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!"