I did an interview the other day with Write Words. One of the questions was what is the worst thing about writing? I found that a hard one, because on the whole I really enjoy writing, which is I guess why I do it for a living.
But in the end I answered: the middle. The beginning of a book is exciting, because it is a fresh start. And you always think you are about to write the most amazing book ever.
And the end is exciting, because it’s nearly finished, and you can see how the whole thing looks.
But there is a chunk in the middle, between about 40,000 and 60,000 words, where it is all a bit of a slog. It’s then you need to dig deep to find the will to get it finished, and not to get distracted.
I’m there right now with ‘Ice Force’. Getting up to about 60,000 words though, so hopefully after Christmas I’ll be into the home straight.
Wednesday, 22 December 2010
The Era of Cheap Money is Ending
In my Money Week column I've been looking at how the era of cheap money is ending. Here's a taster.
Interest rates are at a three-century low, and have been stuck at those levels for more than a year. Your bank deposit account pays so little interest you probably don’t even bother to look at the statements any more. The interest on your mortgage is so miniscule you might well wonder why the building society goes to the hassle of collecting it.
Rates are so pitiful that it may well appear bonkers to start speculating about the end of the era of cheap money. But a fascinating new study by the McKinsey Global Institute has looked at the trends at work in the global capital markets over the last three decades, and looked forward a decade or so as well. It concludes that we may well be close to a turning point.
The global savings rate is about to fall sharply, whilst investment will soar. A lot more people will be chasing a lot less money. If that happens, long-term interest rates will rise sharply.
For investors, that is explosive stuff. Bond prices will fall sharply. Equities may well suffer as well. The private equity and hedge fund industries will collapse. But the traditional bank deposit account will suddenly look quite attractive again.
What are the reasons for thinking the cheap money era is over?
The standard explanation for why money has grown so much cheaper over the last two decades has been that there has been a glut of savings, mainly from big economies such as China and Japan.
Whilst true, that hasn’t been the whole story. There has also been a steady decline in investment. Investment as a share of global GDP fell from a peak of 26% back in the early 1970s, to a recent low of just 20% of GDP in 2002. It has bounced around that relatively low figure for most of the last decade, according to McKinsey’s calculations.
Now it might be about to take off again. The world goes through occasional mega-investment booms. The industrial revolution, for example, or the post-war reconstruction of Europe and Japan. It may be on the brink of another one. New countries are industrialising fast, and creating new cities at the same time. Across Asia, Africa, Latin America and Eastern Europe, there is a soaring demand for new infrastructure. Roads, railways, water systems, homes and factories are all being built at a rapid pace. That requires vast quantities of capital. Indeed the rate of global investment was already starting to rise quite quickly. From 2002 onwards, it started to climb sharply, before being choked off by the global recession. As the economy recovers it will start growing again, probably back to the peaks seen in the early 1970s.
On the other side of the equation, global saving may well start to fall. China is probably not going to save as much in the next decade as it did in the past. Typically, as economies grow more mature, they save less and consume more. There is no reason for thinking that China will be any different. The same forces will be at work in other big emerging economies such as India and Brazil.
At the same time, populations are rapidly aging – not just in the developed world, but in places such as China as well. Typically, older people don’t save. Indeed, they live on the past savings.
In short, there will be a much higher demand for capital, and a lower supply of it. You don’t need to know much about economies to figure out that means prices will go up. How much? No one can say for certain. McKinsey estimates that 1.5% could be added to long-term interest rates. But it could be much more.
For investors, however, that is going to make a hug difference.
First, the bond markets will go into long-term retreat.
Although the equity markets get far more attention, the bond markets have been in a two-decade bull market – and you’d have been better off for most of that time invested in bonds than shares. With the cost of capital hitting record lows, fixed income investments just grew steadily more attractive. But rising long-term interest rates will reverse all of that. Bonds will enter a bear market.
Second, equities will be far more mixed. On the one hand, the cost of capital for companies will rise. Shares won’t benefit from investors switching out of low-yielding bonds. That 5% dividend that looked so attractive when a 10-year bond yielded 3% won’t look so great any more. Against that, costs such as pension funds will be easier to finance. Equities will be okay, but will hardly shine.
Thirdly, it will have a huge impact on the capital markets. The hedge fund and private equity industries have boomed as investors have looked for alternative strategies in a world where real interest rates kept falling. But with rates rising, plain old deposit accounts at the bank will look a lot more appealing. There’s not much point in paying a hedge fund manager 20% for some exotic, high-risk strategy when you could be making a perfectly decent return just by parking the cash in your local building society. The alternative investment industry faces wipe out.
Finally, it will impact the rest of the economy profoundly. The credit boom of the last two decades was fundamentally about money being very, very cheap. They were giving the stuff away – just about literally in the case of some credit card companies. Consumers and governments steadily ran up bigger and bigger debts, often without much of an idea how they would ever pay them back. Those days are over. Governments will have to balance their books, and so will consumers.
In a world in which capital is in short supply, people will have to go back to living within their means, and saving up for things that they want to buy or invest in. Now that really will be a big change.
Interest rates are at a three-century low, and have been stuck at those levels for more than a year. Your bank deposit account pays so little interest you probably don’t even bother to look at the statements any more. The interest on your mortgage is so miniscule you might well wonder why the building society goes to the hassle of collecting it.
Rates are so pitiful that it may well appear bonkers to start speculating about the end of the era of cheap money. But a fascinating new study by the McKinsey Global Institute has looked at the trends at work in the global capital markets over the last three decades, and looked forward a decade or so as well. It concludes that we may well be close to a turning point.
The global savings rate is about to fall sharply, whilst investment will soar. A lot more people will be chasing a lot less money. If that happens, long-term interest rates will rise sharply.
For investors, that is explosive stuff. Bond prices will fall sharply. Equities may well suffer as well. The private equity and hedge fund industries will collapse. But the traditional bank deposit account will suddenly look quite attractive again.
What are the reasons for thinking the cheap money era is over?
The standard explanation for why money has grown so much cheaper over the last two decades has been that there has been a glut of savings, mainly from big economies such as China and Japan.
Whilst true, that hasn’t been the whole story. There has also been a steady decline in investment. Investment as a share of global GDP fell from a peak of 26% back in the early 1970s, to a recent low of just 20% of GDP in 2002. It has bounced around that relatively low figure for most of the last decade, according to McKinsey’s calculations.
Now it might be about to take off again. The world goes through occasional mega-investment booms. The industrial revolution, for example, or the post-war reconstruction of Europe and Japan. It may be on the brink of another one. New countries are industrialising fast, and creating new cities at the same time. Across Asia, Africa, Latin America and Eastern Europe, there is a soaring demand for new infrastructure. Roads, railways, water systems, homes and factories are all being built at a rapid pace. That requires vast quantities of capital. Indeed the rate of global investment was already starting to rise quite quickly. From 2002 onwards, it started to climb sharply, before being choked off by the global recession. As the economy recovers it will start growing again, probably back to the peaks seen in the early 1970s.
On the other side of the equation, global saving may well start to fall. China is probably not going to save as much in the next decade as it did in the past. Typically, as economies grow more mature, they save less and consume more. There is no reason for thinking that China will be any different. The same forces will be at work in other big emerging economies such as India and Brazil.
At the same time, populations are rapidly aging – not just in the developed world, but in places such as China as well. Typically, older people don’t save. Indeed, they live on the past savings.
In short, there will be a much higher demand for capital, and a lower supply of it. You don’t need to know much about economies to figure out that means prices will go up. How much? No one can say for certain. McKinsey estimates that 1.5% could be added to long-term interest rates. But it could be much more.
For investors, however, that is going to make a hug difference.
First, the bond markets will go into long-term retreat.
Although the equity markets get far more attention, the bond markets have been in a two-decade bull market – and you’d have been better off for most of that time invested in bonds than shares. With the cost of capital hitting record lows, fixed income investments just grew steadily more attractive. But rising long-term interest rates will reverse all of that. Bonds will enter a bear market.
Second, equities will be far more mixed. On the one hand, the cost of capital for companies will rise. Shares won’t benefit from investors switching out of low-yielding bonds. That 5% dividend that looked so attractive when a 10-year bond yielded 3% won’t look so great any more. Against that, costs such as pension funds will be easier to finance. Equities will be okay, but will hardly shine.
Thirdly, it will have a huge impact on the capital markets. The hedge fund and private equity industries have boomed as investors have looked for alternative strategies in a world where real interest rates kept falling. But with rates rising, plain old deposit accounts at the bank will look a lot more appealing. There’s not much point in paying a hedge fund manager 20% for some exotic, high-risk strategy when you could be making a perfectly decent return just by parking the cash in your local building society. The alternative investment industry faces wipe out.
Finally, it will impact the rest of the economy profoundly. The credit boom of the last two decades was fundamentally about money being very, very cheap. They were giving the stuff away – just about literally in the case of some credit card companies. Consumers and governments steadily ran up bigger and bigger debts, often without much of an idea how they would ever pay them back. Those days are over. Governments will have to balance their books, and so will consumers.
In a world in which capital is in short supply, people will have to go back to living within their means, and saving up for things that they want to buy or invest in. Now that really will be a big change.
On Motley Fool
You can hear me talking about Bust, my book on the Greek crisis, on The Motley Fool website.
Wednesday, 8 December 2010
Let It Snow
It’s cold at the moment, as you’ve probably noticed. Everyone else has, understandably enough, been moaning about the weather. But when you are half way through writing a book called ‘Ice Force’ it does have certain advantages. When I need to get in the mood for another description of snow storms swirling through the Arctic glaciers, all I have to do is step out into the garden.
One of the things you have to do as writer is create a believable atmosphere. Books vary, of course. Some are set in very, ordinary everyday locations -- the suburbs, for example. I like to set my books in fairly exotic places. I think that is part of the appeal of the adventure-action thriller genre. There is a big element of escapism in these books. Nobody wants to escape to Swindon. They want the book to take them somewhere exciting, and preferably dangerous as well.
That does, of course, mean the writer has to create believable detail. You need to make it real, without overdoing the travelogues. The best way is to focus on little things. When I was writing about Helmand in Afghanistan for Death Force, for example, I mentioned the smell of the wild irises that grow in the mountains along the Afghan-Pakistan border. In Ice Force, I’ve mentioned the grinding noise that the plates of ice moving beneath you make as you trudge towards the North Pole.
The atmosphere has to be woven into every sentence you write.
And, of course, it helps if it is snowing outside while you are doing it.
One of the things you have to do as writer is create a believable atmosphere. Books vary, of course. Some are set in very, ordinary everyday locations -- the suburbs, for example. I like to set my books in fairly exotic places. I think that is part of the appeal of the adventure-action thriller genre. There is a big element of escapism in these books. Nobody wants to escape to Swindon. They want the book to take them somewhere exciting, and preferably dangerous as well.
That does, of course, mean the writer has to create believable detail. You need to make it real, without overdoing the travelogues. The best way is to focus on little things. When I was writing about Helmand in Afghanistan for Death Force, for example, I mentioned the smell of the wild irises that grow in the mountains along the Afghan-Pakistan border. In Ice Force, I’ve mentioned the grinding noise that the plates of ice moving beneath you make as you trudge towards the North Pole.
The atmosphere has to be woven into every sentence you write.
And, of course, it helps if it is snowing outside while you are doing it.
The Return of Stagflation
In my Money Week column this week, I've been looking at the return of 1970s-style staglation. Here's a taster....
Historical comparisons are vital for any serious investor, not because the past always repeats itself, but because it gives you a sense of what forces are at work, and how they are likely to shape events. The tricky bit, however, is deciding which historical parallel is the right one.
So where are we right now? Back in the 1930s, recovering fitfully after an almighty global crash? Standing on the brink of a long bull market such as the early 1980s?
In fact, we are probably somewhere around 1969 – coming out of a decade of relatively strong growth and prosperity, but heading into one that will prove a much harder slog. The ‘stagflation’ of the 1970s – a malignant combination of rapid and rising inflation, zero growth, and rising unemployment which wiped out the wealth of the middle classes – could well be what lies in store.
In the debate between whether we are looking at a decade of deflation or inflation, too much attention is paid to where we are right now. At the start of the 1970s, there wasn’t much sign that rising prices were going to be a problem any time soon. Nor was there much sign that mass unemployment lay ahead.
But, as a fascinating recent analysis by Morgan Stanley made clear, there were forces at work in the early late 196s and 1970s that were to pave the way for stagflation -- and which all have very clear parallels today.
There was an international monetary system, which meant that the expansionary policies of the Federal Reserve were exported around the world. In 1970, it was the Bretton Woods system that had been set up after World War Two. Today, it is quantitative easing. But the net result is much the same. The Fed is trying to inflate its own economy, for its own reasons, but much of the expansion of the monetary system ends up elsewhere.
There was a glut of dollars flooding onto the global economy. In the early 1970s, the US was printing money to finance the Vietnam War. Now it is to keep its banking system afloat, but again the net impact is very similar.
There is a twin-track global economy. In the early 1970s, the peripheral economies – in those days mainly Japan, and the emerging Asian economies such as Hong Kong, Taiwan and Korea – were growing very fast, while the main traditional economies were starting to stagnate. The same is true today, with the emerging markets racing ahead, whilst the established giants of the global economy have all slowed down sharply.
Finally, there were structural challenges to the old heavy-weight economies that meant they found it very hard to grow. In the early 1970s, they were faced with the loss of old basic manufacturing industries, and the creation of new service-based economies. In 1970, for example, 35% of British jobs were still in manufacturing, compared with only 13% now. It was impossible to grow very fast until that process was completed. Now, of course, it is debt de-leveraging: gradually restoring both personal and government balance sheets after the crazy borrowing spree of the last decade, which means that growth is likely to be very subdued for a long time to come.
The net result was rapid inflation and zero or minimal growth – the worst of all possible worlds.
Of course, there are differences as well. No historical comparison is ever perfect. There is none of the wage indexing that was common in the 1970s. When wages went up with inflation automatically, that ratcheted prices endlessly upwards. Today, wages are falling in the UK in real terms – they are rising at about 1% less than inflation – and in most of the developed world as well. The OPEC oil cartel is nothing like the force it was forty years ago – it isn’t going to be able to force up the oil price in the way it did in the 1970s.
Still, the parallels are clear enough. On balance, several years of stagflation looks the most likely outcome.
How should investors respond to that?
First, don’t worry about inflation just yet.
Although the main ingredients of stagflation were all in place by the beginning of 1970, inflation didn’t take off right away. It wasn’t until the oil crisis of 1973 that prices really started to run riot, and it was the second half of the decade that saw rampant inflation across much of the developed world. You need to reckon on the big upturn in prices around 2013 or 2014 – not this year or next. So for the time being you are fine remaining invested in assets such as bonds that don’t protect you from rising prices. They will carry on doing well for at least another two years.
Next, switch into real assets.
With zero growth, and rapidly rising prices you need to be out of cash. The outlook for property prices might look bleak on the surface, with squeezed incomes and little growth in lending, but for British investors there have been few better long-term hedges against inflation than houses and land. That was true of every other inflationary cycle and it will be of this one as well. Gold will do well. So will commodity prices. Even better, try and spot the next OPEC-style cartel that can take advantage of loose monetary policy to squeeze up prices to extraordinary levels – iron ore would be one possibility.
Finally, get ready for the clampdown.
Central banks remain remarkably relaxed about inflation – for now. They may well have decided that with so much debt on personal and national balance sheets, modest inflation is the best way of getting the economy back into shape. But stagflation is a nasty condition: minimal growth and rising prices squeeze living standards very quickly, creating real pain. Eventually, inflation will have to be squeezed out of the system. That will create a lot of losers.
At the end of the cycle, we should end up back in the early 1980s – and ready for another two decade bull market in equities. But that part of the story is still a long way off.
Historical comparisons are vital for any serious investor, not because the past always repeats itself, but because it gives you a sense of what forces are at work, and how they are likely to shape events. The tricky bit, however, is deciding which historical parallel is the right one.
So where are we right now? Back in the 1930s, recovering fitfully after an almighty global crash? Standing on the brink of a long bull market such as the early 1980s?
In fact, we are probably somewhere around 1969 – coming out of a decade of relatively strong growth and prosperity, but heading into one that will prove a much harder slog. The ‘stagflation’ of the 1970s – a malignant combination of rapid and rising inflation, zero growth, and rising unemployment which wiped out the wealth of the middle classes – could well be what lies in store.
In the debate between whether we are looking at a decade of deflation or inflation, too much attention is paid to where we are right now. At the start of the 1970s, there wasn’t much sign that rising prices were going to be a problem any time soon. Nor was there much sign that mass unemployment lay ahead.
But, as a fascinating recent analysis by Morgan Stanley made clear, there were forces at work in the early late 196s and 1970s that were to pave the way for stagflation -- and which all have very clear parallels today.
There was an international monetary system, which meant that the expansionary policies of the Federal Reserve were exported around the world. In 1970, it was the Bretton Woods system that had been set up after World War Two. Today, it is quantitative easing. But the net result is much the same. The Fed is trying to inflate its own economy, for its own reasons, but much of the expansion of the monetary system ends up elsewhere.
There was a glut of dollars flooding onto the global economy. In the early 1970s, the US was printing money to finance the Vietnam War. Now it is to keep its banking system afloat, but again the net impact is very similar.
There is a twin-track global economy. In the early 1970s, the peripheral economies – in those days mainly Japan, and the emerging Asian economies such as Hong Kong, Taiwan and Korea – were growing very fast, while the main traditional economies were starting to stagnate. The same is true today, with the emerging markets racing ahead, whilst the established giants of the global economy have all slowed down sharply.
Finally, there were structural challenges to the old heavy-weight economies that meant they found it very hard to grow. In the early 1970s, they were faced with the loss of old basic manufacturing industries, and the creation of new service-based economies. In 1970, for example, 35% of British jobs were still in manufacturing, compared with only 13% now. It was impossible to grow very fast until that process was completed. Now, of course, it is debt de-leveraging: gradually restoring both personal and government balance sheets after the crazy borrowing spree of the last decade, which means that growth is likely to be very subdued for a long time to come.
The net result was rapid inflation and zero or minimal growth – the worst of all possible worlds.
Of course, there are differences as well. No historical comparison is ever perfect. There is none of the wage indexing that was common in the 1970s. When wages went up with inflation automatically, that ratcheted prices endlessly upwards. Today, wages are falling in the UK in real terms – they are rising at about 1% less than inflation – and in most of the developed world as well. The OPEC oil cartel is nothing like the force it was forty years ago – it isn’t going to be able to force up the oil price in the way it did in the 1970s.
Still, the parallels are clear enough. On balance, several years of stagflation looks the most likely outcome.
How should investors respond to that?
First, don’t worry about inflation just yet.
Although the main ingredients of stagflation were all in place by the beginning of 1970, inflation didn’t take off right away. It wasn’t until the oil crisis of 1973 that prices really started to run riot, and it was the second half of the decade that saw rampant inflation across much of the developed world. You need to reckon on the big upturn in prices around 2013 or 2014 – not this year or next. So for the time being you are fine remaining invested in assets such as bonds that don’t protect you from rising prices. They will carry on doing well for at least another two years.
Next, switch into real assets.
With zero growth, and rapidly rising prices you need to be out of cash. The outlook for property prices might look bleak on the surface, with squeezed incomes and little growth in lending, but for British investors there have been few better long-term hedges against inflation than houses and land. That was true of every other inflationary cycle and it will be of this one as well. Gold will do well. So will commodity prices. Even better, try and spot the next OPEC-style cartel that can take advantage of loose monetary policy to squeeze up prices to extraordinary levels – iron ore would be one possibility.
Finally, get ready for the clampdown.
Central banks remain remarkably relaxed about inflation – for now. They may well have decided that with so much debt on personal and national balance sheets, modest inflation is the best way of getting the economy back into shape. But stagflation is a nasty condition: minimal growth and rising prices squeeze living standards very quickly, creating real pain. Eventually, inflation will have to be squeezed out of the system. That will create a lot of losers.
At the end of the cycle, we should end up back in the early 1980s – and ready for another two decade bull market in equities. But that part of the story is still a long way off.
Tuesday, 30 November 2010
Don't Attack The Customers
I’m not one of those writers who worries about digital books, the decline of the local bookshop, or the closure of libraries. We are story-tellers, and there has always been a demand for stories, and an enthusiastic audience for them. How they are delivered – round a campfire, on a printed page, or on an electronic screen – doesn’t make much difference.
What does worry me is that the publishing industry might repeat some of the mistakes of the music business.
In The Bookseller today, Richard Mollet, the chief executive of the Publishers Association, is demanding that the Internet Service Providers should be clamping down on piracy.
This is the wrong route.
With my other hat as a business journalist on I’ve written a lot about the decline of the big music labels. What they got wrong was trying to sue their main customers – the music fans who download music. But a business can’t constantly be treating its customers like criminals. It doesn’t make any sense.
Interestingly, the music business is in pretty good shape. Total spending on music, when you add up CD sales, licensing fees, downloads and live performance earnings, has been going up over the last few years. It’s just the old music labels that have been struggling – largely because they couldn’t figure out to deal with a changed market.
I hope the publishers don’t end up going down the same road.
The story-telling business is in good shape, even if the delivery changes. But attacking our customers is not the right way to respond.
What does worry me is that the publishing industry might repeat some of the mistakes of the music business.
In The Bookseller today, Richard Mollet, the chief executive of the Publishers Association, is demanding that the Internet Service Providers should be clamping down on piracy.
This is the wrong route.
With my other hat as a business journalist on I’ve written a lot about the decline of the big music labels. What they got wrong was trying to sue their main customers – the music fans who download music. But a business can’t constantly be treating its customers like criminals. It doesn’t make any sense.
Interestingly, the music business is in pretty good shape. Total spending on music, when you add up CD sales, licensing fees, downloads and live performance earnings, has been going up over the last few years. It’s just the old music labels that have been struggling – largely because they couldn’t figure out to deal with a changed market.
I hope the publishers don’t end up going down the same road.
The story-telling business is in good shape, even if the delivery changes. But attacking our customers is not the right way to respond.
Cyprus Well Profile
There is an interview with me today on the Cyprus Well website. You can read it here.
Britain & The Euro Break-Up
In my Money Week column this week I've been exploring how Britain should handle the potential break-up of the euro. Here's a taster.
It would be easy for the UK to stay smugly on the sidelines as the euro collapses. After all, Britain had to struggle not to join the single currency when it was launched. And it had to put up with years of European politicians warning that the City, and the vast earnings it brings into London, would be finished as result of its government’s stubborn scepticism. You hardly need to be German to think the word schadenfreude might be an apporiate way of desribing many people’s response on this side of the English channel.
That would be temptimg, but wrong. Britain has a huge amount at stake in the euro’s crisis. We are contributing billions to the bail-out of the Irish. The Spanish banks, which could well be the next domino to fall, have a massive presence in this country. The euro-zone is our largest trading partner.
If the euro-zone does break-up – and it looks increasingly likely that it will – then the way that it does so, and the currency system that replaces it, will matter hugely to the UK economy over the next decade. Britain should be leading that debate, And it should be arguing for an orderly break-up, returning to national currencies, but with the euro preserved as a business and financial currency.
The troubles of the euro are getting too severe for even its most enthusiatic proponents to ignore. The Greeks going bust was one thing. The Greeks fiddled their way into the system, and made no attempt to play by the rules. They should never have been allowed in, and, once inside, should have been told to reform fast, or get out again.
But Ireland is something different. It was one of the most suscessful economies in the world before it joined the euro. It did everything that was expected of it, cutting wages, and public spending with a ferocity that no other country has matched. Yet it still ran out of money. With two out of 16 euro countries needing bailing out, it is hard to see how the single currency cannot be blamed. Nor is it going to stop here. Portugal will be next, then Spain, and probably Belgium as well. After that, it is merely a qustion of whether the bond markets take France or Italy down first.
For the UK, that matters hugely. We are on the hook for a large chunk of the Irish bail-out. This county will contribute around eight billion euros to the bail-out package for the Irish government. Royal Bank of Scotland and Lloyds, the two partially state-owned British banks, have billlions in exposure to the Irish economy. If Ireland goes down, it will cost the UK huge sums.
It doesn’t just end there. The Spanish banks – most notably Santander – have a massive presence in the UK. If the Spain is the next euro domino to fall, we may end up regretting allowing a bank from that country to end up owning such a large chunk of the British financial system. Likewise, if Portuguese, or Belgium, or French banks get caught up in the crisis, that will have terrible consequences for our own banks, and for the City more widely.
And, of course, the euro-zone is Britain’s main trading partner. It is no use thinking we can simply be a spectator at this drama. The UK needs to get involved in trying to shape the way it plays out.
Of course, as an outsider the UK may struggle to be listened to. Against that, our foresight in staying out may give us a voice. After all, the architects of the euro, who assured us the single currency would protect Europe from chaos in the markets, are looking fairly foolish right now. And, in addition, Britain is one of the largest economies in Europe. All of that gives us a role to play.
So what should the UK be arguing for?
The first and most important point is that the UK should be pushing for an orderly break-up of the euro. The subject is still taboo in Brussels and Frankfurt. That is crazy. There is a real risk the euro may collapse amid chaos and turmoil. If confidence in Spain goes, it might happen very suddenly, taking France and Italy with it. After all, the exchange rate mechanism, the precursor to the euro, fell apart over the space of a few days in 1992. The euro could do the same. It would be far better if there was a calm and measured debate now about how to unravel it. Sensible decisions are rarely made during a few hours of fevered debate with the global markets in freefall.
There is plenty of talk about creating a northern and southern euro – a neuro and sudo (or the medi, as one Morgan Stanley analysis called it). That would fix some of the problems. The peripheral countries could devalue as a bloc against the stronger economies of core Europe. The two currency zones would be more compatible than the one that exists at the moment.
But will there really be any appetite for another monetary experiment after the failure of the euro? Probably not. Nor is it clear that the two zones would work much better than the one we have right now. France has been losing competitiveness steadily against Germany. It might struggle to stay in the neuro. The sudo would be led by its largest economy, Italy. How much confidence would the markets have in a currency zone led by the Italians? Yup, you guessed right – not very much. Even the Italians probably wouldn’t want to join.
The best solution would be to return to the national currencies. But it would be worth keeping the euro as a parallel currency – which is in fact what the British proposed when the euro was launched. The ECB could be jointly owned by the states of the EU, and the currency would be legal tender in every country. Over time, some of the smaller states might abandon their own currencies and just have the euro. But it would happen naturally, and from the ground up – not from the top down.
That would serve Britain’s interests best. But it isn’t going to happen unless we start arguing for it.
It would be easy for the UK to stay smugly on the sidelines as the euro collapses. After all, Britain had to struggle not to join the single currency when it was launched. And it had to put up with years of European politicians warning that the City, and the vast earnings it brings into London, would be finished as result of its government’s stubborn scepticism. You hardly need to be German to think the word schadenfreude might be an apporiate way of desribing many people’s response on this side of the English channel.
That would be temptimg, but wrong. Britain has a huge amount at stake in the euro’s crisis. We are contributing billions to the bail-out of the Irish. The Spanish banks, which could well be the next domino to fall, have a massive presence in this country. The euro-zone is our largest trading partner.
If the euro-zone does break-up – and it looks increasingly likely that it will – then the way that it does so, and the currency system that replaces it, will matter hugely to the UK economy over the next decade. Britain should be leading that debate, And it should be arguing for an orderly break-up, returning to national currencies, but with the euro preserved as a business and financial currency.
The troubles of the euro are getting too severe for even its most enthusiatic proponents to ignore. The Greeks going bust was one thing. The Greeks fiddled their way into the system, and made no attempt to play by the rules. They should never have been allowed in, and, once inside, should have been told to reform fast, or get out again.
But Ireland is something different. It was one of the most suscessful economies in the world before it joined the euro. It did everything that was expected of it, cutting wages, and public spending with a ferocity that no other country has matched. Yet it still ran out of money. With two out of 16 euro countries needing bailing out, it is hard to see how the single currency cannot be blamed. Nor is it going to stop here. Portugal will be next, then Spain, and probably Belgium as well. After that, it is merely a qustion of whether the bond markets take France or Italy down first.
For the UK, that matters hugely. We are on the hook for a large chunk of the Irish bail-out. This county will contribute around eight billion euros to the bail-out package for the Irish government. Royal Bank of Scotland and Lloyds, the two partially state-owned British banks, have billlions in exposure to the Irish economy. If Ireland goes down, it will cost the UK huge sums.
It doesn’t just end there. The Spanish banks – most notably Santander – have a massive presence in the UK. If the Spain is the next euro domino to fall, we may end up regretting allowing a bank from that country to end up owning such a large chunk of the British financial system. Likewise, if Portuguese, or Belgium, or French banks get caught up in the crisis, that will have terrible consequences for our own banks, and for the City more widely.
And, of course, the euro-zone is Britain’s main trading partner. It is no use thinking we can simply be a spectator at this drama. The UK needs to get involved in trying to shape the way it plays out.
Of course, as an outsider the UK may struggle to be listened to. Against that, our foresight in staying out may give us a voice. After all, the architects of the euro, who assured us the single currency would protect Europe from chaos in the markets, are looking fairly foolish right now. And, in addition, Britain is one of the largest economies in Europe. All of that gives us a role to play.
So what should the UK be arguing for?
The first and most important point is that the UK should be pushing for an orderly break-up of the euro. The subject is still taboo in Brussels and Frankfurt. That is crazy. There is a real risk the euro may collapse amid chaos and turmoil. If confidence in Spain goes, it might happen very suddenly, taking France and Italy with it. After all, the exchange rate mechanism, the precursor to the euro, fell apart over the space of a few days in 1992. The euro could do the same. It would be far better if there was a calm and measured debate now about how to unravel it. Sensible decisions are rarely made during a few hours of fevered debate with the global markets in freefall.
There is plenty of talk about creating a northern and southern euro – a neuro and sudo (or the medi, as one Morgan Stanley analysis called it). That would fix some of the problems. The peripheral countries could devalue as a bloc against the stronger economies of core Europe. The two currency zones would be more compatible than the one that exists at the moment.
But will there really be any appetite for another monetary experiment after the failure of the euro? Probably not. Nor is it clear that the two zones would work much better than the one we have right now. France has been losing competitiveness steadily against Germany. It might struggle to stay in the neuro. The sudo would be led by its largest economy, Italy. How much confidence would the markets have in a currency zone led by the Italians? Yup, you guessed right – not very much. Even the Italians probably wouldn’t want to join.
The best solution would be to return to the national currencies. But it would be worth keeping the euro as a parallel currency – which is in fact what the British proposed when the euro was launched. The ECB could be jointly owned by the states of the EU, and the currency would be legal tender in every country. Over time, some of the smaller states might abandon their own currencies and just have the euro. But it would happen naturally, and from the ground up – not from the top down.
That would serve Britain’s interests best. But it isn’t going to happen unless we start arguing for it.
Wednesday, 24 November 2010
A Moment to Celebrate Ourselves
It was National Freelancer’s Day yesterday, although not very surprisingly I missed it. Indeed, I suspect that all the freelancers out there missed it: partly because they are always very, very busy with other stuff; and partly because, by definition, we all work by ourselves, so we aren’t around other freelancers, who might remind us to celebrate.
Still, the Telegraph had an interesting survey to mark the occasion. It found that freelancers were on the whole happier than people who had jobs. Not very surprising, really. If you consider that most jobs consist of some idiot shouting at you all morning, then getting a terrible, over-priced sandwich that tastes like mouldy cardboard, with some bloke you’re only friends with because he happens to sit next to you, and then spending the afternoon in a crushingly dull meeting, it is surprising that us freelancers aren’t even further in the lead.
Its ten years now since I had a job in an office, so I’ve spent a decade now sitting around at home writing stuff. It takes a lot of discipline, of course. You have to get up in the morning and crack on with your work. You need to set yourself targets and deadlines.
And it has it ups and downs. But when you hit a down it is worth remembering that you are a lot happier than you would be in an officer.
In fact next year I might even celebrate National Freelancers Day – possibly with a plate of foie gras and a glass of Bordeaux at my desk.
Still, the Telegraph had an interesting survey to mark the occasion. It found that freelancers were on the whole happier than people who had jobs. Not very surprising, really. If you consider that most jobs consist of some idiot shouting at you all morning, then getting a terrible, over-priced sandwich that tastes like mouldy cardboard, with some bloke you’re only friends with because he happens to sit next to you, and then spending the afternoon in a crushingly dull meeting, it is surprising that us freelancers aren’t even further in the lead.
Its ten years now since I had a job in an office, so I’ve spent a decade now sitting around at home writing stuff. It takes a lot of discipline, of course. You have to get up in the morning and crack on with your work. You need to set yourself targets and deadlines.
And it has it ups and downs. But when you hit a down it is worth remembering that you are a lot happier than you would be in an officer.
In fact next year I might even celebrate National Freelancers Day – possibly with a plate of foie gras and a glass of Bordeaux at my desk.
Wednesday, 17 November 2010
Advice To Budding Thriller Writers.
I’m still really enjoying the round-table discussions hosted over at the International Thriller Writers website. This week, they are discussing the one piece of advice you would give budding thriller writers.
So what would my advice be?
First, learn about structure. Thrillers are very mechanical. They need great engineering. They are a bit like cars in that respect. They can look beautiful, but if they don’t work properly, then what’s the point (unless it’s a Jag, of course, in which case we’ll overlook the fact it doesn’t work).
So the most important thing you need to do is learn about structure and pace and plot. For my money, the best way to do that is to take an early Frederick Forsyth novel, and go through it again and again until you have learned absolutely what he is doing. Then do it for yourself. It’s a bit like taking a BMW apart, then re-assembling. If you do that enough times, you will figure out how to make a car. Same with a thriller.
Next, get with the times. Thrillers are stories of events. They reflect the world around them. So don’t write an old-fashioned Cold War spy thriller. Think about private military corporations (my subject). Or financial conspiracies. Or Iran. Or piracy. But make it something now and fresh we haven’t read about before.
Okay, that’s two pieces of advice – but both valuable.
So what would my advice be?
First, learn about structure. Thrillers are very mechanical. They need great engineering. They are a bit like cars in that respect. They can look beautiful, but if they don’t work properly, then what’s the point (unless it’s a Jag, of course, in which case we’ll overlook the fact it doesn’t work).
So the most important thing you need to do is learn about structure and pace and plot. For my money, the best way to do that is to take an early Frederick Forsyth novel, and go through it again and again until you have learned absolutely what he is doing. Then do it for yourself. It’s a bit like taking a BMW apart, then re-assembling. If you do that enough times, you will figure out how to make a car. Same with a thriller.
Next, get with the times. Thrillers are stories of events. They reflect the world around them. So don’t write an old-fashioned Cold War spy thriller. Think about private military corporations (my subject). Or financial conspiracies. Or Iran. Or piracy. But make it something now and fresh we haven’t read about before.
Okay, that’s two pieces of advice – but both valuable.
The Tech Bubble....
In my Money Week column this week, I've been looking at the bubble in tech stocks. Here's a taster.
Right now, everyone in the markets is worrying about bubbles. It might be commodity prices, it might be bonds, it could be gold, or it could be the emerging markets. They are all up strongly in the past year. They all look as if they might have over-reached themselves.
But one distinguishing characteristic of a bubble is that no one really notices it. If everyone is complaining about the price of a particular type of asset, it is probably in perfectly good shape. It is the bubbles you haven’t seen that are likely to catch you out.
What are they? In a replay of 1998 and 1999, it might well be technology. Amazon is trading on a price earnings ratio of almost 70. Apple is now the third biggest company in the world. Google just keeps going up in price. And Facebook, if it ever comes to the market will be valued at billions.
And yet despite the explosive growth of the internet economy, all the old problems remain. Business models are flimsy, the barriers to entry are wafer-thin, and the technology moves so fast, it is hard for investors to make any money.
When the post-credit crunch bull market comes to a screeching halt, as it inevitably will at some point, it well be a technology crash that bring it down.
No one would deny that internet is now a huge business. That was underlined by a report by the Boston Consulting Group published last month. It found that in the UK alone, the online economy was now worth £100 billion a year, and accounted for 7.2% of GDP. If it was a separate economic sector, it would be bigger than construction, transport or the utilities.
Britain is not particularly advanced in its take-up of technology. What is true in this country will be true in every other advanced economy as well. This is a huge and growing chunk of the global economy.
It is absolutely right, therefore, that the companies that dominate the space should be sought after by investors. Anyone looking for long-term growth is going to want to own a slice of the leaders of the technology boom. Otherwise they risk getting left behind.
But hold on. Just because a company has good long-term growth prospects does not mean it is worth absolutely anything.
Take Amazon, for example. It was one of the pioneers of online retailing, and remains the best brand in that industry. I’d be surprised if there was a single reader of this magazine who wasn’t also an Amazon customer. Its latest figures were terrific: sales were ahead by 16% and profits were ahead by 39%. No doubt it will have a great Christmas. Even so, its share price has gone crazy. They have jumped from $25 a share in 2005 to $170 now. It is trading on multiple of 69 historic earnings, and 49 times the forecast earnings for next year.
Or take Apple. Sure, the iPhone is a big hit, and the iPad has been making a lot of noise. In the last five years it has got just about everything right, and there is probably no other business around that has so many devoted customers. Even so, there must be a limit to what it is worth. The shares are up by more than 50% this year alone. With a market cap of $290 billion, it is the second most valuable American business. It is the third most valuable company in the world, after Exxon Mobil and PetroChina. This, remember, is a company which, while it dominates the market for MP3 players, currently has just 4.1% of the mobile phone market, and slightly over 5% of the global market for personal computers. Those are hardly dominant market positions – but you would hardly guess that from its share price.
Much the same could be said of Google, or Facebook, or many smaller technology companies. They are good businesses, in a fast-growing sector of the economy. But they are also hitting crazy prices.
The trouble is, all the old problems with technology and internet companies remain.
For starters, there are still far too few barriers to entry. The days when a few bright Harvard students could start a website that would blow apart the industry, in the way that Mark Zuckerberg did when he started Facebook in 2004, may be over. Then again, they may not be. This is still an industry in its infancy. It is very easy for a few bright people to turn the web upside down with very little money to play with. That is great for them, and it is what makes high-tech so exciting. But is it very worrying for shareholders in the established companies. It is just too easy for a young entrepreneur to come along and blow you away.
Next, there are still relatively few sustainable business models. The online retailers make money, but often only by squeezing their suppliers to the bone. The internet is the most ruthless price comparison device ever invented, and one consequence of that is that margins will always be wafer thin. Businesses like Google may have a great advertising franchise right now – but there is no limit to ad space on the web in the way there is in the physical world. In truth, all online business models remain very flimsy.
Lastly, the technology moves so fast it is very hard for shareholders to make money. The founders and the venture capitalists who back them usually do pretty well. But by the time a company gets to the quoted market, its best days may already be behind it. It may never get to the stage of paying out steady dividends. Even Microsoft only paid its first dividend in 2003. Neither Google or Amazon have ever paid a dividend, nor are they planning to do so. By the time they do, they will probably look as far past their sell-by date as Microsoft does.
In reality, the tech rally looks overdone. It is bound to come shuddering down to earth again some time soon. And when it happens, it may well prove a trigger for a wider market correction.
Right now, everyone in the markets is worrying about bubbles. It might be commodity prices, it might be bonds, it could be gold, or it could be the emerging markets. They are all up strongly in the past year. They all look as if they might have over-reached themselves.
But one distinguishing characteristic of a bubble is that no one really notices it. If everyone is complaining about the price of a particular type of asset, it is probably in perfectly good shape. It is the bubbles you haven’t seen that are likely to catch you out.
What are they? In a replay of 1998 and 1999, it might well be technology. Amazon is trading on a price earnings ratio of almost 70. Apple is now the third biggest company in the world. Google just keeps going up in price. And Facebook, if it ever comes to the market will be valued at billions.
And yet despite the explosive growth of the internet economy, all the old problems remain. Business models are flimsy, the barriers to entry are wafer-thin, and the technology moves so fast, it is hard for investors to make any money.
When the post-credit crunch bull market comes to a screeching halt, as it inevitably will at some point, it well be a technology crash that bring it down.
No one would deny that internet is now a huge business. That was underlined by a report by the Boston Consulting Group published last month. It found that in the UK alone, the online economy was now worth £100 billion a year, and accounted for 7.2% of GDP. If it was a separate economic sector, it would be bigger than construction, transport or the utilities.
Britain is not particularly advanced in its take-up of technology. What is true in this country will be true in every other advanced economy as well. This is a huge and growing chunk of the global economy.
It is absolutely right, therefore, that the companies that dominate the space should be sought after by investors. Anyone looking for long-term growth is going to want to own a slice of the leaders of the technology boom. Otherwise they risk getting left behind.
But hold on. Just because a company has good long-term growth prospects does not mean it is worth absolutely anything.
Take Amazon, for example. It was one of the pioneers of online retailing, and remains the best brand in that industry. I’d be surprised if there was a single reader of this magazine who wasn’t also an Amazon customer. Its latest figures were terrific: sales were ahead by 16% and profits were ahead by 39%. No doubt it will have a great Christmas. Even so, its share price has gone crazy. They have jumped from $25 a share in 2005 to $170 now. It is trading on multiple of 69 historic earnings, and 49 times the forecast earnings for next year.
Or take Apple. Sure, the iPhone is a big hit, and the iPad has been making a lot of noise. In the last five years it has got just about everything right, and there is probably no other business around that has so many devoted customers. Even so, there must be a limit to what it is worth. The shares are up by more than 50% this year alone. With a market cap of $290 billion, it is the second most valuable American business. It is the third most valuable company in the world, after Exxon Mobil and PetroChina. This, remember, is a company which, while it dominates the market for MP3 players, currently has just 4.1% of the mobile phone market, and slightly over 5% of the global market for personal computers. Those are hardly dominant market positions – but you would hardly guess that from its share price.
Much the same could be said of Google, or Facebook, or many smaller technology companies. They are good businesses, in a fast-growing sector of the economy. But they are also hitting crazy prices.
The trouble is, all the old problems with technology and internet companies remain.
For starters, there are still far too few barriers to entry. The days when a few bright Harvard students could start a website that would blow apart the industry, in the way that Mark Zuckerberg did when he started Facebook in 2004, may be over. Then again, they may not be. This is still an industry in its infancy. It is very easy for a few bright people to turn the web upside down with very little money to play with. That is great for them, and it is what makes high-tech so exciting. But is it very worrying for shareholders in the established companies. It is just too easy for a young entrepreneur to come along and blow you away.
Next, there are still relatively few sustainable business models. The online retailers make money, but often only by squeezing their suppliers to the bone. The internet is the most ruthless price comparison device ever invented, and one consequence of that is that margins will always be wafer thin. Businesses like Google may have a great advertising franchise right now – but there is no limit to ad space on the web in the way there is in the physical world. In truth, all online business models remain very flimsy.
Lastly, the technology moves so fast it is very hard for shareholders to make money. The founders and the venture capitalists who back them usually do pretty well. But by the time a company gets to the quoted market, its best days may already be behind it. It may never get to the stage of paying out steady dividends. Even Microsoft only paid its first dividend in 2003. Neither Google or Amazon have ever paid a dividend, nor are they planning to do so. By the time they do, they will probably look as far past their sell-by date as Microsoft does.
In reality, the tech rally looks overdone. It is bound to come shuddering down to earth again some time soon. And when it happens, it may well prove a trigger for a wider market correction.
Friday, 12 November 2010
Why we shouldn't bail-out the banks....
In the Spectator this week, I've been looking at Iceland. The lesson of its experience, I think, is that we probably never needed to bail-out the banks. The piece is here.
Tuesday, 9 November 2010
Why I Write Thrillers...
The International Thriller Writers website has started a series of online round-table discussions about thriller writing – sort of like a conference panel, bit without all the travelling.
I’ll be taking part in a couple of the upcoming discussions. But I think the first in the series looks really good: ‘Why Do You Read/Write Thrillers’.
It’s a fascinating issue for any writer. I mean, obviously I love thrillers. But I don’t only love thrillers. There are loads of different kinds of books I really enjoy, and I would be just as happy to write.
In the discussion, I think Todd Ritter gives the best answer when he says: “Reading a thriller that makes my pulse race takes me briefly into a world of danger and fear and excitement that I won’t experience in real life. It’s an escape and, well, a thrill”.
Still, that is more of an answer to the question of why you read thrillers rather than why you write them.
For me, I think the answer is that the thriller is such a great canvass. They are widescreen stories. They have action, characters, jokes and drama, but they can also take in politics, economics, war, technology, and international relations. They are very outwards looking books, which weave stories out of current events, but which also, at their best, are timeless. Other genres tend to be much smaller scale, rooted in one place or time.
But I guess every thriller writer will have a different answer to the question.
I’ll be taking part in a couple of the upcoming discussions. But I think the first in the series looks really good: ‘Why Do You Read/Write Thrillers’.
It’s a fascinating issue for any writer. I mean, obviously I love thrillers. But I don’t only love thrillers. There are loads of different kinds of books I really enjoy, and I would be just as happy to write.
In the discussion, I think Todd Ritter gives the best answer when he says: “Reading a thriller that makes my pulse race takes me briefly into a world of danger and fear and excitement that I won’t experience in real life. It’s an escape and, well, a thrill”.
Still, that is more of an answer to the question of why you read thrillers rather than why you write them.
For me, I think the answer is that the thriller is such a great canvass. They are widescreen stories. They have action, characters, jokes and drama, but they can also take in politics, economics, war, technology, and international relations. They are very outwards looking books, which weave stories out of current events, but which also, at their best, are timeless. Other genres tend to be much smaller scale, rooted in one place or time.
But I guess every thriller writer will have a different answer to the question.
Tuesday, 2 November 2010
Writing ....Fast or Slow
In case you hadn’t noticed, this is National Novel Writing Month. An American initiative, it aims to get people writing a whole novel during November. It doesn’t make much difference in my house, of course. Just about every month is novel writing month for me. But the Independent has an interesting take on it, listing some of the great books that have been written in a few weeks. I’m not sure why they included Sebastian Faulk’s James Bond pastiche ‘Devil May Cry’, because it is a laughably poor book. But it has to be admitted there are some great books there. ‘On The Road’ for example took only three weeks. So did ‘A Study in Scarlet’, and ‘A Christmas Carol’. Even Dostoyevsky managed to knock out ‘The Gambler’ in only 26 days – although he doesn’t strike you as a fast sort of a writer, in the way that Dickens does.
So is it better for writers to rattle out a book fairly quickly? I certainly think there is something to be said for it, particularly when you are writing thrillers. They are by definition pacey books. A sense of speed is one of the things that readers like about them. Like roller-coasters, they need to be designed to go very fast, and have lots of twists and turns. It is easier to create that kind of breathlessness when you are working at high speed yourself.
That said, you don’t want that to turn into sloppiness. The other key element of a thriller is structure. And that takes time to build. There is nothing worse than reading a book that is all over the place, because the writer hasn’t taken enough time to construct the plot, or do the research.
My own solution is to spend ages on the outline – the structure – but then to write pretty quickly. But I’m sure every writer has their own approach.
So is it better for writers to rattle out a book fairly quickly? I certainly think there is something to be said for it, particularly when you are writing thrillers. They are by definition pacey books. A sense of speed is one of the things that readers like about them. Like roller-coasters, they need to be designed to go very fast, and have lots of twists and turns. It is easier to create that kind of breathlessness when you are working at high speed yourself.
That said, you don’t want that to turn into sloppiness. The other key element of a thriller is structure. And that takes time to build. There is nothing worse than reading a book that is all over the place, because the writer hasn’t taken enough time to construct the plot, or do the research.
My own solution is to spend ages on the outline – the structure – but then to write pretty quickly. But I’m sure every writer has their own approach.
Monday, 1 November 2010
How To Fix The British Economy...
In my Money Week column this week, I've been looking at how to get the British economy growing again. Here's a taster....
After the cuts, the growth story. Addressing the Confederation of British Industry in Birmingham at the start of the week the Prime Minister David Cameron tried to sound a more optimistic note on the economy. It wasn’t just going to be about slashing benefits, closing down theatres and arts centres, and making everyone work until they are ninety-five. The economy would soon be expanding again.
That is surely right. The U.K. can’t simply cut its way out of a budget deficit of 11% of GDP, the highest in out peace-time history. It needs to start growing again, and at a faster rate than it did in the last decade.
Unless tax revenues rise, and jobs are created to replace those lost in the public sector, the books are never going to be balanced again. Rising unemployment and collapsing firms will mean that tax revenues keep on going down. Very quickly you get into a vicious circle of cutting spending, leading to lower tax receipts, which means even more cuts. Only growth is the way to break out of that.
But how? In fact, there are plenty of good places to start. Cut corporation tax to encourage investment: reform welfare aggressively to increase the labour force: deregulate those industries that are still too protected: and create tax-free zones in those areas of the country where the state has crowded out the private sector.
There is no reason why the economy shouldn’t expand at the same time as the budget deficit is bought under control. Despite the simplistic Keynesianism that seems to have gripped much of the media, it is perfectly possible for economies to expand at the same time that the government is reducing its spending. There are two reasons for that. The government doesn’t create any money itself, it merely takes it from other people, either by taxing them, or by borrowing it from them. So its spending decreases demand as much as it increases it. Next, as government gets smaller, there are more resources for the private sector to exploit. As a general rule, the smaller the state is, the faster an economy can grow,
Indeed, the last time the UK embarked on significant spending cuts – under John Major’s government in the early to mid-1990s – the UK grew at an impressive rate, and plenty of new jobs were created. Two million jobs were created under the Major government of 1992-1997, which more than made up for the 700,000 jobs that were cut out of the public sector. Under Mrs Thatcher’s Tory government of the 1980s, the experience was similar: after the peak of the recession or the early 1980s, 2.97 million new jobs were created by 1990, which more than made up for the two million lost in manufacturing. There is no reason to suppose the UK can’t repeat that experience in the coming decade.
But it isn’t going to happen by magic.
You can expect to hear a lot of waffle from the government about boosting infrastructure spending, encouraging more lending to small business, promoting investment in green technologies, and cracking down on short-termism in the City. Most of it is nonsense. The Government has no idea which ‘green technologies’ will work in the future, and whether this country has any real competitive advantage in any of them. People have been fretting about the short-termism of the financial markets since Victorian times without ever finding a realistic way of doing anything about it. Nor does the government have any idea whether the banks should be lending more to small businesses, and if so, which ones.
In fact, the steps the government should take to get growth going again are far simpler. Here are four good places to start.
One, cut corporation tax. In Ireland, a 12.5% corporate tax rate made the country a magnet for investment from all around the world. It could do the same for the UK. Over the coming few years, dozens of ambitious new companies are going to be emerging out of the fast-growing economies of Brazil, China, India and Russia. Just as the Japanese did a generation ago, they will be looking for a base to expand into Europe. Britain should be the natural destination for them, as it was for the Japanese. But it won’t happen unless there is plenty of incentive for them to come here – and a low tax rates trumps just about everything else.
Two, reform welfare aggressively. The huge numbers of Polish immigrants who came to this country and found work in the last decade tells us the UK can easily create jobs for people that want them. There is no easier way of boosting growth than increasing the employment rate; GDP, remember, is just output per worker, multiplied by the numbers of workers. If you can move some of the roughly five million people now living in benefits into jobs, you not only save on their welfare cheques, you also boost the economy. That is what reforming welfare can achieve.
Three, deregulate protected parts of the economy. The Thatcher government of the 1980s freed up the economy to generate growth – mostly notably through privatisations.. This government should do the same. The most obvious candidate is land and building. It's virtually impossible to build anything, particularly in the South-East, which is one reason we have, for example, a relatively small tourist industry Make it easier to get permission for new buildings, and the jobs will follow.
Finally, create tax-free zones. Big parts of the UK - Wales, the North-East,
Northern Ireland - have reached Soviet levels of state dependency. The public
sector has crowded out any kind of private economy. Nothing can grow when the
state accounts for 60% or more of GDP. But just slashing state spending won't
work by itself. Instead, create virtually tax-free zones to encourage the
private sector to move into those areas as spending is cut.
Growth is not about picking winners, or choosing which sectors of the economy to promote. No one really has any idea, and least of all the government. But if it frees up space for entrepreneurs, the economy will respond – it has in the past, and it will do so again.
After the cuts, the growth story. Addressing the Confederation of British Industry in Birmingham at the start of the week the Prime Minister David Cameron tried to sound a more optimistic note on the economy. It wasn’t just going to be about slashing benefits, closing down theatres and arts centres, and making everyone work until they are ninety-five. The economy would soon be expanding again.
That is surely right. The U.K. can’t simply cut its way out of a budget deficit of 11% of GDP, the highest in out peace-time history. It needs to start growing again, and at a faster rate than it did in the last decade.
Unless tax revenues rise, and jobs are created to replace those lost in the public sector, the books are never going to be balanced again. Rising unemployment and collapsing firms will mean that tax revenues keep on going down. Very quickly you get into a vicious circle of cutting spending, leading to lower tax receipts, which means even more cuts. Only growth is the way to break out of that.
But how? In fact, there are plenty of good places to start. Cut corporation tax to encourage investment: reform welfare aggressively to increase the labour force: deregulate those industries that are still too protected: and create tax-free zones in those areas of the country where the state has crowded out the private sector.
There is no reason why the economy shouldn’t expand at the same time as the budget deficit is bought under control. Despite the simplistic Keynesianism that seems to have gripped much of the media, it is perfectly possible for economies to expand at the same time that the government is reducing its spending. There are two reasons for that. The government doesn’t create any money itself, it merely takes it from other people, either by taxing them, or by borrowing it from them. So its spending decreases demand as much as it increases it. Next, as government gets smaller, there are more resources for the private sector to exploit. As a general rule, the smaller the state is, the faster an economy can grow,
Indeed, the last time the UK embarked on significant spending cuts – under John Major’s government in the early to mid-1990s – the UK grew at an impressive rate, and plenty of new jobs were created. Two million jobs were created under the Major government of 1992-1997, which more than made up for the 700,000 jobs that were cut out of the public sector. Under Mrs Thatcher’s Tory government of the 1980s, the experience was similar: after the peak of the recession or the early 1980s, 2.97 million new jobs were created by 1990, which more than made up for the two million lost in manufacturing. There is no reason to suppose the UK can’t repeat that experience in the coming decade.
But it isn’t going to happen by magic.
You can expect to hear a lot of waffle from the government about boosting infrastructure spending, encouraging more lending to small business, promoting investment in green technologies, and cracking down on short-termism in the City. Most of it is nonsense. The Government has no idea which ‘green technologies’ will work in the future, and whether this country has any real competitive advantage in any of them. People have been fretting about the short-termism of the financial markets since Victorian times without ever finding a realistic way of doing anything about it. Nor does the government have any idea whether the banks should be lending more to small businesses, and if so, which ones.
In fact, the steps the government should take to get growth going again are far simpler. Here are four good places to start.
One, cut corporation tax. In Ireland, a 12.5% corporate tax rate made the country a magnet for investment from all around the world. It could do the same for the UK. Over the coming few years, dozens of ambitious new companies are going to be emerging out of the fast-growing economies of Brazil, China, India and Russia. Just as the Japanese did a generation ago, they will be looking for a base to expand into Europe. Britain should be the natural destination for them, as it was for the Japanese. But it won’t happen unless there is plenty of incentive for them to come here – and a low tax rates trumps just about everything else.
Two, reform welfare aggressively. The huge numbers of Polish immigrants who came to this country and found work in the last decade tells us the UK can easily create jobs for people that want them. There is no easier way of boosting growth than increasing the employment rate; GDP, remember, is just output per worker, multiplied by the numbers of workers. If you can move some of the roughly five million people now living in benefits into jobs, you not only save on their welfare cheques, you also boost the economy. That is what reforming welfare can achieve.
Three, deregulate protected parts of the economy. The Thatcher government of the 1980s freed up the economy to generate growth – mostly notably through privatisations.. This government should do the same. The most obvious candidate is land and building. It's virtually impossible to build anything, particularly in the South-East, which is one reason we have, for example, a relatively small tourist industry Make it easier to get permission for new buildings, and the jobs will follow.
Finally, create tax-free zones. Big parts of the UK - Wales, the North-East,
Northern Ireland - have reached Soviet levels of state dependency. The public
sector has crowded out any kind of private economy. Nothing can grow when the
state accounts for 60% or more of GDP. But just slashing state spending won't
work by itself. Instead, create virtually tax-free zones to encourage the
private sector to move into those areas as spending is cut.
Growth is not about picking winners, or choosing which sectors of the economy to promote. No one really has any idea, and least of all the government. But if it frees up space for entrepreneurs, the economy will respond – it has in the past, and it will do so again.
Thursday, 28 October 2010
An Interview with the Northern Echo.
There's a great interview with me about the Death Force series in the Northern Echo. You can read it here.
Tuesday, 26 October 2010
Don't Diss Jane Austen....
Jane Austen has been getting some flak in the press, although I guess she can survive it. An academic has been studying her letters, noted how confused they are, and how different they are from her books, and concluded that her editor must have done a lot of re-writes on her books.
That story got lots of play in newspapers, and on the web. For some reason, people like the notion that authors don’t really write their own stuff, and there is some team of the people in the publishing house who actually put the book together
But anyway, whoever came up with this piece of research obviously knows very little about how writers actually work. There is a big difference between the writing we do for a living, which on the whole we take very seriously, edit and polish and worry about, and the writing we do like everyone else, which is dashed off without much thought.
Now obviously I don’t have much in common with Austen. I’m better at tank battles, for starters. Plus I’m still alive. But my e-mails, letters, Xmas cards, and indeed blog entries might well lead you to conclude that I couldn’t possibly have written my books either.
But, of course I did. And so, of course, did Jane Austen.
That story got lots of play in newspapers, and on the web. For some reason, people like the notion that authors don’t really write their own stuff, and there is some team of the people in the publishing house who actually put the book together
But anyway, whoever came up with this piece of research obviously knows very little about how writers actually work. There is a big difference between the writing we do for a living, which on the whole we take very seriously, edit and polish and worry about, and the writing we do like everyone else, which is dashed off without much thought.
Now obviously I don’t have much in common with Austen. I’m better at tank battles, for starters. Plus I’m still alive. But my e-mails, letters, Xmas cards, and indeed blog entries might well lead you to conclude that I couldn’t possibly have written my books either.
But, of course I did. And so, of course, did Jane Austen.
Tuesday, 12 October 2010
We Die Alone
One of the pleasures of writing for a living is that you come across all kinds of unexpected stuff. I’ve been getting stuck into the writing of ‘Ice Force’, the forth book in the Death Force series. As you might guess from the title, its set in the Arctic. To get my mind into the right place, I’ve been reading as much polar stuff as I get my hands on.
Most of it is exploration stories, and its useful for the atmosphere, and survival techniques. But not much has been written about Arctic warfare. Eventually, I stumbled across a book called ‘We Die Alone’, which was written in the early 1950s by David Howarth. It tells the story of Jan Baalstrud, a fairly ordinary Norwegian guy during the Second World War. He signs up with the British Army, and is sent on a commando mission into the far north of Norway. It goes terribly wrong from the start, the rest of his unit is killed, and he has to trek a massive distance chased by Nazis to escape.
The brilliance of the book is in its descriptions of Arctic warfare, and the endurance and fortitude of its hero. And it reminds you of what an extraordinary conflict WWII was, and how many ordinary people were caught up in extraordinary events.
The scene where Jan saws off his toes with a bread knife and a bottle of brandy to prevent them getting frostbite is memorable.
It’s now been reissued, with a forward by Andy McNab – and highly recommended.
Most of it is exploration stories, and its useful for the atmosphere, and survival techniques. But not much has been written about Arctic warfare. Eventually, I stumbled across a book called ‘We Die Alone’, which was written in the early 1950s by David Howarth. It tells the story of Jan Baalstrud, a fairly ordinary Norwegian guy during the Second World War. He signs up with the British Army, and is sent on a commando mission into the far north of Norway. It goes terribly wrong from the start, the rest of his unit is killed, and he has to trek a massive distance chased by Nazis to escape.
The brilliance of the book is in its descriptions of Arctic warfare, and the endurance and fortitude of its hero. And it reminds you of what an extraordinary conflict WWII was, and how many ordinary people were caught up in extraordinary events.
The scene where Jan saws off his toes with a bread knife and a bottle of brandy to prevent them getting frostbite is memorable.
It’s now been reissued, with a forward by Andy McNab – and highly recommended.
Monday, 11 October 2010
Why Ireland Should Follow Iceland
In my Money Week column this week, I've been looking at why Ireland should follow Iceland. Here's a taster...
A year ago, there was a joke in the City that went like this. “What’s the difference between Ireland and Iceland.? One letter and about six months.” But right now, you could turn that around, and make the punch line. “One letter, and a realistic economic policy.”
The Irish crisis goes from bad to worse. Despite making the deepest cuts to public spending imaginable, there is little sign of a durable economic recovery. Last week, the government raised the cost of the banking bail-out to 50 billion euros. Its deficit will amount to an eye-popping 32% of GDP this year.
In fact, the country should consider the Icelandic option instead. Go bust. Apologise to the rest of the world, but point out you can’t possibly pay all the debts your bankers ran up.
That is precisely what Iceland did. And despite the warnings of disaster, it is now looking in remarkably good shape. It is possible that the Irish, and indeed the rest of the world, have got it all wrong. You don’t have to bail out the bankers after all.
Two years ago, when the credit crunch hit, governments around the world bought into the idea that they had to rescue their banking system, no matter what the ultimate cost to the taxpayer. Lehman Brothers in the US was allowed to go under, but after that no significant bank was allowed to fail. In Britain, we rescued out Royal Bank of Scotland and Lloyds-HBOS. In France, BNP was helped out. Ireland was the most dramatic example. Its government was forced to bail out Anglo-Irish bank, Irish Nationwide, and others. On a worst-case scenario – and worst cases have a depressing way of coming true – the total bill for the rescues will come to 50 billion euros. The country has been close to bankrupted by the recklessness and irresponsibility of a small group of financiers. In other countries, the cost hasn’t been quite so horrendous, but taxpayers were still saddled with bills running into billions that will take a generation or more to pay off.
Only one country took an alternative route – Iceland. It is such a small place, and its bankers had run up such enormous liabilities, that it simply wasn’t feasible to keep all the Icelandic banks afloat. The country was bust.
The banks have successfully sold the argument that a country has to rescue its financial institutions when they run into trouble otherwise the whole nation will be ruined. The economy will collapse. The global markets will slam the door in your face. If the banks go down, so the argument goes, pretty soon we’ll all be living in caves again, scraping flints together to start a fire.
In fact, however, it turns out that a banking collapse isn’t so bad after all. In fact, Iceland is looking in remarkably good shape.
With some help from the IMF, the country is starting to recover. The economy will shrink by 1.9% this year but is forecast to grow by 3% in 2011. Interest rates are coming down again – the Icelandic central bank in September took interest rates down to 6.25%. Inflation is falling, and the Icelandic krona is rising again – it is up 17% against the euro this year. Capital controls, introduced during the emergency, are expected to start being lifted soon.
Despite all the warning of catastrophe, the country has survived and is putting itself back together again.
That isn’t to say it hasn’t suffered. Real incomes have fallen by about 20% since the financial collapse. Jobs have been lost on a huge scale, and savings wiped out. Ordinary people are angry enough about what happened to put the Prime Minister Geir Haarde, who presided overt the reckless expansion of the financial system, on trial for negligence.
But Iceland still functions. People still eat. The country has survived. By next year, it should start growing again. Modestly, no doubt, at first, but with a sharply devalued currency, and with credit starting to flow again, it should be able to pick itself up. It may be a surprisingly short time before it is allowed back into the global capital markets – after all, Russia defaulted on its debts amidst its financial crisis of 1998, but less than a decade later you could hardly move in Moscow for investment bankers looking for business. The financial markets don’t hold grudges. If you have money, they will do business with you.
So what lessons should we learn from the country’s experience?
Almost every government in the world has accepted the idea that they have to bail-out their banks if they run into trouble. But Iceland suggests it isn’t really true.
In fact, governments could simply protect domestic deposits. After that, they could just say they were very sorry, but there wasn’t enough money left to pay back all the debts the bankers had run up.
It would be better morally. Reckless, irresponsibly behaviour would not be rewarded. Bankers would have to think a lot harder about what risks they were taking, and what their consequences might be. And depositors would have to be a lot more careful about where they put their money, rather than just lazily assuming the government would pick up the tab for any losses.
And it would be better financially as well. Bad debts would get written off immediately, rather than remaining a millstone around the neck of the country for years to come.
Ireland is the most exposed country right now. The debts run up by its banks may well turn out to be quite literally unaffordable. But other countries should keep the Icelandic experience in mind next time a big bank gets into trouble.
It would be better just to let the banks collapse. So long as you protect domestic depositors, and keep the payment system working, it needn’t be the end of the world. Indeed, it may be well be quicker route to recovery the struggling for years to meet all the obligations run up by a handful of bankers.
A year ago, there was a joke in the City that went like this. “What’s the difference between Ireland and Iceland.? One letter and about six months.” But right now, you could turn that around, and make the punch line. “One letter, and a realistic economic policy.”
The Irish crisis goes from bad to worse. Despite making the deepest cuts to public spending imaginable, there is little sign of a durable economic recovery. Last week, the government raised the cost of the banking bail-out to 50 billion euros. Its deficit will amount to an eye-popping 32% of GDP this year.
In fact, the country should consider the Icelandic option instead. Go bust. Apologise to the rest of the world, but point out you can’t possibly pay all the debts your bankers ran up.
That is precisely what Iceland did. And despite the warnings of disaster, it is now looking in remarkably good shape. It is possible that the Irish, and indeed the rest of the world, have got it all wrong. You don’t have to bail out the bankers after all.
Two years ago, when the credit crunch hit, governments around the world bought into the idea that they had to rescue their banking system, no matter what the ultimate cost to the taxpayer. Lehman Brothers in the US was allowed to go under, but after that no significant bank was allowed to fail. In Britain, we rescued out Royal Bank of Scotland and Lloyds-HBOS. In France, BNP was helped out. Ireland was the most dramatic example. Its government was forced to bail out Anglo-Irish bank, Irish Nationwide, and others. On a worst-case scenario – and worst cases have a depressing way of coming true – the total bill for the rescues will come to 50 billion euros. The country has been close to bankrupted by the recklessness and irresponsibility of a small group of financiers. In other countries, the cost hasn’t been quite so horrendous, but taxpayers were still saddled with bills running into billions that will take a generation or more to pay off.
Only one country took an alternative route – Iceland. It is such a small place, and its bankers had run up such enormous liabilities, that it simply wasn’t feasible to keep all the Icelandic banks afloat. The country was bust.
The banks have successfully sold the argument that a country has to rescue its financial institutions when they run into trouble otherwise the whole nation will be ruined. The economy will collapse. The global markets will slam the door in your face. If the banks go down, so the argument goes, pretty soon we’ll all be living in caves again, scraping flints together to start a fire.
In fact, however, it turns out that a banking collapse isn’t so bad after all. In fact, Iceland is looking in remarkably good shape.
With some help from the IMF, the country is starting to recover. The economy will shrink by 1.9% this year but is forecast to grow by 3% in 2011. Interest rates are coming down again – the Icelandic central bank in September took interest rates down to 6.25%. Inflation is falling, and the Icelandic krona is rising again – it is up 17% against the euro this year. Capital controls, introduced during the emergency, are expected to start being lifted soon.
Despite all the warning of catastrophe, the country has survived and is putting itself back together again.
That isn’t to say it hasn’t suffered. Real incomes have fallen by about 20% since the financial collapse. Jobs have been lost on a huge scale, and savings wiped out. Ordinary people are angry enough about what happened to put the Prime Minister Geir Haarde, who presided overt the reckless expansion of the financial system, on trial for negligence.
But Iceland still functions. People still eat. The country has survived. By next year, it should start growing again. Modestly, no doubt, at first, but with a sharply devalued currency, and with credit starting to flow again, it should be able to pick itself up. It may be a surprisingly short time before it is allowed back into the global capital markets – after all, Russia defaulted on its debts amidst its financial crisis of 1998, but less than a decade later you could hardly move in Moscow for investment bankers looking for business. The financial markets don’t hold grudges. If you have money, they will do business with you.
So what lessons should we learn from the country’s experience?
Almost every government in the world has accepted the idea that they have to bail-out their banks if they run into trouble. But Iceland suggests it isn’t really true.
In fact, governments could simply protect domestic deposits. After that, they could just say they were very sorry, but there wasn’t enough money left to pay back all the debts the bankers had run up.
It would be better morally. Reckless, irresponsibly behaviour would not be rewarded. Bankers would have to think a lot harder about what risks they were taking, and what their consequences might be. And depositors would have to be a lot more careful about where they put their money, rather than just lazily assuming the government would pick up the tab for any losses.
And it would be better financially as well. Bad debts would get written off immediately, rather than remaining a millstone around the neck of the country for years to come.
Ireland is the most exposed country right now. The debts run up by its banks may well turn out to be quite literally unaffordable. But other countries should keep the Icelandic experience in mind next time a big bank gets into trouble.
It would be better just to let the banks collapse. So long as you protect domestic depositors, and keep the payment system working, it needn’t be the end of the world. Indeed, it may be well be quicker route to recovery the struggling for years to meet all the obligations run up by a handful of bankers.
Thursday, 7 October 2010
Fire Force Audio Book
I received the audip book of Fire Force today. It sounds great. You can buy it here.
Tuesday, 5 October 2010
Judging A Book By Its Cover,,,
One of the questions writers get asked is how much they say they have over their covers. To which the simple answer is: About as much say as we do over the weather.
My experience is that publishers send you the cover, and then whilst theoretically you could throw a tantrum and say you didn’t like it, that probably wouldn’t be a very welcome response.
Fortunately, I’ve never been in a position where I haven’t like a cover. I’ve just received the jacket for ‘Shadow Force’ and I think it’s fantastic: exciting, direct, in keeping with the previous two books in the series, but different enough to mark out its own space. (Then again, when a book is about mercenaries and pirates, it’s quite hard not to come up with a decent jacket).
And, of course, authors shouldn’t assume they know what is the best cover for their book. The editor and the illustrator will have their own take on it, and how it fits into the market, who it is going to appeal to, and how it will stand out from the rest of the books on the market.
That said, it would be awful to see a cover you really didn’t like on your book. After all, it is the most obvious statement about your work.
Tuesday, 28 September 2010
Putting Voices To Characters:
I got a call out of the blue the other day from an actor called Paul Panting. He was about to start recording an audio version of Fire Force, and he wanted to have a chat about accents, as well as checking the pronunciation of some of the military hardware.
As anyone who has read either ‘Death Force’ or ‘Fire Force’ will know, there is a big group of character in the stories, and they all come from quite different places. Steve is South London, working class. Ollie is a public schoolboy. Dan is an Australian, Maksim a Russian, Chris a South African, and so on.
We were discussing what kind of voices to give the different men, and how far too push it. In the books, I don’t really give them different accents all the time, in the sense that, Chris, for example doesn’t talk about ‘Seth Eefrica’. That’s partly because I’m not very good at writing accents, but also because it could turn into an accent fest, and get very silly and distracting. I prefer to let their characters comes through by the type of things they say, and how they react to situations, rather than by giving them funny voices.
Paul and I agreed that that was the way to do it in the audio version as well – even if it meant he didn’t get a chance to show off all those accents he learned in acting school.
But it also struck me that just hearing the audio book – which I’m really looking forward to – is going to change my perception of the characters. I already hear Steve and Ollie’s voice in my head when I’m writing them, but of course an actor’s interpretation will be slightly different to mine. It will be fascinating, but also a bit strange to hear a different take on all the guys in the unit. It may even change the way I think about them.
As anyone who has read either ‘Death Force’ or ‘Fire Force’ will know, there is a big group of character in the stories, and they all come from quite different places. Steve is South London, working class. Ollie is a public schoolboy. Dan is an Australian, Maksim a Russian, Chris a South African, and so on.
We were discussing what kind of voices to give the different men, and how far too push it. In the books, I don’t really give them different accents all the time, in the sense that, Chris, for example doesn’t talk about ‘Seth Eefrica’. That’s partly because I’m not very good at writing accents, but also because it could turn into an accent fest, and get very silly and distracting. I prefer to let their characters comes through by the type of things they say, and how they react to situations, rather than by giving them funny voices.
Paul and I agreed that that was the way to do it in the audio version as well – even if it meant he didn’t get a chance to show off all those accents he learned in acting school.
But it also struck me that just hearing the audio book – which I’m really looking forward to – is going to change my perception of the characters. I already hear Steve and Ollie’s voice in my head when I’m writing them, but of course an actor’s interpretation will be slightly different to mine. It will be fascinating, but also a bit strange to hear a different take on all the guys in the unit. It may even change the way I think about them.
Monday, 27 September 2010
Lay Off Vodafone.
In my Money Week column this week, I've been looking at how the City is constantly attacking Vodafone. Here is a taster...
What’s the most successful British company of the last twenty years? Tesco would be a contender, but it is still a marginal force outside of Britain, and lags Wal-Mart and Carrefour in the global retail market. Royal Bank of Scotland would have been a possibility until Sir Fred Goodwin blew the whole bank up. GlaxoSmithKline has been treading water since its 1980s to early 1990s heyday.
In fact the answer is easy. Vodafone.
The telecoms conglomerate has 347 million subscribers, and runs the largest mobile network in the world, measured by revenues, even if it is slightly behind China Mobile in terms of its total customer base. It operates networks in 31 countries, and has partners in another 44. Not bad for a company which three decades ago was just a small unit of the long-since forgotten Racal.
And yet you would hardly guess that from the way the City treats the business. The share price is beaten up. The chief executive Vittorio Colao is under constant pressure to dispose of assets. There is an endless stream of stories about how he should be selling his businesses in the US, or France, or somewhere else. Demands are tabled for special dividends and share buy-backs.
It is crazy – and an illustration of the City’s short-termism at its most destructive. There are plenty of criticisms that can justifiably be made of Vodafone. And yet the mobile industry is still in its infancy. Its play for global dominance may yet pay off. It may be able to take full control of units it holds minority stakes in. The City should be supporting once of the UK’s few industrial leaders, not trying to tear it apart.
The last week has seen yet another round of pressure on Colao to dismantle the empire that his predecessor Sir Chris Gent so expensively put together at the turn of the last decade. The company’s $6.5 billion stake in China Mobile was sold off, amid pressure for divestments. The 45% that it owns in Verizon Wireless, the largest mobile network in the US, is constantly under review. So to is the 44% stake it owns in the French operator SFR, of which Vivendi owns the other half. The 25% stake in Poland’s biggest mobile operator Polkomtel could be on the block. One shareholder group to lobby for the break-up of the business has been active since 2007. The demand for deals to boost shareholder returns builds all the time.
Some of the criticism is fair. Amid the telecoms bubble of the late 1990s, the company spent almost £200 billion on acquisitions. The $175 billion it paid for Germany’s Mannesmann remains one of the largest hostile takeovers ever attempted in Western Europe. Of the largest fifty deals of all time, Vodafone was a party to three of them. Shareholders didn’t see much of a return for all that frantic, and expensive, activity. Spending £200 billion only produced a company worth £85 billion today: not a great return, even if much of the money was in shares rather than cash. The share price has perked up this year – its dividend is one of the most generous and safest on the London market – but at just over 160p is still a long way short of the 444p it reached in March 2000.
But so what? All that is ancient history. The fact remains that whilst it may have over-paid for its acquisitions, Vodafone is today an industrial giant. No other mobile company comes close to its reach and scale in the mobile market: China Mobile may have more customers, but it doesn’t have anything like the same global reach.
There is still a good chance that its ambitions may pay off one day. No one knows precisely how the mobile industry will develop. It is, in truth, still in its infancy. It may end up destroying fixed line networks. It may merge with the computing and social networking industries. It may develop into something completely different. Whether having a global presence, in the way that Vodafone does, will pay off remains to be seen. It’s a gamble. But it is hardly a foolish one. Being the biggest gives you muscle in a market. It doesn’t guarantee success – there are plenty of big companies that completely mess up – but it’s a good place to be starting from.
Many of its minority stakes are frustrating. It hasn’t received any dividend on its Verizon shares since 2005: the two companies appear locked in a stand-off that makes the War of the Roses seem amicable and straightforward by comparison. Vivendi shows no interest in selling Vodafone majority control of the French operation they share. In some countries, it has already abandoned its ambitions. In Japan, for example, it sold out in 2006 after years of making little headway in one of the world’s most competitive, and technologically advanced, telecoms business.
But is still crazy to pressurize the company to sell out of successful businesses in France, Poland, and most crucially the US. It may be a long struggle to get control of Verizon. But the prize is surely worth having. Likewise, it doesn’t make much sense to sell out of the Polish market, which must surely have some of the best growth prospects in Europe. It may not have complete control of that business. But who is to say it won’t be able to win it one day.
Mobile telecoms is one of the world’s most lucrative and innovative consumer industries. For the UK to have the global leader is a remarkable achievement. It is an indictment of the City that it only wants to rip that apart – and can’t seem to see any virtue in supporting the company. The German stock market doesn’t try and break-up its most successful business, and neither does the Swiss or the Japanese. The London market should be more worried about supporting the country’s few world-class companies – and should spend a lot less time thinking about where the next deal is coming from.
What’s the most successful British company of the last twenty years? Tesco would be a contender, but it is still a marginal force outside of Britain, and lags Wal-Mart and Carrefour in the global retail market. Royal Bank of Scotland would have been a possibility until Sir Fred Goodwin blew the whole bank up. GlaxoSmithKline has been treading water since its 1980s to early 1990s heyday.
In fact the answer is easy. Vodafone.
The telecoms conglomerate has 347 million subscribers, and runs the largest mobile network in the world, measured by revenues, even if it is slightly behind China Mobile in terms of its total customer base. It operates networks in 31 countries, and has partners in another 44. Not bad for a company which three decades ago was just a small unit of the long-since forgotten Racal.
And yet you would hardly guess that from the way the City treats the business. The share price is beaten up. The chief executive Vittorio Colao is under constant pressure to dispose of assets. There is an endless stream of stories about how he should be selling his businesses in the US, or France, or somewhere else. Demands are tabled for special dividends and share buy-backs.
It is crazy – and an illustration of the City’s short-termism at its most destructive. There are plenty of criticisms that can justifiably be made of Vodafone. And yet the mobile industry is still in its infancy. Its play for global dominance may yet pay off. It may be able to take full control of units it holds minority stakes in. The City should be supporting once of the UK’s few industrial leaders, not trying to tear it apart.
The last week has seen yet another round of pressure on Colao to dismantle the empire that his predecessor Sir Chris Gent so expensively put together at the turn of the last decade. The company’s $6.5 billion stake in China Mobile was sold off, amid pressure for divestments. The 45% that it owns in Verizon Wireless, the largest mobile network in the US, is constantly under review. So to is the 44% stake it owns in the French operator SFR, of which Vivendi owns the other half. The 25% stake in Poland’s biggest mobile operator Polkomtel could be on the block. One shareholder group to lobby for the break-up of the business has been active since 2007. The demand for deals to boost shareholder returns builds all the time.
Some of the criticism is fair. Amid the telecoms bubble of the late 1990s, the company spent almost £200 billion on acquisitions. The $175 billion it paid for Germany’s Mannesmann remains one of the largest hostile takeovers ever attempted in Western Europe. Of the largest fifty deals of all time, Vodafone was a party to three of them. Shareholders didn’t see much of a return for all that frantic, and expensive, activity. Spending £200 billion only produced a company worth £85 billion today: not a great return, even if much of the money was in shares rather than cash. The share price has perked up this year – its dividend is one of the most generous and safest on the London market – but at just over 160p is still a long way short of the 444p it reached in March 2000.
But so what? All that is ancient history. The fact remains that whilst it may have over-paid for its acquisitions, Vodafone is today an industrial giant. No other mobile company comes close to its reach and scale in the mobile market: China Mobile may have more customers, but it doesn’t have anything like the same global reach.
There is still a good chance that its ambitions may pay off one day. No one knows precisely how the mobile industry will develop. It is, in truth, still in its infancy. It may end up destroying fixed line networks. It may merge with the computing and social networking industries. It may develop into something completely different. Whether having a global presence, in the way that Vodafone does, will pay off remains to be seen. It’s a gamble. But it is hardly a foolish one. Being the biggest gives you muscle in a market. It doesn’t guarantee success – there are plenty of big companies that completely mess up – but it’s a good place to be starting from.
Many of its minority stakes are frustrating. It hasn’t received any dividend on its Verizon shares since 2005: the two companies appear locked in a stand-off that makes the War of the Roses seem amicable and straightforward by comparison. Vivendi shows no interest in selling Vodafone majority control of the French operation they share. In some countries, it has already abandoned its ambitions. In Japan, for example, it sold out in 2006 after years of making little headway in one of the world’s most competitive, and technologically advanced, telecoms business.
But is still crazy to pressurize the company to sell out of successful businesses in France, Poland, and most crucially the US. It may be a long struggle to get control of Verizon. But the prize is surely worth having. Likewise, it doesn’t make much sense to sell out of the Polish market, which must surely have some of the best growth prospects in Europe. It may not have complete control of that business. But who is to say it won’t be able to win it one day.
Mobile telecoms is one of the world’s most lucrative and innovative consumer industries. For the UK to have the global leader is a remarkable achievement. It is an indictment of the City that it only wants to rip that apart – and can’t seem to see any virtue in supporting the company. The German stock market doesn’t try and break-up its most successful business, and neither does the Swiss or the Japanese. The London market should be more worried about supporting the country’s few world-class companies – and should spend a lot less time thinking about where the next deal is coming from.
Monday, 20 September 2010
How China Will Change Investment....
In my Money Week column this week, I've been looking at how the rise of China as the world's largest stock market will change investment. Here's a taster....
Any serious investor will already be comfortable with the emerging markets. They know the BRICs - Brazil, Russia, India and China - are doing a lot better than the traditional developed economies. They probably have some money in a fund specialising in those stocks. They might even have dipped into what the investment industry calls the frontier markets – places such as Pakistan, Tunisia, or Vietnam.
But over the next twenty years, the amount of attention they will need to pay to them is going to vastly increase. The emerging markets are going to stop emerging. They are going to turn into the establishment.
The mood of the global markets used to be set in London or New York. Over the next two decades, it will increasingly be set in Shanghai, Moscow on San Paulo. That is going to change the way the markets operate, the signals that suggest you should buy and sell, and the way that investors get rewarded. It will make investing a lot more scary, and the markets will be a lot a more volatile. But you need to get on the right side of that trend, or end up getting badly burned.
Last week, Goldman Sachs published a set of long-range forecasts for global stock market capitalisations. It predicted that by 2030, the value of emerging market
stocks would rise more than fivefold to $80 trillion. Their share of world equity capitalization would, the bank forecast, rise to 55% from 31% today. China will be the world’s largest market. Its total value, Goldman predicts, will increase to $41 trillion by 2030 from just $5 trillion today. It projects that the US market will be worth $34 trillion by then, making China easily the worlds biggest.
That will be a big change. Right now, the US stockmarket still accounts for almost 30% of global market capitalisation. China is just 7.2%, only a little ahead of the UK at 6.6%. Brazil accounts for only 2.8% of the world markets, just slightly more than Switzerland (although there are 205 million people in Brazil, compared to 7.6 million in Switzerland).
There is nothing very controversial about that. The emerging market economies are growing at a far healthier rate than either the US or Europe. The International Monetary Fund predicts the emerging economies will grow at 6.4% next year, compared with 2.4% for the developed world. They keep on growing at double or triple our rate every year. Nor is there any reason to expect that to slow down. The demographics of the developing world are in far better shape. So are government finances. And they still have a lot of catching up to do to match living standards in the West. It’s hardly a surprise that their stockmarket will overtake ours. A hundred years ago, New York surpassed London in importance. Fairly soon, Shanghai will overtake New York.
The interesting question is how that will impact on the way the markets work.
We are used to a world where the dominant investment themes and ideas are set mostly in New York, and partly in London. The Dow Jones index might just be thirty companies. Its rather strange composition might well mean that it isn’t even a very accurate reflection of the American economy, never mind what was happening in the rest of the world. As a general rule, however, if you knew what was happening to the Dow, you’d have a pretty good idea where the rest of the world’s markets were heading. Likewise, the FTSE is an oddball mix of companies, largely dominated by oil and mining companies, plus a big bank and drugs company. It doesn’t tell you much about the British economy. But if mining stocks are all the rage in London, you can be certain they will soon be just as popular in the rest of the world as well.
The themes in New York and London dominate the global markets everywhere. If dividends are in fashion in the U, they will be growing in importance globally. If stock buy-backs are a more popular way of rewarding investors in London, that will be replicated around the world.
Expect all that to change in the next twenty years. What will count is the mood in Shanghai, Moscow or San Paulo. The one number you really want to know won’t be the Dow: it will be the change in the Shanghai Composite. It will be the way those markets are developing, the way that money is flowing through them, and the demands that investors are making, which will set the tone for the global markets. European and American markets will take their cue from the emerging market, not the other way around.
That may well turn out to be scary for investors. It’s dated to portray the Shanghai index as an old-fashioned gangster market, with some mysterious Mr Chan sitting in a dark basement dictating whether it rises of falls with a click of his fingers. But it operates to very different rules to the stock markets of the West. It is heavily manipulated by the government. It has no clear and transparent rules governing what firms can be listed, and what they need to disclose to investors. It is not fully open to foreign investors. And the Chinese, who make up the bulk of investors, are inveterate gamblers, who have always thought stock markets should be casinos without the neon lights and cocktail bars rather than places where you try and seriously analyse a company’s likely future earnings. The critics who point out the New York and London market promote a casino culture, treating stocks like gambling chips, haven’t seen anything yet.
The stock market right now is volatile, short-termist and self-interested. But as it comes to be dominated by Shanghai and Moscow it is going to get a lot more so. The market will be dominated by the state, because that is the way that business works in China and Russia. It won’t be very interested in small investors, because they don’t count for very much in any of those markets. Nor are the standards of honesty likely to be the same.
There is no point complaining about that, however. It is where the money will be. The rules of investment are about to change, and investors need to make sure they understand that. Because one thing is always true: if you don’t understand the rules, then you haven’t much chance of winning the game.
Any serious investor will already be comfortable with the emerging markets. They know the BRICs - Brazil, Russia, India and China - are doing a lot better than the traditional developed economies. They probably have some money in a fund specialising in those stocks. They might even have dipped into what the investment industry calls the frontier markets – places such as Pakistan, Tunisia, or Vietnam.
But over the next twenty years, the amount of attention they will need to pay to them is going to vastly increase. The emerging markets are going to stop emerging. They are going to turn into the establishment.
The mood of the global markets used to be set in London or New York. Over the next two decades, it will increasingly be set in Shanghai, Moscow on San Paulo. That is going to change the way the markets operate, the signals that suggest you should buy and sell, and the way that investors get rewarded. It will make investing a lot more scary, and the markets will be a lot a more volatile. But you need to get on the right side of that trend, or end up getting badly burned.
Last week, Goldman Sachs published a set of long-range forecasts for global stock market capitalisations. It predicted that by 2030, the value of emerging market
stocks would rise more than fivefold to $80 trillion. Their share of world equity capitalization would, the bank forecast, rise to 55% from 31% today. China will be the world’s largest market. Its total value, Goldman predicts, will increase to $41 trillion by 2030 from just $5 trillion today. It projects that the US market will be worth $34 trillion by then, making China easily the worlds biggest.
That will be a big change. Right now, the US stockmarket still accounts for almost 30% of global market capitalisation. China is just 7.2%, only a little ahead of the UK at 6.6%. Brazil accounts for only 2.8% of the world markets, just slightly more than Switzerland (although there are 205 million people in Brazil, compared to 7.6 million in Switzerland).
There is nothing very controversial about that. The emerging market economies are growing at a far healthier rate than either the US or Europe. The International Monetary Fund predicts the emerging economies will grow at 6.4% next year, compared with 2.4% for the developed world. They keep on growing at double or triple our rate every year. Nor is there any reason to expect that to slow down. The demographics of the developing world are in far better shape. So are government finances. And they still have a lot of catching up to do to match living standards in the West. It’s hardly a surprise that their stockmarket will overtake ours. A hundred years ago, New York surpassed London in importance. Fairly soon, Shanghai will overtake New York.
The interesting question is how that will impact on the way the markets work.
We are used to a world where the dominant investment themes and ideas are set mostly in New York, and partly in London. The Dow Jones index might just be thirty companies. Its rather strange composition might well mean that it isn’t even a very accurate reflection of the American economy, never mind what was happening in the rest of the world. As a general rule, however, if you knew what was happening to the Dow, you’d have a pretty good idea where the rest of the world’s markets were heading. Likewise, the FTSE is an oddball mix of companies, largely dominated by oil and mining companies, plus a big bank and drugs company. It doesn’t tell you much about the British economy. But if mining stocks are all the rage in London, you can be certain they will soon be just as popular in the rest of the world as well.
The themes in New York and London dominate the global markets everywhere. If dividends are in fashion in the U, they will be growing in importance globally. If stock buy-backs are a more popular way of rewarding investors in London, that will be replicated around the world.
Expect all that to change in the next twenty years. What will count is the mood in Shanghai, Moscow or San Paulo. The one number you really want to know won’t be the Dow: it will be the change in the Shanghai Composite. It will be the way those markets are developing, the way that money is flowing through them, and the demands that investors are making, which will set the tone for the global markets. European and American markets will take their cue from the emerging market, not the other way around.
That may well turn out to be scary for investors. It’s dated to portray the Shanghai index as an old-fashioned gangster market, with some mysterious Mr Chan sitting in a dark basement dictating whether it rises of falls with a click of his fingers. But it operates to very different rules to the stock markets of the West. It is heavily manipulated by the government. It has no clear and transparent rules governing what firms can be listed, and what they need to disclose to investors. It is not fully open to foreign investors. And the Chinese, who make up the bulk of investors, are inveterate gamblers, who have always thought stock markets should be casinos without the neon lights and cocktail bars rather than places where you try and seriously analyse a company’s likely future earnings. The critics who point out the New York and London market promote a casino culture, treating stocks like gambling chips, haven’t seen anything yet.
The stock market right now is volatile, short-termist and self-interested. But as it comes to be dominated by Shanghai and Moscow it is going to get a lot more so. The market will be dominated by the state, because that is the way that business works in China and Russia. It won’t be very interested in small investors, because they don’t count for very much in any of those markets. Nor are the standards of honesty likely to be the same.
There is no point complaining about that, however. It is where the money will be. The rules of investment are about to change, and investors need to make sure they understand that. Because one thing is always true: if you don’t understand the rules, then you haven’t much chance of winning the game.
Tuesday, 14 September 2010
Thriller Writers Need More Relevance
One of my favourite themes is how thriller writers aren’t keeping up with the times. Britain and the US have been involved in two major and very nasty wars in the last decade, both in Iraq and Afghanistan. But you wouldn’t guess it from reading the thrillers on the shelves at your local WH Smith. The y are all old-style Cold War spy thrillers, stuff about hidden scrolls, serial killers, or lawyers. There is almost nothing about the wars we are fighting now.
There is a fascinating piece related to that in the New York Times. It points out that the most vibrant story-telling about contemporary warfare is in the video game industry, not in the thriller industry. Games like Medal of Honour and Call of Duty are far more relevant to what is happening in the world today than just about any book.
I’m trying to address that with my ‘Death Force’ series, which are bang up to date. But not enough writers are taking up that challenge. I suspect that is partly the fault of the publishers, who should be looking for more contemporary material. But it also because writers have lost the desire to be relevant.
The video game already poses a big challenge for writers. In many ways it is a more interesting narrative form. But surely it is silly to leave the field completely top gaming, rather than the novel
There is a fascinating piece related to that in the New York Times. It points out that the most vibrant story-telling about contemporary warfare is in the video game industry, not in the thriller industry. Games like Medal of Honour and Call of Duty are far more relevant to what is happening in the world today than just about any book.
I’m trying to address that with my ‘Death Force’ series, which are bang up to date. But not enough writers are taking up that challenge. I suspect that is partly the fault of the publishers, who should be looking for more contemporary material. But it also because writers have lost the desire to be relevant.
The video game already poses a big challenge for writers. In many ways it is a more interesting narrative form. But surely it is silly to leave the field completely top gaming, rather than the novel
Monday, 13 September 2010
Questioning Bank of England Independence....
Given the poor track record of the UK economy since 1997, I'm surprised more people have't been questioning whether an independent Bank of England was a great idea. I've been addressing that in my Money Week column this week. Here's a taster....
All of sudden, everyone seems to want to claim credit for giving the Bank of England its independence in 1997. In his memoirs, Tony Blair rather surprisingly said it was his idea all along. Until then, Gordon Brown had always insisted he thought of it. In response to Blair, the Labour leadership candidate Ed Balls popped up to say that he had the idea before anyone else.
The debate is fairly infantile. The idea of an independent central bank had been around for decades, so there was never anything very original about it. The interesting point is how they all assume it was a triumph, a move of such brilliance that the only real debate is about is authorship, not about its effectiveness. But that isn’t nearly as clear as they seem to think.
In reality, thirteen years on, the record is, to put it mildly, mixed. The independent Bank has presided over catastrophic period of British economic management. Growth was disappointing. A debt bubble built up. The housing market went crazy. The banking system collapsed. The inflation target has barely ever been met. It has hardly been an unqualified success.
That hasn’t stopped the Labour tribe squabbling over it. “When I suggested it, he readily agreed,” Blair writes his memoir “A Journey,” published last week, of the decision to give the Bank sole control over interest rates. “I allowed Gordon to make the statement and indeed gave him every paean of praise and status in becoming the major economic figure of the government. In truth, too, as with the Bank of England independence, the broad framework of the economy, never mind anything else, was set by me.”
Gordon Brown has on countless occasions claimed credit for Bank independence as one of the triumphs of his ten years as Chancellor. And Ed Balls has been just as keen to claim it was all his idea right from the start. He points to a pamphlet he wrote in 1992 advocating independence for the Bank. "When I presented detailed proposals to Gordon and Tony in 1995, they both agreed in principle it was the right thing to do," he said in an interview with the Sunday Times last weekend.
In reality, there was never anything particularly original about the idea. Independent central banks had worked very well for a long time in the US, Germany and elsewhere. You could argue the UK already had one in the late 1980s when the then Chancellor Nigel Lawson was shadowing the deutschemark – it just happened to be the Bundesbank rather than Bank of England. Ken Clarke as Chancellor under John Major had increased its powers over interest rates. The decision was part of an evolving policy, rather than a sudden and brilliant innovation.
And yet the fact that suddenly in 2010 Blair was to take credit for the Bank’s independence is, in truth, confirmation that the man knows nothing about economics. After all, looking back at the last thirteen years, it is hard to conclude that Bank independence has been a great success.
Growth has been fairly modest. Over the years 1997 to 2009, the British economy grew at an average annual rate of 2%, according to calculations by the National Institute of Economic and Social Research. Under the previous period of Conservative rule, from 1979 to 1997, it grew by 2.2%. Between 1960 and 1973 it grew by an average of 2.9%. So it’s only compared to the chaotic years of the mid-1970s that the growth figures for the years of Bank independence look good. Judged by the whole of the post-war period, 2% is a slightly disappointing rate.
An enormous debt bubble built up. According to McKinsey data, over the last decade the UK saw the largest increase in the ratio of debt to GDP of any developed economy. Total public and private debts rose from 350% of GDP at the start of the decade to 449% at its end.
The hosing market went crazy. Admittedly, the UK has always had a fairly bonkers property market. But the problem got worse under an independent Bank. Between 1979 and 1997, house prices grew by 146%, according to Nationwide figures. Between 1997 and 2009, they grew by 230%. Housing was already very expensive. On the Bank’s watch, it turned into a bubble.
The Bank didn’t have control of the financial system – that was hived off to the Financial Services Authority. Even so, the fact that the UK saw the most catastrophic series of banking collapse in more than a century since it was granted its independence is hardly a great advert for its role.
Nor has the Bank even been particularly successful at meeting its inflation target. It is mandated to maintain inflation at 2%, with no more than a 1% deviation in either direction. But it has consistently failed to deliver that. This year, for example, inflation has been above 3% for more than seven months in a row, and shows little sign of coming down. Few ordinary people looking at their household bills would conclude the record on rising prices had been great over the last thirteen years.
Naturally, it is unfair to blame the whole of that record on the Bank. The growth rate has more to do with the overall thrust of government policy than just interest rates. Against steadily rising taxes, and more and more regulation, the UK was always going to struggle to grow. The credit bubble was part of a global trend, even if the UK took part in it with even more enthusiasm than any other country. It is hard to disentangle where responsibility lies for the economic mismanagement of the last thirteen years between the government and the Bank.
But it is certainly possible that the Bank could have done better. Interest rates look to have been held too low for too long for the health of the economy. It fretted publicly about house prices, but shied away from doing anything about them. True, it’s hard to prick asset bubbles: but lots of things in life are hard, and that’s not really an adequate excuse for not trying.
Indeed, given the generally disappointing record of the British economy since the Bank was given its independence, it’s surprising that more people haven’t started to question whether it was really a good idea.
And it is even more surprising that so many politicians are so keen to claim credit for it.
All of sudden, everyone seems to want to claim credit for giving the Bank of England its independence in 1997. In his memoirs, Tony Blair rather surprisingly said it was his idea all along. Until then, Gordon Brown had always insisted he thought of it. In response to Blair, the Labour leadership candidate Ed Balls popped up to say that he had the idea before anyone else.
The debate is fairly infantile. The idea of an independent central bank had been around for decades, so there was never anything very original about it. The interesting point is how they all assume it was a triumph, a move of such brilliance that the only real debate is about is authorship, not about its effectiveness. But that isn’t nearly as clear as they seem to think.
In reality, thirteen years on, the record is, to put it mildly, mixed. The independent Bank has presided over catastrophic period of British economic management. Growth was disappointing. A debt bubble built up. The housing market went crazy. The banking system collapsed. The inflation target has barely ever been met. It has hardly been an unqualified success.
That hasn’t stopped the Labour tribe squabbling over it. “When I suggested it, he readily agreed,” Blair writes his memoir “A Journey,” published last week, of the decision to give the Bank sole control over interest rates. “I allowed Gordon to make the statement and indeed gave him every paean of praise and status in becoming the major economic figure of the government. In truth, too, as with the Bank of England independence, the broad framework of the economy, never mind anything else, was set by me.”
Gordon Brown has on countless occasions claimed credit for Bank independence as one of the triumphs of his ten years as Chancellor. And Ed Balls has been just as keen to claim it was all his idea right from the start. He points to a pamphlet he wrote in 1992 advocating independence for the Bank. "When I presented detailed proposals to Gordon and Tony in 1995, they both agreed in principle it was the right thing to do," he said in an interview with the Sunday Times last weekend.
In reality, there was never anything particularly original about the idea. Independent central banks had worked very well for a long time in the US, Germany and elsewhere. You could argue the UK already had one in the late 1980s when the then Chancellor Nigel Lawson was shadowing the deutschemark – it just happened to be the Bundesbank rather than Bank of England. Ken Clarke as Chancellor under John Major had increased its powers over interest rates. The decision was part of an evolving policy, rather than a sudden and brilliant innovation.
And yet the fact that suddenly in 2010 Blair was to take credit for the Bank’s independence is, in truth, confirmation that the man knows nothing about economics. After all, looking back at the last thirteen years, it is hard to conclude that Bank independence has been a great success.
Growth has been fairly modest. Over the years 1997 to 2009, the British economy grew at an average annual rate of 2%, according to calculations by the National Institute of Economic and Social Research. Under the previous period of Conservative rule, from 1979 to 1997, it grew by 2.2%. Between 1960 and 1973 it grew by an average of 2.9%. So it’s only compared to the chaotic years of the mid-1970s that the growth figures for the years of Bank independence look good. Judged by the whole of the post-war period, 2% is a slightly disappointing rate.
An enormous debt bubble built up. According to McKinsey data, over the last decade the UK saw the largest increase in the ratio of debt to GDP of any developed economy. Total public and private debts rose from 350% of GDP at the start of the decade to 449% at its end.
The hosing market went crazy. Admittedly, the UK has always had a fairly bonkers property market. But the problem got worse under an independent Bank. Between 1979 and 1997, house prices grew by 146%, according to Nationwide figures. Between 1997 and 2009, they grew by 230%. Housing was already very expensive. On the Bank’s watch, it turned into a bubble.
The Bank didn’t have control of the financial system – that was hived off to the Financial Services Authority. Even so, the fact that the UK saw the most catastrophic series of banking collapse in more than a century since it was granted its independence is hardly a great advert for its role.
Nor has the Bank even been particularly successful at meeting its inflation target. It is mandated to maintain inflation at 2%, with no more than a 1% deviation in either direction. But it has consistently failed to deliver that. This year, for example, inflation has been above 3% for more than seven months in a row, and shows little sign of coming down. Few ordinary people looking at their household bills would conclude the record on rising prices had been great over the last thirteen years.
Naturally, it is unfair to blame the whole of that record on the Bank. The growth rate has more to do with the overall thrust of government policy than just interest rates. Against steadily rising taxes, and more and more regulation, the UK was always going to struggle to grow. The credit bubble was part of a global trend, even if the UK took part in it with even more enthusiasm than any other country. It is hard to disentangle where responsibility lies for the economic mismanagement of the last thirteen years between the government and the Bank.
But it is certainly possible that the Bank could have done better. Interest rates look to have been held too low for too long for the health of the economy. It fretted publicly about house prices, but shied away from doing anything about them. True, it’s hard to prick asset bubbles: but lots of things in life are hard, and that’s not really an adequate excuse for not trying.
Indeed, given the generally disappointing record of the British economy since the Bank was given its independence, it’s surprising that more people haven’t started to question whether it was really a good idea.
And it is even more surprising that so many politicians are so keen to claim credit for it.
Wednesday, 8 September 2010
Fact vs Fiction....
Fact vs Fiction:
I haven’t been writing very much on this blog, largely because I’ve been rattling out a quick book on the Greek crisis for Wiley. The book was written at huge speed – a couple of months – and will be out in November. That was exhilarating in itself. As most of us know, the process of writing can be pretty leisurely. It takes a long time to write a book, and just as long for the publisher to bring it out. This one will be about five months total from Wiley getting in touch about the idea to the book hitting the shelves.
For me, it was also a chance to reflect on the difference between writing fact and fiction. I wrote a couple of business books much earlier in my career, but this was the first one I had done since I took up writing fiction.
It is a very different process. Obviously, the non-fiction book involves a lot more research. On the other hand, the story is just there. You collect the facts, marshal them into a coherent argument, then tell the story.
In fiction, you have to create every detail of the story yourself. You have to create the characters, and make them real. You need twists and denouements. It’s far harder work.
The funny thing is, most people looking at ‘Bust’ would assume it was a far more serious book than, say, ‘Fire Force’. But a book like ‘Fire Force’ is far more difficult to write.
I haven’t been writing very much on this blog, largely because I’ve been rattling out a quick book on the Greek crisis for Wiley. The book was written at huge speed – a couple of months – and will be out in November. That was exhilarating in itself. As most of us know, the process of writing can be pretty leisurely. It takes a long time to write a book, and just as long for the publisher to bring it out. This one will be about five months total from Wiley getting in touch about the idea to the book hitting the shelves.
For me, it was also a chance to reflect on the difference between writing fact and fiction. I wrote a couple of business books much earlier in my career, but this was the first one I had done since I took up writing fiction.
It is a very different process. Obviously, the non-fiction book involves a lot more research. On the other hand, the story is just there. You collect the facts, marshal them into a coherent argument, then tell the story.
In fiction, you have to create every detail of the story yourself. You have to create the characters, and make them real. You need twists and denouements. It’s far harder work.
The funny thing is, most people looking at ‘Bust’ would assume it was a far more serious book than, say, ‘Fire Force’. But a book like ‘Fire Force’ is far more difficult to write.
Monday, 6 September 2010
Why Humans Are Better At Investment Than Computers....
In my Money Week column this week, I've been looking at why humans are better at investment than humans. Here's a taster.
Two years on from the start of the credit crunch, it is easy to observe that not a great deal has really changed. The banks have gone back to paying big bonuses, the traders and dealers are as speculative as ever, and the hedge funds are still raking in fortunes.
Still, one corner of the capital markets has been hammered hard – the so-called-called ‘quant funds’.
A few years back, the intellectually super-charged hedge funds that used mind-bogglingly complex formulas to trade assets and make huge profits for their owners were the hottest sector on both the City and Wall Street.
But now the combined assets of the quant funds are down from around $1.2 trillion at the industry’s peak to around $470 billion now, a drop of more than 60%, according to data from the research firm eVestment Alliance. Around a quarter of the quant funds have closed in the last two years, according to figures from Lipper Tass.
In part that tells us that investing styles go in and out of fashion. Sometimes people want gurus, sometimes charts, other times they want geo-political trends, and so on.
But it also tells us something more interesting.
Despite the best efforts of thousands of incredibly bright people, and despite the billions of dollars at stake, no one has ever really managed to mechanize the markets. They remain stubbornly human.
The quants, as they became known in the markets, were obsessed with taking the human element out of their trading strategists. The scoured university campuses, taking astro-physicists and mathematicians blinking out of the library, and paying them hundreds of thousands to have a shave, put on a suit (or at least some Boss chinos) and sit all day in an office on Mayfair’s hedge fund alley.
Once installed, they came up with programmes that could trade on minute price discrepancies between different markets, and make a fortune on the results. Or the scoured the record books for past price relationships, and when they found them, built trading computers that could exploit them.
Sometimes they came up with interesting results. The price of oil, for example, expressed in gold has remained virtually static for generations: as soon as it deviated from that norm, there was a trading opportunity.
But, although they had some big successes in the bull market, the quants were undone by the crash. None of the complex mathematical models they built predicted the credit crunch. All the expensive computer programmes were about as useful as a bucket and spade in Birmingham. The quants reputation was largely destroyed. The reason the value of the funds fell so fast was because they preformed so poorly, and because disillusioned investors withdrew their money.
In fact, the markets remain impossible to mechanize. If you could build a programme that predicted the markets, you would make, quite literally, billions. Yet no one ever manages it. Indeed, the harder they try, the worse the results usually are. In the 1990s, another hedge fund, Longer Term Capital Management, which had more Nobel prize winners on board than Man City have expensive footballers, collapsed with vast losses and bought down the markets with it.
There are three reasons why the market remains so defiantly human – and so resistant to smart mathematical models.
First, the markets are chaotic. Computers are very good at capturing fairly straight-forward relationships. They are very bad at modeling complex ones. Chaos theory is one explanation for that. For example, a butterfly flaps its wings in China, and it causes a thunderstorm in Britain. There are so many complex inputs making up the way weather works, you can’t hope to capture them all. It’s the same with the markets. A mortgage defaults in Florida, and a month later The Royal Bank of Scotland is bust. They are inherently chaotic, and so incredibly hard to predict.
Secondly, computer programmes are very bad at capturing human reactions and emotions – and the more people are involved the worse they get. That’s why they are good at chess, but not very good at bridge or poker: both card games are essentially about judging what your opponent will do, whilst chess is mainly about crunching a lot of numbers. The markets are much more like a card game than a board game. Investment decisions, and hence the direction of the markets, are driven as much by emotion as anything else. Sentiment is strong some months, and weak in others, even if not very much really seems to have changed in the meantime. It is tough for any computer programme to understand that, let alone model it, and start building it into its predictions.
Finally, behavior changes. The way that investors behave and the markets respond, evolves all the time. It isn’t static, or predictable, like the way the moon revolves around the earth. It will be different today from yesterday, and different again tomorrow. The quant funds were building predictive models based on the way market behaved in the past. But, whilst interesting, they didn’t really discover anything very useful. Just because a price has moved in a certain way historically does not mean it will move the same way in the future.
The lesson is a simple one. The markets will remain an arena for great traders, with an instinctive feel for where assets prices are going. They can’t be predicted with any kind of precision by computer programmes, no matter how much brain-power has gone into creating them.
And all those astro-physicists who for a few years could drive around in Porsches as they got paid million by a hedge fund can go back to the dusty poverty of the university library.
Still, there is one comforting thought. You might find it fiendishly difficult to predict what any market will do in the next years. But the smartest brains from the best universities couldn’t do it either – the markets caught them out, the same way they usually do the rest of us.
Two years on from the start of the credit crunch, it is easy to observe that not a great deal has really changed. The banks have gone back to paying big bonuses, the traders and dealers are as speculative as ever, and the hedge funds are still raking in fortunes.
Still, one corner of the capital markets has been hammered hard – the so-called-called ‘quant funds’.
A few years back, the intellectually super-charged hedge funds that used mind-bogglingly complex formulas to trade assets and make huge profits for their owners were the hottest sector on both the City and Wall Street.
But now the combined assets of the quant funds are down from around $1.2 trillion at the industry’s peak to around $470 billion now, a drop of more than 60%, according to data from the research firm eVestment Alliance. Around a quarter of the quant funds have closed in the last two years, according to figures from Lipper Tass.
In part that tells us that investing styles go in and out of fashion. Sometimes people want gurus, sometimes charts, other times they want geo-political trends, and so on.
But it also tells us something more interesting.
Despite the best efforts of thousands of incredibly bright people, and despite the billions of dollars at stake, no one has ever really managed to mechanize the markets. They remain stubbornly human.
The quants, as they became known in the markets, were obsessed with taking the human element out of their trading strategists. The scoured university campuses, taking astro-physicists and mathematicians blinking out of the library, and paying them hundreds of thousands to have a shave, put on a suit (or at least some Boss chinos) and sit all day in an office on Mayfair’s hedge fund alley.
Once installed, they came up with programmes that could trade on minute price discrepancies between different markets, and make a fortune on the results. Or the scoured the record books for past price relationships, and when they found them, built trading computers that could exploit them.
Sometimes they came up with interesting results. The price of oil, for example, expressed in gold has remained virtually static for generations: as soon as it deviated from that norm, there was a trading opportunity.
But, although they had some big successes in the bull market, the quants were undone by the crash. None of the complex mathematical models they built predicted the credit crunch. All the expensive computer programmes were about as useful as a bucket and spade in Birmingham. The quants reputation was largely destroyed. The reason the value of the funds fell so fast was because they preformed so poorly, and because disillusioned investors withdrew their money.
In fact, the markets remain impossible to mechanize. If you could build a programme that predicted the markets, you would make, quite literally, billions. Yet no one ever manages it. Indeed, the harder they try, the worse the results usually are. In the 1990s, another hedge fund, Longer Term Capital Management, which had more Nobel prize winners on board than Man City have expensive footballers, collapsed with vast losses and bought down the markets with it.
There are three reasons why the market remains so defiantly human – and so resistant to smart mathematical models.
First, the markets are chaotic. Computers are very good at capturing fairly straight-forward relationships. They are very bad at modeling complex ones. Chaos theory is one explanation for that. For example, a butterfly flaps its wings in China, and it causes a thunderstorm in Britain. There are so many complex inputs making up the way weather works, you can’t hope to capture them all. It’s the same with the markets. A mortgage defaults in Florida, and a month later The Royal Bank of Scotland is bust. They are inherently chaotic, and so incredibly hard to predict.
Secondly, computer programmes are very bad at capturing human reactions and emotions – and the more people are involved the worse they get. That’s why they are good at chess, but not very good at bridge or poker: both card games are essentially about judging what your opponent will do, whilst chess is mainly about crunching a lot of numbers. The markets are much more like a card game than a board game. Investment decisions, and hence the direction of the markets, are driven as much by emotion as anything else. Sentiment is strong some months, and weak in others, even if not very much really seems to have changed in the meantime. It is tough for any computer programme to understand that, let alone model it, and start building it into its predictions.
Finally, behavior changes. The way that investors behave and the markets respond, evolves all the time. It isn’t static, or predictable, like the way the moon revolves around the earth. It will be different today from yesterday, and different again tomorrow. The quant funds were building predictive models based on the way market behaved in the past. But, whilst interesting, they didn’t really discover anything very useful. Just because a price has moved in a certain way historically does not mean it will move the same way in the future.
The lesson is a simple one. The markets will remain an arena for great traders, with an instinctive feel for where assets prices are going. They can’t be predicted with any kind of precision by computer programmes, no matter how much brain-power has gone into creating them.
And all those astro-physicists who for a few years could drive around in Porsches as they got paid million by a hedge fund can go back to the dusty poverty of the university library.
Still, there is one comforting thought. You might find it fiendishly difficult to predict what any market will do in the next years. But the smartest brains from the best universities couldn’t do it either – the markets caught them out, the same way they usually do the rest of us.
Wednesday, 1 September 2010
Zero Rates Have Lasted Too Long....
In my Money Week column this week, I've been discussing how almost zero interest rates have lasted too long. Here's a taster....
On March 5th last year the Bank of England cut interest rates to just 0.5%. It was the lowest rate in the Bank’s 315-year history. Accompanied by a package of asset purchases, it was part of an emergency package designed to shore up and economy which, at that point, appeared to be teetering on the edge of an abyss.
In the last few months, however, something very interesting has happened. Near-zero rates have started to become the ‘new normal’. Rates have stayed at that all-time low for 17 straight months now. No one thinks that they are about to rise any time soon.
And yet, the evidence is starting to emerge that the market is beginning to be seriously distorted by money that is virtually free. An M&A boom is bubbling up, created by cheap money. The housing market is kept buoyant by bargain-basement mortgages. Savers are abandoning deposits accounts for corporate bonds.
If rates stay at these levels much longer, behaviour will have changed so much that the shock once they start to get back to realistic levels again is going to be huge.
In the three centuries that it has been in existence the Bank has never pushed rates as low as this before. As a temporary, emergency measure, it was perfectly understandable. The credit crunch had tipped the global economy into a deep recession. There was plenty of talk of the threat of deflation (even if there was not much actually evidence of it). Something had to be done. And pushing rates down to almost zero was about the only weapon the Bank had available.
But now that low rates have been maintained for nearly a year and half, they are starting to be accepted as completely normal. For the first few months, people realised they were exception. Now they just think that is what money costs.
There is little sign of rates rising soon. At the last meeting of the Monetary Policy Committee, only one member, Andrew Sentence, voted for a rate rise, and that was only by a quarter of one percent. The rest of the MPC seems happy enough to keep rates on hold for the foreseeable future.
And yet at these levels, money is not just cheap: it is, in real terms, effectively free. Inflation remains stuck stubbornly above 3%. The real interest rate is negative, and has been for more than a year now.
A basic rule of economics is that once you change the price of something, you change behaviour as well. With money now virtually free, three things are happening.
First, there is a big upsurge in M&A. BHP Billiton’s $43 billion bid for Potash is only one example. This August has seen more takeover deals than any August since 1999, at the height of the dotcom boom. No doubt the autumn will be even busier.
It makes sense. If a company can borrow money at less than 1% and go out and buy a business yielding 6% or 7% a year, then it isn’t very hard to make a deal stack up financially. When chief executive’s thought 0.5% rates were temporary, they held their fire. Now they are looking permanent, they are starting to do deals based on very cheap money.
Likewise, the housing market remains suspiciously buoyant despite the slump in the economy. Again, it is being propped up by ultra-cheap money. There aren’t any mortgages available at 0.5%, but there are plenty of trackers available at less than 3%. Initially, record low rates were a windfall for home-owners. Their monthly mortgage payments came down dramatically. By now, however, we should assume that many people have bough properties on the assumption they will be paying about 3% a year interest on their mortgage forever.
Savers, too, have started to change their behaviour. There isn’t much point in putting your money into an account paying 0.25% a year or less. It’s hardly worth the trouble of filling in the form. There are plenty of anecdotal reports that savers are switching to corporate bond finds, or high-yielding equities, in record numbers. It is hard to blame them. There isn’t any point in collecting practically nothing on a deposit account when you could be making 5% or more on a bond fund.
The trouble is, as near zero rates come to be accepted as completely normal, behaviour is changing in all sorts of ways. People are starting to act as if those rates will remain indefinitely.
But, of course, they won’t.
The one thing you can say for certain is that if a price is at a three century low, there is nothing normal about it. It’s clearly exceptional. The think tank Policy Exchange predicted last weekend that interest rates could be back up to 8% in two years, as the impact of the huge expansion of the money supply fed through into prices. That may or may not be accurate. Whether it is or not, however, a return to a more normal rate of around 5% is guaranteed at some point in the next two or three years.
When it happens, it is going to be a huge shock to the system. Companies will have made huge takeover deals based on free money. People will have bought houses thinking they would only have to pay 3% on their debts. Savers will be invested in bond funds that may well fall sharply in value once rates start to rise again. The economy will have adjusted to near zero rates – and it will be extremely painful to have to start paying for borrowing again.
The Bank of England probably made the right decision in slashing rates close to zero. The economy did need rescuing. But by allowing that rate to remain in place so long, it is taking a big risk – that companies and individuals get so used to free money, they won’t be able to cope once rates do finally start to go up again.
On March 5th last year the Bank of England cut interest rates to just 0.5%. It was the lowest rate in the Bank’s 315-year history. Accompanied by a package of asset purchases, it was part of an emergency package designed to shore up and economy which, at that point, appeared to be teetering on the edge of an abyss.
In the last few months, however, something very interesting has happened. Near-zero rates have started to become the ‘new normal’. Rates have stayed at that all-time low for 17 straight months now. No one thinks that they are about to rise any time soon.
And yet, the evidence is starting to emerge that the market is beginning to be seriously distorted by money that is virtually free. An M&A boom is bubbling up, created by cheap money. The housing market is kept buoyant by bargain-basement mortgages. Savers are abandoning deposits accounts for corporate bonds.
If rates stay at these levels much longer, behaviour will have changed so much that the shock once they start to get back to realistic levels again is going to be huge.
In the three centuries that it has been in existence the Bank has never pushed rates as low as this before. As a temporary, emergency measure, it was perfectly understandable. The credit crunch had tipped the global economy into a deep recession. There was plenty of talk of the threat of deflation (even if there was not much actually evidence of it). Something had to be done. And pushing rates down to almost zero was about the only weapon the Bank had available.
But now that low rates have been maintained for nearly a year and half, they are starting to be accepted as completely normal. For the first few months, people realised they were exception. Now they just think that is what money costs.
There is little sign of rates rising soon. At the last meeting of the Monetary Policy Committee, only one member, Andrew Sentence, voted for a rate rise, and that was only by a quarter of one percent. The rest of the MPC seems happy enough to keep rates on hold for the foreseeable future.
And yet at these levels, money is not just cheap: it is, in real terms, effectively free. Inflation remains stuck stubbornly above 3%. The real interest rate is negative, and has been for more than a year now.
A basic rule of economics is that once you change the price of something, you change behaviour as well. With money now virtually free, three things are happening.
First, there is a big upsurge in M&A. BHP Billiton’s $43 billion bid for Potash is only one example. This August has seen more takeover deals than any August since 1999, at the height of the dotcom boom. No doubt the autumn will be even busier.
It makes sense. If a company can borrow money at less than 1% and go out and buy a business yielding 6% or 7% a year, then it isn’t very hard to make a deal stack up financially. When chief executive’s thought 0.5% rates were temporary, they held their fire. Now they are looking permanent, they are starting to do deals based on very cheap money.
Likewise, the housing market remains suspiciously buoyant despite the slump in the economy. Again, it is being propped up by ultra-cheap money. There aren’t any mortgages available at 0.5%, but there are plenty of trackers available at less than 3%. Initially, record low rates were a windfall for home-owners. Their monthly mortgage payments came down dramatically. By now, however, we should assume that many people have bough properties on the assumption they will be paying about 3% a year interest on their mortgage forever.
Savers, too, have started to change their behaviour. There isn’t much point in putting your money into an account paying 0.25% a year or less. It’s hardly worth the trouble of filling in the form. There are plenty of anecdotal reports that savers are switching to corporate bond finds, or high-yielding equities, in record numbers. It is hard to blame them. There isn’t any point in collecting practically nothing on a deposit account when you could be making 5% or more on a bond fund.
The trouble is, as near zero rates come to be accepted as completely normal, behaviour is changing in all sorts of ways. People are starting to act as if those rates will remain indefinitely.
But, of course, they won’t.
The one thing you can say for certain is that if a price is at a three century low, there is nothing normal about it. It’s clearly exceptional. The think tank Policy Exchange predicted last weekend that interest rates could be back up to 8% in two years, as the impact of the huge expansion of the money supply fed through into prices. That may or may not be accurate. Whether it is or not, however, a return to a more normal rate of around 5% is guaranteed at some point in the next two or three years.
When it happens, it is going to be a huge shock to the system. Companies will have made huge takeover deals based on free money. People will have bought houses thinking they would only have to pay 3% on their debts. Savers will be invested in bond funds that may well fall sharply in value once rates start to rise again. The economy will have adjusted to near zero rates – and it will be extremely painful to have to start paying for borrowing again.
The Bank of England probably made the right decision in slashing rates close to zero. The economy did need rescuing. But by allowing that rate to remain in place so long, it is taking a big risk – that companies and individuals get so used to free money, they won’t be able to cope once rates do finally start to go up again.
Tuesday, 24 August 2010
How to Read the Uk Economy....
In my Money Week column this week, I've been discussing how we need to look at a different set of indicators to get a feel for how the UK economy is doing. Here's a taster....
Is Britain about to face a double-dip recession? The media and the economic forecasters in the City have been in a flap about that much of the past month. House prices have stalled, and may be falling again. Consumer spending is sluggish. There are big cuts in government spending coming down the track. It isn’t hard to make the case that the reasonably robust bounce back from the collapse of 2009 we are witnessing right now might be about to go into reverse, and that another recession is just around the corner.
Then again, perhaps we are looking in all the wrong places for signs of life from the British economy. Over the last twenty-five years we became used to watching house prices and the retail sales figures to get a sense of where the economy was going. That worked perfectly well during a property, debt-fuelled bubble. But that economy has vanished forever. The British economy of the coming decade will have to be based on exports, small businesses, and making things. And to get an idea of how that is going we will need to get used to a very different set of indicators – the trade balance, the savings ratio, company formations, and private sector job creation. Those are the numbers that will tell us whether the economy is showing signs of life or not.
For most of the past couple of decades, you could get a pretty good idea of where the economy was going just by looking at the monthly mortgage approvals figures. If people were borrowing more money, pretty soon they’d be buying a new house, and a few weeks later house prices would go up. All the people who’d bought new houses would soon be loading up their credit card with all the stuff they needed to put into it. And everyone else would see how much their house had gone up in value in the past year, book themselves a winter holiday to celebrate, then head down to the shopping mall to buy some new clothes for the trip.
The sequence was pretty simple. In an economy based on property and ever rising levels of debt, if you just kept an eye on house prices, and the sales figures from a couple of the big high street chains, you’d have a very accurate idea of how the economy was doing.
But along with the rest of the developed world, the UK has reached the end of that road. The easy-money days are behind us. The credit has all dried up. The British economy might do well or badly in the next decade, but the one thing it won’t do is go through another house price, retail spending led consumer boom. If it is to have any chance of prospering, it needs to create real wealth in the private sector instead.
So what indicators should we be looking at instead?
The trade balance is good place to start. It used to be headline news every month, but has been largely forgotten about in the last twenty years. But with a big depreciation of the pound, the British should be making things and selling them around the world. They should be importing a lot less as well, as they tighten their belts and concentrate on repairing their balance sheets rather than getting a bigger flat-screen TV to put on the wall. Both should result in an improving trade balance.
The savings ratio might be another good indicator. The UK needs to save more and spend less, and much of that saving needs to be directed towards re-building the economy so that it is less reliant on financial services and government spending.
So too is the rate of company formation, and the rate of bankruptcies. Again, the numbers of new small companies getting started, and the percentage of them that fail or flourish, will be a clear measure of whether a fresh wave of entrepreneurs are establishing new industries. The rate of private sector job creation will be important as well. For most of the last decade nearly all the new jobs were in the public sector. In the next ten years, it will be private companies, and mostly small ones, that have to create the jobs.
As it happens, most of those figures are looking pretty good right now. The trade gap is indeed starting to narrow. Last month, exports rose by more than 4%, and imports by only 1%, producing an unexpected narrowing of the deficit. Exports to non-EU countries were the highest on record. Our car exports were up 11% month on month. That’s pretty encouraging.
Manufacturing is currently up 4.1% year on year, with the biggest increases in the machinery and equipment industries. Company formation figures are not regularly produced (and many new companies are just tax reduction vehicles). But company winding up orders in the court s are down 17% year-on-year, according to the latest figures from the Office for National Statistics. That’s a good sign as well.
Unemployment is down slightly, and more jobs are being created. Most importantly they are in the private sector. The numbers of people employed in the public sector fell by 7,000 in the first quarter of this year, whilst private sector employment rose by 18,000. It is a small step, admittedly, particularly when you remember that 29 million people have jobs in the UK. But a small step is still valuable when it is in the right direction. Britain needs a lot more private sector job creation in the years ahead.
The important point is not whether those numbers are looking good or bad. Sometimes they will be up, and at other times down. They are, however, the numbers that count.
None of the pundits writing about house prices or retail sales or government spending are adding anything to the debate. They are referring to an economy that’s vanished. There are a whole different range of indicators we need to pay attention to now.
Is Britain about to face a double-dip recession? The media and the economic forecasters in the City have been in a flap about that much of the past month. House prices have stalled, and may be falling again. Consumer spending is sluggish. There are big cuts in government spending coming down the track. It isn’t hard to make the case that the reasonably robust bounce back from the collapse of 2009 we are witnessing right now might be about to go into reverse, and that another recession is just around the corner.
Then again, perhaps we are looking in all the wrong places for signs of life from the British economy. Over the last twenty-five years we became used to watching house prices and the retail sales figures to get a sense of where the economy was going. That worked perfectly well during a property, debt-fuelled bubble. But that economy has vanished forever. The British economy of the coming decade will have to be based on exports, small businesses, and making things. And to get an idea of how that is going we will need to get used to a very different set of indicators – the trade balance, the savings ratio, company formations, and private sector job creation. Those are the numbers that will tell us whether the economy is showing signs of life or not.
For most of the past couple of decades, you could get a pretty good idea of where the economy was going just by looking at the monthly mortgage approvals figures. If people were borrowing more money, pretty soon they’d be buying a new house, and a few weeks later house prices would go up. All the people who’d bought new houses would soon be loading up their credit card with all the stuff they needed to put into it. And everyone else would see how much their house had gone up in value in the past year, book themselves a winter holiday to celebrate, then head down to the shopping mall to buy some new clothes for the trip.
The sequence was pretty simple. In an economy based on property and ever rising levels of debt, if you just kept an eye on house prices, and the sales figures from a couple of the big high street chains, you’d have a very accurate idea of how the economy was doing.
But along with the rest of the developed world, the UK has reached the end of that road. The easy-money days are behind us. The credit has all dried up. The British economy might do well or badly in the next decade, but the one thing it won’t do is go through another house price, retail spending led consumer boom. If it is to have any chance of prospering, it needs to create real wealth in the private sector instead.
So what indicators should we be looking at instead?
The trade balance is good place to start. It used to be headline news every month, but has been largely forgotten about in the last twenty years. But with a big depreciation of the pound, the British should be making things and selling them around the world. They should be importing a lot less as well, as they tighten their belts and concentrate on repairing their balance sheets rather than getting a bigger flat-screen TV to put on the wall. Both should result in an improving trade balance.
The savings ratio might be another good indicator. The UK needs to save more and spend less, and much of that saving needs to be directed towards re-building the economy so that it is less reliant on financial services and government spending.
So too is the rate of company formation, and the rate of bankruptcies. Again, the numbers of new small companies getting started, and the percentage of them that fail or flourish, will be a clear measure of whether a fresh wave of entrepreneurs are establishing new industries. The rate of private sector job creation will be important as well. For most of the last decade nearly all the new jobs were in the public sector. In the next ten years, it will be private companies, and mostly small ones, that have to create the jobs.
As it happens, most of those figures are looking pretty good right now. The trade gap is indeed starting to narrow. Last month, exports rose by more than 4%, and imports by only 1%, producing an unexpected narrowing of the deficit. Exports to non-EU countries were the highest on record. Our car exports were up 11% month on month. That’s pretty encouraging.
Manufacturing is currently up 4.1% year on year, with the biggest increases in the machinery and equipment industries. Company formation figures are not regularly produced (and many new companies are just tax reduction vehicles). But company winding up orders in the court s are down 17% year-on-year, according to the latest figures from the Office for National Statistics. That’s a good sign as well.
Unemployment is down slightly, and more jobs are being created. Most importantly they are in the private sector. The numbers of people employed in the public sector fell by 7,000 in the first quarter of this year, whilst private sector employment rose by 18,000. It is a small step, admittedly, particularly when you remember that 29 million people have jobs in the UK. But a small step is still valuable when it is in the right direction. Britain needs a lot more private sector job creation in the years ahead.
The important point is not whether those numbers are looking good or bad. Sometimes they will be up, and at other times down. They are, however, the numbers that count.
None of the pundits writing about house prices or retail sales or government spending are adding anything to the debate. They are referring to an economy that’s vanished. There are a whole different range of indicators we need to pay attention to now.
Wednesday, 18 August 2010
The City's Fresh Challengers....
In my Money Week column this week, I've been lookig at the fresh challenges the cuty faces from financia;l centres in the emerging markets. Here's a taster....
Three years on from the start of the credit crunch, plenty has been written about how not much has changed. The banks are all paying big bonuses again. Trading levels are close to where they were before the crisis began, and equity markets have recovered the bulk of the losses they suffered when the markets crashed. At this rate, even Sir Fred Goodwin will be able to show his face in public again soon.
But one thing has changed, and decisively so.
In the wake of the credit crunch, all the traditional financial centres have lost ground. The City of London, along with New York and Tokyo, is being challenged by rising group of new capital markets in places such as Seoul, Mumbai, Shenzhen and Dubai.
That trend is not going to reverse anytime soon. In response, the City has to work out how to remain competitive in the decade ahead. It should focus on three tasks. Concentrate on its Northern European heartland. Encourage more inward investment. And focus on selling expertise and advice more than financial products themselves.
There is little mistaking the way the hierarchy of financial centres has been shaken up in the wake of the credit crunch. We were used to a financial universe in which New York, London and Tokyo were the dominant forces (and pretty much in that order). Hong Kong, Singapore, Frankfurt and Geneva played supporting roles, taking the stage to perform character parts, but never threatening to hog the main action, rather like John Cleese playing Q in a James Bond movie.
Now, however, there are signs that is starting to change. The traditional centres are gradually losing their share of the market. For example, the US and the European Union between them accounted for 75% of global stock market capitalisation in 2001, but are down to 50% this year. The number of listed companies from the BRIC nations (Brazil, Russia, India and China) was just 2% of the global total in 2001. It is 22% now. Last year, more than half of the world’s IPOs were in China alone. Likewise, Asia’s share of the total investment banking revenue pool rose from 13% in 2000 to more than 20% in 2009.
Not surprisingly, new financial centres are emerging to capitalise on that boom. In the annual ranking of the competitiveness of financial centres published by the City of London, London and New York have remained at the top for years. But look at the smaller cities racing up the table. Cities such as Beijing, Seoul, Shenzhen, Shanghai, and Dubai have improved their global ranking hugely since 2007: Beijing is up 20 places, Seoul up 17, Shenzhen up 14, Shanghai up 13, and Dubai up seven spots. Seoul has increased its competitiveness by 42% in just two years. They are clearly the rising powers of global finance.
“In the long-run, emerging financial centres, especially in Asia, are likely to succeed in establishing the scale and scope in their market environment that will help them advance into the top group of global locations,” concluded a recent report on the subject from Deutsche Bank. It predicts a ‘multi-polar’ financial market, with many different centres sharing the available revenues. The big three will remain strong, but they will never be able to recapture their traditional dominance.
It is no great surprise that Seoul and Shenzhen are ring fast up the rankings. That is where the growth is. Other centres may join them. The Russian President Dmitry Medvedev spoke recently of turning Moscow into a major financial hub, and the rouble into one of the world’s reserves currencies. For a country that was defaulting on its debts only slightly over a decade ago, it might not sound very likely. But with Russia’s rapid growth, it would be foolish to bet against it.
So how should the City respond?
There are three ways it can remain competitive.
First, it needs to focus on its Northern European hinterland. All financial centres have strong ties to their local markets. The City has spent too much time focussing on being a global hub. But having decisively bested Frankfurt and Paris to become the main European financial centre, and with the euro not looking like much of a threat to anyone anymore (except possibly to itself), it should be serving the French, German, Dutch and Scandinavian markets. It should be the place entrepreneurs from Eindhoven, Hanover or Lyon come to raise funds, and stage their IPOs. The City needs to widen its definition of its backyard – then make sure it dominates it.
Next, encourage more inward investment. It has done brilliantly as a base for the giant American and European investment banks. Big JP Morgan and UBS offices have made it hugely powerful. But those banks are not the rising forces. What the City needs is to attract a new wave of incomers. It should be the place that Indian, South Korean, Chinese, Brazilian and Russian banks and brokers set up their European offices. It needs to figure out what they need, and how to offer it to them. Ideally, London should be the place a Shenzhen bank plugs itself into the global money markets quickly and cheaply.
Thirdly, get into the picks and shovels business. In a gold rush, it’s the guys selling the digging equipment who make the most money. The new financial centres still have weak infrastructure. They need IT systems, back offices, and the expertise to run banks and bond markets. London should concentrate on selling it to them. Just as the German economy benefits from the rise of the BRIC economies by selling them the machine tools they need to build all those factories, so London should be selling them the machine tools they need to get into the financial services industry.
If London can do all of that, it should be able to remain competitive. But it needs to guard against complacency – because it isn’t going to be easy.
Three years on from the start of the credit crunch, plenty has been written about how not much has changed. The banks are all paying big bonuses again. Trading levels are close to where they were before the crisis began, and equity markets have recovered the bulk of the losses they suffered when the markets crashed. At this rate, even Sir Fred Goodwin will be able to show his face in public again soon.
But one thing has changed, and decisively so.
In the wake of the credit crunch, all the traditional financial centres have lost ground. The City of London, along with New York and Tokyo, is being challenged by rising group of new capital markets in places such as Seoul, Mumbai, Shenzhen and Dubai.
That trend is not going to reverse anytime soon. In response, the City has to work out how to remain competitive in the decade ahead. It should focus on three tasks. Concentrate on its Northern European heartland. Encourage more inward investment. And focus on selling expertise and advice more than financial products themselves.
There is little mistaking the way the hierarchy of financial centres has been shaken up in the wake of the credit crunch. We were used to a financial universe in which New York, London and Tokyo were the dominant forces (and pretty much in that order). Hong Kong, Singapore, Frankfurt and Geneva played supporting roles, taking the stage to perform character parts, but never threatening to hog the main action, rather like John Cleese playing Q in a James Bond movie.
Now, however, there are signs that is starting to change. The traditional centres are gradually losing their share of the market. For example, the US and the European Union between them accounted for 75% of global stock market capitalisation in 2001, but are down to 50% this year. The number of listed companies from the BRIC nations (Brazil, Russia, India and China) was just 2% of the global total in 2001. It is 22% now. Last year, more than half of the world’s IPOs were in China alone. Likewise, Asia’s share of the total investment banking revenue pool rose from 13% in 2000 to more than 20% in 2009.
Not surprisingly, new financial centres are emerging to capitalise on that boom. In the annual ranking of the competitiveness of financial centres published by the City of London, London and New York have remained at the top for years. But look at the smaller cities racing up the table. Cities such as Beijing, Seoul, Shenzhen, Shanghai, and Dubai have improved their global ranking hugely since 2007: Beijing is up 20 places, Seoul up 17, Shenzhen up 14, Shanghai up 13, and Dubai up seven spots. Seoul has increased its competitiveness by 42% in just two years. They are clearly the rising powers of global finance.
“In the long-run, emerging financial centres, especially in Asia, are likely to succeed in establishing the scale and scope in their market environment that will help them advance into the top group of global locations,” concluded a recent report on the subject from Deutsche Bank. It predicts a ‘multi-polar’ financial market, with many different centres sharing the available revenues. The big three will remain strong, but they will never be able to recapture their traditional dominance.
It is no great surprise that Seoul and Shenzhen are ring fast up the rankings. That is where the growth is. Other centres may join them. The Russian President Dmitry Medvedev spoke recently of turning Moscow into a major financial hub, and the rouble into one of the world’s reserves currencies. For a country that was defaulting on its debts only slightly over a decade ago, it might not sound very likely. But with Russia’s rapid growth, it would be foolish to bet against it.
So how should the City respond?
There are three ways it can remain competitive.
First, it needs to focus on its Northern European hinterland. All financial centres have strong ties to their local markets. The City has spent too much time focussing on being a global hub. But having decisively bested Frankfurt and Paris to become the main European financial centre, and with the euro not looking like much of a threat to anyone anymore (except possibly to itself), it should be serving the French, German, Dutch and Scandinavian markets. It should be the place entrepreneurs from Eindhoven, Hanover or Lyon come to raise funds, and stage their IPOs. The City needs to widen its definition of its backyard – then make sure it dominates it.
Next, encourage more inward investment. It has done brilliantly as a base for the giant American and European investment banks. Big JP Morgan and UBS offices have made it hugely powerful. But those banks are not the rising forces. What the City needs is to attract a new wave of incomers. It should be the place that Indian, South Korean, Chinese, Brazilian and Russian banks and brokers set up their European offices. It needs to figure out what they need, and how to offer it to them. Ideally, London should be the place a Shenzhen bank plugs itself into the global money markets quickly and cheaply.
Thirdly, get into the picks and shovels business. In a gold rush, it’s the guys selling the digging equipment who make the most money. The new financial centres still have weak infrastructure. They need IT systems, back offices, and the expertise to run banks and bond markets. London should concentrate on selling it to them. Just as the German economy benefits from the rise of the BRIC economies by selling them the machine tools they need to build all those factories, so London should be selling them the machine tools they need to get into the financial services industry.
If London can do all of that, it should be able to remain competitive. But it needs to guard against complacency – because it isn’t going to be easy.
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