Another week, and more elections to analyse. In the UK, the results were fairly predictable; Boris got re-elected, albeit by a slim margin, whilst elsewhere the Conservatives faired badly and the LibDems got wiped out. Which leaves them with a problem; despite their protests, they were always the “none of the above” party, and people were happy to camp under their wing because they knew that they would never be elected. Coalition leads to compromise, inevitably, and they have probably done quite well in getting some of their policies adopted, but how to differentiate themselves next time round is going to be very difficult.

….and abroad

Francois Hollande crawled over the line to victory inFrance, whilst the Greeks are still trying to put any sort of government together. Most of these contests were characterised by low turnouts, and quite violent swings to either left, or right. When people are placed in an impossible position, they either give up, or get more extreme, and as the later gain momentum, the former follow. Add in financial repression, and debasement of the currency, and you are back in the 1930s. (At which point the Editor will cry “Enough!”…… but the warning signs are there for all to heed).

Stress tests neither stressed nor tested……

Whilst the new French President waits to get inaugurated next week, (so that he can go and talk to Mrs. Merkel), markets have trooped on. We are back in Spain, where every bank has passed some kind of stress test recently, but it turns out neither stressed nor tested. Bankia, the third largest bank has had to be bailed out. It was formed in 2010 from seven of the cajas, (think regional building societies), but the game was up before it had started. At a ceremony to mark the floatation in the Madrid stock exchange last July, a large screen beamed the share price in the first moments of trading, until people started shorting it, whereupon the price fell sharply, and someone was despatched to pull the plug. You only find this kind of insight deep inside the FT.

Spain – decisive action but……

It is, of course, decisive action, but it looks, to me at least, like standing in front of a train. On full bore, and it is not that long ago, Spain was building 850,000 houses a year, which employed 20% of the population. And lending against it. Now all that has gone, bar the houses of course. Headline values have fallen circa 30%, but the real numbers will be much worse, and falling. I was talking with a friend today, who had another friend who had just bought a property for 65,000 Euros, a massive discount on the 230,000 it was worth at the peak. Except it never was “worth” anything of the sort, and even now, it will probably halve. See Ireland for recent experience. So, if you are some wretched institution that has lent money against these assets, hmm…

Moderation in mining……

Meanwhile, global mining companies have finally worked out that it is time to moderate their investments; to be fair, it takes multi year commitments to get a project going, and you can’t really stop half way. Nevertheless, Citigroup reckon spending will rise only 13% this year, whilst not long ago they were talking 34%. Next year? Not good. And the oil price has also been falling like a stone.

Japan pushes gas prices up……

Not so gas, and the by-product, electricity, which are about to go up by another 15% in the UK. The culprit is Japan which has rather gone off nuclear energy, having nearly wiped itself off the world map last year, and has thus turned off the last of its reactors. So demand for LNG, and therefore the price, has increased dramatically. More fracking needed, although the industry lacks any knowledge base, inEurope, and the suppliers know it.

Aircraft Carriers – to ‘jump’

Whilst we ponder all the imponderables above, the coalition has taken “decisive action” on our aircraft carriers, which you may recall are being built in various bits around the country, and then glued together somewhere else. Two were ordered, amongst much fanfare, and then one was to be immediately mothballed, or something like that. Obviously, you need some planes to fly off these things; the clue is in the name really, so the last lot ordered a version of the American F35 that is pretty much a jump jet.

or not to ‘jump’…….

However, our new leaders concluded that if we bought some catapults, we could have a longer range machine, but it turns out that these bits of kit cost about £1bn a ship, which is rather a lot for a glorified piece of string, and don’t actually work. Well, not yet, you understand. So, the jump jet version it is, not that that works, or not yet..

French sharing in tatters…….

Nor does it have a price tag, but it will cost more to buy, and maintain. Both are down to the fact that planes are not meant to rise vertically; it is just unnatural, and expensive. But no, because we are no longer buying the launch thingy, we save enough to get some planes, and can afford both carriers. Utter joy. Furthermore, our agreement to share these facilities with the French is in tatters because they have the wrong type of plane. So, they can’t land on our ships, and the only one they have never worked anyway.

Starting from scratch……..

You might think that this is Britain at its best, until you reflect that not so long ago, we sold our remaining fleet of Harrier jump jets to the Americans for less than scrap value. Pretty sure that they own the right to the know how, as well, which is galling, since it was invented here. But, hey, we can just buy it back, eventually, if it works, in 10 years time. Too late for all those people, pilots, engineers, and the massive support team that knew everything about these extraordinary machines, who have been”retired”. We will have to start from scratch.

Some things never change……..

I was very puzzled why it took quite so long to get to the West End on Wednesday morning, until the guy explained that it was the “State opening of Parliament, Gov”. The traffic was back to Euston, and beyond. Thus, a glorified version of a horse and cart had brought central London to a halt. Which got me thinking about how good we are at building such carts, but no longer own our car industry, but that can wait for another day.

The Queen has no input to the speech she has to deliver, sadly, and it was rounded on, soon enough. Pretty much, it said “My Government will do nothing”. You really would rejoice, were that the case.

But I am coming round to this mode of transport, which seems to be green, never booked for speeding, towed away, impounded, and also needs no tires, suspension parts or MOT.

Back to the future?

CDO

11^th May, 2012

News reaches me this evening, as I sit down to write this blog, that RBS has repaid the £163bn that it borrowed from various governments, and that Lloyds hopes to repay the £157bn that it owes to similar sources, by the end of the year. Blimey! Maybe it is only after the event that one realises what has been happening, since I do not recall seeing the scale of these numbers before, but they are still very grown up sums, indeed.

…….compensation deserved?

As shareholders, directly, indirectly, or sadly both in my case, I guess that one should rejoice. But, maybe they just sold the best collateral, called in the easiest of loans, and what kind of toxic nightmare is left behind? In both cases, and indeed in other banks, there are people in there that know what they are doing, and deserve the compensation that they are so reviled for receiving. Just a shame, to put it mildly, that they were not running these things ten years ago…

…..not a fit person.

The media storm continues unabated, with a parliamentary report concluding that Rupert Murdoch was “not a fit person” to run an international company. The comment registers, amongst all the other incoming noise, but it is only when you stop and think about it that the full absurdity hits you. No one is forced to buy any product from the Murdoch’s, be it Sky, The Times, or The Sun, in the UK. They have built a huge, global, business, but just to repeat myself, you do not need to partake. So, this judgement from a group of people who can’t even run a canteen profitably, in one of the tourist hotspots of the world, is not likely to have much impact.

Taking a different approach……

Other media groups have been taking a different approach. Daily Mail and General, (DMGT), now generates 84% of its revenues away from newspapers; it owns, for instance, the most popular website, globally. The shares are still rated as though it was in its old model, so perhaps a change of name might help? Apparently no, which I find oddly reassuring.

.…..you cannot cut your way to growth

Over at Trinity Mirror, the Directors have finally had enough of the Chief Executive, one Sly Bailey. The share price has fallen more than 90% since she was appointed in 2003, and there has been no dividend since 2008. Well, for the shareholders; Sly has fared rather better, with a pay package of £1.7m, according to the FT.The internet is the great enemy here, we are told, but both News International and the Daily Mail have proved otherwise, as above. Maybe the lesson to take from this is that you cannot cut your way to growth, something that they could have explained to those chaps trying to run the Westminster canteen.

Chinese acquisition……

Anyway, with elections in the UK, France, Germany and Greece either happening, or imminent, I am not going down that thread this week. Suffice it to say that anything could happen, and often does. Thus news, today, that a Chinese company called Bright Food has bought control of the makers of Weetabix, valuing it at £1.2bn. The UK sales of this product, according to the BBC, were £101m last year, and that is turnover rather than profit. And they will find this a pretty crowded marketplace.

Tesco…….range and volume

I ventured out to the local Tesco last weekend, based in a village, rather than a town, and was taken aback by the sheer range and volume of stuff on sale. Far beyond the needs of anyone, and eerily quiet. I know that they have had a bad press, but I just wonder if people, who are on very straightened incomes, find this sort of rather ostentatious display off-putting, or indeed, offensive? To which, the answer was at the till. If I return this weekend, and spend £70, they will refund me £10. Given that their net margin is around 6%, (quite high), you do the maths.

Paying not taking……

I am sure that there is much more to this than I can see, but it just reminded me of the time when the Icelandic’s swept in to town, buying all before them, on the High Street. It had no great logic, that I could spot, but at least they paid for it, rather than stole it, as they did some hundreds of years ago. Not dissimilar to our efforts in Africa compared to the Chinese today; they are paying for what they take, whereas we were engaged on some noble enterprise of educating the locals whilst actually…

The Great Pacific Garbage Patch……

It is always good to find a story of human redemption, or just a happy one, and thus Ikio Yokoyama has had a good week. His beloved Harley-Davidson motorbike, which was stored in a shipping container, was swept out to sea when the Tsunami hit Japan last spring. Along with millions of tons of assorted stuff, this is either starting to wash up on the west coast of America, or getting amalgamated in to what is known as the Great Pacific Garbage Patch, thought to cover at least 700,000 sq kilometres.

……..a time delayed valve

Given my love of sailing, I have always thought that these containers should have some sort of time delayed valve in them, whereby they sink after 7 days, or whatever. Some 20,000 are thought to be lost overboard ships every year, never mind the one off described above. Hitting a 40ft steel container, 95% submerged, in a glass fibre yacht is not going to make your day.

Anyway, Ikio is a happy man; the bike is to be sent back to Japan, and the local dealer is going to restore it. Given that oil and water don’t mix, he should get it on e bay, soonest.

CDO

May 3^rd, 2012

The abrupt change in mood was caused by the European Central Bank announcing the Long Term Refinancing Operation shortly before Christmas. The mechanism allows the ECB to lend unlimited amounts to banks for a three year period, at an interest rate of just 1%. The nature of acceptable collateral has been broadened considerably.

The banks have, in turn, been encouraged to buy their local sovereign debt, with the carry worth some 50 billion euros a year. This is a useful way of recapitalising the banking system. A further tranche of loans was released at the end of February, and as with previous experiments of this type, have boosted risk assets significantly.

The LTRO is not, however, a cure for the problems affecting the weaker economies of the euro zone; it simply buys time for reforms to be enacted. This is where it gets difficult. Unprecedented austerity measures are causing real pain, with unemployment in Spain now topping 20%. Greece has all but been written off by most commentators, with the focus now moving to Portugal, Italy, Spain and maybe France, depending on the outcome of the forthcoming elections.

With the exception of America, most equity markets retreated in March as reality returned.

Away from the spotlight, the Japanese stock market has been enjoying a strong run, up some 19% on the quarter. A weaker yen has boosted the prospects for exporters and improving consumer confidence has led to increasing domestic activity. In contrast, the Chinese market has continued to struggle on the back of reduced growth forecasts for the year. Whilst it is difficult to get precise information on the economy, a crude measure of activity is provided by the Baltic Dry index, a measure of charter rates for ships. This has fallen by 46% so far this year.

Outlook

Economic indicators, in most developed economies point to a pick-up in growth, albeit modest, and from a low base. There is much still to worry about including political instability in the Middle East, and any number of factors which could shake markets. Recovery will take a considerable time, but the foundations are in place, particularly in Europe, and we therefore expect markets to reflect this better outlook as the year progresses.

CDO

20^th April, 2012

Raining on the Murdochs……

It has also rained, in a different sense, in other places. One can only presume that the Murdoch family have adopted a “scorched earth” policy, taking all with them. For sure, cosy relationships exist in any forum. Politicians crave publicity, “papers” want to be seen to be at the forefront of the action, and then there are all sorts of other people who want to get in to the debate.

Everyone wants something……

I gather that, at the Conservative conference in Manchester last Autumn, there were 4,000 of the tribe, MPs, and Councillors etc, and 8,000 others who were lobbyists. They all want something; power, in whatever form, tends to corrupt, and whilst we would never tar everyone with the same brush, we are not dealing with the brightest stars in the firmament, here.

…….a changing mood

I doubt that the Leveson inquiry will make much difference to these fundamentals, but it is changing the mood.

Double dip arrives……

And talking of those, Q1 GDP numbers came in at minus 0.2%, and if you add in Q4, 2011, the economy has contracted by 0.5% over the last six months. These, of course, are the average, and provisional. So, tis possible that they can be revised by 0.2% in either direction, but, as it stands, the UK economy has entered a “double dip recession”, some 32 months after we escaped the last.

……or did recession never leave?

Or maybe we simply didn’t. GDP has yet to get back to the levels seen in 2007, (still some 5% below), and the trajectory is firmly down. We have postulated, many times, on the causal effects of this, but there is a death spiral of cuts reducing economic output. Pretty simple, but so difficult to sell to the electorate. Thus France will change horses, and both the Belgian and Latvian governments fell over this week.

The fire of London……..

Average, mentioned above, is the key. I have endlessly commented on how unreal London seems to be for a visitor, but it continues to boom. House prices are thought to be up 7% Q1; annualised rate?!!! You think this cannot last, because it is so illogical, but if London is on fire, (economically rather than actually), then it follows that the rest of the UK is not in good shape.

Spend any time going round the country, and you see this. Increasing numbers of shops are “shuttered”, which has massive implications for property values, and those that depend on the rental income.

Bond investors in control……

I mentioned last week that the bond investors are in control of these things, rather than the politicians, and the electorate, and you will see that playing out in these countries.

Spain downgraded……

Just this morning, the credit rating agency, S&P, downgraded Spain yet again, on the back of the latest unemployment numbers, which are somewhat out of date. By the end of last year, 23.6% of the workforce were idle, but it must be far worse by now. More than half of people under the age of 25 have no job. I would ask you to think about that number. And the consequences. It is thought that something approaching a third of all the unemployed, in Europe, are in Spain. I doubt this; official figures tend to disguise reality.

Claire Squires…….

Most of you, I expect, will have heard of Claire Squires, who died running the London Marathon last weekend. Donations to her chosen charity, the Samaritans, have exploded, now thought to be through £1m. Nobody could possibly want this outcome, but, if you have not yet contributed, please do so. They do an amazing job, away from the glare, and often at a huge personal cost.

RBS ‘reverse stock split’……

Back in what counts for the real world, Royal Bank of Scotland has decided to undertake a “reverse stock split”, so for every ten shares you held, you are to get one. This lifts the share price, by their reckoning, from 23.2p to £2.32, “which will result in a share price more appropriate for a company of RBSs size in  the UK market and may assist in reducing volatility, thereby enabling a more consistent valuation of the company”, the bank wrote to shareholders, reported by the Financial Times. Hmm. Somebody got paid to think this up; how much has this cost?

It just about lifts the share price above the last Rights Issue, £2 a share. And, no, will share the blushes of those who subscribed, underwrote it, and signed off the official documentation.

Barclays……shareholder revolt

Likewise, Barclays, where something like a quarter of shareholders voted, today, against the pay package that the Board had decided on for themselves, which, in City terms, is a very big number, or statement, depending on your view. I am not sure that this is fair, on two counts. Firstly, when they needed additional capital, they found it from other investors. There was no recourse to the public purse. Secondly, the employees operate in a global marketplace, so it is really stupid to try and cap their earning potential.

Living with capitalism……

It does not mean that the highest paid are the best, (witness the Manchester City/United clash next Monday evening), but it is raw capitalism, at work. Unless someone comes up with a better system, we will have to live with this.

CDO

27^th April, 2012

I went to London on Sunday evening, the train from was Crewe crammed, as it always is at the end of the weekend. One of the offspring had lent me an Oyster card, albeit that it had no credit, reminiscent of getting in to any car they have driven recently to find no petrol. Anyway, topped up, I set off for Moorgate, from Kings Cross, on Monday morning, opting for the Northern Line. I don’t know if it was the time of day, or choice of line, but I had to wait for the third train before I could squeeze on. Maybe you just get used to it, but you would be prosecuted for transporting animals in this fashion.

…….loss of self policing

I have been back to school; apparently, I need a two day refresher course in Regulation and Ethics, at vast cost. I am told that the world has moved on considerably since I became a member of the Stock Exchange in 1984, when “my word is my bond” and all the members were, collectively, liable if one of the member companies defaulted. Thus, there was considerable, if discrete, self policing. I fully accept that such a cosy circle could not survive the globalisation of the financial world, but in the merry go round of regulators that we have had in the last 25 years since “big bang”, this has all been lost.

We just get the bill……

It is not the fault of the present regulators, who have to strike a balance between all sorts of conflicting interests, not least the politicians, but there needs to be a rethink. Collective liability is still with us in the form of the Financial Services Compensation Scheme, which pays out some of those who have been disadvantaged, in some way.  But the surviving companies have to pay for those that fail, and yet we have no influence as to who can hide under this umbrella. We just get the bill, which last year amounted to some 3% of our turnover, and which we cannot insure against. The latest company to go down is called Worldspreads, which was a spread betting company; it should have been holding some £30 million of client deposits, but there is only some £15 million left. For a company that was not meant to be taking any risk, that is some hole.

A good first quarter……

Equity markets have enjoyed a good first quarter, and in the case of America, a pretty good six months, up 25%. The increase this year is due to improving economic indicators in most developed economies, but also the effect of the LTRO, previously discussed. Now this “sugar rush” of liquidity has begun to wear off, as reality has returned, in the form of raw politics. Elections are coming up thick and fast, and remember, hardly any government of any hue that was in office before the “crisis”, is still there. And it does not matter which side they represented; change was all that was needed.

Frantic election schedule…..

It kicks off this weekend with the first round of the French presidential elections; the incumbent, Sarkozy is level with the leading challenger, Francois Hollande on some 27% each, according to the latest polls. The eight other candidates, amounting to 46% get knocked out before the second round, on May 6^th, when the winner takes all. Hollande, a socialist with some pretty bizarre views, would cause chaos, given a chance, since he is not in favour of the austerity measures needed.

Mayor of London…….

Between these two contests lies the Mayor of London election on May 3^rd, together with the usual council elections; the polls are predicting that, with the exception of London, the coalition parties are in for a drubbing due to the factors mentioned above, and the appalling reception given to the Budget. Thus Boris could be the only politician to have sailed through the economic downturn, surely linked to the immunity of London from reality. Just a thought.

Greece, Germany and France (Round 2)……

There is a little time to recover before the 6^th, when you have the second round of the French election, Greece has a national election, and there is the first of two regional government elections in the German state of Schleswig Holstein, followed on the 13^th by another in the most populated region of North Rhine-Westphalia. Why does this matter? Well, the two “ruling” parties that form the coalition in Greece attracted 77% of the votes between them, at the last election; polls now indicate 40% support. The scope for chaos is obvious, but maybe the “authorities” will overturn the result, whatever, and as before.

The verdict belongs to the bond markets……

The regional elections in Germanyare more problematic; the junior coalition member, the FDP, looks likely to be wiped out, and that calls into question the validity of the “Grand Coalition”. Add in the potential change in France, and the central driving forces of Europecould move, very quickly. Whilst all this matters, the verdict belongs to the bond markets. Those who own existing issues, or are potential purchasers, determine the outcome, whatever the politicians say, or promise. Expect some turbulence as these things play out.

Failing exports……Abu Qatada

Meanwhile, with the UK economy improving, albeit estimated by 0.1% in Q1, you would hope that exports would be picking up, but not the one that matters, a certain Abu Qatada, who the powers that be were hoping to send to Jordan. Anyway, this failed because there is a fundamental inability to count to 100, which is the number of days needed to pass between one appeal and another, to some authority to which we are beholden. Stuff happens, but it looks incompetent and will be damaging at the polls.

Deteriorating etiquette……

Finally, and it is such, one of my daughters copied me in on an e mail that she had sent to her Professor at Toronto University, which ended with the proclamation “Best”. This ghastly thing seems to have crept across the pond in the last eighteen months, particularly in London, but what does it mean? There seems to be no etiquette on how to sign off an e mail, or text. Indeed, many cannot construct, or write a letter, so where will this end up?

CDO

20^th April, 2012

No reversion to normal cycle……

Or, maybe, they are just realistic. Had we more time, we could go and see what is happening, but I suspect that none of it is good. The gradual unwinding of positions taken, whether personally, or by governments, is going to take many years. Indeed, a lot of these things are never going to revert to what we thought was the normal cycle.

The web, outsourcing and hot desking……

The internet is destroying High Street shopping, and thus the basis for investing in property funds. No more 25 year leases, with upwards only rent reviews, every 5 years. Offices are no better, bar Central London, but even that will fall victim to hot desking, and outsourcing. A lot of our chosen fund managers now work very far from the City, and seem to thrive on it. One commutes fromThailand, but not everyday. For the moment, the marketing departments don’t want you to know this, but it will out.

……driving an on-going property crisis

It is difficult to get numbers on the property crisis, since the banks are unwilling to foreclose, if there is any other way out. But apartments in Dublin would appear to have dropped by some 80% from the peak, according to the Irish Times, and development sites by some 90%. Some of the smart guys decided to “diversify”, (seeing the bubble coming), but bought property across the north of the UK, whilst those with bigger pockets had a tilt at London. Some even tried southern Europe.

Right decision….same asset class

Right decision, diversification, just the same asset class, albeit that they managed to stay in the same currency, mostly, unless they explode that as well. I find it difficult to see how this is going to get better, anytime soon, or who the natural buyers are. Certainly, those trying to get on the bottom of the “property ladder” are hugely disadvantaged, and without their input, prices are going nowhere.

Swiss peg under attack……

Elsewhere, this week, I could tell you why the Swiss Franc peg to the Euro has come under enormous attack, (which it survived), or why the Austrians are so keen to recover tax on deposits held there, by their own citizens. I have lost the exact quote, but pretty much, the Swiss were not interested. The French, meanwhile, ruled out any thought of a double taxation agreement..

Roll on the election there; could be fireworks.

Titanic anniversary……

The immediate outlook will be dominated by the anniversary of the loss of the Titanic, played out from every angle. It was the largest, floating object, ever built, when it set off from Belfast. And within a week, gone. Many will debate the cause of the loss, invincible, just maybe, but there were other factors at play. Some think that it is all down to the glass transition temperature, by which, because of the difference in temperature between the iceberg, and the surrounding waters, the hull just shattered. Think dropping a glass on a floor; from then on, no one had a chance. Thomas Andrews, architect of the enterprise, was never recovered, but knew the outcome, on impact, and warned others.

Little learnt……

One hundred years on, with the sinking of the Costa Concordia, we seem to have learnt little. Human intervention can wreck the best of plans, albeit if they were never going to work in the first place, such as the North Korean satellite launch, they just were doomed to failure.

Patience and noise……

I went to see a fund manager, in London, this week. We had supported him, in the past, but he had to leave the industry, for health reasons. Three years later, he is back, and delivering fantastic numbers. Just his job, you might say. And very difficult to ask what he has learnt, over that period, but the answer is both twofold, and instructive. Firstly, patience; take a view, on a stock, and stick with it. Secondly, there is far too much noise, most of which is just chatter. I am guilty of that, obviously!

Finally, the cover story on the Economist focuses on the cost of Scottish independence, this week. Whatever the rights and wrongs of the debate, I think it might, just, reduce their circulation numbers.

CDO

13^th April, 2012

Those of you who live in the Northern part of the UK, however defined, have had an interesting 10 days, weather wise. Maybe I should define this better; we are 200 miles north of London, and about the same south of the border with Scotland. Carlisle, (the crossing point), is some 400 miles south of the tip of Scotland, so we are not really in the middle.

Such, common, misconceptions will be pounced upon come the Scottish Referendum, whenever that gets called. For the record, I am 50% Scottish and my children 75%, by birth. A very measured chum who knows all about bond markets, and credit ratings, entered this lions den a few weeks ago, and has promised never to go back. Passions run very high; good. And not because he thought the whole thing looked worse than Greece, which it does.

 And now for the weather…

Anyway, back to the thread. The week before last, somewhere in Aberdeenshire recorded a temperature of 23.7C, a record. Yesterday, it was under 10 inches of snow. Not that the melt will help; 10 inches of snow is equivalent to 1 inch of rain.

These extraordinary shifts in temperatures are not unique to us, however you think about the country geographically.

The Farmers Guardian has reported that the drought, (now affecting southern England), is most acute in Spain, Portugal, and southern France. The more perceptive might note that these are amongst the countries that are in major default problems. And no, I don’t know how the Greek olive oil harvest is going to pan out this year.

“Further north, crops are suffering from frost kill, notably in Germany, Poland and eastern France, which is forcing farmers to think about re-sowing their fields”.

So, these crops, once planted, failed to get going due to lack of rain, and have now been killed by frost/snow. Replanting is an option, but it is thought to cost 200 million Euros, according to this study.  I don’t know where they get these numbers from, but more importantly, I don’t know where they get the seed from.

 Bad news is always good news for someone…

“Unfortunately, due to the lack of seeds available, farmers will not be in a position to plant what the market needs”, the report concludes.

Those farmers, in the previously defined “middle England”, will know all about this.

Furthermore, recent scientific studies have shown that even small amounts of pesticides are playing havoc with bee populations, and without them, many crops do not get pollinated.

In short, we are very optimistic for soft commodities and water infrastructure. If this sounds like a replay, and the dire political consequences that follow, I apologise.

Now back to the circus…

And no sooner than we had posted last week about the elephant in the room, (euro zone debt crisis), than it returned. The latest Spanish debt auction had few takers, whilst on both sides of the Atlantic, policymakers indicated that they had grown bored with printing money, otherwise known as Quantitative Easing. Thus, risk assets have had a bad week, although it is not remotely clear if current prices are supported by this policy, or a genuine recovery in underlying demand.

Meanwhile, the Lord Wolfson has offered a prize of £250,000 to anyone who can write an essay of how best to manage an orderly breakup of the European currency. The pretext is that he is quite up for this, apparently, but it still attracted 452 entries, one from an 11 year old Dutch schoolboy, who seems to recommend that the Greeks convert their Euros to new drachma, which then converts to pizza, and they give slices to the creditors. Well, in the absence of anything else…

Just 5 were shortlisted, result known by July 4^th, but Capital Economics were one of them. Having read the abbreviated version, you wonder what the others were proposing, but Roger Bootle has always told it as it is. Handled well, the exit of a few peripheral countries would be mutually beneficial, and containable. And since the numbers indicate that they are leaving anyway, it should be. Just find a group of politicians that can sort it out….

Ringmasters or Clowns???

Sadly, Jerre Hermans, (the schoolboy described above), has had different thoughts. And according to the Telegraph, “I want to be the director of a zoo”.

I am left wondering if that is much different from being “Ringmaster of a Circus”, but on such small detail, our future may hang.

Finally, I don’t know if I am allowed to wish you a Happy Easter, or if this gets to be published before or after, but downtime is good, whatever your mantle.

Do enjoy.

CDO

April 5^th, 2012

The comedy, Yes Minister, is going to be relaunched, shortly. You may recall that this was a sideswipe at mandarins, and Whitehall, but according to those in the know, it was pretty accurate. Likewise, they stopped producing Spitting Image because “real life” was more surreal than anything the scriptwriters could produce, in the latter days of the last Conservative government. And I know, before you point it out, that this is not a Conservative government, but a coalition of the willing, or some such.

Nevertheless, it would be hard to recall a week when the news flow, for the incumbents, was so relentlessly negative.

Coalition government, Nil

Maybe, these people who influence the national agenda read this blog on a Monday morning. Thus, my comments on charging VAT on “hot” take away, food have morphed in to the pastytax, which is a tag they will never be able to disown. Similarly, on the “petrol strike” that never was, or at least, not yet.

And it is not just the language used, such as fill up your “jerry cans”, but the implication that everyone can afford a full tank of fuel. Many, many, simply cannot. So a careless phrase, a throwaway line, becomes a symbol of an uncaring government. Of course, the media leap on this; thus George Osborne was reported to have presented a real Oyster when trying to board a London underground train. (Oyster being some kind of electronic payment system, whilst underground trains are what the name implies; apparently, they do exist).

Other ministers, apparently, have instructed their chauffeurs not to queue for fuel in case it creates panic.

In both cases, I jest, of course, but this stuff sticks, very firmly.

Opposition, Nil…

You might think, therefore, that the opposition would be having a pretty good week, which they were until they staged a pretty hapless photo shoot in a branch of Greggs, in Redditch, with the Shadow Chancellor buying 8 of my beloved sausage rolls, but none for his erstwhile friend, Ed Milliband, Leader of the Opposition. Clearly, neither of them had any local connections; just a grasp at a sound bite.

Such complacency sank them in the by-election for Bradford West, on Thursday evening, statistically one of the most amazing results, ever, in a parliamentary democracy. I don’t think that the election of George Galloway can be extrapolated in to any sort of national trend, and, of course, every mainstream party has rushed to the microphone with a rationale of why they came second, third, or fourth. The LibDems lost their deposit, for the record.

Newsflash:  Galloway scores!

Like petrol in a kitchen, Galloway is combustible, but there is a message here. We, previously, thought that younger voters were not engaged in the democratic process, and all the numbers bear this out. Participation has steadily declined, and the most victorious New Labour government, ever, in 1997, had the support of less than 25% of those entitled to vote, from memory. Now, various forms of social media allow people to connect, and mobilize, very quickly. This was apparent in the so called Arab Spring a year ago, which swept across the north of Africa, and is far from finished yet, witness Syria. All of the “established” parties looked white-faced on the back of this, not that it stopped the traditional quote, “we will learn lessons”.

I did not set out to reflect on the volatile state of the UK political scene, but, to be fair, it has been a great week for observers of this dark art.

But back to the main course…

I wanted, as hinted last week, to go back to the whole European debt issue, and see where we are up to on that. I think there was a feeling, after the latest bailout of Greece, that the problem was solved, and life could move on.

The Spanish budget, unveiled this week, shows that much still remains to be done. The European Union wants to see budget savings of 20 billion euros, whilst some economists talk of the need to find up to 55 billion. The problem in all deficit reduction countries is that these cuts become self fulfilling, and create a downward spiral. Tax revenues fall, whilst unemployment increases.

In Spain, it is already 23% and still rising; some think it will peak at 33%, or one in three of the workforce. No wonder that riots are becoming more frequent.

Of which we are likely to see more in the not too distant future…

France is now three weeks away from the first round of the Presidential elections, but none of the candidates are talking about the economy, or the painful measures needed to get the borrowing under control. Here again, unemployment is rising, now past 10%.  Nothing much is likely to happen before the successful candidate is named on May 6^th, but then the time for postponing difficult choices will have passed, a point that will no doubt be reinforced by the bond markets, and the Germans.

I fear this whole topic will return to centre stage as the year progresses.

CDO

1^st April, 2012

It has been Budget Week, the annual ritual of suspense and pre event lobbying, complete with comprehensive leaks, and positioning. Thus, negotiations across the airwaves saw the headline rate of tax reduced from 50% to 45%, in exchange for a 7% stamp duty on houses that cost more than £2 million pounds. It is unlikely that the original, higher, tax rate raised much revenue, and difficult to see that the stamp duty will do much either. But it is deemed to be good politics, which of themselves are at a premium.

…….but not business as usual

I am not really sure why they bother with this annual exercise; most businesses run 12 month rolling budgets, where incomes, outgoings, and possible outcomes are constantly monitored and managed accordingly. Why does Government behave differently?

Some will never come back…….

I talked to a chum in London about this on Monday; he left the UK when the tax rate was increased, and now operates from Zug, in Switzerland. The rate there is somewhere between 12 and 18 percent, so he is not coming back. And neither are his bright, young, colleagues, who went with him. But the politicians don’t seem to get this, and many others, who should know better.

Petrol to go much further………?

Strapped for cash, they must raise enough as cheaply, and as efficiently, as possible. So Income Tax, National Insurance (laughable), and Fuel Duty are obvious targets. They also have the distinct advantage that the costs of compliance are bourne by others. Thus petrol will soon be 145p a litre, and much more, if sterling falls by 20% against the dollar, which is our central expectation.

Austerity yet to kick in……

With the full effect of the austerity measures yet to kick in, there will come a limit to public tolerance, but it is, as ever, impossible to predict when. To be fair, the present government did not bring about this crisis, and I really doubt that we could have spent our way out of it, as the Americans have tried to. Fortunately, the focus has been on the euro zone, but our plight is little better.

What is the ambient temperature…….?

Even so, it seemed just mean-spirited to try and tighten up the VAT rules on the sale of hot food, with sausage rolls, (“when served above ambient temperature”), attracting the full 20% rate. This is going to create big problems for Greggs, which sells 2 million a week. The items are made in central bakeries, and then dispatched to the shops, where they are, effectively, reheated, but not stored in “hot” cabinets.

…….depends on the length of the queue!

Thus, if you are at the front of the queue when the latest batch is taken from the oven, your roll will be served, and sold, above ambient temperature. If you are at the back of the queue, it probably won’t, but the difference in price is 20%. So, if you take it back to the office, and microwave it, you have made the saving. This seems both impossible to police, and just pathetic.

……..and when is a mobile home static?

On the same subject, the full VAT rate is to be applied to mobile homes, or static caravans, as they are otherwise known. However disguised, they are a blot on the landscape, but attracted 3.38m visits in 2010, apart from the owners, according to the National Caravan Council. 95% of these things are built in East Yorkshire, the hub being Hull; some 6,000 people are employed.

This is a result of an historical accident; Hull has always imported timber, and sheet metals, some of which were used to maintain the fishing fleet, which has long gone. Those craft skills remain, however.

Closing which loophole…..?

Anyway, it closes a tax “loophole”, apparently. I would quite like to know which one that was; easy enough to announce, sounds macho, and strong government taking action against these people who dodge the system. But this? What were they trying to avoid? Some of my friends have “holiday homes” in Anglesey, which, like any other coastal area, has a proliferation of caravan parks. Now, you would buy “bricks and mortar”, which does not attract this penal rate of VAT, and probably not even Stamp Duty, either. Hardly helps the local population, though. Can no one, else, see these things?

Apple……distorting indices

Finally, going back to the food theme, it would be remiss not to mention Apple. This has become the most valuable company in the World, the share price having risen by 83% in the last 12 months, and 50% this year, until Friday, when it fell by nearly 10% after what is reported to be a dealing glitch. But it demonstrates how nervous people are about this company; the share price increase, let lone the size of the market cap, is now starting to distort performance indices, the holy grail of investment management. Thus, the more the shares go up, the more everyone needs to buy…

Actually, it is still not expensive, says he, as a bull of Apple, but it does demonstrate how quickly sentiment can turn.

Forgotten but not gone……!

Next week, we might look at those things that have preoccupied so much of our time recently; we might have forgotten about them, but they have not gone away.

CDO

24^th March, 2012 

A very, very, long time ago, I signed up for a BMI credit card, administered by MBNA.  Both have been through changes of ownership since, and in the case of the airline, the dispute is over the ownership of landing slots at Heathrow, which are inheritantly valuable.

Anyway, I really cannot remember the last time I went on one of their planes, and have certainly never used their affinity card. Notwithstanding, they have written to me to advise of “Changes to handling fees”. Thus, from the 21^st April, “the standard handling fee for balance transfers, money transfers, cash advances (e.g. ATM withdrawals) and credit cardcheque transactions will be increasing to 5% per transaction, with a minimum fee of £5 per transaction.

Umm. Think about that. These costs are so massive that it is not possible to comprehend them. But, clearly, it is the new norm.

Travel in the “cheap window”…….

One of the very few advantages of increasing years is to see things in a slightly different light. Not that I qualify for any reductions, anywhere. But the 9.56 from Crewe to Euston is the first one in the “cheap window”, and it is just that. Off peak, a return is £67.40, and the train is rammed; people standing, (who have no reservations), all the way. Given the popularity, you might think it would be more than 5 coaches long, but no. Indeed, two of these are given over to First Class, fully 40% of the capacity.

London vs KL……?

An open First Class return now costs a maximum of £364, and another 5% if you use the card mentioned above. When I have time, I shall go and see who occupies these seats, and who is paying. You can guess the latter, even if I will not name the former.

My daughter, Katie, is flying back from Malaysia, tonight, after two weeks holiday. £400 return. Enough said.

…….a soulless and windy gully!

On Crewe station, I bumped in to my oldest friend. He has business in London, and Cheshire, and moves in between, but was booked in a different coach. So, we agreed to meet on the concourse outside Euston, for a coffee, at the end of the journey. They keep trying to improve this space, but it remains a soulless, windy, gully. Knock the whole place down, or stick a roof over it.

“Evenin’ all”…….

We sat on a bench, in the weak sunshine, and chatted, not quite about the cost of cabbage, but amiable banter. Presently, two policemen strolled past, each with a machine gun. Which left me both shocked, and speechless. Obviously, there are lots of people milling around in this environment, none of whom looked threatening, so what are they going to do with these things?

Furthermore, these instruments seemed to be equipped with telescopic sights; I thought that machine guns were “spray and kill” within 30 yards, but maybe they are more sophisticated, now. First Class suddenly seems more attractive, now. Not that it would protect you any better……..

Not in the real world……

Anyway, on Thursday, at least, London looked good. Spring sunshine raised the temperature to some 19 degrees, and the overcoat, so necessary in Crewe, looked and felt positively idiotic. Oh well, as a Northerner, you get used to it.

I will not bore you with the tale of how I ended up in a Casino, in Berkeley Street, on Wednesday evening; suffice to say that I was just being kind to my host. Years ago, you needed to be a Member, which took either 24, or 48 hours, to get approval, not sure from whom. Back then, those punters were loosing eye watering amounts of money, but now it is more reserved, and open to all to chance their arm, in an environment where the gross margin is 98%. (All casinos, not just this one).

So the bets are smaller, the characters likewise.

But, it is not the real World. Much like First Class.

Gilts on the move……

Meanwhile, in what is defined as normality, yields on Government Debt have ballooned(capital values collapsed) this week, both here, and in America. In the UK, they have moved from 2.02% to 2.30%, in only three days. I know; most of you have lost the will to live right now, but this is very important. If government debt, (Gilts), yield a “normalised rate” of 4%, then investors in 30 year redemptions could lose 50% of their Capital!

Printing Euros…..avec denial!

Enter left, 100 year Gilts. We speculated on this a couple of weeks ago, in the blog. Could the, highly successful, LTRO, be extended beyond the 3 years that was set? You may recall that this is printing Euros, avec denial.

Lethal in the wrong hands…….

Well, clearly yes. Politicians can do anything. At some point in the lifecycle of these bonds, they have to be worth buying, but it is difficult to think of a more volatile investment. Meanwhile, those who regulate our “industry” regard these instruments as only slightly more risky than cash; both are lethal, in the wrong hands, and guess where they are now?

CDO

16^th March, 2012