Thursday, 25 December 2008

Christmas Lists

Merry Christmas everyone and I hope Santa brought you all you wanted. I managed to get some 'wish lists' of important people and despite libel laws I am going to share them with you.
Lord Mandelson
  • No Passport Holder - I already have one. His name is Mr. Hinduja.
  • A new diary - only this time can I have one where the pages don't fall out so meetings with Russian Aluminium Oligarchs don't 'accidentally' fall out making people 'misunderstand' that I had not met him before crucial votes on Aluminium tariffs.
  • A Summer Holiday - one of the downsides of not being an EC Commissioner with a £200k+ salary and now being Business Secretary at only £100k+ salary is that I don't get a freebie trips on £80 million yachts owned by Aluminium Oligarchs who want my 'opinions and good company'. Still, at least I am paid the EC Commissioner's salary for another 3 years while I have my new job.
  • A large, reliable bank - to store all that extra cash from the old EC job so it isn't frittered away on things I would normally have to pay for like holidays.
  • More exfoliating scrub and face cream - it's important to keep up my complexion with all these TV interviews and I love the way I scrub up to have skin like the smooth, glistening backside of a china doll.

George Osbourne

  • Some new friends - now that Nat Rothschild has been so nasty to me. I was only trying to sneak on Mandy and point out he was far too pally with that Aluminium Tycoon to have not met him before.
  • A Summer Holiday - it's highly unlikely that anyone will be inviting me onto their £80 million yacht anymore and where else am I going to get ideas about Party funding? I do my best thinking when I'm having my back soporifically scratched.
  • A more reliable job - heck, even if we win an election, I'm going to have a rubbish job which will likely not last very long.
  • A better image - people say I have that annoying look of the school snitch. Maybe some exfoliating scrub and face cream like Mandy will help.

David Cameron

  • Some better polls - I mean after disasters like the Credit Crunch, Recession and currency, then using billions of pounds of taxpayers money, how on earth can Gordon Brown be so popular?
  • Some 'weathering cream' for my face - I think part of the problem is I look too young to be considered experienced like Tony Blair and not haggard and brow-beaten like Gordon Brown. I look more like 'Baby-Faced Finlayson' out of the Beano and frankly that isn't cutting the mustard with the voters.
  • Some policies - it really annoys me that those Labour guys just keep messing up and when I point it out to everyone, they just say 'What would you do then?' I mean, that's not the point - Labour did it wrong, can't people see how important that is? Only people are now saying I should have some pithy one-liners about what I would do instead. But I've tried but I can't think of any and then I would only have to do them if we won an election.
  • Someone to take me seriously - come on guys, at least I don't have a daft name like Vince Cable.

David Davies

  • A new ego - the last one was completely shot to pieces when I staged my one-man protest over detention period and resigned my seat. I mean, it was just a fantastic idea about how to highlight the most important piece of Labour nonsense and further my career by gallantly falling on my sword in a safe seat so that we could run a new election. That would show them. But it didn't and now people call me names and I don't feel very confident anymore. And I want my old job back.

Gordon Brown

  • An early election - it can't get much better than this. Even when I thought Alistair had blown the gaff by saying we were doomed, I have single-handedly saved the world from financial extinction and every one loves me. Better than Tony too - I bet that snivelling little devil is really happy he took a £1.5m Non Exec job at a Bank and they are the ones being vilified for paying out vast bonuses or £1.5m per year for advice on 'Globalisation' to has-been Prime Ministers. If he were on the Board at RBS, it would be a different story now!
  • A spare Superman suit - this one is wearing out fast and I get it cleaned every day too. I need a spare one as I like to wear this one in bed and dream of saving the world every day. Bring on more crises, there isn't anything I can't handle.
  • A new calculator - we just can't seem to get the figures right and I think it's because regular calculators simply don't have enough digits to handle these large bail-out numbers.
  • A new Governor of The Bank of England - I mean, what is that guy on? We, I mean I, have just saved the world and he keeps wittering on about more Banks failing and that more bail-out money is required. It's over, mate - get with the program, the world is already saved. I have said so, and I have been right about the last 10 years, so it must be so.

Alistair Darling

  • Some more black hair dye - someone said that my eyebrows are beginning to go grey and that would be awful and look silly.
  • A more positive outlook - since Gordon sat me down in that dark room and spanked me for talking so gloomily it hasn't been the same. When I told him it was bad out there, he told me to lighten up and be positive. It's difficult, I read those JK Rowling predictions, she is really Nostradamus reincarnated you know, and she predicted that the 'Dark Lord would Rise' and sure enough he's back and in control of us all. Now where's our Harry Potter to get rid of him? That's where I need to be more positive.

Barack Obama

  • Something to say - the trouble with that election campaign is that it didn't so much tire me out as exhaust all my clever things to say. Between writing books and that election acceptance speech, I think I have said just about everything clever I could.
  • A new dog - heck, I have had all sorts of dumb offers from a bald rat from the guy in Peru, some Scotty terrier from that guy in Britain, a poodle from the guy with a strange name in France where he claimed it has '4 magnificent legs not just 2', and Dubya offered me his Rottweiler but I said I had no use for Condie.

George W Bush

  • A legacy - Jeez, I don't know. What does a guy have to do to get remembered? People tell me it's not getting guys killed in Afghanistan and Iraq but they started it and that's what 'Yo Blair' said too. I mean there was no need to hate America.
  • A new nickname - I'm not happy with 'Dubya' if I tell you the truth. It sounds a bit dumb and I went to Harvard, for God's sake. How the heck did Brown get called Superman when I'm the one who gets everything done around here?
  • A new car - when Obama gets in I have to give back the car. Trouble is, while I might spend $17 bn rescuing the auto industry, not one of them makes a decent car. I have my eye on a solid silver Audi like that guy in Dubai, I wonder if my friends in Saudi can help get me one?

Robert Mugabe

  • Some decent publicity - I keep saying that Gordon Brown is in charge of a 'nothing country' then he gets called 'Superman'. I single-handedly cure the population of cholera and what do I get called?

Osama Bin Ladin

  • A better video camera - amongst all the mod-cons we have up here 'the location which must not be disclosed', we still have that cheap thing I picked up at duty free. It really does not show my best side or how big the cave is.

John Thain, CEO Merrill Lynch

  • $10m - I just need a lousy 10 million bucks, for God's sake. Is it too much to ask for? I mean I did save the company from going bust you know and I kept turning the lights off before leaving the office too. I mean, that deserves far more bonus but all I'm asking for is $10m. God, get a life guys - it's only $10m.

Fred Goodwin, ex-CEO RBS

  • A break - that's all I needed was a break, a bit of luck and none of this would have happened. The £54 bn we spent on ABN was a snip, but everyone keeps on moaning about £1.3 trillion of liabilities and £161bn of funding gap. It was a boom, guys. What do you do in booms? You gamble. Just ask Gordon Brown. If I had just one more little piece of luck I would still be there today.

Adam Applegarth, ex-CEO Northern Rock

  • A new cricket bat - playing at Sunderland CC was hell this year and it was the bat's fault. I must get a better average next year and the bat will make all the difference. Also, the club secretary has asked me to see if I can get sponsorship from some company called Norther Rock but to be honest I have no idea what he's talking about.

Ron Sandler, Interim CEO, Northern Rock

  • Nothing - I hit the jackpot. £90k per month for spending taxpayers money and no one can fire me if I get it wrong, what more could I possibly need?

Robert Peston, Financial Correspondent at the BBC

  • More Crisis - bring it on. Sold my book and everyone thinks I'm an expert - give me some crisis and I will make a fortune telling people the obvious. They think I broke banks, you know.

There are many more but I didn't want ruin your Christmas.

Good luck in 2009 - remember the Labour Slogan, 'Things can only get better.' Gordon says so, so raise your glass to 3m unemployed, 75,000 repossessions and a currency worth less than a Euro - it's all just an illusion which the Dark Lord and Superman will magic away.

Sunday, 21 December 2008

Climate Change - Real or Another Scientific Example of Hokum?

If you should Google 'Climate Change' long before you find the faddy sites from 'greenists' you will find information from the FT, the UK Government, Scottish Government, the Met Office, the Royal Society and Chevron. All bristling with compelling evidence that the earth's climate has changed due to human intervention.

In a discussion over dinner, a friend of mine asserted that this is just hokum presented by the green lobby based on misrepresentation of the very facts used to argue the case for Climate Change.

I must admit that I am personally concerned about whether such 'greenist' evidence is exaggerated after watching parts of Al Gore's 'An Inconvenient Truth' which frankly scared the pants off me, but I am also a pragmatist.

Common Sense - My Opinion

The earth has existed for billions of years and in that time there have been many incredible cycles as the earth and then life has evolved and in that long expanse of time there have been periods when the earth has alternated between very cold and very warm, full of noxious gas and even had its poles reversed. That's what we might describe as the phenomenon known as Nature at work. As the late Carl Sagan explained in his excellent series, 'The Cosmos', if the entire history of the planet were expressed as a calendar of a single year, humans appeared at approximately the last hour of the 31st of December. We are THAT new to this earth.

In that short human history compared to the rest of earth's age, humans have subjected the planet to a whole host of things from pollution to nuclear weapon explosions to World Wars to ozone depletion and lots more all of which have never occurred before in the cycles of the earth. Yet all of that has occurred in an amazingly short period of the earth's history and as we consume the vast resources left to us by that history we present ourselves with the conundrum about the earth's future.

The crux of the matter is that common sense says that human intervention has changed the planet because most of what we have done has never occurred before. But the 'Denyer' viewpoint would say that over a long period the earth has cycles anyway and our trivial existence will have no real effect.

'Denyers' see the issue as a question of lifestyle - much like smoking, choosing what cars they drive or wanting a free world to live in - because capitalism, and therefore the perceived progression of humans, does not square with some of the outcomes of believing that we have to do something about emissions and the like. Legacy is not their concern.

The 'Greenists' would assert the question of Climate Change, while rapidly upon us, is actually about legacy. If we do not do anything about the world we live in today, it will be future generations who will be affected by our laissez faire indecision. We will leave them a depleted and uninhabitable planet, and in their eyes, every minute we delay doing something about it could cost future generations years of life expectancy.

This is something I am very much bought into. Our responsibility as humans today is to make sure we leave a planet capable of sustaining human life for as long as possible in the future. Sticking our heads in the sand about Climate Change today will curtail the lives of our future generations, possibly even our next generation.

It's as fundamental as wanting your child to have a good chance, possibly any chance, in life.

The Evidence

A quick bit of research shows there are around 12 assertions by Climate Change opponents and the Royal Society has put together a team who looked at these and using evidence from sources such as the IPCC and the United States National Academy of Sciences, they answered these questions so I summarise their findings - forgive me if trivialise some of their learned research:

  • The IPCC is too politicised so does not reflect the uncertainty of scientific opinion

In 2001, the Bush Administration commissioned the United States National Academy of Sciences to assess the IPCC's assertions. The answer was, “The IPCC’s conclusion that most of the observed warming of the last 50 years is likely to have been due to the increase in greenhouse gas concentrations accurately reflects the current thinking of the scientific community on this issue.”

That from the guys who did not sign the Kyoto Protocol.

  • Many scientists do not think Climate Change is a problem and have even signed petitions

It's true there are plenty of scientists who dispute some of the evidence either in part or wholly. However, in the journal Science in 2004, Oreskes published the results of a survey of 928 papers on climate change published in peer-reviewed journals between 1993 and 2003. She found that three-quarters of the papers either explicitly or implicitly accepted the view expressed in the IPCC 2001 report that human activities have had a major impact on climate change in the last 50 years, and none rejected it.

Many of the opposing views are those from scientists funded by the US oil industry who even use the very same evidence to assert that action on Climate Change will have the opposite effect and actually bring about changes faster than doing nothing.

To illustrate this illogical thinking, I saw Top Gear the other night where Clarkson showed that the new nickel batteries in the Toyota Primus car cost more to the environment to make than the good they bring about. That's a fair comment. In the same program he also showed that a Primus driven flat out for 10 laps consumed more fuel per gallon than a BMW M3 driven at the same speed. He's right.

But he misses the point - driving BMW M3s or not having the Primus is not an acceptable alternative. Finding a Primus that is less cost on the environment is. Poo-pooing research and progress has been the stable argument of Denyers for years and has stifled the alternatives to the status quo.

  • There is little evidence to show that the earth is warming - in fact parts are cooler and some parts of Europe were much warmer previously

The IPCC concluded that global warming is not uniform although evidence shows that the earth has warmed on average by o.6 of a degree centigrade in the 20th century and even pinpointed the 90s as the warmest decade since records began in 1861 and 1998 was in fact the warmest year on record.

There is a problem with this evidence, and I sympathise with the opponents. Over the billions of years of earth history, we have only measured temperature since 1861 - what if every period of a similar length showed a cycle of heating and cooling? And what of these areas that don't rise in temperature? Many argue that urbanisation causes 'heat islands' and for this reason the South Seas and Antarctica have not changed much in temperature.

Certainly, this evidence is not convincing on its own.

  • The earth may be getting hotter but this has nothing to do with greenhouse gases such as CO2 - it's the sun's variations

About half the sun's radiation which reaches our atmosphere gets to the surface. Some of this radiation is absorbed and some of it is radiated back into the atmosphere which is then absorbed by 'greenhouse' gases such as CO2, methane and water vapour which helps keep the earth around 20 degrees centigrade warmer than it otherwise would be, this is known as the 'greenhouse effect' and it's what keeps us alive.

Increases in the concentration of greenhouse gases has caused a greater effect. CO2 strongly absorbs infra-red radiation, I know that much from my chemistry and the concentration of CO2 has increased from 280 parts per million before 1750 to 368 parts per million in the period up to 2000, a 31% rise. This is a level in CO2 in the atmosphere which has not been exceeded in the last 420,000 years of the earth's history. Doubters point out that the increase in CO2 is in fact due to Climate Change not caused by it. Funny that it has only risen that sharply since 1750, the dawn of the mechanised world.

The IPCC acknowledge that solar radiation and decreased volcanic activity played a part in the early 20th century, but the latter half was all ours.

  • There is no accurate method of predicting temperature change in the future

Good - let's ignore it then and carry on emitting freely. I find that argument in the heartland of all doubters. However, if you just go back and think about the levels of concentration of CO2 in the atmosphere and look at the correlation between average earth temperature rise and the rise on CO2 levels, there would be some cause for concern at least.

  • Scientists mislead us by pointing out extreme weather as indicative of Climate Change

Of course, you cannot put down the extreme weather conditions like Bocastle or New Orleans to to the rise in CO2 emissions alone - the earth is far more complex than that. Vast eruptions like Mount St Helena may just as well have been more of a cause. However, if you are happy that's the only answer, fine. Just remember that the IPCC say that there is now a 66-90% likelihood of an increase in volatile weather systems like El Nino due to the rise in concentration of greenhouse gases like CO2.

  • There is conflicting evidence that polar ice caps are melting, heck, they're even getting thick in Antarctica

The Arctic ice cap thinned by 40% in the last few decades and by 15% since the 1950s - you can measure that for yourself. The Antarctica has not experienced the same. No worries then. It's just that if the Greenland ice sheet continues to melt at the same rate then a further 7m will be added to sea level. I'm ok, I live inland and on a high point. Those on the coast, kiss your backsides goodbye.

  • There is little evidence that sea level has risen due to Global Warming

Sea level has risen on average between 0.1 and 0.2 cm per year during the 20th century, that's about 15cm then overall. I don't suppose the water flows off the corners of the earth when ice melts so expect it to continue. There are other factors which change our apparent sea level such as isostatic rebound but that's more to be with land shape than water level.

  • Even if Climate Change is occurring it won't be dangerous

Keep your head in the sand and you'll be okay. If temperature continues to rise at the same rate and unevenly, then common sense, not science, says we are in for some rough weather. Many believe that methane (CH4) has far more of an effect in the atmosphere as a greenhouse gas and that's pretty much down to the output of all those cow farts etc. The problem is that CH4 is short lived in the atmosphere whereas CO2 has a prolonged life. Besides, there has not been a corresponding rise in CH4 concentrations over the period of measurement to explain the temperature rise only CO2 - so perhaps those little CH4 molecules have changed their fundamental properties and started absorbing far more radiation. We chemists, if I may call myself one, would argue that nature says that cannot happen.

  • What evidence is there to show higher temperatures are bad for you?

Maybe Newcastle will no longer sell coal but nice claret - is that so bad? Well that's fine so long as the poor Southerners covered in water have the wherewith all to pay for it. As much good as it may bring, there would be corresponding consequences - again it's just common sense to realise that sunbathing at the North Pole is probably not good.

  • There are too many uncertainties to make Climate Change believable

Again I can sympathise - the world is an uncertain place and we would sure like to believe that these nasty things cannot happen. Temperature itself is a man-made phenomenon and is simply the approximate indication of the energy given off through the friction of molecules moving about - it averages it out in a form we can understand. But down below are those molecules are moving and colliding and as they heat up they move faster and collide more. We know these tiny things can have incredible effects when summed up and this is the problem. The faster we make them move the more uncertain it gets.

What most agree upon is that it is better to not make them go much faster than they need to.

  • The Kyoto Protocol is a waste of time as the US will not ratify it

I don't have to read the evidence here. Like Clarkson's Primus - if attempting to make something more effective at controlling emissions is itself contributing more to the problem (allegedly) then it's no point in trying. It argues that we just sit here and do nothing - that option is for cissies.

It's Not Our Future - It's Their Future

And we are back to square one. What will be, will be - Nature itself is more a cause of Climate Control than man and so we should do nothing. By the same argument, then what are we doing trying to fight the elements like cold, heat, disease, famine and what indeed are we inventing things for if not to better ourselves and survive and thrive as a species if indeed there is no point as Nature will win?

It's the argument that is applied with equal measure to the Third World - it's beyond our personal control so we leave it. Only when it threatens the onslaught of capitalism, democracy and freedom do we actually allow our Governments to do anything. For years 'Greens' have been ridiculed as faddists and using science wrongly, causing more disasters in trying to dispose of toxic wastes in Fjords than the open sea as a for instance.

Well, the capitalist world and corporations have a nasty track record of putting the pursuit of their own goals, well-being and wealth ahead of the general welfare of the world and others. If left to their own devices they would carry on regardless.

The future is ahead and we will be long dead by the time the consequences of our current actions and inactions have taken full effect. So we can either bury it or think, 'Is that what I want for my children or their children's children?'

For all of you who believe that you would die for your children, think only of this - are you prepared to let them die for you? Because that is a very likely outcome of your denial of this issue today.

Saturday, 20 December 2008

Which Comes First? Spending or Lending?

There was a time when the amount you spent was very proportional to the amount you earned. Under the Labour term of office we lost that connection.

Much of the spending of the last 10 years and economic growth that ensued was from the amount of equity we withdrew from our mortgages which was fuelled by a big rise in house values and the corresponding availability in credit. It became a circle of plenty. And the more credit we got the less it had to do with our ability to service the debt but more to do with the value of our property.

Now things have changed.

'Bank Lending Will Not Recover Soon'

So says John Varley, the Head of Barclays Bank. He believes consumers will find it hard to access credit for possibly the next two years which sort of dampens the hopes of Gordon Brown who wants us to mobilise and spend as we did just over a year ago in order to kick start the rapidly receding economy and that depends on how much banks will lend us.

Varley further points out that while credit is available it's shrinking and he did not foresee banks increasing lending again until 2010 at the earliest. This, he believes, will spark a 'public relations crisis'. In his job he must work so hard that he is denied access to world information as I might suggest there is just a little public mouth-frothing going on already about how banks have behaved over the last few years, but perhaps he means it's going to get a whole lot worse.

What Varley is certainly right about is his assessment that there should be a reduction in the overall quantity of debt in the economy. For that to happen, lending will have to decrease - it's a mathematical thing.

Bloated Asset Values Squealing Like a Deflating Balloon

In his interview with the BBC, Varley said, "The amount of credit available was shrinking, it absolutely is, and that is a painful process, it's a process through which the world absolutely has to go. As soon as asset prices stabilise, then we will see the financial economy recover. And when will that occur? That will occur some time over the course of the next 18 months."

We all like to play with the farting noises of a deflating balloon on Christmas Day, or at least I do. This year it can be a handy scientific demonstration of how asset values are deflating in your Christmas Lecture on spending in 2009 to the family, perhaps just ahead of the Queen's Speech.

Clearly Varley has linked our ability to spend and his ability to lend with the decreasing value of our property assets - the two things are now inextricably linked. The old days of you spent what you earned are out of the window - in the last 10 years we spent what our properties increased by and now we have that spending as debt around our necks along with some £1 trillion of unsecured credit card loans.

We Are So Sorry

Varley continued by offering that banks should take some share of the responsibility for all this and that banks had a lot to do to regain confidence. It's really nice as lots of families face a nervous Christmas this year wondering whether in 2009 the bread winners will have jobs and so will have to go on that nice Mr. Brown's schemes to defer their interest payments on their mortgages that at least someone has held his hand up and say, 'Yup, all this financial mayhem around you was partly caused by me.'

Now, before we start throwing rotten tomatoes at Varley and his fellow bankers, they would all like to point out that it takes two to tango and that we share a portion of the blame too. They believe the fact we were offered so much cheap lending against assets that had to go pop some time was partly our fault for accepting it - the more we accepted it, the more they offered it. And yes, we should accept our guilt.

Just A Second

Business naturally relies on suckers for its products. From classy products to pyramid scams - we love a good purchase. And if we are given access to tons of freely available cash because business tells us we have a new source of wealth, i.e. our homes, then we should not heed the warnings of the gremlins on our shoulders and not take the nice sweeties on offer from the nice gentlemen in bowler hats. We should be austere, firm and refrain.

Sadly the last 10 years didn't a work like that. Consumers were offered credit and we spent it. Everyone thought it was a business model that could not fail.

The Boys in Suits

When thinking about who else we can neatly blame all this on we should not turn to Superman Brown. After all he has been absolutely correct in every prediction that we had a stable economy for the past 10 years due to prudent fiscal policy and because of that this 'Global Economic Downturn' that happened to suck Britain in was at first, 'Not going to affect us chickens' (sad use of the Mad Cow joke) and 'Won't affect so bad as we have such a good economy'. Anyway it all, started in the US and even they agree with that.

Consequently, Honest Gordon's stock has ridden so well that mortgage companies are basing new trackers on his growth index instead of the FTSE.

Hello - is there anyone at home? Why do we believe the tripe he says and why are we giving him so much credence after he has allowed this whole fiasco to develop? The third lot to blame in all this once we have stopped pelting bankers and beating ourselves up is to blame a Government that rode a bandwagon of growth that they knew could not be sustained. And during that time they allowed Britain to float along, allow education to drift, the NHS to sponge up more money for less return, allow kids to start killing each other and stoked up the hornet's nest of international terror as we fight at least one war that never should have started and two we can't win.

Suddenly we are getting hard on people on benefits when there are over 2 million on long term disability allowance and have been for ages. Now we face 3 million unemployed, the rules will get tougher. So as we get kicked in the nether regions and lose our jobs, the Government plans to apply heavy handed new rules which will apply to everyone the same whether you have started claiming or done so for 10 years - akin to peeing on us as we are doubled up in pain.

The Reality

Superman Brown may have a rude awakening soon. As Mervyn King worries about whether the banking bail out was ever going to be enough and more cash is required, as old businesses like Woolies go belly up, the car industry collapses like Bambi on ice, Brown would like us to spend more. Well average household earnings decreased over the last 10 years and now asset values and the equity we withdrew have also collapsed. So 2.5% off VAT and a few scraps of incentives just won't cut it.

We boomed, we bust. Deal with it.

Thursday, 18 December 2008

When Enough Is Not Enough

It’s just a bit embarrassing really but entirely expected by most people. The scale of the UK Government bail outs seems to have come up a few digits short. Nobody’s quite sure what or how many digits are missing but digits are required - some may argue all ‘Fiscal Stimulation’ requires as many digits as possible.

£400 billion doesn’t really sound much in reality. People are talking in trillions these days but to us in the real world we are more worried about the value of the Secret Santa gift we have to buy. Our concern is about not having more than two digits in front of the decimal point. Mervyn King is a little worried this week that we have come up short by not having perhaps 12 or 13 digits or more in front. The sort of number our calculators and even the famous Manhatten read out that counts the US National Debt (recently upgraded courtesy of some duff bankers) are not capable of handling.

‘Please Sir, Can I have Some More?’

It brings a tear to my eye to think of that wonderful scene in Oliver Twist, when the baby-faced Mark Lester asks for more gruel. The whole thing bursts into song and I think perhaps singing will help us through this current crisis. The song might be entitled ‘Additional Measures’ sung in the key of B for B***** off perhaps.

You see, Mr. King, the venerable Governor of the Bank of England, who knows a thing or two about money, has realised that slashing interest rates to the lowest levels since 1951, giving back 2.5% of VAT and stuffing a fat load of cash into the Banking system courtesy of a bunch of mugs called ‘Taxpayers’, is simply not going to be enough.

Indeed he has suddenly realised that all these current measures are not enough to bring back bank lending to ‘reasonable’ levels – maybe the Brown aim of pre-August 2007 levels he hallucinates about. While Mr. Brown enjoys the crest of a wave of new popularity in his nice red pants and cape with the ‘S’ logo on the front, Merv has tried to pee into his Christmas Mulled Wine – a pinch at the new VAT prices, sadly not available from Woolies this Christmas.

We Have Plenty of Money – Just Print Some More

With Bank interest tending to zero we have some new terms to conjure with on top of the sinister ‘Additional Measures’ such as ‘Quantitative Easing’ which basically is a process of taking old toilet paper and photocopying pound signs on it – as large as denominations as possible. I have tabled an idea to Alistair Darling as I have some spare inkjet paper that I could copy some £20 notes for him or and my nephew has a Christmas card press which may help also. Avid readers and watchers of Niall Ferguson’s ‘Ascent of Money’ will be aware that several former South American Republics hit the printing presses and produced so much money that it became not worth the paper it was printed on. Just use recycled paper chaps and heed The Dark Lord’s call for more carbon friendly business.

Agenda Item at BoE Monetary Committee Meeting – What was the bail out for again?

Yes, at the heart of the matter it seems that no one is quite sure what all that sensual ‘Fiscal Stimulation’ was meant to do. Obviously the first aim was to put a cork up a backside that was about to explode (sorry for the poor analogy but I am reminded of the old joke) i.e. the banking system. Certainly, as Mr. Brown’s ratings show, this was achieved. The unfortunate question that Merv and his team have to conjure with, this may work at the moment but how long will the cork stay in?

Central to Merv’s problem is that the banks are not lending enough – the poor lambs are having a fit of ‘commercial knowledge’ which seems to be verging on the common sense. From interbank lending, corporate loans and even mortgages, those bankers are just not lending enough which has the nasty repercussion of just deepening that recession that Gordon Brown told us could not happen to us because we have a stable economy – well not as deep as we have a better economy. Yes, Gordon, old chap, that recession that is causing all that pesky unemployment and shortfall in tax receipts you have promised to use to pay for the extra debt you raised on our behalf to keep spending and bailing.

The danger here is that we get a vicious circle – if we don’t lend we get more depressed so we lend less again and get more depressed until the banking system disappears up its own backside. Some may ‘good riddance’ but it’s actually a bad thing, at least long term after the smile of satisfaction fades.

Come On Boys – Lend, I say, Lend!

Brown et al definitely want plenty of lending – it has served him well over the last 10 years as it fuelled a great rise in the value of properties which we all capitalised on to use the increase in equity to spend a ton of cash which in turn fuelled growth in the ‘stable’ economy. So what he would like us all to do is to do that again. Get some money from somewhere and spend it in the High Street. It may have escaped his attention, but since August 2007, that peak of lending time when 49% of all mortgages were Equity Withdrawals (a form of fiscal contraception), house prices have collapsed by around 15% as a conservative estimate and lenders reckon there’s a further 18 to 20% to go. So all that equity we leveraged has disappeared and all we have is debt, so a) it will be difficult to remortgage without realising the losses and b) who would sell a depreciating asset like a house right now?

To boot, banks are cutting back lending because they got it horribly wrong and the same Government has ordered them to repair their balance sheets. So lending like salivating hounds around a dead fox is not a good plan. Without, of course, some nice chap pumping a whole load of new capital into their coffers – then they might change their tune. Naturally, we private sector types and our erstwhile investment funds aren’t going to do that, so the only alternative is that the Government will have to do so.

This ‘Additional Measure’ is termed by Mr. King as a wholesale nationalisation of the British Banking System.

Nice Thought – Anything Else We Can Do, Lads?

Well I suppose we could increase the bad debt insurance provision and make it less punitive but it stands at a paltry £250bn at the moment – far too few digits I am sure. The second is to guarantee banks’ lending to both corporate and individual customers which the Crosby Report (Sir James not Bing although you can’t be too sure these days) recommends and the Government is so keen it wants to extend it to mortgages.

Sadly, these ‘Additional Measures’ may not be enough, fabulously generous though they are. Mainly, as our banks still own many billions of dodgy mortgage-backed debt in the US housing market. It would be helpful if this debt too is bought or written off by Government.

Counting The Cost

I suggest we all club together and buy a new calculator with enough digits for Alistair Darling and Gordon Brown’s Christmas Stocking this year – they will need it. As only when they have totted up the above will they get anywhere near realising just how much the whole cost to us really will be. A ton of new capital into the banks is really the only way to shore up the mess created. And only at that point will we know if we have done enough to avoid disaster or if more is required.
There are a ton of missing digits between global output at $50 trillion and outstanding derivative positions at $535 trillion which contain the toxic debts everyone casually refers to. Somewhere in between lies the approximate answer the question – How much is enough? What is clear is that we have only plugged the gap short term – we will have to dip a long way into our pockets to find enough digits to sort this out.

In the meantime, keep smiling as the pain hasn’t started yet.

Thursday, 11 December 2008

Is This A Different Kind of Financial Crisis?

I recently saw a question on Linked In which referenced an article about whether the current Financial Crisis was just a piece of necessary 'Housecleaning' and therefore good for us.

I read with some incredulity the answers which trooped out well trusted economic data on the rescue packages which they asserted would patch up the problem and we can then get back to growing. What it displayed was the archetypal financial viewpoint to the world crisis - just get a few things right and we will back to normal - history shows the system mends itself and all will be well again soon enough. Markets will recover.

I am sure they will at some point, but in the meantime at what cost?

Fiscal Stimulation

Much has been blurbed about this by people like Gordon Brown and Alistair Darling using 'Fiscal Stimulation' as if it was some kind of concept from the financial Karma Sutra. There is some confusion here - at least the experiences of the Karma Sutra are meant to be pleasurable. This crisis is all but that.

Missing The Point

I don't think I am alone in thinking this and the Linked In discussion was interrupted by a poignant comment by an American person who was facing Christmas having just lost his job - for the first time in 20 years. His plight is not uncommon in the US as last month alone over 500,000 people lost their jobs.

The reality is that this financial crisis will cost not only money now and in the future but it will cost an enormous amount of jobs and the ruination of many a decent company and even country. It is that big.

The Size of The problem

In the discussion much credence was given to what Gordon Brown describes as his 'Saving the World'. Between the US, Asian and Europe, over $5 trillion has been pledged to shore up the global financial markets and underpin the bad debts incurred by reckless lending. That sounds a lot of money, but when you realise the value of mortgages in the US alone rated as sub-prime is estimated at $12 trillion, you can see we have only scraped the surface. Perhaps a more telling problem is that combined global output is $50 trillion yet the total amount of outstanding derivatives is $535 trillion.

You see, the sheer enormity of this financial crisis has burst the boundaries of our knowledge, experience and historical comparisons and taken the world into a new territory of numbers.

The World Has Changed

Different to all the other downturns and crises it has faced, deregulation has introduced the concept of derivatives as the fundamental way to raise capital in the world markets. This has added considerably to an already overly complex financial world and has also scaled the use of credit beyond all known measurements. Even if you try to compare the situation we are in today with say the Great Depression, you cannot compare apples to apples because the financial world is vastly different and more complex than then.

It is like the Medical Profession encountering a formidable new virus. We are using old theory, logic and methodology to try to treat a completely new sort of disease whose make up and behaviour we have yet to experience.

It will be some time before we realise whether our normal treatments have any effect.

We Have Changed

And we have changed as people too. In the last 10 years, the economies in the UK, the rest of Europe and the US were stimulated by a massively new phenomenon. In the period, average household disposable incomes in real terms declined not insignificantly and long term savings declined very sharply as a proportion of that household disposable income. We were not increasing in worth and not saving for our retirements, yet spending increased massively.

Where did all that wealth come from? Thanks to the world of derivatives, cheap, freely available and unlimited credit was advanced against the security of the growth in equity in people's homes. As never before, people increased their disposable income by as much as 100% as they remortgaged their homes and released equity.

This spiral of income growth depended on two things - 1) the continued rise in the value of properties and 2) the continued availability of credit at similar terms.

BOTH have changed.

Fiscal Stimulation - The Reality

Economists and Politicians are smug in the feeling that once credit starts moving again, then the band wagon of growth will follow. But there is a problem in that theory.

As house prices in the UK fell 15% last year and are forecasted to drop by a further 20% this year and not recover until 2011, there has been a rapid shrinking in that equity gain in the UK and the US, experienced by most households. In fact, most UK households will see their entire equity gain, against which they secured extra loans, crash to nothing and even go negative.

If there is no equity to release, then people will have to rely on their disposable income to restart the economy - but that has shrunk over the last 10 years. Small VAT changes, stamp duty holidays and minor tax giveaways cannot increase household disposable incomes by the same amount that Mortgage Equity Withdrawal (MEW) did.

The equations don't add up.

Manifestations of a Bigger Problem

Only now are we seeing just why the world has changed because of the lack of ability to leverage household equity. The car building and car industries have Hit The Wall. It stands to reason that if by extending or renovating your house it will not contribute to an increase in value then you will not do it. You will not sell and buy a house if your new asset falls in value by 20% in the next 12 months. You will not buy a new car to see its value depreciate by 20 to 30% or more in the first 12 months of ownership.

Buying decisions are now very different in the world of the consumer.

The World of Finance Just Doesn't get It

As financial people wax lyrical about their cleverness and ability to avert disaster to see the world recover, in its wake lies the devastating reality.

On the brink of collapse stands the car industry which in the US alone employs up to 5 million direct and indirect jobs - in the UK there are a further 850,000 jobs at stake and it accounts for 11% of our manufacturing base and contributes £51 billion to our GDP.

It will not be the first or last major industry to stand at the edge of the precipice. The rate of business failure in the UK is increasing and the jobless total approaches 2m and is forecast to rise to 3m in the next year.

The cost of this financial disaster will mean a lot of good businesses and real people will be profoundly affected for some time.

Wake Up

The world of Finance ought to get a sharp jolt of reality. Their industry has been saved and has alone cost the taxpayers some $5 trillion. It has cost Britain £20bn in short term borrowing, for which we will have to pay. The cost of this is not just money, it is businesses and jobs.

So while the Armani suited whizz kids in their Porsches spout out that the 'World is Saved' they actually mean is that THEY ARE SAVED.

As Mr. Thain, CEO at Merrills, has the unthinkable audacity to ask for a $10m bonus for saving the company he drove to the edge of destruction only to be given away to its rival, we know that the elite of society are getting back to normal. Business as usual.

So when we pick and choose who we save, we have to remember there is a cost to each and every bank and executive we bail out in terms of countless jobs.

We are paying for saving their jobs and their future by OUR loss. That is the reality.

And Is The Rescue Working?

As in dealing with a new disease, traditional treatments may not work. In London there has been a dramatic collapse in its core business as global lending has fallen at record rates. Cross border loans fell $1.1 trillion in the first half of the year as credit worries continue. Foreign lending by UK banks fell by $884bn or 81% of the entire contraction in international lending. Further, The City is facing another blow as worldwide bond issues and securities have also plummeted 77% or over $247 trillion in the third quarter. Sterling is on its knees trading a €1.14 to the £.

Reality is a tough beast for sure - it would be just a little comfort if Finance Executives show just a little understanding of what they have caused before they tell us how clever they are.

Another Day Another Microsoft Nightmare - How Do They Get Away With It?

As a small business, I use Microsoft Automatic updates to make sure I get the latest security and bug fixes automatically installed but once again I have awoken to find the 'refreshed' Internet Explorer IE 7 cannot find the internet.

Before you say it, I am using another machine to write this.

As I write

As I write, I have been talking to some poor soul in a country on the other side of the world on my landline and his VoIP with what appears to be a bunch of animals in the background cackling and whooping more like a zoo than a professional call centre. This is the world of Microsoft Support. So far, due the extremely poor phone line and the interminable series of scripted questions, we have spent 60 minutes on the line to determine indeed my browser is not working and yet my external connection is fine, as was given in my opening statement where I told the poor fellow I could still receive mails in Outlook. Exactly the same problem as last time. The helpless chap has just realised that in fact I was routed to the wrong area and so is incapable of solving the problem. This after just over 60 minutes, so I have to call back on the same number.

When The Pursuit of Profit Stifles Service

This is the second time I have experienced the exact same problem. I already know that a rogue patch or update is causing the problem and all I need to know is which one it is, how to uninstall it, wind back the clock to last night so that I can do what I am supposed to be doing, which is trying to do some business.

The problem here is that Microsoft have long lost the connection between service and satisfaction. Maybe some day it will suffer a significant slowdown in sales and profit to realise just because you are big, you can't forget the customer.

That will be some day.

Tuesday, 9 December 2008

The Dark Lord Rises

A few months ago, the twice sacked pariah of the New Labour Government, was languishing in his lavish office in Brussels wondering whose expensive boat he could Summer on to have his back scratched when suddenly he gets the call from HQ - "Save Our Souls".

Since then Peter Mandelson was hastily given a peerage and installed as the most powerful man in Britain. The man known in Political Circles as the 'Prince of Darkness' was now the 'Dark Lord' and, boy, was he going to get payback.

Fact is Stranger Than Fiction

If JK Rowling had written it herself we would not have believed it. It's as if Dumbledore had called up Voldemort and buried the hatchet, forgotten all those horrible spells and dark magic, and puckered his lips and kissed the backside of The Dark Lord.

Well, desperate times call for desperate measures, and GB indeed puckered his lips, closed his eyes and pinched his nose - there it wasn't so bad after all. Suddenly, Lord Mandelson has a new Teflon sheen - no Deripaska saga could get in his way even though through some oversight he did not inform his mandarins in Brussels that he had indeed met the Russian Aluminium Tycoon BEFORE the crucial vote to lower tariffs on Russian aluminium. Whiffs of guilt slip by now not like the old days when he was caught bending the rules and Bad Uncle Tony used to send him to the dunce's corner. How he hated that.

Now Lord Mandelson struts the corridors of power with a confidence he could never have dreamed he could have - thanks to an economic disaster.

Power, Power, Power

This week, in interview with The Sunday Times, Mandelson showed he wields the most powerful stick of all. The magic wand that can save industries or businesses in this recession. He is now on record as saying that there is 'no open cheque book' to save UK plc. He will arbitrate who is deserved of his charity. Companies 'with flawed business plans and no hopes of recovery' would be left to whither, he growled. Quite how that was applied to Northern Rock we will never know as if ever there was a worthless wreck with a flawed plan and no hope.....well, that was before The Dark Lord took the reins.

Now it is a different story.

He is already viewing Jaguar Land Rover and Vauxhall with his new tough eyes and there is no indication they will be the recipients of his royal magic. Though he does admit that some large businesses with heavy repercussions on unemployment may be viewed differently. Broadly, the only exceptions will be for those companies that specialise in areas that Britain will need in order to become a 'broader-based knowledge driven and low-carbon economy' although he declined to point out which sectors this would apply to but it is thought to be those which are creating what is termed 'green collar' jobs. Or those who deal in Russian Aluminium - maybe?

Tough Guy For Tough Problems

Mandelson has gone on to say 'There is no open cheque book but a series of tough tests.' I think the message is plain from the tough man - 'if you have a nice yacht, let's talk.'

Interestingly, Mandelson has stressed there is no queue outside his door - which falls in line with my own theory that generally executives are too busy spending last year's bonuses to worry about the recession yet. When the Wall is inevitably Hit, I dare say they will come, cap in hand to pay homage at the feet of Britain's most powerful man and beg for survival. In a show of his brutal strength, he has already advised he does not expect to see a queue.

'We have made it clear that they need to look for alternative sources of lending before they can expect a response from Government,' said the Dark Lord ominously.

Who Would Have Believed It?

Since Mandelson's remarkable rehabilitation, he has risen dramatically to the very top of Government, wearing the mantel of power as if it was always meant for him. Gone are the days of the seedy affairs involving loans from Geoffrey Robinson, or the passport affair of the Hinduja Brothers or even the Deripaska mystery or even the Millennium Dome Fiasco, the unelected formerly disgraced Politician is now Lord Mandelson and is the most powerful man in Britain.

Pinch yourself - it's true.

"It's Just So Unfair!" - By A. Dog

I recently responded to an advertisement in the Vienna Post to participate in some research. I and a group of friends went to meet Professor Friederike Range of the University of Vienna's Neurobiology Department (and trying saying that when you are trying to lick your own genitals).

The Perfectly Obvious

Firstly we were asked to participate in a number of experiments which involved being offered treats in turn for raising a paw. Sometimes I worry about the human fascination of offering treats for tricks, we would be perfectly happy to pay - but each to their own, I suppose.

The Professor kept cooing and gasping then scribbling avidly on his note pad each time one of us received the treat. He seemed particularly fascinated by the obvious. For instance, whenever he offered my mate Rover a treat instead of me, I took the cob. This seemed to amaze Freidericke and he shouted something about 'Ve Hav been zo wrong - zese beasts hav ein self-image'. To be honest he sounded more like Max Mosley than a Professor but I digress.

What seemed to elude him was that we dogs have a great deal of self awareness and self image, I mean why else would we slurp at our own private parts all day? He seemed to think beforehand that we dogs lacked a sense of self but I have always been fascinated by the smell of my rear end and the contents of my ears. He also thought that we needed to have 'secondary emotions' in order to have a 'sense of self' like jealousy, embarrassment, empathy or guilt.

But I can tell you, I experience all of those and had he bothered to ask rather than put us through endless daft experiments, I would have told him.

Den of Inequity

You see when Rover was offered the treat ahead of me I was well peeved. It was clear the treat should have been mine but that furry swine stuck his nose in first and I swear the Prof actually angled his hand toward him. Well Is showed him - I turned my head in a haughty pout and awaited the next treat with some disdain. What he didn't know was when he turned to scribble in his notes, I gave Rover a good biff and he was suitably contrite.

You see, we dogs have feelings you know and if there's one thing we cannot stand it's unfair treatment.

Next, the Prof denied me the treat by offering it then withdrawing it several times. I don't mind saying I was pretty livid so I gave him a pretty decent whack with my paw when he stuck his hand out next to make sure he knew who was boss. He labelled this as anger.

Finally, Petra the standard poodle was prancing about at the back the class so while Bowser was getting his turn she and I went behind the desk for a bit of slap 'n' tickle and howsyourfather if you get my drift. I came out with very nice smile on my face and the Prof was very chuffed as it showed both lust and joy. Petra wasn't so enthusiastic as she had mistaken me for a sheepdog. When she told me that, I flew into a fit of jealousy and went off and had good sulk in the basket.

Having a Laugh

It struck me that humans are more stupid than I ever thought. What the experiments taught me was that in a time of something they call an economic downturn humans still fund daft experiments like this by highly paid academics in well funded universities. I could have got on the internet and asked around 30 of my doggie mates on Facebook and we could have told you all you wanted to know for nothing.

But that's humans for you, they are just like consultants - they charge you the earth for the perfectly obvious.

Bonanza Is Over - Where's My Bonus?

It's hard to comprehend but Mr. Thain, CEO of Merrill's, who were saved at zero hour from going bust like Lehmans, has actually lobbied his Board for a $10m bonus saying if it wasn't for him the company would have gone bust.

I had to read it several times to work out whether this was a joke but sadly it is the Financial mentality - no doubt if he doesn't get it he will ask for $5m because he kept the office windows clean during the crisis. The fact that because of his mismanagement the entire company was at risk seems to have alluded him.

It's that bonus culture (some would say hallucination) which many believe got the banking sector into the terrible mess we see and it's heartwarming to know the little lambs are suffering and in need of bonuses despite the end of the bonanza.

Hey, Leave Off The Bankers

Let's face it, our friendly but greedy banking executives were not the only ones guzzling the rich honey of short term success. And I know you will reach for your hankies on this tear-jerking story.

Knight Frank, commercial property estate agents (no please, read on) have suffered a 40% decline in sales since their new year started in April. Further the Royal Institute of Chartered Surveyors (RICS) have forecasted that commercial property prices could halve in price by the end of next year, making this crash worse than the one experienced in the 1970s.

The staff and partners at Knight Frank shared out a measly £81m from the bonus pool last year while in April they only had £46.4m to share out and that to go around 28% more staff than the previous year, don't you know. The 46 partners, bless them, had average bonuses of £780,000. They are cautiously optimistic for next year they say.

Er, hello! The bonanza is over chaps, sales down 40% and rapidly falling prices after increasing staff by 28%. Get out those pencils and do the sums. The bonus pot will only be good to stop the leaky roof this year, I'm afraid.

The Scale of Things

Like the housing market, commercial property is set to slump alarmingly and forecasts recovery in 2011 according to RICS. Capital values have already slumped 25% since August 2007 and they predict drops of a further 16% this year and 10% next year. The belief is we are only half way in what they describe as a 'Price Correction' which always meant to me someone correcting a wrong digit, not slashing by two.

More worryingly, the CBI has reported that there is a marked slowdown in the Service Sector which accounts for 75% of UK economic growth and is suffering its worst drop in activity since records began a decade ago. The CBI calmly urged employees to prepare for a rush of redundancies - no 'Don't panic!' cry there then. To add to all this woe, the CBI further said profitability for consumer and business services were falling at unprecedented rates as appetite for spending dries up. To put a final nail in it, they said job losses in the Service Sector had been minimal so far but would falls would get faster in the coming months. Thanks.

Just a Slight Reminder

I know I have harped on about this but I get it every day - 'My business is recession proof' or 'I have not felt any effect yet' and so on. What the CBI is saying is that we haven't even started feeling it yet. The Service Sector is bloated with excess profit from the good years and it is very ripe for popping. For all those servicing major or minor businesses, it is a time to start to review that pipeline and check whether you are being realistic, then doing something about it. Things are changing very rapidly from day to day and those who do not plan to do something about the recession will be the victims and spectacularly so.

If you don't know what this means, just read my blogs or call me and I would be happy to explain.

Saturday, 6 December 2008

Motown Has Got The Blues

GM down 41%, Ford down 30%, Chrysler 47% - the sad roll call of declining annual sales to November shows the US car industry in meltdown. The UK reported new car sales down 21% earlier this quarter while Honda has retrenched and pulled out F1 motorsport in a bid to cut costs.

Loads of Money

The hazy diagram above illustrates the extent to which US consumers leveraged the equity in their houses as compared to their household disposable income in order to raise funds to spend more. The graph for the UK is worse and it shows the extent to which we have dipped further into our equity to fuel the growth of the last 10 years which is why the IMF is predicting Britain has further to fall than the US in this recession, contrary to Government opinion. Real incomes down but spending was up. It was no coincidence that we all saw a glut of Aston Martins on our roads as Britons used their home equity to buy luxury goods beyond their means as 49% of all mortgages at its peak were re-mortgages. No one read the obvious signs of a bubble over-ripe to burst explosively although it has more shrunk due to lack of gas.

But can the car industry be blamed for not anticipating this dramatic downturn in sales? Currently, the US car industry is looking for a collective bail out of $35bn which is small fry compared to the Banks but still an awful lot of money.

So Should The Car Industry Be Bailed Out Too?

My question is - where do we draw the line? The car makers alone are the tip of the iceberg. You then have all the ancillary suppliers, component makers and service industries which are entirely dependent on the car makers keeping their production lines moving. Because the bail out will not be to stimulate the industry it will be to mothball it. Why? Because for a car maker to sell their cars in this climate they will have to at least sell their entire finished stock at cost or below but even then, thrift-minded consumers are going to think twice about buying an expensive item which will depreciate by a minimum of 20-30% within the next 12 months. It is throwing money down a drain so the market will simply stop.

In many respects this is the problem that Gordon Brown faces in the UK over housing. Firstly, nearly half all mortgages up to August 2007 were Mortgage Equity Withdrawals (MEWs) and secondly the market is falling. Just like buying an expensive car, the house-asset will drop the moment you buy it by up to 20% in the next 12 months. So if there is no equity to leverage and the asset is depreciating, even if the interest rate is as low 2% at base, it still makes financial nonsense to buy a new house.

So Which Are Vulnerable Businesses?

What the graph illustrates is that the spending boom over the last 10 years was not created by the average household increase in disposable income in the US or UK - in fact disposable income shrank over the period so we should have afforded less. Income was massively supplemented by a new wealth machine - our own banknote printer and 'Money Creation' device - our houses.

For those who do not believe money cannot created or destroyed and there is zero sum finance listen in. As house prices grew 160% over the last 10 years in Britain, people began withdrawing some of the increased value (equity) by re-mortgaging and effectively issuing bonds or IOUs to themselves. Mortgage Companies were happy to redeem the IOU as cash because it was backed by the equity in their home. We, the consumers, then went on spending sprees buying second homes in sunny climates, new cars, extensions and renovations to our houses, fabulous holidays, far more regular trips to expensive restaurants, lots more clothes and upmarket fashions, and then filled our houses with the most latest mega-flatscreen TVs, Home Cinema set ups and latest wizardry like mobile phones, ipods etc.

So those businesses will get affected by the lack of cash as the house prices decline and that IOU we withdrew on our equity is worth far less and in many cases nothing. In other words, we have borrowed money with a lack of security and in many cases negative security or equity.

Money has indeed been destroyed as value has been destroyed.

Already 75,000 homes have been repossessed this year higher than the number affected in the slump of 1991 - and the figures are terrifying as mortgage providers estimate up to 2 to 3 million households could go into negative equity before the house market starts to recover some time in 2011. With unemployment set to rise to 3 million in the next 2 years, the Government backed scheme to protect those who cannot repay their mortgages from repossession for up to 2 years looks like King Canute in a storm. But the potential liability for taxpayers is huge as we underwrite all the schemes, tax cuts and generosity of these schemes with the sure knowledge we will be paying for them in the future.

The domino effect of lack of equity and capability to spend has already hit the building industry for new homes and many major firms like Barratt have reined in their operations. But all the local tradesmen builders who have benefited from cheap money for extensions and renovations will be affected as will Estate Agents, conveyance lawyers and insurance salespeople who rely on new mortgages going through. Savills reported an 82% collapse in high end house sales in a single quarter while the average Agent sells just one house per week in the South of England.

And what of foreign homes? many countries like Spain, Portugal, Cyprus, Malta, Bulgaria and others have benefited in micro-markets for new homes as Brits and Germans in particular rushed to spend their equity cheques on new homes, many raising mortgages abroad. If you asked the locals, they would tell you they could not afford the prices in these micro-markets so if times get hard and the foreigners have to sell, who will buy their homes? The locals won't at those prices. Such micro-markets are ticking time bombs and could collapse spectacularly at any time.

We have already seen MFI go to the wall - it had a highly discounted selling model which lacked services to underpin it so it was a disaster waiting to happen. But it is indicative of the kind of business right in the firing line as fitted kitchens and bedrooms were prime examples of how leveraged equity was being spent. Perhaps one of the most alarming casualties has been Woolies. The High St low-end specialist had the ideal model of decent goods at decent prices, surely it should survive better than most? But what it shows is that marginally profitable businesses are right in the firing line - it only takes a small decrease in sales to punch a major hole in profits and if you are dependent on high borrowing you are doubly at risk.

How Vulnerable Are You?

Downturns have domino effects. As one industry like the car industry is affected, all those in some way dependent on them will get in some way affected. This is the dilemma Governments face as it is more like the little boy with his finger in the dyke than the domino effect. If the finger is removed the entire dyke collapses. And if that happens, how many industries can we afford to step in to save? We have the banks and car industry so far, next will be insurance maybe - then who? Rumours abound about the steel industry.

For us mere mortals, I have urged everyone to review their sales pipeline and look at their exposure to expected business from companies who are vulnerable already. I have recently spoken to one company who found 60% of their sales pipeline depended on the financial sector - there was no point in believing business from there would carry on, they had to rapidly change the profile of customer and re-mobilise their sales activities very quickly to replace all those opportunities with new ones. Telecoms has already stalled with BT laying off 6%of staff and Virgin Media following suit.

Now is also not the time to be exposed to any single major customer. Woolies' fate might have been avoided because their customer base is so spread but it didn't help them. If any customer in your business represents more than 10% of your revenue and you are a marginal profit based business (i.e. reselling) without a great service business then you are right in the firing line. A dip in sales to a major customer could be the difference between surviving and disaster. So go check your business now, review the pipeline and your current business and do something to protect yourself.

The Road Ahead

What the car Industry collapse has taught us is the speed and effect of a recession is frightening. We have not even technically started the recession to already see the effect because despite what economists have said it started in August 2007 when the credit crunch was initiated. While the sub-prime market showed how daft the lending policy had become, what it did was to expose the flawed business model of not just the financial sector but Governments too. And despite what Mr. Brown says about the current problems starting in the US, it was a good old home grown problem which was far worse in the UK where sub-prime is a minimal issue (barring a few 125% mortgages etc).

We funded an economy on leveraging the increased equity in homes not on the goods we produced, our productivity or endeavours. Now there is only so much we can do to save our industries and it will mean the Government will step in and preferentially save certain industries and businesses - they cannot save them all. And that will cheese off all the rest who suffer by losing their jobs without intervention. It won't be pretty.

Thursday, 4 December 2008

Cut Tax and Tax Collectors - Good Strategy?

Okay, I wasn't at all sure about the strategy to spend your way out of a recession and all the juicy tax giveaways were somewhat perplexing as we hit austere times, but that's what the Keynes Theory said so that's what we'll do.

In fact the Government were so committed to this that they said they would not cut spending on major enterprises and in fact bring them forward. And to try and help businesses not cut jobs, it would encourage banks to led more freely.

So what's this about 3,400 jobs going at HMRC? As tax gets more complex and the Government faces a hole in collections in the near future, plus its commitment to keep jobs, why is a major Government Department shedding staff?

Public Sector Jobs - The Reality

Well over a year ago, 1 in 4 jobs were in the Public Sector as New Labour's focus on bureaucracy created a job bonanza. For the sole purpose of pandering to the philandering John Prescott, the previously non-existent Department of The Deputy Prime Minister sprang up to insert itself as an extra layer of fat in an already top-heavy planning regime. As the economy grew, Public Service Departments and layers of Government swelled with the New Welsh and Scottish Assemblies buying themselves brand new buildings ignoring the plentiful empty office space in their countries in order to provide much needed shelter for all those important and expenses-rich politicians. The good times rolled in.

But as the downturn and Credit Crunch bites, unemployment in the Private Sector has risen sharply and so that proportion of jobs in the Public Sector grew and it was once again obvious to the man in the street something had to give. For all the Big Talk about rescuing the economy, the reality is that Gordon Brown is not King Canute. Jobs will have to go and that's an economic fact.

Recession Hurts

There is no hiding from the effects of recession. As much as you can lower interest rates to stimulate a housing market that has some 15-20% of fall left in it, the corresponding effect is that Britain becomes less attractive for foreign investors and our currency takes a pounding (excuse the pun) as George Osbourne was reprimanded for pointing out. Over £200bn has drained out of the UK financial markets in less than a few months and that again creates another hole in invisible earnings as Britain fights to recover.

Desperate Schemes Lacking Execution Skills

Yesterday we saw an interesting move to help those facing mortgage difficulties. It is a fair assumption to make that someone losing their job does not mean they don't intend to pay so are not really a bad credit risk. However, the details are the devil as if the person cannot restart repayments after 2 years then their house is repossessed and if it cannot repay the outstanding mortgage at auction then the Government will underwrite the difference to the mortgage provider, i.e. the taxpayer.

Umm, so who pays the 2 years of deferred interest? Oh the mortgage company does - well that will serve them right for being so greedy in the past. You know the ones who actually tripped over themselves to give away money and stoked up the economy to its current heights without which the Government would not have had a 'stable economy' in the last 10 years. No wonder the Banks don't want to lend if they stand to lose out. Bail out the fat cats but leave the mortgage providers in the lurch.

The Lord Giveth and The Lord Taketh

As we absorb all this bonhomie of tax cuts and decrease in inflation, ignoring the job losses, it almost slipped our attention that Councils have been granted the right to add up to 2% on business rates in their areas in order to boost economic developments. So while there is some relief on tax it will be grabbed back again in another charge. Nice one - it should fund a few 'fact finding' mission to exotic places to see how its done on the beaches in Thailand.

Crazy, Crazy

I can't help feeling there is a forlorn belief by Mr. Brown that a 2.5% cut in VAT, a couple of snippets on tax and lower interest rates are going to blow away an economic downturn that has been pending for some years and get the housing market all stoked up a again. Repossessions are rising fast and the new figure is 75,000 this year and while interest is at its lowest since 1951, we are now back at the giddy heights of 1991 for repossessions. When the Conservatives were in power - so the clock has been reset after the boom time and we can no longer have the age-old argument about the last Government because we are now officially in a worse position. I wish.

You do not need to be a genius to work this out. If a mortgage company offers a mortgage based on 90% of the house value today and the market drops 20% in the next year, the householder will be in negative equity and the asset at risk. If there is a risk that householder will lose their job then the mortgage company would be barmy to lend money. In Germany deposits have to be around 40% of the value - at this rate in the UK a minimum of 80% deposit would be required here for break even after one year. It doesn't make sense.

At current values and forecast - the housing market will not save this economy and pouring more fuel into a broken engine will not make it move. As caring as it may have sounded, the Government is fast building up the liabilities of the taxpayer from bail out of banks to underwriting the housing market. With falling tax revenues to come, we face an almighty reckoning at some point. Why not retrench today, cut spending and focus on surviving not pretending a recession is not here and spending like obsessed gamblers?