Thursday, 11 February 2016

Market panic

Something scary is going on in financial markets, where bond prices in particular are indicating near-panic.

Panic moves to prop up Deutsche bank underline fears about both the eurozone and a wider global financial crisis. And there’s a lot of volatility in the political as well as economic markets, when it comes to the EU referendum. The Mail splashes on plunging exports to the EU, while the Telegraph reports that the Companies Act will force firms to detail the risks of ‘Brexit’ on the eve of the poll.

The stock market had predicted nine of the last five recessions; the wisdom of crowds is often overrated. Still, bond markets are a bit less flighty than stocks, and also more closely tied to the economic outlook. [A weak economy has mixed effects on stocks, low profits but also low interest rates, while it has an unambiguous effect on bonds.] What plunging rates tell us is that markets are expecting very weak economies and possibly deflation for years to come, if not full-blown crisis.

The government and central banks world wide have spent the past seven years inveighing against both fiscal and monetary stimulus, and seems to have learned nothing from the utter failure of its predictions to come true. One of the most popular political outs is "we will have to learn the lessons from this" but it is now obvious that this is not true with financial regulation.

If I were a betting man putting a wedge down on the next financial crisis happening before 2020 would not be a difficult choice, however, I do not expect good odds.

Tuesday, 9 February 2016

Financial instruments

Last week I went to see "The Big Short" and enjoyed it for it's entertainment value, however it was remarkably accurate.

The FT has a front page story today [Tuesday 9-Feb-2016] suggesting The Big Short is on again, this time in London, luxury homes are being shorted by hedge funds in a bet on falling prices.

If you are unfamiliar with the back story, the gist of the unsavoury activities that led to the housing crisis was threefold:-

lenders handing out risky [sub prime] mortgages to borrowers with poor credit scores
banks bundling these sub prime mortgages into securities and treating them as if they were not risky
banks and insurers issuing insurance policies against the system’s implosion

The good news is CDO's [collateralised debt obligations] are dead. Pre-crisis, investors were gorging on these bundles of residential mortgages, to be more precise, bundles of bundles of mortgages.

Similar financial devices are still around, including private label CMBSs [commercial mortgage-backed securities] and CLOs [CDOs with regular bank loans instead of mortgages]. The Consumer Protection Act prevents people from issuing these securities to hedge or transfer all the risk, meaning they are still exposed to some of the risk.

Can another Big Short happen?

Well not in the same way, for one thing, the complex insurance products that "The Big Short" guys used to bet against the housing market so-called CDS [credit default swaps] are dead too. That is a good thing but it is now concerning that the solution to the crisis generated the seeds of another.

Essentially the government nationalised the entire residential mortgage market, handing the reins to Fannie Mae, Freddie Mac, and the Federal Housing Authority. Although these entities do not make dangerous CDOs, and you cannot buy a CDS from them, our reliance on them leaves the economy vulnerable.

Are we as safe as we could be from all the lessons learned? I think not.


Monday, 8 February 2016

Another charity scandal

Age UK and E.on have been exposed by The Sun as the charity was paid £6m by the energy giant for a deal to sign up pensioners to its fixed rate tariff. Some claim it is standard practice for price comparison websites to get a commission for passing on business, yet when a charity is involved then it looks quite different.

The main allegation is that thousands of pensioners were not informed properly that they could switch to newer deals that would save them £245 a year. Energy Secretary Amber Rudd said "I take very seriously this allegation that Britain's pensioners are being misled” and she has ordered OFGEM to look at it.

Last year Age UK warned that a third of older people are ‘anxious’ about ‘high heating costs’ and had criticised the Big Six power firms for overcharging, now it seems they are in league with the rip off.

Last week Age UK chief executive Tom Wright, who earns more than £180,000 a year allegedly, was announced as a non-executive director of the Financial Conduct Authority, where he will be regulating companies and helping to protect consumers, no conflict of interest there then!

In a statement, the Charity Commission said: “The Commission is aware of concerns raised in the media regarding Age UK’s partnership activities with E.ON. The Commission is in contact with both Age UK and OFGEM to determine what regulatory role the Commission might have and any action that might be necessary.” So be prepared for another whitewash report hitting the desks.

This special tariff agreed by E.ON and Age UK is not a good deal for old people, many of whom may be in fuel poverty.  The Conservative MP Dan Poulter told BBC Radio 4’s Today programme: “There is a moral obligation for the charity and E.ON to recompense them.”

Thursday, 4 February 2016

PM's sham reforms

Yesterday [Wednesday 3-Feb-2016] David Cameron laid out the re-negotiated deal that he has come back with from Brussels and after a two hour question & answer session in parliament he now stands accused of selling the country short. About half way through there were no more questions available from the opposition benches, only conservatives asked questions in the final hour.

Remember, this is the great deal that will encourage the public to vote remain on 23-June-2016, well it looks more like a damp squid.

The four points:-

were not really stunning to start with, he has now returned with a watered down version saying that this is not the final version, but time is running out. If I wanted to be cynical I would say the PM actually wanted the public to vote leave!

The Prime Minister claimed he had secured 'substantial change' to the UK's relationship with Brussels. In the chamber at Westminster angry Tory backbenchers lined up to denounce his 'slap in the face for Britain'. They said his supposed 'breakthrough' deal did little or nothing to curb mass immigration, restore sovereignty or end the hugely divisive splits in the Tory Party over Europe.

After months of negotiations, in which the PM flew thousands of miles to EU capitals, European Council president Donald Tusk yesterday released the basis for a draft deal intended to keep Britain inside the EU and it is worthless. There is only one way to vote now and that is to leave.

Monday, 1 February 2016

GDP 2015

Measuring output is the best way we have of taking the temperature of an economy. But the industry standard GDP [gross domestic product] has a host of weaknesses. It is reliant on an arbitrary definition of what is productive, so it includes childcare by nannies but not by house-husbands and wives. It takes no account of who is doing the producing, meaning an economy could have a single worker or full employment. It ignores the underground economy to a large extent, guaranteeing that production always undershoots reality. But more than any of these, GDP is extremely difficult to measure.

The UK economy grew by 0.5% in the fourth quarter of 2015, according to figures released from the ONS [Office for National Statistics].

GDP growth between October and December was up 0.1% from the previous three-month period. It also meant the economy was 1.9% larger than during the same quarter of 2014. But annual growth for 2015 was at 2.2%, down on 2.9% for the previous year. This pace of annual growth is the slowest for three years.

The ONS attributed the quarterly rise in GDP to a 0.7% increase in services, while agriculture also grew by 0.6% during the period. There were falls in construction output and production, which fell by 0.1% and 0.2% respectively. The figures released today are preliminary and are often adjusted up or down once more data become available to the ONS.

George Osborne said: “These figures show Britain continues to grow steadily. Despite turbulence in the global economy, Britain is pushing ahead. "With the risks we see elsewhere in the world, there may be bumpy times ahead – so here in the UK we must stick to the plan that's cutting the deficit, attracting business investment and creating jobs."

The ONS’ chief economist Joe Grice said: “Growth continues to be driven by the UK's dominant services sector, while the production and construction sectors shrank slightly in the fourth quarter.”

China’s growth is over 6% and we are still talking of 0.1% changes being good, we have such a long way to go to be able to say we are paying our way. How can we pay off the deficit support huge infrastructure projects shore up the NHS which is creaking like never before and still supply the public services the public expect?

Wednesday, 27 January 2016

Google conspiracy

The Diverted Profits Tax [DPT] announced in 2014 was designed to “deter and counteract” companies that “seek to avoid creating a UK permanent establishment” for purposes of avoiding UK corporation tax, and exploit tax arbitrage. The DPT tax rate is 25% and was deliberately set higher than corporation tax currently at 20%.

It was instantly dubbed the “Google Tax” as multinationals that book profits through another EU member state, and claim to have no UK presence, were clearly its target. Google argues it has “no fixed base” in the UK, despite employing thousands of staffers in London alone. However Google will now evade the DPT as part of the backroom deal.

Even the French got more [3 times more] out of Google than we did!

Google’s UK “business” is in Ireland, and the company pays the UK Exchequer only on profits from UK transactions. While our taxmen have failed to challenge the legality of this arrangement, the French have not and look set to extract far more from the search giant, the Times reports. The paper also says France will get three times as much as HMRC, even though its UK revenue and profits are greater. The French are pushing for €500m, while a concession that Google’s French operation is really French could be worth even more.

MPs have launched an inquiry into the UK’s tax system after the government was accused of allowing Google to pay too little in a £130m deal. The House of Commons Treasury committee announced that it would examine whether a radical shake up of corporation tax was needed, amid concern that Google has been allowed to get away with an effective rate of 3%. The inquiry is not directed at Google, but will investigate the UK’s shrinking corporate tax base more widely and whether HMRC is doing enough to tackle avoidance.

Cosy meetings do not do it justice, the government have got this wrong.

Monday, 25 January 2016

Business Growth

Profit warnings from listed companies are at their highest level since the 2008 credit crunch because of stock market and economic volatility and increased competition. Although companies are operating in a growing economy, more and more are issuing profit warnings because of increased competition and structural changes taking place in their sectors, as well as increased economic and market volatility.

The dramatic collapse in the price of oil led many firms in the sector to issue profit warnings. Half of the companies that provide services to oil and resources groups issued earnings alerts last year. Economists predict that the Office for National Statistics will say that the UK economy grew by 0.5 per cent during the fourth quarter of 2015, a slight improvement on the 0.4 per cent recorded for the third quarter.

George Osborne said that to ensure the UK remains on a sound economic trajectory and that 2016 should be a year of action on a number of fronts. "For as that Chinese saying goes, talk does not cook rice," he said. "In turbulent times we need action to deliver economic security at home. At its heart are sound public finances."

Reaffirming the Conservatives as the party for business, Mr Osborne made a dig at his political rivals. Mr Osborne's 20 minute speech covered a number of areas, including the need to reform global bodies such as the G20 and the World Trade Organisation to make sure they work towards a more competitive environment. He also touched on global markets, repeating his comments from a fortnight ago when he spoke of a cocktail of global risks.

"My main message on China is that we won’t rubberneck and fret about each new bump on the road. We are in it for the long haul. We are going to support China on the difficult route of economic reform that it is following."

All this comes at a time when the UK is suffering growth at less than 1% and inflation nearer deflation. China currently has a growth rate of over 6% per year, if only we could match that.