Carpe Diem

Hello, and Merry Christmas! I trust you were all good boys and girls and that Santa has been good to you..... I decided that I believe in Santa, all these Christmas films have convinced me of his existence. So this will be my last post of 2008 (I will do a review of 2008 in early 2009), and lot has happened since my last post, so let's get going:

• BROWN SAVED THE WORLD! Priceless.
  
• We had the world's largest ever fraud discovered this past week. It is believed that the total fraud by Bernard Madoff (appropriately pronounced Made-0ff) was $50bn. It was a classic Ponzi scheme; a fraudulent investment operation that pays returns to investors out of the money paid by subsequent investors rather than from profit. For example Ferdi gives me £100 to invest, then Mo likes the idea and thinks I will do well so he gives me another £100, I use some of Mo's £100 to pay Ferdi a dividend/interest/"profit", then Calum wants to get in on the action, so he gives me £200, I then use Calum's money to give both Ferdi and Mo some money.....and so on. Everything goes swimmingly until a few people start asking for their money back, and that's what happened with Madoff. Here are a few facts that the impotent US regulator, the SEC, missed: first, this graph, can you tell what's wrong with it? It's flat, there is no volatility! Second, the the firm that audited Madoff's company had three employees, one was a secretary, one a 78 year old and a 47 year old accountant. And finally, he could never explain to anyone how he earnt his money.
  
• The main fallout from the Madoff scandal will hit other hedge funds, as people lose trust in hedge funds and want their money back, so-called "redemptions". This will mean that the hedge funds will have to sell their assets in order to give investors their money back, so expect shares to fall again in the new year. The main selling point of hedge funds was their claim to be able to make money in any market, absolute returns. This claim has been demolished this year, with many funds losing over 20% of the value of their assets. Thus I expect the hedge fund industry to contract considerably as they have lost they lustre and they will find life tough when they become regulated.
• The retailer Zavvi (formerly Virgin Megastores) has gone into administration, this is the fallout from Woolworths going bust as one of Zavvi's main suppliers, EUK, was owned by Woolworths and Zavvi could not get any new stock for the important Christmas period. I think that their business model is dead, I personally buy all my DVDs and games from Amazon or another online retailer, as it is cheaper and easier. I recently had a stroll through M&S and the shop was empty but full of rubbish clothes, so I expect M&S to hit an iceberg soon, along with BHS, another rubbish shop. Remember pensioners are their main customers, and they will be the most affected by the falling interest rates, as they relied on their savings to top up their pensions.
  
• The Fed has cut interest rate from 1% to 0.25%, America has arrived at ZIRP (Zero Interest Rate Policy) and just like Japan did in the 1990's. This means that conventional monetary policy is now useless, as interest rates cannot go any lower.
• Credit Suisse is employing an interesting employee compensation scheme, it is paying its top executives a bonus but not in cash or shares but in illiquid mortgage securities, the toxic stuff that those very employees bought but is actually worth nothing now! A very cunning plan, Baldrick would be proud.
• According to the US Commerce Department, the US recession began in December 2007. That means it's already the longest downturn since the 16-month recession of 1981-82. That downturn and another 16-month slump in 1973-75 are tied as the longest recessions since WWII. I expect that at the very earliest we will see the light at the end of 2009, ergo this shall be the longest recession this side of WWII.
• Finally, here is a map of Britain with all the job losses plotted. Notice how many are in London, and especially in the City.
  

Every post will come with this 4 bad bears graph, click to enlarge, courtesy of this website.

To finish off I will say some quick words on 2009. If you keep your job in 2009, you will have a great year. Prices in the shops will be lower, there will be some fantastic bargains and great investment opportunities. In a recession cash is king. You will be relatively richer, your status will rise relative to others and you will attract a greater quality of mate (not a friend but a member of the opposite sex) and this fantastic article attests you will thus be happier.....life is about surviving in order to be able to reproduce! On that note Merry Christmas and a Happy New Year.

Jail Bait

Hello there, hope you are all getting into the festive spirit. I personally can't wait for the Mighty Ducks and Home Alone to hit our TV screens, some escapism is in order. I've been trying my best to avoid financial news this week, all this doom and gloom is getting a bit repetitive! So my attention switched towards politics, and Mugabe-esque arrest of Damian Green and the subsequent debate in the House of Commons on the handling of the issue. Thankfully, former Latymerian and Chairman of the Home Affairs Select Committee, Keith Vaz has stepped in and is investigating. The whole issue reflects badly on Zanu Labour, who have continually eroded the civil liberties of our country, undermined Parliament, and squashed free debate.

Anyway back to economics, and the implications of the Pre-Budget Report are still bothering me. The government aims to deal with the economic problems, by borrowing EVEN more money. Everybody knows this is a terrible idea, one that has never worked. Let's leave this problem for now, as it is one that will not be changing for a while! And let's turn our attentions to the USA:

• 530,000 jobs where lost in November. This is considerably more than forecasters predicted (they will be too optimistic at the start of this recession, and when things slowly start to get batter they will be too pessimistic) and October's job losses were revised up by 80,000. Since September a total of 1 million Americans have lost their jobs. And none of these figures include the potential job losses that will occur if General Motors or Ford fail. This chart shows the percentage of people employed, and illustrates how things are going awry in America (the grey areas indicate when the economy is in recession):
  

• Obama is the Messiah....no seriously the whole world, especially Wall Street is looking/hoping that he will save the world economy, and drag it out of the abyss that we are quickly tumbling into. He has promised a "stimulus package" worth $500bn, that will create/keep 2.5million Americans in their jobs. Now if this doesn't work then we are in big doo doo.
• Over here in the UK, we are buying less in shops, with sales in November down 0.4% compared to last year. That may not sound like big news, but this is the first time ever, in the history of this survey, that retail sales have dropped for consecutive months....and this is just the beginning. The abysmal situation facing retailers is best illustrated by M&S launching yet more promotions after it held its second "one day sale".
• I forgot to mention that the Bank of England cut interest rates from 3% to 2%, the lost level since 1951. I expect interest rates will be 0% sometime in the Spring of 2009. The usual calls for the banks to pass on the full rate cut, to keep on lending..... This whole episode has become rather hypocritical. The banks were attacked for lending too much, now they are attacked for lending too little, who would want to be a banker?
  
• If you are angry at the banks for lending too little, put yourself in their shoes. Imagine you have £100million that you can lend; now the economic environment does not look good for 2009, this will mean that people will lose their jobs, and therefore have trouble paying back the money you lent them (so don't lend to them, or if you do, charge them a higher interest rate to cover the risk of them losing their jobs). This is exactly what the banks are doing, it is perfectly rational, and remember banks are not charities. However, if EVERY bank does this, then this will just make the situation worse, and their predictions will become a self-fulfilling prophecy (if no-one lends, no-one can invest in new ideas/businesses, therefore less economic growth, therefore more people lose jobs and so on..).
• You may reasonably reply, "well the government, therefore the people, own the banks, and they should listen to us and give us what we need", unfortunately that is the way to run a profitable bank....personally I need at least £2million! :)
  
• Finally China....some truly worrying news is emerging from there. China's export FELL in November, China's exports grow at over 20% per month, they do not fall. If this is true (it may not be, but the main picture is that exports are at the very lest growing at a considerably slower rate than before) then China is heading for a big slowdown and it needs to implement a fiscal stimulus (China can afford it, as it has huge foreign currency reserves, nearly $2000bn). China needs to grow at around 8% in order to continue the rural to urban migration, and the rapid creation of new jobs. If it does not grow this fast, there will be an increase in social unrest, and I would not be surprised if calls for democratic change grow louder, a revolution could be on the cards.
• Finally this graph shows that we have a long way to go (click on it to make it larger):
  

So any good news??? YES!! The death of consumer culture, or consumerism! Society had become so celebrity focused, so brand conscious, so vulgar....the recession, and future austere times will ensure that this hollow way of life will be buried for if not at least a good while then hopefully forever. It was best epitomised by stuff like this. We can now come together as a society through these tough times, allowing us to have a more meaningful existence. And remember!

"Recreational Dancer"

This weeks headlines:

1. Pre-Budget Report
   
2. CitiGroup (the worlds largest bank) bailout, $300bn
3. Another bailout, this time $600bn
4. Obama names his economic team, and Wall Street likes them
5. We own RBS, 58% of it to be precise, ergo RBS employees are civil servants
6. Bonuses will be down around 70%-100% for bankers
7. Woolworth's has gone into administration
   
8. The Bank Of Essex will be founded soon
   

1. The Pre-Budget Report (PBR)
As I mentioned before the government will try to stimulate demand by cutting taxes and this is what they have done:

• VAT cut by 2.5% for a year
• Introduced a top rate of tax of 45% on those earning over£150,000 per year
• Increase National Insurance by 1% from 2011
• save £5bn in efficiency gains.

However the main news is the projected borrowing figures. In 2009-10 alone, the government predicts that it will borrow £118bn, and only £15bn of this debt is from the fiscal stimulus. The government debt will rise from 40% of GDP at the start of the crisis to over 57%. Do you remember Gordon talking about prudence, about the end of boom and bust? Well, we had a massive boom, and now here comes that bust.

To make matters worse, all these figures are based upon the very optimistic assumption that economy will start to pick up again in the summer of 2009 and that by 2010 we will grow by 1.25% and that in 2011 by 2%. Very few forecasters are this optimistic, even the Bank Of England is more pessimistic.

Now if the government is wrong about the growth figures then borrowing will be even larger. Plus he expects growth to return to "trend", which means the average growth rate which is around 2.5%. However economic growth in the UK has been based upon the financial services industry and housing, the two sectors that are being most affected. Oh and he expects to return to a balanced budget in 2015/16, so not after the London Olympics, but after the Olympics in Chicago/Paris/or somewhere else. The government has gambled, only time will tell if it has paid off.


2. US government saved Citigroup from collapse by providing the beleaguered bank with $20bn in additional capital and arranging $306bn in credit guarantees, meaning that any losses over $29bn will be "shared" with the US government. With the US government taking 90% of those losses, not really sharing is it?

Citi is highly leveraged, meaning it has loads of debt and very few assets. For example, if I bought a £100,000 house with a £10,000, I have a leverage ratio of 10 (100,000/10,000 = 10). Citi's ratio is 56! That is like buying a £56,000 house with a £1,000 deposit. Now if house prices drop 10%, I lose my £1,000 and another £4,600. This is exactly why the banks have got into so much trouble, their assets are falling in value, and because they borrowed so much they end up losing money, hence the government has had to jump in, pump money into the banks to save them.


3. I was tempted to say this last bailout, but lets go with the latest bailout was to save the GSE (Government Sponsored Enterprises) with $100bn. They hand out mortgages to people who usually can not get mortgages. However it is important to note that these guys pulled out of the sub-prime market, recognising that it was too risky. The other $500bn will be used to buy MBS (Mortgage Backed Securities), and the toxic waste that helped to bring down the financial system.

Here is some bailout maths, all adjusted for inflation, to put the current crisis in perspective:

Marshall Plan: Cost: $115.3 billion
Louisiana Purchase: Cost: $217 billion
Race to the Moon: Cost: $237 billion
S&L Crisis: Cost: Cost: $256 billion
Korean War: Cost: Cost: $454 billion
The New Deal: Cost: Cost: $500 billion (Est)
Invasion of Iraq: Cost: $597 billion
Vietnam War: Cost: $698 billion
NASA: Cost: Cost: $851.2 billion

Total: $3.92 trillion ($3,920bn)
Oh and WWII cost $3,600bn

The current crisis is expected to cost $8,500,000,000,000 or $8,500bn or eight thousand five hundred BILLION DOLLARS!!! Even Dr. Evil couldn't imagine such a large number.


5. The effects of government ownership have already been felt, today the boss of RBS Stephen Hester announced that they will give their NatWest and RBS mortgage customers "6 month moratorium to right themselves before we begin repossession proceedings". The normal period of grace is 3 months, so this extra 3 months will be helpful.


Finally, I have been debating in my head "how bad it will be?" or more precisely "how deep and how long" (sexual innuendos on a post card please). One scenario is "This time it will be different", meaning we're all screwed, and there's is not much we can do about it other than getting into the crash position, and hope the pilot crashes the plane into a pillow factory. The second scenario is "creative destruction" which will pull us out of this doldrums, and as a beautiful girl (who was somehow as interested as I am in the economy, loser!) said "out of the ashes, a Phoenix will rise!"

To save or not to save?

This programme on BBC2 last night addresses one of my major concerns regarding the US and UK economies, the amount of debt. Not just government debt, but personal debt as well. It's an hour long, and worth your time. You have until Monday 1st Dec to watch it as the BBC iPlayer is gay.

Des and Tiny

Another turbulent week, so much is happening that I may have to write twice a week, but only if I could find the time to do so! Again thank you for all your feedback, hopefully what I am writing is interesting, and if you have any questions or if anything is unclear, please do ask. Or even better if you disagree with something, or I have missed something out, contact me.

So here are the big stories of the week:

1. US Retail sales slid by a record 2.8 per cent in October, the fourth consecutive decline and the largest percentage drop since records began in 1992.
2. Banking layoffs. CitiGroup (the biggest bank in the world) announced that it was sacking 20% of its workforce, or another 53,000 with 22,000 already announced earlier this year, so a total of 75,000! Other banks and fund mangers are also sacking people. The City will have a lot less people working in it by the end of 2009.
3. Oil is below $50/barrel. Despite Somali pirate activity! There's even an economic theory about now!
   
4. At least one of the Big Three (General Motors, Ford and Chrysler) are on the verge of collapse. GM is in the worst state, and because the majority of car parts suppliers rely heavily on GM to stay alive, a collapse in GM would take down the whole of the US car industry. In normal times bankruptcy and then reorganisation would be welcome, however these are not normal times. These are extraordinary times, and thus GM has to be saved (something that I would NEVER normally support). The US can ill afford to have an extra 2 million people made unemployed all at once. Bankruptcy and reorganisation can happen later down the road. Here is the article that convinced me to support intervention.
   
5. On Monday we have the pre-budget report coming up. The UK government is widely expected to announce some sort of fiscal stimulus. This can come in two forms, either a tax cut or an increase in spending. The idea is to increase demand in the economy, a quick economics lesson:
   

Aggregate Demand (total demand in the economy) is made up of Consumption + Investment + Government spending + eXports - iMports AD = C + I + G + X - M

• A tax cut will mean that people have more money in their pockets and therefore will spend more, therefore Consumption will increase. Unfortunately it is not that simple, people are likely to save a considerable proportion of the money they get from the tax cut(as they are worried about their jobs), or use it to pay off debts, thus little new money will enter the economy.

• An increase in government spending can take many different forms, however the most cost efficient and therefore the most likely will be an increase in pensions/winter fuel allowance as old people are more likely to spend any money they receive (as there's no point saving it as they might/will die soon).

• As you all know a tax cut/increase in government spending will result in an increase in the government's deficit/debt. Government spending will also increase because of so-called "automatic stabilisers", an example is unemployment benefit. This acts as a cushion/stabiliser against the effects of people losing their job, giving them a little bit of money and thus propping up demand.

• However this will all come at a time when government's income is falling, this is because firms are paying less corporation tax (as they are making less profit, especially the banks which used to make huge profits and thus pay a lot of tax), people are paying less tax (as fewer are in work, and the City bonuses, a huge source of tax revenue, are much lower/none existent). It is estimated that the slump in the City has knocked around £40bn!!! from tax revenues.

• Governments, like you and I, have to borrow this money and then they have to repay it. Who are they borrowing the money off? Well against future tax receipts. Which means from future taxpayers, who will be you and me! And this will have to be funded in the future either by tax increases or lower government spending.

• I expect the government deficit at the height (or shall is say bottom) of this recession to reach between 8% to 9.5% of GDP, that is over£110bn!

• Robert Peston predicts that VAT will increase later in the future, and I agree with him. VAT is a tax on spending. If we were to have a deferred increase in VAT, people would be encouraged to spend now rather than later. However VAT disproportionately affects the poor, as they spend a greater proportion of their income.
  

In other news, I recently went to a posh West End night club purely to do some research on whether the recession has affected the super-rich. As I was conducting some serious research I deemed it necessary to fully immerse myself in that world for the night. I partied hard, maybe too hard, thus my recollections are a bit hazy. The super-rich do not seem to have been affected by the recession. However one of the striking characteristics of this current climate is its volatility, and unfortunately I will have to visit such establishments on a regular basis to ensure that my data is up to date. So if any of you have a table at such a venue, and you have a free seat, who better to fill it than a serious, but fun loving researcher like myself.

I have just seen this and I am shocked. The economy is in worse state that I could have ever imagined!

Dr Doom

If you have 15 minutes spare I highly recommend that you watch this video there is a link on the right hand side on the site, and fast forward to 23:40 and follow it on the transcript. This is the so called perma-bear Nouriel "Dr Doom" Roubini (my hero!) talking about the economic situation and whether things are going to get better or worse, I'll give you a hint, it won't be getting better. I'll be summarsing some of this video in my later posts.

Also I now consider myself a "writer"....I could become Hank Moody in the future!

It is polite to listen to other people's opinions

great video...never listen to people on tv! but maybe just Peter Schiff

Responsibilities

Thank you all for the feedback, I have also received a lot of stick for writing a blog, and the responsibilities that come with it. I have also been questioned as to the purpose of my blog. There are two main ones:

• Firstly to (re)educate those who are interested in the economy and who gain all their economic information from either the LondonLite or another tabloid.

• Secondly to inform people that we are entering a recession (not a credit crunch, although is ones of its features) and to start preparing for the end of the party. Our generation has no idea what a recession is like. We have had it very good all our lives, and as we all know every good party is followed by a painful hangover.

What a week to start my blog. Over 17,000 jobs have been lost this week; that recession train has not only left the station but its beginning to accelerate, rapidly. I thought I would first mention where I acquire my data, opinions and facts from. I rely heavily on several sources, so if you want to go straight to the source, and miss me out, feel free to do so. I will list them in order of preference:

1. First up we have RGE Monitor that "delivers ahead-of-the-curve global economic insights that financial professionals need to know”. The site is headed by my hero Professor Nouriel Roubini, who wrote a paper in Feb 08 predicting the crisis, worth a read if you are bored. The best thing about the site is that at the moment it is free to sign up, “because of the financial turbulence”. So sign up!
2. Next up we have Robert Peston who is the BBC’s business editor. He offers a UK centric view of what is happening. Very good for the situation with the UK banks.
3. FT Alphaville offers updates and opinions throughout the day on anything happening that is relevant to the economy. Some of the stuff even I don’t understand but most of it is simple and very insightful. As there is a lot of information, so focus on the Lunch Wrap; which offers selection of the best articles of the day or search to find what you are after.
4. And finally The FT!

I realised that I missed out a few important events in my last post:

• For starters the lack of credit/money available to everyone from banks, companies to the consumer, and this more than anything will exacerbate the recession. A credit crunch! This is reflected in the 3 month LIBOR (London Interbank Offer Rate), which shows how expensive it is for banks to lend to one another. This has shot up, as the graph shows because banks no longer trust each other, especially after Lehman collapsed. If they don't trust each other, this means that the banks will not lend to busniesses or to normal people.

• This then turned into a liquidity crunch, where because companies could not get access to credit they did not have access to enough money to pay off their liabilities.

• Also the fact that the US and UK governments now own a sizable proportion of their respective banking industries
• Finally it is GLOBAL. Globalisation has driven the world economy and now it will make this recession worse than those before it.
  

Now to a review of the main news of this week:

• 17,00 job losses announced this week. Mainly from BT (10,000), Virgin Media (2,200) and Yell, the publisher of the Yellow Pages (1,300). All these job losses are for so-called white collar workers. It is not the manufacturing sector that is bearing the brunt of this recession, as it has in the past, but the service sector. Although manufacturing has been hit, especially the car makers, it is the service and banking sector that will be most affected. Thus this time round it will be “Grim down South”, with London the worst affected.

• London’s GDP is predicted to shrink by a massive 3.8% (Oxford Economics). The City will lose 35,00 jobs at least over the next two years, and house prices in the affluent areas of London and the “stock broker belt” will plummet. City workers who bought their properties based on the expectation of future bonuses will be forced to sell, as their will be no bonus this year.

• The pound has nose diving lower and lower as each week has gone by. One pound now buys $1.47 compared to over $2 earlier this year. Why does this matter, well if the pound keeps falling any debts that are held in foreign currencies will become larger and larger, as you will need more pounds to pay them off. This will put a large strain on banks and companies that are already being attacked by falling sales, however it will be good news for exporters.

• This article poses a very interesting and worrying question, it asks whether the UK will follow in Iceland's footsteps and default. I believe that George Osbourne read this and then made this statement . Even that is a remote possibility is very worrying. All those jokes about what is the capital of Iceland, soon we could be asking what is the capital of the UK?
• Finally I am not the only one who is so bearish, so is the Bank of England. It has just published its November 2008 Inflation Report, and here are the headline figures. It expects growth to fall to -2% by 2009 and delfation to become the main worry rather than inflation. Deflation is when the general price level drops, the opposite of inflation. This is bad news as deflation can be very bad. Imagine if you know that prices of the goods that you buy are falling, so you decide to wait for a bit and the price will drop, you decide to wait some more for it to become even cheaper. This is the problem with deflation, consumers decided to defer their purchases, and therefore little gets bought. This is exactly what Japan experienced during the 1990's, its "lost decade".

Finally a little rant. I shall be very angry (bare vexed, suffering from inconsolable rage, angrier than a little spoilt girl who cant have that 35th Barbie) if any bank that has received state aid proceeds to pay out bonuses to its staff. I don’t care if you have made millions upon millions for your bank, your bank failed and it lost a hell of a lot more. These banks received state aid (taxpayers money, your hard earned money) in order to prevent them going bankrupt, thus these are failed businesses. The only reason they were saved was because banks are so important to the smooth running of the economy, if they were any other type of business the accountants and lawyers would be in sorting out the bankruptcy. Ergo the fact that they have a job should be their bonus.

It's a start

Hello, I thought I would use this blog (horrid word) as a vehicle to save my thoughts about the current economic climate. I will also try and summarise all the best/worst news from the week gone by (this may be a bit ambitious) but given that I am unemployed it should give me some focus and allow to develop and further think about the issues at hand. So here we go....

As Professor Nouriel "Dr Doom" Roubini (as you will soon understand I love the guy, economically speaking of course) the "recession train has left the station", it probably left about 2 or 3 months ago. So we are in a recession, a big, bad, ugly recession and I would like to call it a depression. As the title suggests I am a bear. For those who are not into their economic lingo (I don't blame you) it means that I am pessimistic about the short term economic future, and why name it after a bear? Simple, when a bear attacks its paw attacks downwards. And when things are going well its a bull market. If you recall the scenes from Pamplona every year where crazy Spaniards are chased through the streets by bulls. They are always tossed up into the air.

I thought of explaining why I am so bearish, but I realised that it would take far too long to explain. So I will do a quick round up of the major economic news to date:

• Largest intervention in the free market, by a supposedly free market country, the TARP in the US.
  
• Lehman Brothers collapsed.
  
• Germany, as of today, is the first major economy to be in recession, the others are just waiting for the formal confirmation.
• Oil has plummeted from $146/barrel to $60
• The Baltic Dry Index which is "an assessment of the price of moving the major raw materials by sea" has nose dived by 93% since its May 2008 peak.
• House prices are falling in the UK, US, Spain, Ireland and pretty much everywhere.

We'll leave it there for now, and I shall come back to some of these facts and explain why they have happened and why they are important.

I will leave you with two facts about the current direction of the economy:

1. In September 2007 Aston Martin sold 150 cars. In September 2008 Aston Martin sold 3 cars.
2. In the 3rd quarter of 2007 Volvo sold 42,000 trucks in Europe. In the 3rd quarter of 2008 Volvo sold 115 trucks in Europe. That is a drop of a staggering 97.3%.
   

So what is my advice? Save some money, however if we all do that we entertain the "paradox of thrift", and then things only get worse, because if we all save more, fewer people will buy goods, so demand will fall, then people lose jobs, so demand falls again, so we save even more.......

So.....use this recession wisely, learn new skills, learn a language, do a masters, and save some money, as this shall be a once in a lifetime (hopefully) investment opportunity, and remember from the flames of a forest fire a new forest shall be born.