch diary (Oct 08 to Oct 09) will recall, I lambasted the Chelsea Building Society on several fronts that I will not bore you with repeating. The chickens (or perhaps better the dogs and turkeys) duly came home to roost. The recorded loss for 2009 is £27.1m before tax as it was hit by a £41m mortgage fraud. This monumental figure was exceeded only by its provision in the previous year of £44.3m against the Icelandic bank.

The “mutual” solution is to merge with a rather larger society, namely Yorkshire, that incurred mortgage bad debts of £59m in 2009 and causing an overall loss before tax of £12.5m. As I mentioned before, Chelsea isn’t actually in Chelsea so let’s hope Yorkshire is actually in that first-class county that has always enjoyed a reputation for looking after its own. One of my Chelsea rants was about executive remuneration but this was not in the investment banking league. On the other hand, investment bankers made money.

Rank the fruit machine.

2010-02-26T08:24:00.000-08:00

Rank the fruit machine.

Rank Group the quoted casino and bingo hall operator and with a leisure industry pedigree longest than most, has turned the post-smoking ban corner. In the year to December 2009, it turned loss into profit, reduced its debt burden and equally important, brought new products to the market including a more upmarket casino brand “G” and a more whizzy late-night form of bingo with music for the youngsters. Maybe a slug of those youngsters who have neglected Luminar that in turn led the boss Steve Thomas to call it a day. Furthermore, Rank expect to get back from HMRC about £35m in recovery of overpaid VAT.

Non of this interests me as much as a bald statistic thrown up by Rank’s annual report. The group operate 991 “club” fruit machines that now pay a jackpot of £500. Anyone who has read my book Violets will have enjoyed my tale of travelling the UK buying up routes of club machines for Bell-Fruit and explaining why. Club fruit machines are magic to operate. You could find the best ones in Bolton and Dundee but in this dreariest of UK winters, why not do a spot of research to prove the international case for this fact. I recommend Las Vegas and the club world of Sydney.

More at www.jgwalkersmith.co.uk

Out Of Character.

2010-02-19T02:20:00.000-08:00

Out of character.

If he was a brinkman by nature, one could perhaps come to terms with it. The sort of man that can take an exceptional risk with confidence in a super future benefit. The sort that willingly puts his home on the line as security for borrowings.

But Gordon Brown is just not that man. He gives the impression rather of nervous twitchiness and remember that all the women in his life were named Prudence. So the latest UK debt figures are doubly frightening: as if he does not understand or if he does fears no consequence, no personal assets at stake. Secondly, a democracy is supposed to throw light on such blindness. But there is no effective reining in, no group of people capable or willing to appreciate the obvious. Namely that the UK is rapidly going bust.

January is a good month for national finances. Income tax, corporation tax and capital gains tax peak due to the six monthly instalment not least from the self-employed. But this time (2010) there was actually a shortfall in public finance with net borrowings of £4.3bn. This was £9.6bn more than net borrowings in January 09 – itself hardly a successful financial month. Britain’s national debt now stands at £848.5bn or 59.9% of annual GDP.

On the bad news, gilts rose to a 15-month high yield of 4.1%. Just think, that is eight times the bank rate! On currencies, the pound dropped against the dollar and (note this) also the euro despite the eurozone woes.

Economists currently disagree on the timing of public expenditure cuts. But, as Boris Johnson has proved in London, reduced spend and loss of service are not mutually exclusive. He has cut spend by increased efficiency and productivity, leaving front line services untouched. We need a change and fast.

More at www jgwalkersmith.co.uk

Capital versus revenue cost.

2010-02-18T08:12:00.000-08:00

Capital versus revenue cost.

I would like to have a little bet with anyone interested that given the reduction in the capital expenditure allocated from the Exchequer for public services, some accounting engineering is going on. After all, what is deemed a “capital” cost and what a “revenue” cost is down to definition. All capital is revenue eventually, it is merely a question of deferment via the mechanism of depreciation/amortisation.

If I ran an educational establishment (where capital spending is reportedly being cut back) I would ask my money man to think of ways to re-classify some categories of hitherto capital cost and/or start changing our behaviour. We might, for example, think of things like fixtures and fittings and furniture and office equipment and raise the floor amount at which “capital” arises. We might also rent/lease (short term) equipment previously bought in. We might outsource more stuff. Someone just said that local government needs to be more enterprising, probably not with this in mind.

More at www.jgwalkersmith.co.uk

2010-02-15T06:51:00.000-08:00

Job vacancy
Wanted: An old fashioned type hero
Qualification: Not brain-washed
Compensation package: a small girl’s life

China’s next big export?

2010-02-08T01:56:00.000-08:00

China’s next big export?

No nation has had more written about it over the past eighteen months (certainly in my case) than China. The world’s greatest creditor nation and sustainer, if not causer, of the West’s consumer binge.

Now stand back for the next major export. This one will bug you even more.

Prof Xiao, the head of China’s National Antibiotic Resistance Investigation Network has said, “In Chinese hospitals our data shows that 60% of inpatients are being prescribed antibiotics compared with the World Health Organisation guidelines of 30%.” It is reported that although China’s state food and drug administration bans the sale of antibiotics without a prescription, such drugs are easily available over the counter (source Daily Telegraph). Three out of five chemists agreed to sell antibiotics after a cursory consultation with the “patient” who complained of a sore throat. At one outlet a pharmacist handed over a course of the second-generation antibiotic, Cefuroxime Axetil, with minimal hesitation. Asked if the sale could get her into trouble, she said that the pharmacy would get a doctor to write the prescription later to cover its sales records.

Scientists say that the reckless use of antibiotics in the health system and agricultural production is creating an explosion of drug-resistant super bugs that risk global health and there is a frightening rise in bacteria such as MRSA spreadable quickly via international air travel and food sourcing. A new strain of MRSA has already been found in Chinese pigs imported into Hong Kong. The source was confirmed as Guangzhou where many of the pigs are farmed.

You could stop buying Chinese goods for a while. Try stopping this export.

More at www.jgwalkersmith.co.uk

Obama’s heart over head

2010-01-28T07:34:00.000-08:00

Obama’s heart over head

One can sense it in President Barack Obama’s passionate belief in a form of UK-style NHS. His risk is whether heart rules head in a sovereign culture that still sees self-help as the American way and fears a monolithic socialist state. That is my reading of the lost seat in the Senate held for so long by the late Edward Kennedy.

Now we see it again. His twin attack on the evil American banks is:-

• To forbid proprietary trading

• To slim down banks to become smaller entities.

From the heart, both aspirations are admiral. From the head there are certain practicalities. The US government (like its UK cousin) leans on the investment arm of bankers to find buyers for its own debt. There is plenty of that debt about as we all know only too well. To upset the applecart overmuch might be to cut off ones nose to spite ones face, so to speak.

Is there a measurable difference in risk degree between what banks do for themselves and what they put on the line for their customers? Is it big that is bad per se or the management of risk?

As a big fan of President Obama, I am a little worried. Worried that the heart precedes the head. A big climb-down on either or both the health care and banking issues would set things back considerably.

More at www.jgwalkersmith.co.uk

Obama the clever, bold and right.

2010-01-16T06:06:00.000-08:00

Obama the clever, bold and right.

It used to be American-ese that was sickening. No more. The only world statesman speaking plain English these days is President Obama. These are the direct words that matter in a bold plan for Americans to get their own back on the bankers that have been saved by the taxpayers and are back making mega-bucks.

“Massive profits and obscene bonuses at the very firms who owe their continued existence to the American people.”

“Recover every single dime.”

His plan is a straight right to the goolies. The tender parts in this case being wholesale funding. A 0.15% levy is aimed at twin objectives. First, get our money back and secondly, change your behaviour. If you recall the $700bn TARP (well covered in the credit crunch diary of this website), the President thinks that $90bn will be lost for ever. So he intends to shrink the evil ones’ balance sheets and get it back. And again the Americans have coined the perfect words, Financial Crisis Responsibility fee. Exactly and in straight forward plain English too.

Contrast this to the UK’s plan for taxing bonuses above a certain level. That is both emotive and easily get roundable. They are serious, we fart about.

More at www.jgwalkersmith.co.uk

German Recession

2010-01-14T06:01:00.000-08:00

German recession

Those that followed my credit crunch diary in the crucial year to October 09 will know that the sovereign state of Germany got itself labelled as a maverick by diverging vociferously from the path chosen by the UK and the USA. It did not believe in priming the pump, in printing money and generally spending its way out of the recession. Was it right initially and did it play catch up too late?

Official figures (UK statistics are due on January 26th) say that over 2009 the German economy contracted by a full 5%, that its reliant export trade shrank by 14.7%, business investment was lower by 20% and 3.3 million are out of work – 8.2% of the working population.

Whether this is a price worth paying for what will turn out to be a retained relatively low level of government borrowing is hard to say at this stage. The absolute comparator with the swift moves by the UK and the USA to loosen monetary and fiscal policy will almost certainly turn on long-term legacy debt.

A 5% decline in sovereign wealth is a lot. Is balance sheet strength worth it? We shall see.

More at www jgwalkersmith.co.uk

Whether or not

2010-01-08T03:44:00.000-08:00

Whether or not

Two days ago I blogged about wanting a bit of the global warming as we continue in the big freeze-up. Last night on TV a reporter who has obviously picked up this theme as being in many people’s mind, said it was very important to distinguish between weather and climate.

Over to you.

More at www.jgwalkersmith.co.uk

Boiling over with mirth

2010-01-07T10:52:00.000-08:00

Boiling over with mirth

You could not fail to see and hear the brown stuff extolling the virtue of a new government initiative. For a limited quantity only, so rush rush to cash in, you can get £400 towards a new domestic boiler. The environment wins, your pocket wins, the UK manufacturers and installers wins, it is a win-win situation all round.

What was not mentioned was that based on the average price of a new boiler, the VAT (non-recoupable for domestic users) is £437.50. No marks for working out who else wins. You have to laugh really.

More at www.jgwalkersmith.co.uk

Of the white stuff atop the icy layer

2010-01-06T09:09:00.000-08:00

Of the white stuff atop the icy layer

To a depth of about six inches the snow covers our rural landscape and as if to mimic, the sound is ghostly too. In fact there is no sound. No traffic, no movement, no sound.

On TV last night was a fleeting glance of northern China and northern India. Their vast landscape was also blanketed in the white stuff. Beauty defeats the industrial push of even these two behemoths.

Was it really only two weeks or so ago that the world was beating its divided chest about global warming? Could you please pass a little of that phenomenon in this direction.

More at www.jgwalkersmith.co.uk

The John Smith 2009 top-ten awards

2009-12-31T04:56:00.000-08:00

The John Smith 2009 top-ten awards

1. Most understated quote

“The Treasury may not have secured the best price for the advice.”

(National Audit Office referring to £107.1m paid to accountants, lawyers and bankers between September 07 and March 09).

2. Most inappropriately named executive

Sir Fred Good-win

3. Most appropriately named executive

Bernard Mad(e)-off

4. Best monetarist trick

Quantitative easing

5. Best UK prime minister by default

Sir Mervyn King

6. Worst UK prime minister by default

Gordon Brown

7. Greatest global blood-sucker

Goldman Sachs

8. Best UK sucker

Alistair Darling

9. Best white-knuckle ride

FTSE 100

10. Most hated activity

Investment banking or UK Government borrowing (equal 10th)

More at www.jgwalkersmith.co.uk

A gift to Mammon

2009-12-27T09:03:00.000-08:00

A gift to Mammon

We have survived again. The gift to Mammon and the gifts to everyone we know and just about everyone we ever knew. If you are a child of the Western world, then the gifts are so numerous that like all things en-masse they are not special, not wanted and absolutely not appreciated. The giver makes no sacrifice and the child must know this. My granddaughter is so bored with ripping off the paper that she leaves the room and starts skipping with her old rope in the hallway. Why can’t we learn? Bring back the money box and the rainy day. Don’t chastise her later on for wanting her own way all the time. It is your fault, not hers.

Eaten too much of the wrong things – again. Drunk too much and tried too hard to keep up the mindless banter about things that don’t matter with people you would not normally choose to be with. What is worse, there is still New Year to come. If I decide to go that far.

More at www.jgwalkersmith.co.uk

Getting Wet On Rainy Days

2009-12-20T10:16:00.000-08:00

Getting wet on rainy days

A recurring theme in the Credit Crunch Diary and in certain articles (such as The Parable of the House Builders) and in discussing the role of a good financial director of any business (including UK Ltd), has been the vitality of building reserves, getting some financial muscle on the skeleton – even a touch of fat.

Just think about this. The Bank of England in its latest report has claimed that if Britain’s biggest banks had put aside 20% of the cash they paid their staff and shareholders in the eight years preceding the credit crises, they would not have needed bailing out by the taxpayer.

For a banker to have built such a reserve does not strike me as overly prudent. But then, as we know, prudence was found murdered quite some time ago.

More at www.jgwalkersmith.co.uk

Saab Is Scrapped

2009-12-19T05:04:00.000-08:00

Saab is scrapped

My credit crunch diary spoke much about the big global motor manufacturers: how sales plummeted, the demise and bankruptcy and pull-out and how ownership changed fundamentally.

Aside from what was generally thought to be a good sound engine and individually quirky design, Saab must at one point have been an attractive business proposition or else why did General Motors buy it? However, that is now sadly all history. I wrote in the past that the company was returning to Sweden. That was premature. Then it was going Dutch. Now that too has failed. Saab is in tune with the scrappage schemes and is to be scrapped.

Once again the Chinese have done the clever thing and bought the technology and someone may pop up and buy the brand name. Not that that is much consolation for the UK’s 80 dealerships. Seems there is not much national pride left, at any rate in Sweden. Have been considering a little holiday there but probably won’t bother now especially as Volvo might well be next.

More at www.jgwalkersmith.co.uk

Sheer brilliance

2009-12-12T10:02:00.000-08:00

Sheer brilliance

The more time passes in the death throes of this UK administration, the more I become convinced that the brown stuff is brilliant. Brilliant at borrowing money, brilliant at spending money and now brilliant at pledging money. There is a direct correlation between sheer brilliance of this kind and the knowledge that none of this money is actually his and in six months time (as now) there will be absolutely no accountability.

Just brilliant.

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Reparations

2009-12-11T03:09:00.000-08:00

Reparations
Last week over three days I helped my son smash up an old patio and throw all the debris into a mini-skip before laying a new one. The reparation is estimate to add £5,000 to the value of the barn. I occasionally stay at the barn overnight.
The materials used were:-
12 new slabs
One ton of hardcore and one ton of slate chippings
Half a ton of builders’ sand and a bag of sharp sand and two bags of cement
Wooden battons, sundry screws and nails.
The services used were:-
Hire of mini-skip
Hire of wacker machine and sundry tools including heavy pick and hammer
42 hours of labour at £15 per hour.
The total cost came to £1,290 plus vat at the special temporary rate of 15%.
I mention all this since I have designated the barn as my second home and sent the total account to my local MP who has agreed, since I am an exemplary citizen, to lose it in his next claim and reimburse me accordingly.
As honest taxpayers, it is only fair to put you in the picture and at this time when the latest round of MP’s claims is much bigger news alongside the PBS. The MP agrees with me that this is a good time to claim such a trifling sum.
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The return of long-termism

2009-12-08T02:56:00.000-08:00

The return of long-termism

Years ago I was a member of the Long-Term Planning Association. I have no idea whether it still exists. It, and its members, attracted much cynicism not least after the author of a best-selling book recalled that, as the corporate long-term planner, he returned home from the office to be greeted by his wife with the words “Hello darling – and what have you long-term planned today?”

I predict that in 2010 there will be a leitmotif. It will be the return of the long-term planning mindset. I know from personal experience that it is one thing to manage when things go well. Quite another when things start to go wrong: when the market starts to move away. So we shall see a sea-change in 2010. The short-termism at the heart of the financial crisis of 07-09 and the short-term crisis management, both monetary and fiscal, characteristic of the second half of 2009, will be history.

The entire global system will shift to a longer-term focus. The whole culture of sod the future, someone else can take care of that, will go. Good worthwhile pay packets will only be forthcoming from proven long-term success. Top managers will call the bluff of short-term whizz kids, if they want to all congregate in Hong Kong, so be it. China will be (actually is) as focussed on a solid tomorrow as anyone.

John Maynard Keynes famously put it “In the long run we are all dead”. True, but there is a whole load of bright children following on and we owe them a future. A spot of altruism would not go amiss. Your resolution for 2010: “Think tomorrow”.

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Sweets from a sweetie

2009-12-07T06:57:00.000-08:00

Sweets from a sweetie

The Lord of all Business thinks it would be quite wrong for the quintessentially British Cadbury to be Krafted into a chocolate bar; whilst admitting that he can do little about it. How normal an approach in these oh-so-illogical times.

It was quite o.k. for our steel to go Far East and our Ports to go Middle East and our airports to go Spanish and our utilities to go European mainland, but sweet crème eggs – good gracious me no. And in any case, they have only just cottoned on that dark chocolate is best, leave the little darlings alone.

Chapter 10 of my book Violets hints about Cadbury’s perceived superiority over a then competitor, although granted we were in a cake mix and not a milk chocolate one.

The board of Cadbury will duly reject the Kraft bid today. But like eating too many out of the Milk Tray selection, the sickly feeling comes later.

More at http://www.jgwalkersmith.co.uk

Chelsea Not On Top

2009-12-02T14:07:00.000-08:00

Chelsea not on top

This headline will not be recognised by football fans. But we are not talking about the premier league but rather impending relegation from the building society league.

Twice in the past year I have blogged disparagingly about Chelsea Building Society. First when its Annual Report disclosed the level of remuneration paid to its top people coupled to the admission of bad loans in the Icelandic direction. Secondly about the reported mortgage fraud in its buy-to-let book. The sum of these Icelandic and fraud losses amounted to some £85m. I had a personal interest to the tune of a sizeable one-year bond paying 6.75% that was unbelievably high for the times. Needless to say, it came out of Chelsea on maturity. I also pointed out that Chelsea wasn’t Chelsea but Cheltenham.

So, there is a touch of irony in that it is Chelsea bondholders who, by writing off half of their investment and having coco for supper, will allow the society to be taken out by Yorkshire Building Society. It seems there was just nowhere else to run. The second irony is that whereas I thought 6.75% was high, the coupon on the reduced contingent capital is a whopping 13.5%.

Good luck Yorkshire, you are now in charge – one hopes.

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Europe 3 – UK 0

2009-11-30T07:49:00.000-08:00

Europe 3 – UK 0

Under the auspices of the European League, the UK has just lost 3-0.

The ink was barely dry on my blog that under the new constitution, Europe actually needed no Mr President since they had a power lady already in place with Neelie when, by some stroke of genius, she is replaced. Replaced in the most vital job of all as far as the UK in concerned, that is, the economic one. Her replacement is an avowed federalist. But the game was all but over by the time this third goal had whizzed past the keeper.

Goal number one was of course the placing of an introvert Belgium as Mr President and the second was an own goal by an unknown British lady with good experience of local government to help run all European foreign affairs.

More at www.jgwalkersmith.co.uk

I am not a football fan but it sounded a good game even though the UK got relegated.

Lloyds Banking Group Escape Route

2009-11-28T06:30:00.000-08:00

Lloyds Banking Group escape route

The mechanism and price of the escape route for Lloyds Banking Group out of the APS programme is now agreed. Due to the success of the first element which was to issue £8.8bn worth of contingent convertible bonds, the rights issue is somewhat stronger than initially thought and as set out in this diary dated 9th November.

The rights issue is valued at £13.5bn and means it is the highest ever attempted beating the HSBC issue by some £.3bn. Of equal significance is that Lloyds has the largest private shareholder base of any company listed on the London Stock Exchange at 2.8 million people and amounting to about 7.5% of the equity. The event is therefore of major public interest. Furthermore, since the taxpayer owns 43.4% of the business and intends to keep it that way, the Government (that is the taxpayer) is going to stump up a further £5.8bn just to stay still.

The issue, (as approved by a vote of shareholders on the 26th November) is of 1.34 shares for each existing share (previously 2 for 1 was mooted) at a price of 37p per share. The market overall seems pleased since the share price ahead of the issue had passed the 93p price. Post the approval, it fell as expected to around 58p.

The taxpayer does have some compensation in that £2.5bn has already been paid for insurance of the assets up to this point and £144m will be the underwriting fee. The investment banks will also have a fee bonanza – as usual.

Was it all worth it to escape the insurance scheme? The market seems to think so. As a fairly large private shareholder, I hope so.

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Dubai And Debt

2009-11-27T02:54:00.000-08:00

Dubai and debt

Ok, it is a hackneyed phrase but they must be turning in their grave. Back in 1822 Brodie McGhie Willcox and Arthur Anderson got together and were joined in 1835 by Captain Richard Bourne to form in 1837 what was to become the well loved and greatly respected Peninsular & Oriental Steam Navigation Company (P&O): registered by Royal Charter. As recently as 2004 it was glorified in the FTSE 100 as a prime UK-based business turning over £2.4bn and with over 22,000 employees world-wide.

P&O not only weathered the seven seas, its assets and men weathered British interests to the tune of losing 85 ships in the Great War and 179 in World War 2. From packages to heavy freight to the largest ocean-going liners to hotels and ports, P&O bestrode the world. Then, like all great empires, it started to fade. The liners faded into Carnival and the ports and infrastructure faded into DP World except that American Senators cried foul and an American business subservient to (can you believe) AIG bought out the American ports on nationalistic grounds after ex-President Bush threatened to veto any deal to let Arabs have his port interests.

Can this woeful story have a happy end? It is just possible since DP World is part of Dubai World which is a Dubai government investment company that cannot pay its way. Its huge debt way. So huge that the financial world shudders once again and all the stock exchanges are flashing red. Come on British Business Ltd, go get our P & O back.

More at my website: http://www.jgwalkersmith.co.uk

Embarrassing or what..

2009-11-24T03:17:00.000-08:00

Embarrassing or what..

The poor old lady must have been squirming in her gilded seat.

“My Government ….” If ever anyone wished they did not own something!

Aside from the fact that the legislation outlined in the latest Queen’s speech has only an outside chance of ever hitting the statute book, how does one legislate away half of the nation’s debt? It was, after all, acquired without legislation. Sort of laissez faire really.

Hope my three clever granddaughters read this in a few years time. It will give them a huge belly-laugh. Not that either has a belly of course; unlike UK Ltd.

Neelie The Elephant

2009-11-22T06:30:00.000-08:00

23rd November 09 – Neelie the elephant

She’s not really an elephant but merely a behemoth beast. Neelie Kroes has done it again. The European Competition Commissioner has done it again ; eaten Angela Merkel for breakfast. Just as well for the German Chancellor that she rode to victory in the elections on the back of saving thousands of German Opel jobs by backing the Canadian car parts firm Magna to buy GM Europe assisted by the Russian bank Sberbank.

Kroes broke up the Dutch bank ING, played a starring role in the reduction of Lloyds Banking Group and RBS and now has helped persuade GM that they might as well do their own thing with their European business since by the time Neelie has felled another tree, the answer will be about the same. Of course, the Russian bear is sore.

Few items of news have occupied more column inches in the credit crunch aftermath than what the bankrupt GM Motors would do with its European wing. With 25,000 jobs at stake in mainland Europe and 5,000 in the UK plus probably as many again in the ranks of distributors and ancillary trades, it was and still is one of the major fall-outs.

Well, the Americans have stood their ground and the sovereign governments will have to put up if they want to keep the business in tact. All this talk of the new European Constitution and whether there will be a European President seems a bit pointless. We already have the most powerful person in Europe firmly in place. Not nearly but Neelie.

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If A Soft Man Turns Hard

2009-11-16T08:13:00.000-08:00

If A Soft Man Turns Hard

It was sort of inevitable that President Obama would stop off in Singapore en-route China since it is the thrusting little state of the Far East that cannot be ignored (refer to Chapter 11 of Violets) as a microcosm of the China syndrome.

Ex President Bush played the hard man, ably backed by his Treasury Secretary of the time. They put the East/West trade imbalance on the line and blamed China openly for its currency hold-down in support of its exporters and worried openly about China’s purchase of stakes in mines in Africa and elsewhere to support its gargantuan appetite for commodities.

Then came a softer approach from the new administration. The two big powers needed to understand each other, needed to get closer together on economic thinking. The trouble is that China has continued to pump its money into the supply side by building more and more infrastructure: more manufacturing capacity. It has played with its worry beads about its external funds invested in the greenback and even threatened to invent its own world currency exchange.

The employment situation in the US is very grim and getting worse no matter the rate of unemployment may be steadying off.

What happens when the soft man turns hard? In my experience he can be harder than the upfront hard man. The US economy is still vastly greater than that of China. If President Obama closes the door for a year or two, China will be in the biggest mess the economic world has ever seen. If the students with their primed questions laugh at Obama like they did at Bush, watch the worm turn.

More comment and articles on my Website.

“Probably the worst managed bank this country has ever seen.”

2009-11-15T09:44:00.000-08:00

16th November 09 – “Probably the worst managed bank this country has ever seen.”

The quote from Lord Myners, the City minister, relates to none other than the Royal Bank of Scotland (RBS) as it was announced that it would use the Government’s Asset Protection Scheme (APS) for £282b of toxic assets. It will stand the first £60b of losses itself.

A further £25.5b is to be pumped into the bank (in “B” shares with a coupon of 7%) to add to the £20b of existing support and giving the taxpayer an 84.4% holding in the beleaguered outfit. A further £8b could be injected in the future should the tier 1 ratio fall below 5%.

Like Lloyds Banking Group (see entry dated 9th November 09) concessions have been dragged out of the bank as one cost of the saviour efforts. Cash bonuses are to cease for those on salaries above £39,000 pa in favour of shares and even new recruits who were appointed on multi-million “guarantees” will be caught. Directors are to defer bonuses until 2012 and clawback clauses will apply. RBS will have a lending target of £25b for this year and next.

Facing up to Europe’s competition authorities, RBS will sell its insurance arm Sempra, its global payments business and 312 branches.

Lloyds and RBS taken together, it is estimated that 10% of all personal banking and small business arrangements will pass to new owners over the term of the deal.

All that “goodwill” on past acquisitions wiped out at a stroke.

More at http://www.jgwalkersmith.co.uk

What A Lottery!

2009-11-12T05:57:00.000-08:00

What a lottery!

Combining two sources creates “A voluntary tax on the stupid”.

Impatiently waiting to pay for my Saturday paper, the lady at the counter looked (as my dad would have put it) as if she hadn’t two half-pennies to rub together. Her clothes were old and very worn and her hair not brushed since last Saturday at least. She bought one of those magazines aimed at young girls that have alluring bangles and sparkly things on the front cover and which I know from getting them myself for a granddaughter cost about £1.60. But the lady’s bill came to £18.60. Why?

Three scratch cards and three lottery tickets for tonight and three for something in the week is the answer.

Some statistical wag has just calculated that if one buys a lottery ticket at 4pm on a Monday, the odds favour your death within the next 40 minutes rather than a win on the lottery next Saturday. Whether that is any win or the massive Euro Lottery win just announced, I know not but the point is well made.

The couple who have just picked up £48m or so will be ruined. No ordinary human being can handle that sort of windfall. Plenty extraordinary souls cannot either. 48 people winning £1m each would have made more sense.

Was the lady just plain stupid or is the scratch card and lottery phenomenon symptomatic of a despairing society where there are only two hopes left – make the beautiful granddaughter happy for a few minutes and to get something big to get me out of this lot?

More financial comment at www.jgwalkersmith.co.uk

A Race Apart

2009-11-10T01:25:00.000-08:00

A race apart

Having blogged on this before, it still blows my mind. The disconnection betwixt the demonstrable affects of the continuing UK recession and the activities of the unaffected.

We have just returned from a celebratory two days and one night at the Belfry, the HQ of UK golf. The car park is huge with only the Ferrari Dino and The Bentley Mulsanne managing to stand out from the everyday Mercs and Beamers. The vast main restaurant (£25 per head for the buffet) was packed from 7 pm onwards as was the golf bar from 3 pm. To leave means a good five minutes wait before a gap opens up on the passing A446. All this on the manufacturing-depleted outskirts of Birmingham.

We stop off en-route back for a spot of Christmas shopping (with 13% of the year yet to go before the commercial feast day) to find central Nottingham heaving and specifically the erstwhile MP’s listed store John Lewis packed to the gunwales with free-spending cosmopolitans and where ipods at £115 were flying off the shelf.

Still trying to comprehend, I telephone the Manchester Crowne Plaza for a room on Saturday 28th November to find they are full, “Manchester City are playing that day and the Classical Spectacular is on at the MEN Arena.”

In my little book “Derbyshire born …” I refer to the haves and the have nots of the early 1950’s in rural Derbyshire. The disparity is wider now and those that worry about it, are hiding under the bed.

The APS that wasn’t

2009-11-09T01:36:00.000-08:00

The APS that wasn’t

Back on the 13th August, I was writing a piece that assumed that the new Lloyds Banking Group (LBG) would sign the government inspired Asset Protection Scheme (APS) agreement. Well, it never was signed and now will not be. Rather the bank has crawled out from under the insurance cover preferring big funding actions and bowing to competitive pressure issues from Europe.

The future shape of LBG can be summarised as follows:-

• There will be a massive (the largest ever in the UK) rights issue to raise £13.5b. The shares will be issued on the basis of 2 for each existing share and priced at the higher of 15p or a 38% to 42% discount to the ex-rights price and calculated as 29p or 34p based on the closing price on Monday 2nd November 09.

• £7.5b of debt will be swapped for capital that can convert to shares.

• The Government will pump a further £5.7b into the bank to augment the £15b of taxpayer support previously applied.

• Cash bonuses are banned to staff on salaries above £39,000. Bonuses will have to be in shares.

• Board directors will defer all their bonuses until 2012.

• All bonuses will be subject to clawbacks.

• Lending targets have been set at £14b for both this year and next.

• 600 branches of Lloyds/TSB must be sold, together with the Cheltenham & Gloucester branded accounts and mortgages and the Intelligent Finance business, all by the end of 2013. Halifax is to be retained.

• Acquisitions are banned for the next four years.

• Dividends are banned until the end of January 2012.

• There is an expected hit of about £34b in loan losses for the next two years.

Quite a turn up. And to think that I used to bank with Bank of Scotland, a lovely friendly bank that had pushed quietly Southwards and started off the bidding round for Natwest. How times change.

Read About My Own Life In Business at http://www.jgwalkersmith.co.uk

Back To School

2009-11-05T04:29:00.000-08:00

Back to school

Taking a young child to school for the 9am start is a very emotional experience. It happens to me occasionally either with my two granddaughters in Bristol or my third one on the Nottinghamshire/Lincolnshire border.

I think it is because whether we are walking hand in hand (Bristol) or driving (Notts/Lincs), there is always much chatter and today for instance about bonfire night and the danger involved and needing to stand well back from the fire behind a fence. And with sparklers the fact that they are still hot after they have finished burning and so there must be a bucket of sand or water ready to put the spent sparkler in.

All this follows making sure the school clothes are on properly, the school work is in the bag together with a bottle of water and sandwiches and biscuits and grapes for lunch. It is a busy and exciting hour or so, until the school gate is reached.

Then it all changes. The hand is released, “goodbye granddad”, she turns away and walks on already having met up with a friend. She has entered a different and full world and I am left empty and drained. I shout “bye Katy” or “bye Colette” or “bye Zoe” but it is not heard. She doesn’t turn around, she has gone.

There was no taking to school in Newton in 1948 or warnings about the dangers of bonfires and sparklers. You were just thrown in and that was that. I will re-read my book “Derbyshire born” and try and imagine how different was that record of early school life compared with whatever Katy is experiencing this morning in her bright new school. It might help, but I still feel lost.

Lloyds Banking Group And Robots

2009-11-03T03:47:00.000-08:00

Lloyds Banking Group and robots

I should be writing about LBG’s great escape from the Asset Purchase Scheme but that can wait the “credit crunch aftermath diary” once the final details are announced later today. Instead, I can announce the replacement of humans by robots.

My wife has banked with Lloyds for over forty years and when there has been a little problem can pick up the ‘phone and chat to the lady in the Mansfield branch and sort it. Now a small diversion. It is well known that power in a two-way communication always lies with the questioner. That is why the media interviewers are always on the front foot.

Suppose a cheque has gone missing either courtesy of our kamikaze friends at Royal (does the Queen still approve by the way?) Mail or due to inefficiency of the receiver. No matter, all we need do is cancel it and start again. Try getting that through to the new robot who does not ask the question “Do you want to cancel a cheque?” He will ask for your account number (either tell me or input from your telephone key pad) and your identification number (which of course is long forgotten) and what the cheque number is you are enquiring about and confirm it has not been processed. But that is all folks – bad luck.

My advice is, go to First Direct, who still employ people.

From Farm Boy To Financier: Read My Book Derbyshire Born.

Of Confidence

2009-11-02T07:00:00.000-08:00

Of Confidence

In the early days of the credit crunch diary, I referred to the esoteric factor of confidence as the most important ingredient in getting things going again and likened it to “culture” overlaying the performance of a corporate body.

Market research company Nielsen has published its latest survey on consumer confidence showing the highest level for eighteen months. Specifically, sentiment about personal finances has improved a little and attitudes to spending on discretionary items are more positive. Overall the consumer confidence index rose to 75 in October being a 10 point gain on the all-time low registered in April 09.

Significantly, 20% of people now believe job prospects in the UK will be “good” or “excellent” over the next twelve months compared with 14% in June 09. Adding some mollification, the British Retail Consortium’s (BRC) director general, Stephen Robertson said “There’s no question the general mood of customers is better than a year ago when conditions were dire, but improvements have been slow so far. Half of consumers believe we’ll still be in recession in a year’s time. More than half are worried about jobs and their own finances and that will hold back full scale recovery well into next year.”

One other aspect of aftermath is worth noting since it is definitely a factor in my family. People still in employment are working harder and there has been an increase in people feeling their work-life balance is their biggest concern (9% compared with 4% a year ago.)

Now available in paperback!

Derbyshire Born - My journey from Farm Boy To Financier.

Welcome The Big Scene

2009-11-02T01:10:00.000-08:00

Welcome the big scene

Desperate to find the macro and shake off the micro, desperate to see global and dismiss with disdain our small Island’s woeful leadership and weak opposition, I homed in on some statistics trotted out by Alan Steel, chairman of Alan Steel Asset Management in a piece in Saturday’s Daily Telegraph. I know not whether they are truly factual, but I hope so. And hope is at the zenith of my economic horizon as we successfully survive Hallowe’en.

“First, there are three billion people in the developing world who want to be better off; 180,000 people a day in these countries are moving from the country to the city, increasing their income and prospects. This will continue for at least the next 20 years. Growth in India, China and Latin America has accelerated. It’s expected imports to (he means their exports to) China will dramatically rise shortly, benefiting commodity funds. The second reason is Generation Y in the US. This is a generation 20% bigger than the post-war Baby Boom generation. It’s estimated they’re four times wealthier than baby boomers in real terms. And progress and new opportunities will come out of left field.”

Alan Steel’s context is British investors. Mine is the big scene and time enough to find better economic leaders in our little bit of that big scene.

Read My Book Derbyshire Born (How Life In Middle England Changed After The War)

Maverick No 2

2009-10-30T08:01:00.000-07:00

30 October 2009 – Maverick No 2

Lloyds Banking Group is starting to mimic Barclays in the maverick stakes. Not in terms of declining the taxpayers shilling (much too late for that) but in shedding the handcuffs of the Asset Protection Scheme (APS). It has been a long time in coming and it will cost but the European competition commissioners, the UK Government and the tripartite authorities have given permission for Lloyds BG to go fund-raising and asset divesting to avoid the expensive APS insurance.

To reach today’s point has been a bumpy ride for the long-suffering long-holding shareholders. Over the past 52 weeks, the share price has ranged from 210p down to 40p at the nadir. As recently as the end of September 09 the shares were priced at 110p before falling as worries about the fund-raising escalated to touch 80p a few days ago. Now as the thinking is that the rights issue discount could give an issue price as low as 30p, the shares are touching 87p on a volume of 106 million shares and that two hours before the market closes.

Obviously, the potential capital strength of Britain’s second biggest bank has held sway in favour of a break-up such as will happen to Dutch bank ING. The sell off of bits such as the old TSB branches in Scotland, Cheltenham & Gloucester BS and Intelligent Finance are not viewed as great events in the scheme of things.

At 30p, any new shares I am allowed to buy will do wonders for my average holding price and so say all of us and good riddance APS.

The Brains Behind

2009-10-29T10:04:00.000-07:00

The brains behind

What really encourages me, now that we have just about reached the second anniversary of the Northern Rock disaster, is not the decision to split that business into two bits of deemed “good” and expected “bad” or even the European endorsed motive of increased competition. Rather, it is the talent lurking in Britain today. Wherever it has come from, what is evident is that there are some first-rate brains at work and we should be pleased about that.

The work that must have gone into this plan and others in the pipeline is an example of a high-level service industry that can and does serve Britain well. In the historical cycle of things, it was inevitable that much low skill manufacturing would migrate to the emerging nations. That is not to say we cannot add value with brainpower. Wish I was still in the swim.

What Goes Around Comes Around

2009-10-26T09:45:00.000-07:00

26 October 2009 - What Goes Around Comes Around
As time passes so I believe the old adage that what goes around comes round is true. When I was growing up on a small farm (see Derbyshire born –www.jgwalkersmith.co.uk) farmers were a very important section of society. Many of my generation can trace their roots back to the land. The last fifty years has seen such a reversal that farmers are invisible and farming is never spoken of.
A report by Standard Chartered “The end of cheap food” says in relation to indigenous food production that North Africa and the Middle East has already turned negative. The same is nearly true of China. Topsoil is so weakened by intensiveness that clouds of dust are spreading over Asia, parched land becomes desert and rivers run dry. It seems that China has lost 1,400 square miles to desert each year of the last decade. Urban sprawl covers fertile land in China’s east territory whilst the Himalayan glaciers are ebbing and the Yellow River no longer reaches the sea for 200 days a year. Northern Indian has a similar plight.
Either Russia, the Ukraine and Central and Southern Africa will fill the void or else your local farmer will become very important and very rich once more. Hope I live to see it. In our local community only farmers work all hours and every day. Others might claim to but farmers actually do.

Fascism - Really??

2009-10-25T03:40:00.000-07:00

Fascism - Really?? – 24th October 09

In my latest bit of aftermath to the credit crunch diary year, dated 24th October 09, I suggested a mild bit of revolution regarding the economic team running the UK. On the same theme of revolution, the first poll of a sample nation following the anti-climactic BBC Question Time programme suggested that 20% of the populous were “thinking about” voting for the BNP.

Think black shirts, think Mosley, think about a small island called Singapore (refer to my book Violets, Chapter 11, page 171) that just twenty years after being ripped apart by Japanese troops, pulled itself up by its own bootstraps with as diverse an ethnic group imaginable all pulling together for a common good.

May daylight shine in the darkest corners. Think on you 20%.

Great expectations

2009-10-25T03:38:00.000-07:00

24 October 2009 – Great expectations

Dashed. I know of no leading economist or respected economic institution that did not think that the UK economy would pull out of recession in the third quarter of 2009, that is, as ended on 30th September. But it was not to be unless later revisions change the figures. The economy shrank by 0.4% in that quarter to bring total output down nearly 6%.

According to The Office for National Statistics, every sector contracted except for a “flat” public sector. The big surprise was a further decline in the most important services sector not least due to the rampant time investment banks are known to have been experiencing. Management consultancy has been doing well too. One assumes it is the professional services associated with the construction and related areas that still pull down the overall services sector average.

What are the consequences of the surprise failure to move back into the black?

• Sterling weakened closing down 2.4 cents against the dollar at $1.6338 wiping out earlier gains. This should continue to help exporters but also led to Britain slipping down to seventh place in the economic nation league table

• The yield on gilts fell sharply on expectations that the QE programme will be increased beyond the £175bn current threshold

• The equity market continued to shrug its shoulders with the FTSE 100 closing up 35.2 points at 5,242.

The political take on the economic news is interesting. There would seem to be a difference of opinion. Our laid back, one hesitates to use the word moribund, Chancellor Alistair Darling ( a Darling was a deer hunter by the way) said “I’ve always been clear that growth will return at the turn of the year” whilst his shadow George Osborne replied “Britain urgently needs new economic leadership.”

I have a new team in mind. Mervyn King for PM and our Vince for chancellor. The revolution starts right here.

Let's Just Pretend For A Moment....

2009-10-23T02:17:00.000-07:00

Let’s pretend I’m a financial director. I go to this month’s board meeting with figures showing last month’s sales down 6.3% and costs up 4.9%. The company’s borrowings in the half year ended last month are 128.7% higher than in the comparative period. The trend line of borrowings indicates a year-end figure of about 220 against the budget I submitted to the board at the start of the year of 175 or an increase of 25.7%. Furthermore, the price of the debt is high relative to a 0.5% bank rate and stretching out until the year 2060.

My questions are these:-

• Will I be sweating or calm as a cucumber with eyebrows a different colour to my head of hair?

• Will I be challenged by my MD for competency and pressurised by the whole board to step down?

• Does it matter that I am at odds with the big bank manager who publicly proclaims a solution to the debt problem different to the one I have put to the board?

By the way, the company is UK Ltd and the numbers shown are in £billions.

Whirligig!

2009-10-19T01:33:00.000-07:00

Whirligig is a wonderful word, I use it a lot. It is almost, but not quite, onomatopoeic. Whirligig is old, according to the Collins dictionary it is 15th century “whirlegigge” made from whirl and gig. Literally it is any spinning toy, such as a top. Another name for merry-go-round. Anything that whirls about, spins or moves in a circular or giddy way.

For the actual numbers quoted here, I am indebted to an article called “Buy equities, sell bonds” by Ian Mc Diarmid in Shares magazine.

By 1st October 09, the Bank of England had completed £158bn of its allotted £175bn asset purchase programme and of this 98% has been gilts. That is to say, government debt with a prescribed coupon maturing at a prescribed date. This exercise has been termed quantitative easing (QE) or more colloquially “printing money”. Neither lending by the big banks nor M4 – broad money supply – has increased very much notwithstanding this huge injection of funds into the gilt market. Rather, the banks in a drive to rebuild their balance sheets have held on to the proceeds of the gilts they have sold to the central bank. When these banks have large surplus cash they pass it for save keeping (and a bit of interest) to the Bank of England.

So there we have it. The Bank of England prints money and uses this paper to buy gilts from banks who then return the cash so received to the Bank of England. Oh what a tangled web we weave. Whirligig.

Incidentally, the net issuance of all gilts in the years 06/07 and 07/08 averaged £30bn or about 20% of what has just been bought in.

Much more on my Website

Would Anyone Appear On TV If They Didn`t Have A Book To Plug??

2009-10-16T08:10:00.000-07:00

My director was reading from an appraisal form. I was stung “But Henry, that is just not fair.” He paused. “No John, life isn’t fair.” Henry is long since dead. Life goes on.

Sir Ranulph Fiennes is a great man. No cynicism intended. But there is something very unfair about a slot on breakfast TV to plug his latest book. Something very unfair about a national book retailer taking full-page adverts to plug the books of five “celebrities” and then fill their window display with the publicity material to back it up.

I am not saying that my book “Violets” is a literary masterpiece but it would stand up against these six works except of course it will not since no-one knows about it.

Much More at: http://www.jgwalkersmith.co.uk

Turn Again Whittington

2009-10-16T07:13:00.000-07:00

16 October 2009 – Turn again Whittington

The famous Christmas pantomime is supposedly based upon the story or Richard Whittington, a medieval man from Gloucester, who found fortune (with his cat) when he turned to London to find the streets paved in gold. So did the aptly named Goldman Sachs. The biggest investment bank is the leading lady in a pantomime only too familiar to chief executives needing to raise capital (due largely to the consequences of the credit crisis), re-finance generally, re-structure or do a spot of merger or acquisition work.

The fact is that in this recovery period, competition for the big financial services has reduced significantly. So what? Well, one can widen the spreads, up the margins and push service charges through the roof. Risk has not gone away and if you want those shoes mending, the monopoly cobbler can charge more. Simple as that. The fact is that markets cannot be regulated away and the regulators and controllers cannot do what has to be done themselves.

The likes of Goldmans are actually needed. If that golden goose is maimed, another egg will surely be laid someplace else. In the third quarter of 09, Goldman’s revenues increased by 105% on the comparative period to reach $12.3bn. From a UK economic viewpoint that is excellent news since about 43% of revenue is paid to its staff and the treasury takes a top-slice 52% of that. It also takes a whopping chunk of profit in corporation tax. For a full current year, it is thought that the UK taxpayer will pull back about £2.5bn just from this one business. That will pay for a few dolers.

What is more, the ultimate risk-takers, the shareholders, got a 21.4% return in that third quarter. Admit it, you are just jealous.

Catching ones breath

2009-10-14T08:05:00.000-07:00

Catching ones breath - 14 October 2009

The credit crunch diary poem dated 9th October was intended to summarise the key events of a very special year. A year in which the economic world was caught on the hop. A world of events that started in some remote distant place, like an earthquake in San Francisco, that sounds bad and must be horrible for those left homeless over there but will not, let’s face it, affect us.

Except this time the homeless will affect us because unlike an act of God, this event is an act of man. Man at his most avarice.

After a full year of commentary and blogging, it was time to retreat to a secret place where only sea and wind crash in as a harmless spectacle. Time to catch ones breath so as to climb a mountain and take in a spectacular view of what nature intended and man can not mess with.

So, the credit crunch diary, etched into my life between successive Octobers, has ended. I hope readers enjoyed it and appreciated the research and the asides. It will live again as a whole and be re-launched as a book. A historical record of the year. Watch the website for the birth.

Meantime, is it not incredible that the Magna saga lives on? Lord Mandelson has concluded (well, actually he didn’t, my old firm PricewaterhouseCoopers did) that the business plan has “shortcomings”. No kidding! It worked before with 25% of the UK Vauxhall workforce gone and now with no compulsory redundancies, how can it still work? You will recall form my diary that Germany was to disproportionately benefit from job cuts amounting to about 16% of their, admittedly much larger, manning level for Opel. But this is the new Europe and Neelie (not Nearly) Kroes, the European Competition Commissioner, thought that the four-and-a-half billion euros offered by the Federal German government looked a bit like a bribe. Like Britain, Spain, Poland and Belgium where none too chuffed either. Nevertheless, GM is going to do the deal with Magna (and Russia) and sod the European governments.

The spreadsheets in that business plan must look a bit wobbly, especially as a bolt-on to a Canadian car parts outfit. My wife would like a new Astra. Whether it will come from Ellesmere Port is still in doubt but we will keep tabs on events.

Violets - The Remarkable Story Of The Life And Times Of John Smith

That Was The Credit Year That Was

2009-10-08T14:10:00.000-07:00

9th October 09 – That was the (credit) year that was

There were some poor folk across the pond

and a cold shiver is slowly wending

The Fed puts up the interest rate ‘cause

there’s been some very lax lending.

The credit checks were not that sound, housing

market collapses,

with assets bundled up and sold,

Sold in securitised packages.

If you’re the buyer, it’s not your fault

The world’s like a ram on the tup,

but some clever sods in some distant bank

just sold you the world’s biggest pup.

US bean-counters quickly make the great money bets

Although historical records will tell

that $700bn of green backs for bank toxic debts

went some place else, and a bit extra as well.

Back home in Blighty and in the Brown stuff

we’re a match for the old Yankee troopers,

£500bn of huff and of puff (37% of our entire GDP)

- Come on Europe, wake up, follow suit,

Don’t play the old party poopers.

But No 1 i.e. Germany is not on our side

Not that Keynesian you see,

Yet, by the time this year is played out,

as before, they are down on one knee.

Spain is a shame, the Costas are missed

We went there each year to get pissed,

But with apartments all built on sand

unemployment is now15% and the casa takes 65%

of that hard-earned cash in hand.

Ireland is green, and perhaps a bit green

to guarantee all bank deposits and bail out

its three biggest banks,

but, caught twixt a rock and a hard place

(in euros up to its shanks) since

it exports to us and to US

whose currency takes quite a slating,

so Standard & Poor think, ta very much Mik,

we’ll grab back your AAA rating.

The UK now enters the second dark ages,

its economists spout forth as if new-age sages,

but theory is theory and like lambs to the slaughter,

output drops by 6.4%, and in one single quarter.

Shopkeepers are we and we used to ride high

but gone dear old Woolworths, and gone MFI.

The Brown stuff awakes “try fiscal” says he

and knocks 2.5% (temporarily) of the VAT.

Shareholders are bleeding, bleeding faces like thunder,

Why? 2008, down 34% - The Footsie 100.

Ever a silver lining, here’s one little beauty,

UK Treasury is down £6bn as house sales pan,

down on insidious stamp duty.

We had four banks that now are two, so you would

think competition needs no more glue.

Though not so. The Brown stuff says “waive that aside, I’ve £17bn

riding the new Lloyds Banking Group’s backside.”

It looks bad, it feels bad, there’s no good, you’ll see,

and no good there was, for shareholders like me.

No tale of woe is complete without its rogues.

We heard the word Ponzi and sorry, what did you say?

I said pay out today what you got in yesterday.

It’s easy and simple, just bluff and don’t flaff,

Security regulation? You are having a laugh.

Madoff made off and guilty the plea

while Stanford played cricket with wives on a knee.

When folks stop buying – no new motor for me,

especially of the big American gas-guzzling three,

GM, Chrysler and Ford,

down on their uppers with just one accord,

the first lost its Europe, after Chapter 11 ashes

Chrysler found Italy to save a few blushes and Ford,

good old Ford, just about held its sway

but never again, the American way.

It’s important to learn how economies got sick

Tell you what I’ve learned. Learned how to get rich.

Bought a new press and, if you please,

I’m printing and printing to quantitatively ease.

Using new money to buy up their bonds

that have to be auctioned to finance the debt wood

created by filling a banking black hole

caused by securities packaged though not understood.

Whirligig, whirligig – big hairy beast,

Wealth has just tilted, tilted due EAST.

Jgs – copyright reserved

Pearl of the week

“I don’t think there’s any reason why everyone is going to suddenly feel much better. But I don’t think they’re going to feel much worse.”

Sir Stuart Rose – Executive Chairman, Marks & Spencer plc

Save It!

2009-10-07T13:25:00.000-07:00

8th October 09 – Save it!

Desperately searching for good news in this penultimate entry of my (nearly) year long diary, I found it nestling amongst some soft undergrowth of green shoots courtesy of the Office of National Statistics’ latest quarterly bulletin. At any rate, those long-suffering loyal readers of my diary and blog will recognise it as good news from my perspective given the encouragement to consumers to spend and spend again, has never resonated with me.

Just as in business enterprises, culture is everything, so in private households is behaviour. Behaviour, habit, custom, the pattern of how life is lived. The economic crisis has produced a change. The statistical measurement of how much British people are putting under the mattress (seeing as how banks have lost all credibility for Joe ordinary saver) has risen to 5.6% of their earnings in the second quarter of 2009. This figure is the highest since 2003 and compares with 1.7% in the same period last year.

The savings ratio – incidentally mirroring figures from the US – was accompanied by a few bits of other comfort. The ONS’s final estimate for UK economic growth in the second quarter showed a slightly lower decline in GDP than previously at -0.6% from -0.7%. Surprisingly too was a registered increase in household income of 0.9% and a drop in consumer spending (hence the savings result).

To put the green shoots into some sort of perspective, the ONS said that compared with last year, the economy has shrunk by 5.5%, the biggest annual decline since comparable records began in 1956. To conclude my good news search, the Bank of England said that in July 09, home owners repaid £203m more than they borrowed, the first time lending has been negative since the Bank’s data began in 1993.

I cannot think of a better slogan (pity one of the political parties didn’t dream it up prior to the current conference season) “Save and get out of debt”.

More at: http://www.jgwalkersmith.co.uk

Road To Istanbul, And Back..

2009-10-06T14:14:00.000-07:00

7th October 09 – Road to Istanbul, and back

On what is fast approaching the anniversary of this credit crunch diary, an even more important anniversary event is to be held in Istanbul. The International Monetary Fund (IMF) will unveil its “early warning system” designed to prevent future financial crisis of the magnitude catalogued in this diary. Istanbul (extremely aptly where the East meets the West) will witness the new set of models to become the centre piece of the IMF’s new post-crisis role in the economic world.

The future role of the IMF – agreed at the latest meeting of the G20 nations (refer back to the previous two diary entries) – is to ensure that financial bubbles do not build to threaten world economic stability. The crucial meeting is heralded as probably the most important in the history of the venerable body.

Hitherto, and has been reported many times in this diary over the past year in relation to specific nations, the IMF has been tasked to bail out economies struggling to finance themselves. Now it moves up a gear to actually monitor the health of the global financial system. This monitoring is of the extent to which the major economies stick to “balanced and sustainable growth.”

Julian Jessop, international economist at Capital Economics, said “This is a positive development. It would make sense to monitor the build up of financial instabilities. It will most likely focus its analysis on asset prices, and perhaps credit growth. To be fair to the IMF, it did lead the way in calling for a big fiscal stimulus early on in the crisis, so has a good basis for this role. It was quick to pick up on the scale of the problem and the need for a fiscal stimulus. In a sense it has had a good crisis.”

On balance and having learnt much myself over the past year, I concur with this view about the IMF. Wouldn’t it be nice if one day soon it relocated from Washington to (say) Istanbul. One might call it the half-way house in a changed world?

More at: http://www.jgwalkersmith.co.uk

G20 Prognosticates And Procrastinates

2009-10-05T14:18:00.000-07:00

6th October 09 – G20 prognosticates and procrastinates

The meeting of the G20 nations (which is to replace the G8 forum as the world’s leading economic master) in Pittsburgh – see yesterday’s diary entry – decided that their banks will be forced to more than double levels of capital reserves for the riskier parts of their operations. But, the meeting stopped short of placing specific minimum requirements for both liquidity and capital.

The Basel Committee on Banking Supervision will be asked to draft new rules on liquidity and capital reserves by the end of this calendar year. The stated objective is to strengthen the global banking system to withstand future shocks and make it less likely that sovereign government resources will be called upon.

The conduit for details was the Financial Stability Board (FSB). It’s final report said in relation to capital requirements that banks should be retaining profits now to meet future capital needs and to achieve this by a combination of:-

• Restricting dividends to shareholders

• Ceasing the practice of share buy-backs

• Limiting compensation packages for its top managers (see yesterday’s entry).

In relation to trading activities, banks were instructed to ensure that the capital held to cover positions should probably double by the end of next year. The outcome would be a greatly improved Capital 1 tier ratio. The Basel framework will also require banks to be counter-cyclical by building capital reserves in the good times to provide a buffer for the bad.

On bank liquidity, the Basel committee will draft rules for a minimum global liquidity ratio to be applied across international borders. There was more. Accounting standards are to be strengthened and over-the-counter trading is to be watched more closely. Also, a system of peer reviews of regulations and standards is to come into play.

Some commentators wondered how any of this would bear fruit without countries at least discussing the issue of conflicting currency levels. It seems poignant that in the final communiqué no mention was made of the imbalance between the Chinese yuan and the US dollar.

Procrastination is not only the thief of time but maybe of economic progress too.

More at: http://www.jgwalkersmith.co.uk

Delightful Damp Squib

2009-10-04T15:54:00.000-07:00

5th October 09 – Delightful damp squib

Like so many long drawn-out sagas, it all ended like a damp squib and much to the delight of the London and New York non-retail bankers. It is another of these “us and them” stories that eke out from the intended reforms aimed at making sure the credit crisis never reappears. The “us” of course is the UK and US financial market interests so vital to overall GDP in Britain and America and the “them” are France and Germany who want Paris and Frankfurt in the toppling zone.

The long and winding road can be summarised as the two mainland European states wanting to hang the evil bankers from the nearest and highest yardarm whilst the UK and US want a brain industry largely in tact if somewhat shackled. And it’s ironic that the place of decision was founded in 1758, named after a British prime minister and not on neutral ground. Not a good omen for modern France and Germany.

The G20 group of nations meeting in Pittsburgh allowed city traders to avoid the threatened curbs on their remuneration and instead agreed to align compensation packages to long-term risk and not impose specific caps on bonuses. The final communiqué made a firm pledge to bring bankers’ pay in line with institutional performance and ensure that loss-making and government-backed banks do not continue to pay out large sums based upon short-term results. The three bans committed to were:-

• Multi-year guaranteed pay deals

• The inability to claw-back bonuses if future losses ensue

• Pay not aligned to risk.

If I was an erstwhile highly-paid city banker/trader, I would be shaking in my moleskin shoes and cashmere jacket. Implementation old boy, implementation.

More at http://www.jgwalkersmith.co.uk

Another Turning Point

2009-10-01T14:19:00.000-07:00

2nd October 09 – Another turning point

The residential mortgage backed securities market (RMBS) has been closed since the financial crisis occurred. Or rather it has been until now. There has been a greater than anticipated demand from institutional investors for a sale by Lloyds Banking Group of £4bn of mortgage backed bonds.

The issue was more than twice oversubscribed and involved bonds backed by more than 513,000 prime UK residential mortgages written by HBOS before its merger with Lloyds.

Before the credit crisis began, RMBS provided massive funding for banks as lenders swapped mortgage assets for cash together with passing the risk of borrower defaults to investors in the money market. However as part of the failure of the sub-prime market, institutions turned their back on these increasingly hard to value bits of real estate that subsequently proved to have lethal risk. Asset backed bonds are one of the last parts of the credit market to recover from the economic recession. At deemed lower risk that housing, Tesco has just sold £564.5m of bonds backed by its property leases.

In a further sign that the asset-backed securities market is reviving, Volkswagen is selling 475m’s worth of euros debt secured by car loans.

Returning to the Lloyds Banking Group deal, it seems symptomatic of confidence returning to the wholesale money market, the UK housing market and the UK economy as a whole. Furthermore, the pricing was at 170 basis points (1.7%) above LIBOR. In other words, it is not the cheap money of the past.

Pearl of the week

“The UK data continues to exceed the Bank of England’s projections on the upside.”

Report by Goldman Sachs

Reparation Time

2009-09-30T13:14:00.000-07:00

1st October 09 – Reparation time

The anniversary of the collapse of Lehman Brothers seems to have cemented the surge in equity markets to a degree that company boardrooms plus advisors are hell-bent on repairing their balance sheets. A secondary influence is the ongoing squeeze of bank lending (see yesterday’s statistic on bank deposits with the B of E). The reparation is taking the form of rights issues and share placings. In one 48 hour period, no less than £3bn was gleaned from investors.

Overall, some £60bn has been raised in the UK market this year or is imminent. In order of magnitude the repairers are:-

• HSBC bank

• Rio Tinto mining

• Lloyds Banking Group bank

• Wolseley plumbers merchants

• Standard Chartered bank

• Liberty International property

• Songbird property

• Land Securities property

• British Land property

• 3i Group investors

• Barratt builders

• Hammerson property

• Yell media

• Redrow builders

Quite a list and highlighting the sectors worse hit particularly banks and property related (11 out of the 14).

But it is an ill wind. Guess what. The banks that advised and underwrote the cash call for just one of the above, namely Barratt, including HSBC, Lloyds Banking Group and RBS will collect £27m in fees. And, according to research from Thomson Reuters, banks have billed £455m in fees from the top 20 UK deals this year. Underwriting fees on right issues (was underwriting really necessary given the heavy discount to current share prices?) have increased from 1.5% to circa 4% before being passed on to sub-underwriters at about 1.75%.

Bank competition aint wot it used to be.

Contrary Goldman Sachs

2009-09-29T14:13:00.000-07:00

30th September 09 – Contrary Goldman Sachs

Hardly had the little grey cells stopped bobbing up and down on the pound-to-euro parity prophecy trampoline than up pops Goldman Sachs claiming that currency investors have exaggerated the risk faced by UK banks from the credit crunch. Goldmans went on to say that the currency players had punished sterling because a high proportion of Britain’s overseas assets are in equities. But, they claim, this makes no sense due to global stock markets recovering strongly. Quite a contrary view.

Britain will transform itself from chronic over-spender to a global surplus country as the weak pound revives its export industry: so says a new Goldman report.

Ben Broadbent, the bank’s UK economist, said that the 20% slide in sterling over the past year was “enough to push the UK’s current account into comfortable and permanent surplus.” Such a durable current account surplus has not occurred in living memory. On the back of this theory, Goldmans issued an alert advising its clients to build up sterling positions. The UK economy was in better shape than it looked, with public debt likely to peak at under 80% of GDP – lower than either Germany or France. “The UK data continues to exceed the Bank of England’s projections on the upside. We expect interest rates to rise from next spring.”

One foundation for the positive currency theory is that the UK economy is already expanding at a 2% pa rate and inflation is “sticky” (a new adjective) compared with the rest of Europe. Consequently, Goldmans expect the pound to strengthen and not weaken against the euro over the next three months. It predicts a worth of 84 pence and not 90p as now or £1 as predicted by e.g. BNP Paribas.

As regards reserves for the next rainy day, the amount of cash held by UK based banks in their reserve accounts at Threadneedle Street has reached the equivalent of 10% of UK GDP (5% US, 3% Europe and 3% Japan).

Wow, what a relief.

More at www.jgwalkersmith.co.uk

Rents Backtrack 20 Years

2009-09-28T14:08:00.000-07:00

29th September 09 – Rents backtrack 20 years

Due to the perceived global recovery in economic conditions and more specifically to a dearth of new developments in the City of London, new research by Knight Frank, the UK property agent, suggests that rents in the City will rise next year. Such an event would be ahead of the date of recovery feared until only recently.

Space in the City of London is now available at the cheapest rents since 1989 and in the West End since 1996. The agents found that concerns that there would be a major increase in businesses sub-letting unwanted space have been largely unfounded. The forecast is for City rents to rise by 4% in 2010 to £44 per sq ft to follow the 21% decline this year.

Specialists seem to confirm that the rent trough has been reached. Will Beardmore-Gray, head of City leasing said “The City has seen a marked increase in activity since its low point in quarter one. There is a definite upwards trend in activity emerging – it is certainly not a fresh boom, but it is a steady return to normality. The current wave of demand is partly driven by Asia-Pacific financial firms, like Bank of China, Daiwa Securities, Bank of Tokyo, Mitsubishi, Macquarie Group and Nomura. I see the City as benefiting from its status as a hub in the system of global trade.”

Of course, there may be an element of self-fulfilment in such research and opinion. Still, a base line reaching back to 1989 cannot be a bad starting point for a revival and one thing is certainly not pie-in-the-sky. Nomura, the Japanese bank, has agreed the largest rental deal this year, moving into the new Watermark Place on the banks of the Thames.

Come on banks and the rest of you. Sock it back to them!

The Paradox Of Thrift

2009-09-27T12:49:00.000-07:00

28th September 09 – The paradox of thrift

“Any attempt to reduce consumption is likely to push down on output and hence household incomes. That could actually make it harder for households to increase their savings – known as the paradox of thrift.”

This statement is contained within the latest Quarterly Bulletin issued by the Bank of England. Because consumer spending accounts for two-thirds of total spending in the UK, household decisions on whether to spend or save have a major impact on the economic outlook in this, hopefully, emergence from the credit crisis.

The dichotomy is expressed by the Bank by saying that even if households saved as much as 10% of income, it would take nine years to bring wealth to the average of the last 20 years. That really is quite some paradox considering that spending led to the crisis in the first place. The two big factors quoted as most likely to lead to a reluctance to spend again at previous levels are:-

• Credit conditions remaining tight

• Job insecurity

The B of E’s bulletin does, however, find some helpful signs. Most financial asset prices have continued to increase over the third quarter of 2009 and conditions in bank funding markets have improved. Also, sentiment has allowed analysts to revise upwards their expectations for short-term corporate earnings. Equity prices continue to rise and as at today the FTSE is sitting at 5,133 a twelve month peak.

There is one final paradox. In the period July 24 to August 4th the B of E did not buy any corporate bonds after receiving no offers in five consecutive auctions. No sellers means no QE. No QE must mean there is enough dosh out there somewhere. Surely that is a trigger point. Even so, many people will be reluctant to spend again and not least the army of public workers.

Pound To Euro Parity

2009-09-24T14:10:00.000-07:00

25th September 09 – Pound to Euro parity

Four euros for a small cup of black coffee seems quite a lot of money converted back to UK pounds. But that is what it cost this week in a small town in Germany. Two years ago at a rate of 65p to the euro, £2.60 would still have been steep and last year at 79p, even more so. But now, at about 91p, it is positively expensive.

I mention this not to gain sympathy, that can be left to the family with a few children in tow that have to eat, but because currency experts are predicting that the pound will reach parity with the euro within the first three months of 2010. The factor chiefly to blame is said to be the loose monetary conditions in the UK relative to the eurozone. In turn, the main cause of that looseness is debt, as commented upon yesterday.

Currency experts at BNP Paribas said “Sterling is likely to be the underperformer among the majors, despite a favourable global financial market environment, as the UK domestic picture is set to deteriorate with the fiscal/monetary mix in particular working against sterling.”

The big issue is that the eurozone is a major source of imports to the UK and a weaker pound makes such goods (many often just passing through) more expensive in pound terms and thus not helping when inflation times return. But, by the same token, the eurozone is the largest export market for UK businesses. Exported goods become cheaper to the buyer if invoiced in sterling and so on balance UK Ltd ought to come out on top (much to the annoyance of our German friends).

The cynical will say that this is all very well but unfortunately Britain’s export industry is shot to ribbons. To them I would reply that the first posh shop window we looked at in Rottweil help shoes. The shop was full of high quality shoes. Shoes made by Clarke of UK fame, the biggest shoe manufacturer in the world.

The moral to this story is, sell like there is no tomorrow to Europe, but tomorrow – do not go there.

Pearl of the week

“The European Union faces a quasi-existential crisis”

Mario Monti

Between A Rock And A Hard Place

2009-09-23T13:33:00.000-07:00

24th September 09 – Between a rock and a hard place

The optimism of recent times could not last, at least not in terms of the balance sheet of UK Ltd. The total tax take in the five months of this fiscal year to the end of August 09 was 11.4% down on the equivalent period last year (the rock). Government spend on social benefits was 9.5% higher (the hard place). What are the consequences of this two-way stretch? In a word: debt.

The UK’s government borrowing is two and a half times higher that at the same point last year due to a record £16.1bn borrowed in the month of August 09. For perspective, this sum represented an increase of 63% on August 08 and it was the largest August deficit since records began in 1993. The UK has borrowed £65.3bn since the start of the financial year in April 09 compared with £26.1bn in the comparator. How would you feel if your personal borrowings mirrored these percentages? Try to feel it for the nation, your children will.

John Hawsworth, head of macro economics at PricewaterhouseCoopers, said “The figures confirm the dire state of the public finances. It seems likely budget deficits will overshoot Treasury forecasts not only in 2009/10 but for some years to come, resulting in pressure to tighten fiscal policy by more in the medium term than the Treasury’s Budget plans suggested.” He estimated that Government borrowing could reach as much as £200bn in the full fiscal year. Jonathan Loynes at Capital Economics went further by thinking that there would be an overshoot in the Treasury estimate of £50bn to reach a staggering sum of £225bn.

That the Bank of England is on the other end of this borrowing by printing cash to gobble up the gild-edged securities issued to effect the borrowing is hard to fathom since broad money supply in August 09 grew by just 0.1%.

A rock, a hard place and a dollop of QE. Quite a witch’s brew.

Barclays Are At It Again

2009-09-22T11:51:00.000-07:00

23rd September 09 – Barclays are at it again

My favourite maverick bank, that can only be Barclays (please read my earlier entries in this diary or think back to the TV documentary on the collapse of Lehman Brothers in which the boss of Barclays, Bob Diamond – an American – played quite a starring role) have pulled another flanker.

Britain’s second-largest bank has “sold” £7.5bn of its riskiest assets to a new company called Protium (the most common isotope of hydrogen) Finance. The new company is registered in the Cayman Islands and will be run by two former Barclays investment bankers and 43 colleagues, all of whom have resigned from Barclays Capital on completion of the deal and will charge Barclays $40m annual management fee, including office costs. If this all sounds somewhat surreal, then that is probably because it is.

The detail of how Barclays pulled off this deal are complicated but very interesting and may provide a blueprint for similar transactions in the future and not necessarily linked to Barclays toxic assets. Barclays has provided Protium with a 10-year, $12.6bn loan to buy the assets. The sale allows the bank to “derecognise the assets” by shielding it from any further falls in their “mark-to-market” value. Ian Gordon of Exane BNP Paribas said that the deal will provide “a boost to its capital strength by punting the issue into the long grass.”

The loan from Barclays to Protium is unusual. It will earn interest at 2.75% above the US inter-bank rate. This interest (which could accumulate to $3.9bn over the 10 year life) will be paid after investor returns. These investors, as yet unknown, are injecting $450m to earn 7% a year.

So far as I can see, the transaction will remove volatility from Barclays’ balance sheet, but the bank’s regulatory capital will not be changed until the loan is repaid on a gradual basis.

All seems like a return to the old days. Have the bad assets gone away?

Selecting Reverse Gear, US Style

2009-09-21T14:12:00.000-07:00

22nd September 09 – Selecting reverse gear, US style

The motoring theme has tended to dominate this diary in recent times (and the Canadian Magna outfit with its Russian supporters has finally won the Opel/Vauxhall stakes) but this reverse gear has nothing to do with driving. Rather it is about money supply.

One of the biggest crutches applied to the US financial market following the collapse of Lehman Brothers a year ago was a $2,500bn guarantee for the money market mutual fund industry. This guarantee is to be allowed to expire on schedule this month. In addition, there is to be a review by the Federal Deposit Insurance Corporation that is likely to lead to funding guarantees for banks either to end completely or be restricted to emergency cases.

Tim Geithner, the US Treasury secretary said “As we enter this new phase we must begin winding down some of the extraordinary support we put in place for the financial system. We must continue reinforcing recovery until it is self-sustaining and led by private demand.”

Commentators think that whilst the timing of the strategic shift towards pulling back support is symbolic, it is a fact that US banks have repaid more than $70bn of the emergency bail-out funds. It is estimated that a further $50bn will be repaid over the next 12 to 18 months. The size of the Federal Reserve emergency fund loan programmes has diminished greatly with commercial paper funding facilities down 87% from the peak and the cash auction scheme down 57%.

Only time will tell if these first reversals of the emergency moves last year will prove to be timed correctly or be premature. Certainly, initiatives to mitigate home foreclosures and increase available credit to small businesses is continuing. Professor Tim Congdon referring to bank loans in the US falling at 14% in the quarter to August 09 said “The rapid destruction of money balances is madness.”

Money Magic

2009-09-21T01:31:00.000-07:00

Money magic

The illusion starts with my daughter-in-law explaining how she got £300 worth of wine for “free”.

Julia and I do not normally shop at Tesco, primarily since if time is worth spent physically shopping as distinct from on-line, then one might as well spend plenty of money. Therefore we go to Waitrose.

Nevertheless, having bought a new TV set on-line from Tesco due to the offer of a free installation of Sky (a deal pointed out to me by my son), we received “points” that themselves turned into vouchers with a value. We also got a little colourful booklet entitled “How to double up your vouchers on all this and more”. Page 2 of the booklet explained a 4-stage process:-

• Choose the department you want to spend your rewards tokens in

• Decide where you want to use your tokens (in-store, wine by the case, Tesco direct or grocery delivery charge)

• Decide how many Clubcard vouchers you want to exchange

• Take your Clubcard vouchers to the Clubcard desk at your local store, where a customer service assistant will exchange them for double up rewards tokens.

“Make sure you don’t go straight to the checkout as your vouchers cannot be doubled up there.”

Seems simple enough if unduly complicated. The customer service assistant has a face glowing with rouge and bonhomie and explains that my £10 voucher can be doubled up – no problem there. My £5 voucher can be doubled up – no problem there. But, my £4 voucher cannot be because it is less than £5. Therefore she can turn £15 into £30’s worth of rewards tokens and I can use the £4 just as a straight voucher discount, understand? Yes I think I have it and please proceed.

Clutching my 3 times £10 rewards tokens tightly in a sweaty hand (still thinking about what the customer service assistant will be doing after her shift ends) and putting the £4 voucher in a safe pocket, I proceed post haste to the wine section. What my daughter-in-law had explained is really true. There are shelves of wine at half price (that is how £300 worth was obtained with just £75 in vouchers – get it?). However, my eye is caught by a 3 bottles for £10 offer. Seems too good to miss and so I choose two separate white wines and grab 3 of each.

To insure against the 3 for £10 stuff not being up to quality standard, I then spot a marvellous New Zealand Marlborough that will have previously been priced “at some Tesco stores” at £9.99. It is now half-price at £4.99 (we can forgive the odd half-pence error). I go for 2 bottles thinking that I have more or less spent the £30 rewards tokens (6 bottles from 3 for £10 and 2 bottles at a fiver each).

About to leave the wine counter, I suddenly remember the £4 voucher. Nearly made a mistake. I grab thankfully a lovely Isla Negra Chilean Chardonnay at £3.99, half price. That should just about do it. On the way to the checkout I collect 4 large potatoes for tonight’s steak dinner and a large jar of Nescafe coffee priced at £3.

I enquire of the checkout assistant if she wants the rewards vouchers and the token before of after the checkout routine (must not make a mistake at this stage as I recall the threat note below the 4 options outlined in the booklet). She confirms “at the end” and wants my Tesco clubcard to award more points for this purchase basket. Amazing really.

The net cost to me, and I have studied the till roll now for over half an hour and am still no wiser on how it happened, is £2.08. What I forgot to mention was that the jar of coffee is for our local village hall of which I am chairman. The £3 mentioned on the till roll will be reimbursed to me by the treasurer.

In conclusion, I bought from our local Tesco 9 bottles of good wine, 4 large potatoes and a large jar of coffee for -92p. Can anyone beat that? First thing Monday morning I intend to dump my Tesco shares on the basis that the purchase of a TV was a one-off, my wife will still shop at Waitrose and the world has gone completely and utterly mad.

Jgs -20 September 2009

Banking’s Bigger Buffers

2009-09-21T01:25:00.000-07:00

21st September 09 – Banking’s bigger buffers

For the second time, this diary can capture the deliberations of a bi-annual meeting of the finance ministers of the G20 group of nations. The main outcome of the decisions taken this time around is that banks will have to maintain bigger buffers under the new framework now agreed, once the financial crisis has passed.

Unlike the US and UK’s banking capital provisions, those of European mainland banks have buffers made up of so called “hybrid” securities that are more like debt than equity. Analysts believe that some European banks have met as much as half of existing regulatory requirements on capital buffers this way. Bernd Brabander, MD for economic affairs at the Association of German Banks said that proposals to cap the overall level of debt that a bank could hold in relation to its size, could put European banks at a competitive disadvantage.

Another principle established at the latest meeting of the G20 was that complex financial institutions should develop “living wills” to plan for their unwinding. Thirdly, banks will have to retain some portion of the loans they repackage and sell as asset-backed securities.

Bernd Brabander also said of the new proposals “The bit about leverage ratios really makes me a bit nervous.” Having just passed the anniversary of the collapse of Lehman Brothers, that must be the jaw-dropping mollification of the decade.

Motoring From US via Sweden to China.

2009-09-17T14:11:00.001-07:00

18th September 09 – Motoring from US via Sweden to China

This is a credit crunch tale that started way back, is still motoring and may yet take an unexpected turn. It is anchored on the data that Chinese car sales surged 90% in August 09 year-on-year. For the whole of 2009, sales of vehicles in China could reach 12 million and if so, it will attain the top spot as the world’s biggest auto market, taking the crown from the US.

This diary has reported earlier about the impending fate of the quality, design-led Saab marquee on the back of the demise of the US’s General Motors who drew the brand away from Sweden some years ago. Now it could return home. A Swedish “supercar” maker called Koenigsegg is on the cusp of buying Saab via a consortium. The consortium includes Beijing Automotive Industry Holdings. And this is where the circle forms.

GM, newly emerged form Chapter 11 bankruptcy, is doing very well out of the Chinese vehicle sale boom using its joint ventures where sales are up 40% this year. So, GM ditches one to benefit with another. But, that is not the end of the Swedish tale.

Ford owns Volvo, the second and more safety conscious if less designer Swedish brand. Where is Volvo being driven? You guessed it, China of course. Geely Automobile Holdings is apparently working with Chinese state investment companies on a bid for the whole of Volvo. Volvo manufactures in both Sweden and Belgium but the US is its biggest market.

The draw back of big luxury cars in the US is not a problem for the emerging middle-class of China. The real evidence for this is Buick, retained by GM but now sold to those affluent Chinese gentlemen.

US to China via Sweden seems an improbable outcome of the credit crisis, but it could happen.

Pearl of the week

“Customers want a choice, they do not all want small cars – and neither do they all want big cars.”

Ian Robertson, BMW’s head of sales

GM Europe Still Not Sorted

2009-09-17T00:35:00.000-07:00

17th September 09 – GM Europe still not sorted

It seems ages since we wrote about the Canadian/Russian solution to how General Motors would off-load its European business featuring the marques of Opel and Vauxhall. But, having successfully passed through Chapter 11 bankruptcy in it home US territory, GM has not managed to pull the deal off.

Talks between GM (chief negotiator is John Smith) and the German government have stalled notwithstanding the Germans putting up 1.5bn euros as security. From a UK perspective, this leaves the 5,000 Vauxhall workers still in no-man’s land. The spoiling factor has been a rival bid from RHJ International, the Belgium investors. This bid has been finally rejected by the German government since it prefers the original deal with Magna of Canada and its Russian banking investor.

Intertwined with the commercial case for resolving the future ownership aspect of GM Europe is a political one. Germany goes to the polls in late September and obviously the question of jobs is key especially during these hard times for employment. The original deal was likely to save most jobs. On the other hand, the Americans are worried about the risk of technology transfer and future competition from Russian interests. It is no coincidence that the re-born Chrysler business is currently aiming a small car at mainland Europe.

GM would appear to have three alternatives with its European business:-

• Agree a compromise with Magna (the Canadians)

• Refinance Opel and Vauxhall

• Restructure the business through some form of insolvency.

The back rooms are likely to be buzzing at the Frankfurt Motor Show which starts today. If the German government decides to up-front the whole finance for Magna, the US and UK administrations are likely to have a headache whether tea or German beer is consumed in those back rooms.

Out In The Cold – Still.

2009-09-15T14:18:00.000-07:00

16th September 09 – Out in the cold – still

Iceland with its funny banking system and outrageously entrepreneurial businessmen was the first economy to slide down the credit crisis pan. It was not just latitude that made that remote island so cold, and it remains out in the cold.

Data just released shows that Iceland’s GDP shrank by 6.5% in the quarter to June 09 compared to a year ago and, indeed, fell by 2% in the quarter alone. The country’s central bank has forecast that the economy will shrink by 9% this calendar year and as contributory factors, household spending will be down 19.7% and fixed investment will collapse by 48.4%. These are big, big numbers for any sovereign state.

Icelandic interest rates still hover around the 12% mark and controls still stop capital from flowing outwards. The IMF had to bail out the country with a $5.1bn aid package and three of its leading banks, Glitnir, Landsbanki and Kaupthing all failed.

Many of us can remember the somewhat surreal “cod war” when little Iceland actually went onto the offensive against the UK in an attempt to expand the territory of its greatest fishy asset. Now the Icelanders, who previously enjoyed an extremely high standard or living, have something even more fishy on their hands. There are 20 “suspicions of criminal activity” cases in process relating to the banking system. A leaked list of recipients of huge loans has not helped the confidence of Iceland, not least since the security taken is said to be dodgy at best or non-existent at worst.

In the early days of the credit crisis, Iceland complained about the use against them by the UK of legislation drafted originally to prevent terrorism. Assets were “frozen” and deposits placed with Icelandic banks had to be redeemed by the UK taxpayer. Paying this money back to the UK is a condition of the IMF support scheme for Iceland.

The only question in doubt now concerning how the UK reacted initially, is the definition of terrorism.

Down With Commercial Property

2009-09-14T14:10:00.000-07:00

15th September 09 – Down with commercial property

One aspect of the credit crisis that has not been touched on so far is how commercial property has fared. In a word – badly.

The benchmark Investment Property Databank (IDP) Monthly Index peaked in July 2007. Since then, it has fallen by more than 35% and at a faster rate than in the previous property downturn in 1990/1991. For those largely conservative investors in this “safe as houses” sector things got worse. Many open-ended investment companies and unit trusts punters have been unable to withdraw money since funds could not sell underlying properties to raise cash to meet redemptions. Others, locked into closed funds, such as investment trusts, may be looking to take their money and depart the scene.

However, there are signs that the worst is over and the performance of property shares has often been a leading indicator of change. Since March 09, the FTSE Real Estate sector has gone up by more than 50% and property companies have started to raise funds to allow them back into developments and to take advantage of distressed sellers. And, there is one most important factor bringing the commercial property market back to life.

Foreign, often sovereign, funds have begun to weight up “trophy assets” in the UK and specifically London. Last week, China and Qatar invested in Canary Wharf and an Asian consortium is thought to be interested in bidding for British Land the second largest property company in the UK. Now, the National Pension Service of Korea (NPS) says it wants to invest in “landmark” London office and retail properties.

So, commercially speaking, what went down must come back up even if in the most unlikely of places. Who would have thought it – South Korea

Buyers Back In Business

2009-09-13T13:50:00.000-07:00

14th September 09 – Buyers back in business

There is a highly respected index that has pretty much universal recognition. It measures whether purchasing activity and therefore factory output is expanding or contracting. The break point being 50. In most countries it is known as the PMI (purchasing managers’ index) although in the US it is the index of factory output as issued by The Institute of Supply Management. For the UK, a combination of the PMI’s for different industrial sectors is regarded as a good indicator of GDP movement.

Just as the stock markets around the world appear to be saying that the worst of the credit crisis is over (see the diary entry dated 11th September), so PMI’s are singing the same tune. August 09 figures compared to July are reported as follows:-

• USA 52.9 (48.9)

• China 55.1 (52.8)

• Taiwan 55.0 (53.8)

• South Korea 53.6 (54.0)

• France 50.8 (48.1)

• Germany 49.2 (45.7)

There are countries that have not broken through the 50.0 barrier including the UK (49.7), Italy and Spain. In the UK, the index was dragged down by substantial job losses with the labour market contracting for the 17th month in a row.

Although the UK appears to be lagging behind the likes of the US and China, it is important to note that for the first time in living memory, the British saved more than they spent. In other words they preferred to pare down debt rather than spend in the shops. This in turn helps the lenders repair their balance sheets.

Who can remember Aesop’s fables? The tortoise won the race. Slowly get better. Go out and spend later.

The Really Big Picture

2009-09-11T03:14:00.000-07:00

11th September 09 – The really big picture

Two days ago this diary covered the story of a resurgent UK stock market and gave passing reference to some global markets. Since then I have been searching for a really big picture to reinforce a view that the credit crunch crisis is actually turning the corner on a global scale.

What I have found is the Morgan Stanley Countries Index (MSCI) World Index. This index tracks the composite of 22 component stock markets, alphabetically starting with Australia and ending with the USA. The vital factor is the moving average and specifically the 50 day and 200 day. The graph starts in January 98 and progresses quarterly.

The theory is that when the 50-day moving average rises above the 200 day one, equity investors have good vibes and when the opposite occurs, it is time to sell. Looking back at the two trend lines, one certainly could have done worse than to follow this rule doggedly. From January 98 to October 00 the signal (with one exceptional quarter) was “buy.” From then until June 03 it was a “sell” phase. But then the lines turned again and one would buy equities until February 08 (recall that that was the boom phase) before getting well and truly out of the markets until – guess when? August 09.

Anyone actually following the graph closely would have spotted the 50 day line turning sharply upwards from March 09, when of course the rally started. The big message though is that the time to buy equities on any of the 22 world stock markets has returned. Furthermore, the indexes that monitor buying activity support a view that the worst is over (see entry to come dated 14th September).

Pearl of the week

“The majority of cars made in the UK are exported abroad.”

Angela Monaghan reporting in the Daily Telegraph

Reasons To Be Cheerful, Part 3

2009-09-10T01:41:00.000-07:00

10th September 09 – Reasons to be cheerful, part 3

In my continuing quest to be cheerful, I have found something. Not much, but something. In the second quarter ended June 09, the UK GDP did not as reported earlier fall to -0.8%. Rather it fell to -0.7%. I did say it wasn’t much!

The reasons for the betterment were said to be:-

• A 0.8% rise in government spending (that is better!!)

• The success of the “cash for clunkers” car scrappage scheme

• More manufacturing output

• More energy extraction and supply

• A positive contribution from net trade as imports fell more than exports

The Society of Motor Manufacturers and Traders (SMMT) supplied figures showing that car and commercial vehicle production increased 38% between May and June 09 noting that the majority are exported. Still trying to be up-beat, taken on an annualised basis, the UK’s economy has proved more resilient than for Japan and Germany since their GDP has fallen more.

As reported yesterday, those driving the FTSE 100 liked the news and sent the leading index up 6.5% in the month of August alone closing at 4909. Reaching a psychological 5,000 could trigger more cheer.

What else can we find? Most commentators think that UK GDP will return to positive territory in the third quarter. Whoopee. If that happens, it will be the fourth reason to be cheerful. But best not get carried away.

Reasons To Be Cheerful, Part 2.

2009-09-09T01:49:00.000-07:00

9th September 09 – Reasons to be cheerful, part 2

Since the diary entry of 14th August (the worst is over) things economic have spiralled downhill. But, unless my faithful friend the UK stock market is leading me up the garden path, there just has to be some reasons to be cheerful to build on the indicators set out in that earlier item. After all, the FTSE 100 is up 38% since early March and yet has 20% further to rise to reach the point it was at just one year ago. The stock market looks forward. Can we find pointers to its optimism?

We can think about contrarian investors (a definition of which can be found elsewhere on this website). A contrarian might look for two flashing green lights. First, experienced investors holding record levels of cash. Secondly, private investors being extremely pessimistic. According to Alan Steel, chairman of Alan Steel Asset Management Ltd, a survey some six months ago showed that experienced investors had the highest level of cash on the sidelines at 45% (almost exactly mirroring my own position). This figure compared with 11% in the late Nineties just before the dotcom bubble burst. The moral is – low cash equals euphoria and high cash extreme pessimism. Two weeks ago, cash levels had fallen to 25%.

Most of the cash used in the latter part of that six month period to end August 09 went back into equities. What this means is that for private investors in the market, the extreme pessimism had turned to something approaching a dismissal of all the economic indicator woes. Furthermore, global economic indicators do support a view that the worst is over. For the first time ever, all 39 countries’ composite leading indicators recorded monthly increases. The aggregate increase is the highest since records began 47 years ago.

My personal shares portfolio is up 21% in the last three weeks. I am determined to be cheerful. What else can I find?

Business Investment Down The Pan

2009-09-07T14:22:00.000-07:00

8th September 09- Business investment down the pan

The Office for National Statistics (ONS) has reported that business investment fell by 18.4% in the second quarter of 2009 compared to the same period last year to stand at £29.9bn. The result represented the largest annual decline since records began in 1965. Yesterday this diary highlighted the plight of the manufacturing sector and of course, the two subjects of failures of businesses that make things and investment by businesses are entwined.

The ONS cited the unsavoury cocktail of falling profits, poor credit availability, the high cost of capital and weak company liquidity as causal factors for the fall-off of new investment. While the reduction in investment was broadly based, it fell particularly sharply within private sector services and construction.

David Kern, chief economist at the British Chamber of Commerce, commenting on the figures said “The further sharp decline in business investment signals serious threats to Britain’s long-term recovery. In the face of weak demand and mounting financial pressure, businesses have little choice but to cut investment and stock. Unless this trend can be reserved, the long-term productive capacity of the economy will be damaged, and the country will lack the necessary capital stock to sustain a recovery….”

Such fine words from Mr Kern but to state the obvious is one thing, to effect a reversal, quite another. We could always champion key high quality business sectors, form a national bank and make it invest in those sectors rather than print money to buy back Government debt. Make any sense?

Manufacturing More Woes

2009-09-07T01:29:00.000-07:00

7th September 09 – Manufacturing more woes

The manufacturing sector amounts to 13% of the British economy and still employs 2.6 million people. Compared to a year ago, production is down 10%.

Manufacturing businesses that have fought to survive during the recession are on their last legs and 2,460 are expected to fail this year. A report by accountants BDO Stoy Hayward and the Centre for Economics and Business Research (CEBR) puts this figure as a forecast to compare with 1,600 failures in 2008 (up 54%). The average number of failures in the decade 1997 to 2007 was 1,263 so that if the forecast number materialises for this year, it will represent an increase over that ten-year period average of 95%.

Richard Snook, the senior economist at the CEBR, said “Business failures, like unemployment, generally lag the recession because businesses hang on as long as they can, but in many cases they run out of money.” How sad, how true. According to the Engineering Employers Federation, almost two-thirds of companies have frozen pay to avoid redundancies and cut costs as they fight for survival during the recession.

As has been noted earlier in this diary, it had been expected (hoped) that a weaker pound would boost exports of UK manufactured goods but so far there has been no real pick-up. As we have learned during the course of the last nine months or so, those developing economies such as China, have counter-balanced a drop off in exports with huge internal stimuli programmes of infra-structure capital projects. This has not happened in the UK where monetary policy has been adopted in the hope that eased credit channels would lead to self-help.

So far the only self-help seems to be one-way traffic. One way to the high-street bank.

Looking To The Future

2009-09-03T11:41:00.000-07:00

4th September 09 – Looking to the future

If we have turned the corner in the credit crisis, the question inevitably arises as to what can be put in place to avoid a repeat performance. The deputy governor of the Bank of England has been putting his mind to this and had some thoughts for a conference held in Barcelona.

Charles Bean referred to a “tumultuous” two years for the global economy and went on to say that “pre-emptive action” would be needed to cool future credit and asset price booms. “We have seen the eruption of a systematic financial crisis of quite unusual intensity and international reach. The nearest precedent is probably the widespread closing of international capital markets on the eve of the First World War.”

Mr Bean had two proposals:-

• The introduction of pro-cyclical capital requirements for banks. They would be required to build up extra capital during a credit and asset price boom and which could be run down in the event of a bust

• Increase the risk weights attached to lending when calculating how much capital a bank requires.

Placed in an historical context, Mr Bean proffered this view, “In all probability, the Great Panic and the Great Contraction of 2008 will join the Great Depression of the 1930’s and the Great Inflation of the 1970’s as discipline defining events.” One other constructive thought was that such financial crises should be treated as a central feature of capitalist economics and factored into economic models accordingly. They should not be explained away as “pathologies that happen at other times or in other places.”

Not one to overstate the case, the deputy governor also told the conference that the initial response to the B of E’s QE programme had been “moderately encouraging.”

£175bn sounds a lot of money for moderation.

Pearl of the week

“You have a financial system that creates products which at one level help you to hedge volatility but which can also be used in ways that create more volatility. I don’t know whether that means the world would have been better off without any credit default swaps, or simply some”.

Lord Turner of Ecchinswell – Chairman of the FSA

Stock Markets Saw It First

2009-09-02T12:27:00.000-07:00

3rd September 09 – Stock markets saw it first

This diary has been remiss in not reporting sooner how the author’s favourite baby has been growing. Stock markets (a brief history of the UK one can be found on the main website) look forward. They are disinterested in history and have only a casual relationship with the present. Corny perhaps, but true.

Yesterday we dealt with the emergence from a hole. Actually it was follow-my-leader. The FTSE 100 is up 40% since the nadir of March 09 and enjoying its strongest summer run in 25 years. For we close-watchers, the surge has started each trading day with the Far East. This is due partly to timing, i.e. where the sun rises first, and partly to the lower impact the credit crisis has had on Japan and China. As this piece is being written, the Nikkei is closing up 3.4% and the Hang Seng is up by half that percentage. In fact anyone betting on the Chinese stock market this calendar year can now go out and buy up all those vacant apartments/flats on those desirable water-side complexes.

Markets are global and what starts in the Far East is repeated at a slightly lower key in Germany, France, the UK and then the US as the sun moves Westward. Talking of betting on China, Simon Denham, MD of spread-betting firm Capital Spreads said “With yet another month almost over (sic) without some horrendous thing going wrong, I suppose it is natural that more and more of the fence-sitters are tempted, finally, to dip a toe into the water.”

It is worth saying too that the recovery in equities is pretty much across the board. I have a portfolio centred largely on “yields” since liquidating some two years ago. The stocks therefore are mainly on the conservative side. Even so, in the last three weeks the value has risen by 21%. All I need now is a further 26% and I have my money back!

In A Hole, But Emerging

2009-09-02T12:25:00.000-07:00

2nd September 09 – In a hole, but emerging

Hollywood could not have script it better. They met in a hole. Jackson Hole, Wyoming as it happens. In this most aptly named of towns within a rocky cowboy state, Ben Bernanke, chairman of the US Federal Reserve, told leaders of the world’s central banks that “Prospects for a return to growth in the near term appear good.”

On this side of the pond, Kenneth Rogoff, Harvard professor and former chief economist of the IMF voiced his opinion that there was “no question the global economy is healing and emerging from recession.” Furthermore, according to a German purchasing managers’ survey, business confidence in August hit its highest level since January 2006 and led to Klaus Baader, chief European economist at Societe Generale to utter the immortal words “The recession is over.”

So there we have it then, the world has emerged for its (Jackson) hole.

But what about the UK specifically? Our man in the frame, namely Mervyn King, Governor of the Bank of England, is more head-scratchy and cautious. He is focusing on the threats that remain and emphasising that even if recovery has started, the major tests lie beyond 2009 when stimuli are unwound and consumers have lost their appetite to spend. He backed up his caution by wanting more QE than he got at the last meet of the Monetary Policy Committee.

In many ways the apparent conflict of view between those in the hole and those in central Europe with the UK, is not conflict at all. It is more an issue of emphasis. Things may not look as bad as they did, but we still have to pay for the rescue. We still have to emerge from the hole.

Chelsea Have Done It Again.

2009-09-01T01:43:00.000-07:00

1st September 09 – Chelsea have done it again

In the early days of this diary, I wrote a scathing piece on the Chelsea Building Society. It was triggered following my research into the revelation that Chelsea was amongst those who had done business with the Icelandic banks. Remember that it was the lack of standards within the Icelandic financial system that was one of the first stories to break once the era of credit crunch had dawned.

My interest was personal having a good sized deposit with them. I pawed them on a number of fronts:-

• The Icelandic escapade

• Turning to the wholesale money market in hot pursuit of Northern Rock

• Suffering substantial write-downs

• Having to pay exceptionally high rates to attract new deposit money

• Paying the directors bucket loads of dosh

• Not being in, or anywhere near, Chelsea.

What I didn’t know at the time, since it has only just been uncovered following a review by accountants KPMG, was that the Chelsea has been hit by an alleged fraud during the period 2006 to 2008. Stuart Bernau, the new Chairman, has said “Obviously it’s criminal activity. We have insurance and will try to recover what we can but I’d rather we were up front with the charge.”

In the six months to the end of June 09, the society reported a £26m loss. The main cause of this loss was a bad debt charge of £53m and the main part of that arose from its buy-to-let book where the mortgage fraud is suspected to have occurred. Mr Bernau stressed that there is no suggestion that any Chelsea employee committed fraud, but did admit to “questions about our lending policies.”

Just a few weeks ago, my one-year bond with Chelsea matured having paid out 6.75%. A staggering rate of interest in the current climate. I declined the offer to renew and placed the cash elsewhere.

One other thing I did not know earlier is that the society was founded in 1875 as the Camberwell and South London Building Society. I bet the Victorians felt comfortable with that working-class sounding solid name that would lend out from the deposits it had taken. Thinking about the founding fathers, the words “turning” and “grave” spring to mind.

Of Bangers & Mash

2009-08-30T12:59:00.000-07:00

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

2009-08-27T11:54:00.000-07:00

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

2009-08-26T14:15:00.001-07:00

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

2009-08-25T11:46:00.000-07:00

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!

2009-08-24T12:42:00.001-07:00

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

2009-08-23T12:46:00.000-07:00

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

2009-08-20T14:10:00.000-07:00

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

2009-08-19T14:26:00.000-07:00

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

2009-08-18T14:21:00.000-07:00

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

2009-08-17T14:05:00.000-07:00

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

2009-08-16T15:04:00.000-07:00

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

2009-08-13T14:24:00.000-07:00

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

2009-08-12T16:11:00.000-07:00

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

2009-08-11T14:15:00.000-07:00

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

2009-08-10T14:13:00.000-07:00

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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2009-08-09T15:15:00.000-07:00

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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2009-08-06T15:55:00.000-07:00

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?

2009-08-06T02:49:00.000-07:00

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

2009-08-04T14:24:00.000-07:00

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

2009-08-03T16:11:00.000-07:00

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

2009-08-02T16:18:00.000-07:00

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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Factories In The Doldrums

2009-07-30T16:16:00.000-07:00

31st July 09 - Factories in the doldrums

Whatever slightly brighter news there may be around with retail sales and the stock market both picking up, factory orders in the UK as a whole not only remain low but things are getting worse. The CBI’s quarterly industrial trends survey covering a period from July 09 revealed that orders are at the lowest level since January 1992.

The survey asks businesses to assess whether they consider their order book to be below normal. Taken forward to September 09, 59% of respondents confirmed the below normal status and this compared to 57% at the August 09 point in time. Specifically on the export side, the trend was worse in that the September % was -45 compared to an August figure of -34%. The export position is particularly bad given that the weak pound should be boosting exports whereas in fact the collapse in demand from overseas markets has consistently outweighed this advantage.

The weighted percentage of firms who consider themselves to be working below capacity stood at 70 for the month of July 09 and is forecast to rise to 76% in August. The one shaft of light related to output and sentiment. Output over the past three months improved to -31% from -53% and sentiment on output expectation improved to -14% from -32%. But, as was pointed out by Jonathan Loynes, chief European economist at Capital Economics, "The improvement in sentiment appears so far largely to reflect firms’ hopes rather than any firm signs of an improvement in actual demand for their products. The outlook for the industrial sector remains highly uncertain at best."

Meantime my sleeping beauty of a moribund furniture factory in Nottingham has been dealt another blow. The beautiful magnanimous big bank (RBS) has withdrawn the overdraft facility. This action seems perfectly timed to ensure that the two big orders we are on the cusp of winning cannot be funded. Of course how is the long-standing bank manager to know that in this industry raw materials have to be paid for about two months before the customer pays us?

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The Two Big Mistakes

2009-07-29T15:58:00.000-07:00

30th July 09 - The two big mistakes

You could say that hindsight is cheap and easy. A bit like the critic who can not create himself. You could say that things would be that much worse had it not happened and to a limited degree you could be right. Nevertheless, in my opinion and on both sides of the Atlantic two big mistakes were made in what was a hasty attempt to get credit moving again.

The first was to pump money almost exclusively into the banks because they were too big to fail (global in life and national in death as the sound bite from the Governor of the Bank of England put it). Savers funds should have been guaranteed in their entirety but that is all. The banks should have failed and fallen wholesale into state hands. Top management is cleared out, past practices cleaned up and the big bank is re-packaged into ten smaller banks and re-privatised.

The money that went into the bank black hole should have gone somewhere else. It should not have reduced the liability side of the sovereign balance sheet but have added to the asset side. It would occur by investing in people as the best asset of any nation and secondly in projects that can be activated immediately. For the best people affect in the UK, National Insurance contributions by employers should have been abolished (there aint any anyway once the jobs go) and 5% of wages credited back to the employer by the state. All employers can then afford to hold on to people longer even if on short-time. Such people have some spending power and are not on benefits. Instant projects include repairing the nation’s infrastructure and forget the capacity increase schemes, the UK is not China. Time to repair the crumbling roads and railways, catch the nation’s breath by quality improvement.

The second big error was to reduce taxation aimed at increased consumer spending. In the UK by VAT reduction, in the US by federal tax easing. It will not work, it did not work. If you feel under threat, your job, your income, your standard of living, you will not spend, you will save. You ran up the debts, now try some reparation. All the statistics show this is precisely what happened.

As it is, the mess drags on as tomorrow’s piece will show and by widening the spreads and increasing the commissions and fees, the big banks are rolling it in.

The UK PM is bankrupt and Obama is feeling the heat.

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