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.

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.