End Game Approaches Fast!

‘Risk’ assets…..all encompassing!

It has been yet another grim week for what are termed “risk”, assets; a description normally applied to equities, but now, almost, all encompassing. We have debated before the performance of gold, and the Swiss franc, at times of high stress; they didn’t work.

Agreeing to stop disagreeing……

Now, we are looking at the imminent break up of the euro, which is unimaginable in terms of the chaos that would result. There is no precedent for this, but it is unlikely to be a good outcome. The leaders of Germany, France and Italy met this week, together representing 70% of the European economy, so you might think that they get the seriousness of the situation. But no, they agreed only to stop disagreeing with each other, in public.

End game approaching……?

Meanwhile, Italian 3 year bonds were yielding 8.13% yesterday, France is in line for a downgrading, and the latest auction of German bonds was left at the lych gate, rather than the alter. The end game approaches fast.

An immediate implication……

This has huge implications, nearly all of which are beyond our knowledge base. On a more immediate level, my son, Henry, wants to know what currency he needs in a French skiing resort on the 16^th of December, and will he need a different one when he has to return on the 3^rd of January? Note the “has to” bit; maybe we are all too gloomy. Of more immediate concern is a scan of the webcams on these resorts, which look more like a clip from the Sound of Music, with cows grazing on the upper slopes. There is no snow. At all. Maybe we should take our lead from that film. What goes round comes round.

UK bond auction at 0.10%……

Anyway, back in the UK, we have no reason to worry. The government auctioned £3bn of index linked bonds this week, and was hit by a wall of £9bn. The interest rate? 0.10%. Yep, 10 basis points. The only possible rationale for this is that people are not so much frightened, as terrified.

You could argue that Italy is in a far better economic state than we are, but as that trade unwinds, as it surely will, the losses will be catastrophic.

Heading for recession……

All of the above, and more, means that Europe is heading for another recession, as are we, if we are not there already. The modestly positive Q3 GDP numbers were as a result of restocking, and government spending, neither of which create growth, or are sustainable.

Companies in better shape……

The only positive take on this is that companies are in far better shape than 3 years ago, so it will not be so deep. If everyone keeps their heads. The odds? Not good. The FT reports as follows: “In an often tetchy interrogation by the Treasury select committee on Wednesday, Stephen Hester, RBS Chief Executive, said he would be very interested to see the investor who is prepared to put more capital towards UK banks. All of them are thinking that’s a dumb place to put capital.”

To be fair, he was not there when they launched the largest rights issue in history, raising circa £12bn, in 2008, on a prospectus thought to have been written by Enid Blyton.

Selling a ‘parts bin’……..

As we struggle with the lack of any obvious logic in the relative pricing of assets, it is perhaps comforting to see that others are having similar issues. In quite well hidden news, we are about to sell our remaining 74 Harrier Jump jets to our American friends, for $180mn, or £116mn. These are no longer perfectly serviceable planes, but “airframes”, with the implication that they will be taken apart for the content of spares. Which was not the message from the other side, who reckon there is 15 years life left in these things.

But market price is all. Defence economist, Professor Ron Smith of Birkbeck,University of London, told Channel 4 news it would be hard to put a figure on what the Harrier sale could raise:” What they are worth is what someone is willing to pay for them”. Hmm. What is the entry level qualification to be a “Professor”?

More useless than a wheelwright……

The replacement for the Harrier, the JSF, is still in build, and so they won’t give you the price list, but the proceeds from the sale might allow us to buy just three of these things. Interestingly, it is thought to be the last manned fighter plane that will ever be built, replaced by much cheaper drones. Given that it is thought to cost up to £5mn to train a Harrier pilot, you can see where this is going. Odd to go, in a click of a button, from being one of the most experienced pilots on the globe to more useless than a wheelwright.

Usual escape route closing……

Nor is the usual escape route going to be open for long. Thomas Cook, second largest tour operator in the world, is in severe difficulty, and could well self implode, taking the Civil Aviation Authority, (an insurer of last resort, no pun intended) with it. In time, these things are self righting, but the dislocation is not good. As anyone passing through Heathrow, (or not), on Wednesday will discover. Massive public sector strikes will disrupt theUK, in response to a reduction in pension payouts. I doubt they will get much sympathy; the private sector, which generates the wealth, and pays for the above, saw this train coming down the line more than 15 years ago. There is no money.

Things to stockpile……

All of this relentlessly bad news might drive you towards the sweet cupboard, but no let up there. The cost of gelatin has risen by 30% in the last 12 months, those pesky Chinese again, together with sugar. So, in these uncertain times, you need to be stockpiling wine gums and jelly babies.

I am trying to find out what the shelf life is, but probably months. How has it come to this?

CDO

26^th November, 2011