If you look at the Kindle chart and the traditional charts, you’ll notice something quite interesting. They aren’t at all similar. The UK Kindle chart today is topped by Phil Rickman, who is hardly a household name, followed by Damon Galgut and Kerry Wilkinson. The physical chart is led by the latest Wimpy Kid, followed by Jamie Oliver, Lee Evans and Michael Connolly.
Why is that, I wonder? After all, these are all books. Of course you can probably discount Wimpy Kid and Jamie Oliver. Most kids don’t have e-readers yet and cookbooks aren’t a natural for the Kindle. Even so, if you look at the Kindle charts, the ‘big authors’ don’t do so well. PD James and Kathryn Stockett are in the Top 10 and Patricia Cornwell in the Top 20. But heavily hyped writers like James Paterson don’t really do that well. In my own corner of the market, military adventure, I don’t sell as well as Chris Ryan and Andy McNab in the bookshops, but on Kindle I am regularly out-selling them.
One reason might be that the Kindle audience is slightly different from the mainstream audience. It is probably slightly more male – hence the number of thrillers in the chart – and a bit more techie. It may also be more adventurous in its taste.
But the real reason, I suspect, is because it is a much more level playing field. Some books get more push than others online of course. But going into the Kindle store is nothing like going into a bookshop, and nothing at all like the books section of a supermarket. The choice is vast, there are no in-your-face promotions, and word-of-mouth (in the form of reader reviews) is everywhere.
So what we see on the Kindle chart may well be a far better guide to what people actually want to read. I’m not sure the publishers have quite realised that yet though.
Sunday, 4 December 2011
Monday, 28 November 2011
How Many Kindles Are Out There?
At the moment, I’m spending a lot of time setting up my new digital publishing venture, Endeavour Press. One of the things that interests me is, how many Kindles are out there. Amazon reported today that over the holiday weekend in the US it had sold four times as many Kindles as it did last year. But, rather irritatingly, it doesn’t actually say how many.
Figures are surprisingly hard to come by. For 2010, the estimates from the analysts are that five to eight million Kindles were sold. Let’s take a median figure, and called it 6.5 million. If Amazon has quadrupled those sales this time around – and based on anecdotal evidence, that sounds realistic – then it should sell around 26 million this year.
Add in the 2010 sales, and, after Xmas there could be 32 million Kindles out there globally. That’s about half the population of the UK. More significantly, I bet nearly all of those people are keener than average readers. After all, there isn’t much point in getting one if you only read on James Patterson book a year. You need to be a 5-10 books a year minimum reader to make the investment worthwhile.
So what proportion of heavy book readers will have a Kindle by 2012? I’d estimate about 40%. That’s what makes this market so fascinating.
Figures are surprisingly hard to come by. For 2010, the estimates from the analysts are that five to eight million Kindles were sold. Let’s take a median figure, and called it 6.5 million. If Amazon has quadrupled those sales this time around – and based on anecdotal evidence, that sounds realistic – then it should sell around 26 million this year.
Add in the 2010 sales, and, after Xmas there could be 32 million Kindles out there globally. That’s about half the population of the UK. More significantly, I bet nearly all of those people are keener than average readers. After all, there isn’t much point in getting one if you only read on James Patterson book a year. You need to be a 5-10 books a year minimum reader to make the investment worthwhile.
So what proportion of heavy book readers will have a Kindle by 2012? I’d estimate about 40%. That’s what makes this market so fascinating.
Saturday, 19 November 2011
The Return of Pulp Fiction
The most interesting thing happening in writing right now is the way the Kindle is breaking down old barriers. It is creating a lot of new space for writers, and, rather surprising, it is also bringing back some old forms.
One is the long essay, which is really just a recreation of the polemical pamphlet. The other is the e-novella, which is really the heir to pulp fiction.
Pulp fiction flourished as the ‘penny dreadfuls’, lurid, sensationalist tales that filled Victorian and Edwardian railway bookshops in Britain, and in the ‘pulp fiction’ story magazines that were hugely successful in the US right up until the 1960s.
Both specialised in genre fiction, usually written fast by highly professional writers. The stories ere disposable, shocking, and attention-grabbing. And they were sold cheaply.
Look at the Kindle charts and you’ll see a lot of stuff is very similar. Lots of fairly sensationalist cheap fiction.
In effect, new technology has bought pulp fiction back to life.
The interesting point I think is that some great writing emerged from that tradition. The Victorian penny dreadfuls contained plenty of rubbish and so did the American pulp magazines.
But those magazines also provided the foundation for some great writers. Raymond Chandler, Zane Grey, Rider Haggard, and many others. Upton Sinclair was at one point knocking out 8,000 words a day for the pulps.
They allowed writers to write a lot, to develop characters, and push genres. At the moment, Kindle is allowing writers to do something very similar. There is a lot of rubbish, of course, but I suspect when we look back in fifty or a hundred years time we will decide that a lot of the most interesting work is being done for Kindle, just as it was in for the pulps in the past.
One is the long essay, which is really just a recreation of the polemical pamphlet. The other is the e-novella, which is really the heir to pulp fiction.
Pulp fiction flourished as the ‘penny dreadfuls’, lurid, sensationalist tales that filled Victorian and Edwardian railway bookshops in Britain, and in the ‘pulp fiction’ story magazines that were hugely successful in the US right up until the 1960s.
Both specialised in genre fiction, usually written fast by highly professional writers. The stories ere disposable, shocking, and attention-grabbing. And they were sold cheaply.
Look at the Kindle charts and you’ll see a lot of stuff is very similar. Lots of fairly sensationalist cheap fiction.
In effect, new technology has bought pulp fiction back to life.
The interesting point I think is that some great writing emerged from that tradition. The Victorian penny dreadfuls contained plenty of rubbish and so did the American pulp magazines.
But those magazines also provided the foundation for some great writers. Raymond Chandler, Zane Grey, Rider Haggard, and many others. Upton Sinclair was at one point knocking out 8,000 words a day for the pulps.
They allowed writers to write a lot, to develop characters, and push genres. At the moment, Kindle is allowing writers to do something very similar. There is a lot of rubbish, of course, but I suspect when we look back in fifty or a hundred years time we will decide that a lot of the most interesting work is being done for Kindle, just as it was in for the pulps in the past.
Sunday, 6 November 2011
E-Books Are Blurring The Lines Between What Is ‘Published’ And What Isn’t:
About the most interesting thing happening in the book trade right now is that the lines between traditional publishing and self-publishing are getting blurred. My Death Force series is published by Hodder Headline, but my Black Ops series of novellas I am bringing out myself.
More and more writers, so far as I can tell, are going down that road.
One indicator of that this week was the decision by the International Thriller Writer’s Association to allow its members to post the details of their self-published work up on their website. Until now, they had only allowed work bought out major publishers.
A hybrid model is emerging I suspect where writers do some work for major publishers, and some work for themselves, probably forming their own judgements on what mix will maximise their sales, income and creative satisfaction.
Personally I like the combination. I value the prestige of the mainstream publisher, and seeing my books in the shops. But I like the energy and immediacy of doing my own thing as well. And, I suspect I’ll soon be making more money as well.
But how exactly this is all going to work, however, no one really knows.
More and more writers, so far as I can tell, are going down that road.
One indicator of that this week was the decision by the International Thriller Writer’s Association to allow its members to post the details of their self-published work up on their website. Until now, they had only allowed work bought out major publishers.
A hybrid model is emerging I suspect where writers do some work for major publishers, and some work for themselves, probably forming their own judgements on what mix will maximise their sales, income and creative satisfaction.
Personally I like the combination. I value the prestige of the mainstream publisher, and seeing my books in the shops. But I like the energy and immediacy of doing my own thing as well. And, I suspect I’ll soon be making more money as well.
But how exactly this is all going to work, however, no one really knows.
Saturday, 29 October 2011
Will The Kindle Get Men to Read More?
If you haven’t bough one of the new Kindles yet, I really recommend it. It’s lighter than the old one, which makes it completely portable, but it is just as slickly designed, easy to read, and simple to use.
But I’ve noticed one thing about it. It fits perfectly into inside breast pocket of a man’s jacket. I’m a fairly averaged sized bloke – 42 jacket size if you must know – so I guess that is true for most men.
This is a more important point than most people realise. Men don’t normally have anywhere they can carry a book around. We don’t have handbags. Jacket and coat pockets are two small for printed books (unless you are going for the intellectual look, in which case you might have a copy of Camus stuffed into a big, grey coat). Unlike women, we don’t have anywhere we can slip a book away that we can read on the bus, or waiting for a meeting, or whatever.
On the whole women read more than men – that’s why women’s fiction sells more than men’s fiction. I’m not suggesting the Kindle is a male device – I’ve seen loads of women reading them on the train.
But it might well encourage men to read as much as women – which can only be a good thing.
But I’ve noticed one thing about it. It fits perfectly into inside breast pocket of a man’s jacket. I’m a fairly averaged sized bloke – 42 jacket size if you must know – so I guess that is true for most men.
This is a more important point than most people realise. Men don’t normally have anywhere they can carry a book around. We don’t have handbags. Jacket and coat pockets are two small for printed books (unless you are going for the intellectual look, in which case you might have a copy of Camus stuffed into a big, grey coat). Unlike women, we don’t have anywhere we can slip a book away that we can read on the bus, or waiting for a meeting, or whatever.
On the whole women read more than men – that’s why women’s fiction sells more than men’s fiction. I’m not suggesting the Kindle is a male device – I’ve seen loads of women reading them on the train.
But it might well encourage men to read as much as women – which can only be a good thing.
Saturday, 22 October 2011
Authors as Entrepreneurs
We tend to think of authors as fairly reclusive characters. The word ‘bookish’ summons up images of fairly self-absorbed, introverted characters, with a slight detachment from the real world. And from the authors I have met, I would say that is, in the most, a fairly accurate characterisation. Some were larger than life – Dickens, perhaps, and certainly Hemmingway – but they also led largely artistic careers.
Now, however, something is changing.
Authors are becoming entrepreneurs.
The books industry has changed. Even when you are published by one of the big houses – Headline in my case – you still need to do a lot of marketing of yourself to make sure your book finds an audience. You need to build a website, get on Twitter, and give talks. There is no point in expecting the publisher to do it all for you.
And, more and more authors are turning to Kindle as well. They are bringing out their own books, and promoting then themselves, either entirely on their own, or in conjunction with traditionally published books. They are in effect setting up small businesses.
One consequence, however, is that the books we all read will be increasingly produced by people who are as much entrepreneurs as writers. That may well not be a bad thing. A lot of fiction in the last half-century has been very inward-looking. It doesn’t have much of the energy and involvement in the world of Victorian fiction.
But it certainly means that the types of books that get written are going to be very different.
Now, however, something is changing.
Authors are becoming entrepreneurs.
The books industry has changed. Even when you are published by one of the big houses – Headline in my case – you still need to do a lot of marketing of yourself to make sure your book finds an audience. You need to build a website, get on Twitter, and give talks. There is no point in expecting the publisher to do it all for you.
And, more and more authors are turning to Kindle as well. They are bringing out their own books, and promoting then themselves, either entirely on their own, or in conjunction with traditionally published books. They are in effect setting up small businesses.
One consequence, however, is that the books we all read will be increasingly produced by people who are as much entrepreneurs as writers. That may well not be a bad thing. A lot of fiction in the last half-century has been very inward-looking. It doesn’t have much of the energy and involvement in the world of Victorian fiction.
But it certainly means that the types of books that get written are going to be very different.
Thursday, 6 October 2011
Making It Worthwhile
There’s always plenty for writers to moan about. Not having our books prominently displayed in the bookshop for example. A miserable sales ranking on Amazon. And that’s before we even get started on the publishers and agents.
But every so often something comes along to make it feel worthwhile.
A couple of weeks ago I got an e-mail from a women who’s son was very unwell. He wouldn’t be having much of a birthday, she said, and his situation made it hard for him to get out and meet people. But he was a big fan of my first two books, Death Force and Shadow Force. And he would really like it if I sent him a birthday card.
In fact, I sent him a signed copy of Shadow Force.
It’s nice to know your work has got through to someone enough that they would be pleased to hear from you, even though they don’t know you. I guess that is what all writers aspire to.
I hope he has a good day.
But every so often something comes along to make it feel worthwhile.
A couple of weeks ago I got an e-mail from a women who’s son was very unwell. He wouldn’t be having much of a birthday, she said, and his situation made it hard for him to get out and meet people. But he was a big fan of my first two books, Death Force and Shadow Force. And he would really like it if I sent him a birthday card.
In fact, I sent him a signed copy of Shadow Force.
It’s nice to know your work has got through to someone enough that they would be pleased to hear from you, even though they don’t know you. I guess that is what all writers aspire to.
I hope he has a good day.
Saturday, 1 October 2011
A Stupid Tax on E-Books
E-Books are the best thing that have happened to writers since…well, probably the invention of instant coffee. Sure, there is a lot of nervousness among publishers and bookshop owners and that is understandable. But for writers, they can only be good news. At the flick of a switch, you have a global market. Far more of the money generated goes to the writer. And it opens up markers for all sorts of new kinds of work.
There is one glaring injustice, however. E-books carry VAT, whereas printed books are tax-free.
That is just short-sighted greed on the part of the Treasury. A petition has been started up on the government’s website calling for its abolition. As it rightly points out, e-books are far more environmentally-friendly than the old, paper sort. No trees get cut down. No vans drive them around the country. A book is a book, regardless of the form of delivery. It is crazy to discriminate in favour of one kind through the tax system.
I’d add another point. I bet e-books can be a huge industry for the UK. We have great writers, English is the world’s language, and we have the editors and entrepreneurs who can seize the market. And yet the Government is taxing e-books unfairly – which almost certainly means the industry won’t develop as fast as it otherwise would. Bonkers.
I’ve already signed the petition, but there are only 2,500 so far. So click on the link and add your name today.
There is one glaring injustice, however. E-books carry VAT, whereas printed books are tax-free.
That is just short-sighted greed on the part of the Treasury. A petition has been started up on the government’s website calling for its abolition. As it rightly points out, e-books are far more environmentally-friendly than the old, paper sort. No trees get cut down. No vans drive them around the country. A book is a book, regardless of the form of delivery. It is crazy to discriminate in favour of one kind through the tax system.
I’d add another point. I bet e-books can be a huge industry for the UK. We have great writers, English is the world’s language, and we have the editors and entrepreneurs who can seize the market. And yet the Government is taxing e-books unfairly – which almost certainly means the industry won’t develop as fast as it otherwise would. Bonkers.
I’ve already signed the petition, but there are only 2,500 so far. So click on the link and add your name today.
Tuesday, 20 September 2011
Swearing in Books
I had an e-mail this morning from a reader who said he was a big fan of my books, which was nice of course. But he also pointed out that the characters in the Death Force series used the word ‘sodding’ all the time, and it got a bit repetitive.
He’s right, of course. They do, and it is.
There is a reason, however. They are soldiers. In real life it would be fu%£kig this and f!c£king that. And for some reason, I don’t think swearing works very well in books. I don’t have anything against it in real life, and it can work fine in films, but I print it somehow falls flat.
So I use sodding instead.
But maybe that doesn’t quite work either?
He’s right, of course. They do, and it is.
There is a reason, however. They are soldiers. In real life it would be fu%£kig this and f!c£king that. And for some reason, I don’t think swearing works very well in books. I don’t have anything against it in real life, and it can work fine in films, but I print it somehow falls flat.
So I use sodding instead.
But maybe that doesn’t quite work either?
Thursday, 1 September 2011
Real-Time Story-Telling
The Kindle is a huge opportunity for writers. It is not just a new way of distributing our work. It is also an opportunity to tell stories in a new way. I’m just launching a new series of e-book only novellas called Black Ops. The first one is called Black Ops: Libya, so it is fairly obvious where it is set. The idea, however, is to tell stories ripped straight from the headlines, and put them out instantaneously.
The e-book allows us to do that. Traditional publishing takes a year at least to get a book to the market. So the instant thriller, which is what the Black Ops series aims to be, takes advantage of the technology to tell a story that has the advantage of immediacy. It is real-time story-telling.
In the first one, an ex-SAS guy called Alex Marden and a former Navy Seal called Jack Rogan are dropped into Libya by NATO to retrieve a document in the hands of the old regime that would be hugely embarrassing to the British and American governments if it fell into the wrong hands.
But they soon get themselves caught up in the fighting and chaos as Tripoli falls to the rebels.
It is a cracking adventure story. And the first time anyone has taken advantage of the e-book to try something like this.
Monday, 15 August 2011
The Possibilities on Kindle
The Kindle is one of the most interesting things happening in publishing right now. Not all of it is good, of course. The publishing industry may end getting destroyed the way the music industry was. But it also creates possibilities.
There is a fascinating story in the New York Times about the thriller writer Richard North Patterson. He has a book out featuring Osama Bin Laden. But by the time it came out, the man had already been killed, which rather ruined his book. So he went onto the Kindle edition and changed it - just like that.
One of the things the Kindle can do for us is create that kind of journalistic immediacy. In fact, it is a possibility I am working on right now. But more on that later....
There is a fascinating story in the New York Times about the thriller writer Richard North Patterson. He has a book out featuring Osama Bin Laden. But by the time it came out, the man had already been killed, which rather ruined his book. So he went onto the Kindle edition and changed it - just like that.
One of the things the Kindle can do for us is create that kind of journalistic immediacy. In fact, it is a possibility I am working on right now. But more on that later....
Wednesday, 20 July 2011
Summer Reading
I'm off to Cornwall at the weekend with the kids, so I need to choose a few books for what I hope will be a relaxing week. I've already got a copy of Hunted by fellow Curzon-ite Emlyn Rees, The Big Short by Michael Lewis, who I know a bit from our work on Bloomberg, and American Pastoral by Philip Roth, who I have got back into since attending the Man Booker Prize dinner a few weeks ago in his honour. That seems like a pretty good range - some light fun, some art, and some serious stuff.
Hopefully a fair number of people will be taking 'Shadow Force' with them on holiday. I think of my own books as summer reading. But what makes a great story for the beach?
I think it needs a number of qualities. It needs a rattling good story that grips you from start to finish. It needs some jokes - no one wants to be too downbeat on holiday. It needs some escapism - a holiday is all about getting away from things, and we want a book that does that as well. But it also needs to tell you something serious, and educate you in some way, because a holiday is one of the few chances we have to fill gaps in our knowledge.
I try and touch all those bases in my own work. And I always keep in mind that that is the recipe for a great holiday read.
Hopefully a fair number of people will be taking 'Shadow Force' with them on holiday. I think of my own books as summer reading. But what makes a great story for the beach?
I think it needs a number of qualities. It needs a rattling good story that grips you from start to finish. It needs some jokes - no one wants to be too downbeat on holiday. It needs some escapism - a holiday is all about getting away from things, and we want a book that does that as well. But it also needs to tell you something serious, and educate you in some way, because a holiday is one of the few chances we have to fill gaps in our knowledge.
I try and touch all those bases in my own work. And I always keep in mind that that is the recipe for a great holiday read.
Monday, 18 July 2011
The History of the Greek Crisis
I've done a piece of History Today about the Greek debt crisis. You can read it here.
Invest in Stable Democracies....
In my MarketWatch column this week, I've been arguing you should invest in stable democracies - there are more of them all the time. You can read it here.
The IMF Isn't Worth Any More Money
On RealClearMarkets this week I've argued that the IMF shouldn't be given any more money. You can read the piece here.
Sterling Will Fall Again....
I've made my debut as a Huffington Post blogger this week with a post on sterling. You can read it here....
France Will Be the Next Eurozone Victim
In my Money Week column this week, I argue that France may be the next country to fall to the euro crisis. Here is a taster.
The euro debt crisis increasingly resembles a teen horror movie. As soon as you think it is all over, the monster springs back to life. There is an unlimited number of sequels. And it usually ends up with a bloodbath.
This week it was the turn of Italy to be in the spotlight. The country’s bond yields started to spike upwards, a serious issue for a nation that has vast debts to pay the interest on. After flying under the radar for much of the crisis, the Italian debt market looks close to unravelling. Spain is coming under increasing scrutiny as well. It might well be next.
But in fact the markets are looking in the wrong place. True, there is plenty to worry about in both Italy and Spain. But the real testing ground for the euro is going to be their northern neighbour, France. It too is struggling to stay in the euro – and it, far more than Italy or Spain, has the potential to trigger a financial meltdown. France matters to the global financial markets far more than any of the other euro countries in trouble.
Monetary union was, of course, largely a French idea. The country’s industrial and financial establishment had long been unhappy with floating exchange rates. As one of the major exporters within the European Union, they could see that constantly shifting currencies made life very difficult for their companies. While Germany primarily exports to the rest of the world, France is a euro-zone manufacturing hub. A fixed currency system was very much in its interests. Indeed, one interpretation of the creation of the euro was that it was a deal between the French and the Germans: the Germans accepted merging their currency with France’s in exchange for French support for the re-unification of Germany after the fall of the Berlin Wall. It is ironic, therefore, that it isn’t working out the way France planned.
Could France seriously have a problem staying in the euro? After all, it is a big, successful economy. It is not a peripheral nation like Greece or Portugal, neither of which ever really industrialised, or a chronically financially chaotic country like Italy. Then again, Ireland was a successful, wealthy economy, and that didn’t stop the country going bust as a result of monetary union.
In reality, France is steadily losing competitiveness within the euro. That was confirmed last week with the latest trade data, which showed a widening deficit. The April trade gap rose to 7.42 billion euros. The UK, by contrast ran a deficit of £2.8 billion or 3.1 billion euros in April. The French deficit now amounts to 3% of GDP, and has been hitting fresh records month-by-month. France’s trade deficit with Germany, its main trading partner, is now one billion euros a month. “Within euroland, France is losing competitiveness to Germany, and it has no option for devaluation to help itself out,” noted Hi-Frequency Economics in an analysis of the figures. “A potential rift between France and Germany on trade would be a far more serious challenge to EMU’s political fabric than a disagreement over how to restructure loans to euroland’s second-smallest economy [Greece].”
Indeed so. There is no great mystery about what is happening. French wages have been rising at a faster rate than German wages, and their productivity is not as good. The country is steadily becoming a less attractive place to make things.
The important point is that persistent and rising trade deficits are clear evidence that France is struggling within the single currency in precisely the same way as the Greeks – it’s the same explosion, just with a much longer fuse. As it runs bigger and bigger deficits, the money will have to be re-cycled through the banking system. Eventually that will lead to a financial crisis.
It may happen sooner than anyone thinks. While a country such as Italy has a greater stock of out-standing debt, France is racking up new debts at a far faster rate. Last year it ran a deficit of 7% of GDP. French debt will total 90% of GDP this year and 95% in 2012 according to estimates by Capital Economics. That isn’t exactly running out of control – but it is getting very close.
There are other problems on the horizon. A Presidential election is due next year. That may turn into a competition for who can make the most extravagant promises. And the far-right National Front leader Marine Le Pen is pledged to bring back the franc. If she continues to do well in the polls, then pulling out of the euro will be on the agenda. That is not true of any other euro area country, not even Greece.
At any point, the bond markets may well take fright. They will start pricing in the possibility of France pulling out of the euro, or defaulting on some of its debt. Yields on French debt will start to spike upwards. And that will be the point at which the crisis turns scary.
While Greece, Portugal and Ireland don’t matter very much to the global capital markets, France does. In fact, it matters much more than Italy and Spain. It has $1.7 trillion of outstanding public debt, making it the fourth largest debtor in the world, according to data from the Bank for International Settlements. (The US, Japan and Italy are ahead of it). That debt is widely traded – 37% of French debt is held internationally, which is a lot more than Italy (24%), the US (19%) or Japan (1%), again on BIS figures. In truth, French bonds are held by institutions right around the world and have always been regarded as rock solid.
On current trends, that will have to change. France can no more survive in the euro-zone than Italy or Spain can. At some point, the bond markets are going to wake up to the problems in France. They are going to get very nervous about French debt, the same way they did about Greek and Portuguese and Spanish debt. They will start marking down the bonds, and factoring in potential default. But if that happens the losses to the financial system will be very nasty indeed. The euro was created in France. It may well be in France that it starts to finally unravel as well.
The euro debt crisis increasingly resembles a teen horror movie. As soon as you think it is all over, the monster springs back to life. There is an unlimited number of sequels. And it usually ends up with a bloodbath.
This week it was the turn of Italy to be in the spotlight. The country’s bond yields started to spike upwards, a serious issue for a nation that has vast debts to pay the interest on. After flying under the radar for much of the crisis, the Italian debt market looks close to unravelling. Spain is coming under increasing scrutiny as well. It might well be next.
But in fact the markets are looking in the wrong place. True, there is plenty to worry about in both Italy and Spain. But the real testing ground for the euro is going to be their northern neighbour, France. It too is struggling to stay in the euro – and it, far more than Italy or Spain, has the potential to trigger a financial meltdown. France matters to the global financial markets far more than any of the other euro countries in trouble.
Monetary union was, of course, largely a French idea. The country’s industrial and financial establishment had long been unhappy with floating exchange rates. As one of the major exporters within the European Union, they could see that constantly shifting currencies made life very difficult for their companies. While Germany primarily exports to the rest of the world, France is a euro-zone manufacturing hub. A fixed currency system was very much in its interests. Indeed, one interpretation of the creation of the euro was that it was a deal between the French and the Germans: the Germans accepted merging their currency with France’s in exchange for French support for the re-unification of Germany after the fall of the Berlin Wall. It is ironic, therefore, that it isn’t working out the way France planned.
Could France seriously have a problem staying in the euro? After all, it is a big, successful economy. It is not a peripheral nation like Greece or Portugal, neither of which ever really industrialised, or a chronically financially chaotic country like Italy. Then again, Ireland was a successful, wealthy economy, and that didn’t stop the country going bust as a result of monetary union.
In reality, France is steadily losing competitiveness within the euro. That was confirmed last week with the latest trade data, which showed a widening deficit. The April trade gap rose to 7.42 billion euros. The UK, by contrast ran a deficit of £2.8 billion or 3.1 billion euros in April. The French deficit now amounts to 3% of GDP, and has been hitting fresh records month-by-month. France’s trade deficit with Germany, its main trading partner, is now one billion euros a month. “Within euroland, France is losing competitiveness to Germany, and it has no option for devaluation to help itself out,” noted Hi-Frequency Economics in an analysis of the figures. “A potential rift between France and Germany on trade would be a far more serious challenge to EMU’s political fabric than a disagreement over how to restructure loans to euroland’s second-smallest economy [Greece].”
Indeed so. There is no great mystery about what is happening. French wages have been rising at a faster rate than German wages, and their productivity is not as good. The country is steadily becoming a less attractive place to make things.
The important point is that persistent and rising trade deficits are clear evidence that France is struggling within the single currency in precisely the same way as the Greeks – it’s the same explosion, just with a much longer fuse. As it runs bigger and bigger deficits, the money will have to be re-cycled through the banking system. Eventually that will lead to a financial crisis.
It may happen sooner than anyone thinks. While a country such as Italy has a greater stock of out-standing debt, France is racking up new debts at a far faster rate. Last year it ran a deficit of 7% of GDP. French debt will total 90% of GDP this year and 95% in 2012 according to estimates by Capital Economics. That isn’t exactly running out of control – but it is getting very close.
There are other problems on the horizon. A Presidential election is due next year. That may turn into a competition for who can make the most extravagant promises. And the far-right National Front leader Marine Le Pen is pledged to bring back the franc. If she continues to do well in the polls, then pulling out of the euro will be on the agenda. That is not true of any other euro area country, not even Greece.
At any point, the bond markets may well take fright. They will start pricing in the possibility of France pulling out of the euro, or defaulting on some of its debt. Yields on French debt will start to spike upwards. And that will be the point at which the crisis turns scary.
While Greece, Portugal and Ireland don’t matter very much to the global capital markets, France does. In fact, it matters much more than Italy and Spain. It has $1.7 trillion of outstanding public debt, making it the fourth largest debtor in the world, according to data from the Bank for International Settlements. (The US, Japan and Italy are ahead of it). That debt is widely traded – 37% of French debt is held internationally, which is a lot more than Italy (24%), the US (19%) or Japan (1%), again on BIS figures. In truth, French bonds are held by institutions right around the world and have always been regarded as rock solid.
On current trends, that will have to change. France can no more survive in the euro-zone than Italy or Spain can. At some point, the bond markets are going to wake up to the problems in France. They are going to get very nervous about French debt, the same way they did about Greek and Portuguese and Spanish debt. They will start marking down the bonds, and factoring in potential default. But if that happens the losses to the financial system will be very nasty indeed. The euro was created in France. It may well be in France that it starts to finally unravel as well.
Tuesday, 5 July 2011
Launching Onto Kindle....
The Kindle is a fantastic device for readers, but it potentially is even more interesting for writers. It isn’t so much the ability to reach readers directly, as the opportunity it offers to try out new forms. The publishers and the bookshops are all focused on the 100,000 word book. But there are lots of other ways of writing things.
I’ve just launched by first short story on Kindle. It’s called ‘Lethal Force’. It would be free, but Amazon won’t let me give it away, so instead it is 71p. It will be free in iTunes just as soon as I can get Smashwords to give it an ISBN number and get it up. Take a look, you might enjoy it.
But it isn’t just short stories that can find a home on Kindle. There are other forms of writing as well.
I already have one idea, which I’m working on right now. Watch this space…..
I’ve just launched by first short story on Kindle. It’s called ‘Lethal Force’. It would be free, but Amazon won’t let me give it away, so instead it is 71p. It will be free in iTunes just as soon as I can get Smashwords to give it an ISBN number and get it up. Take a look, you might enjoy it.
But it isn’t just short stories that can find a home on Kindle. There are other forms of writing as well.
I already have one idea, which I’m working on right now. Watch this space…..
Saturday, 2 July 2011
The British Monetary Union Isn't Working Either....
In my Money Week column this week, I've been looking at the the UK as a monetary union, like the euro....and concluding that doesn't work either. Here's a taster.
What does the euro need to make it work better? The most common answer is that it needs to be turned into a fiscal union, with large-scale transfers from the richer regions to the poorer. It is the conventional wisdom of every editorial, and City pundit. Until it becomes a ‘transfer union’ it doesn’t stand a chance of succeeding.
A caveat or two is usually thrown in. The political obstacles are formidable. The Germans might never agree to their taxes being sent to bail-out Greece or Portugal. The treaties might need to be re-written, and that would require the agreement of all the European Union’s members. Still, if only those obstacles could be overcome, a fiscal union would smooth out most of the problems.
The trouble is, no one seems to have stepped back and questioned the fundamental assumption. The evidence suggests it may well be wrong. Europe has another monetary union between countries at very different stages of economic development. It is called the UK, and the currency is sterling. Reverse the polarities – the UK has a rich south, and a poor north, rather than a rich north and a struggling south – and the sterling area has many similarities to the euro area. It is made up of group of countries with very different levels of prosperity. And it has huge transfers between the richer regions and the poorer.
And the result? It doesn’t do any good at all. True, it holds the currency area together. But it only does so at the cost of creating regions that are ever more dependent on state aid. The truth is, a transfer union won’t save the euro even if it was politically feasible. Nothing will. The project is doomed.
That doesn’t stop people from trying, The most common critique of the single currency is that is an economic union without a political union. George Soros has argued for a year that without a single government the currency won’t survive. The President of the European Central Bank Jean-Claude Trichet has called for a European finance ministry.
The UK’s experience, however, suggests that even if it happened, it wouldn’t work. Britain used to be a fairly homogenous economy, with wealth relatively evenly spread out across its major industrial centres, much as it is in modern Germany. Not any more. Post-industrial Britain has a very, very prosperous capital, surrounded by equally wealthy suburbs. The Midlands and East are doing fine. The rest of the country has been falling behind at an increasingly rapid rate. The result is that there are huge disparities between output per head in the South and Wales, Scotland and Northern Ireland. It isn’t quite as dramatic as the gulf between Germany and Greece – but it isn’t that far off.
That gets fixed by fiscal transfers. The UK, which has of course a single government, and single finance ministry, shuttles large sums of money from the richer regions to the poorer. Oxford Economics, the consultancy firm, has calculated the amount the British government spends per person employed – per taxpayer, in other words - for the different parts of the country. In the prosperous South-East, the government spent £14,100 per working person. In Northern Ireland, it spent £21,200. Wales, Scotland and the North-East were all way above average. The East, East Midlands, and London were all below average – although London, which has pockets of real poverty amidst its wealth, not by as much as you might think. It also looked at expenditure relative to gross value added, that is the actual output of the region. Taking the average for the UK as 100, Northern Ireland scored 155 and the South-East just 84. In other words, a lot of the wealth from the South-East gets sent to the ‘periphery’.
The UK is, therefore, a monetary union with very significant transfers between its richer and poorer regions. The trouble for the euro’s would-be fiscal unifiers is that there is very little evidence that it fixes the problem. Northern Ireland for example has had a consistently lower growth rate than the UK as a whole – this year, it will grow by 1.1% compared with 1.7% for the UK according to estimates by Northern Bank. Much the same is true of Wales and the North-East. The regions with the biggest fiscal transfers have grown consistently more slowly than the rest of the UK, with the result that the ratio of state spending relative to their local economies has grown steadily over time. Between 1999 and 2010 state spending rose from 50% of the Welsh economy to 69%, according to calculations by the Centre for Economics and Business Research.
Fiscal transfers can hold a monetary union together. There is no sign of the sterling area breaking up, although the Scots might eventually decide to go their own way. But they won’t close the gap between the richer regions and their poorer neighbours. They are a permanent subsidy – and one that will probably grow over time.
If anything, the fiscal transfers probably make the problem worse. They crowd out private investment – after all, why would anyone in Northern Ireland set up a business when they are relatively few industries where it has much strength, and when they could just get on a plane to London, or else get a secure job in the public sector? It creates whole regions where the fiscal transfers are the only thing that keeps the economy afloat.
That just about works in the UK. It has been a unified state for several hundred years, and has close ties of language, culture and family between its regions – although it remains to be seen whether the Tory voters of the south-east will accept the deal forever. But it is very hard to see it working for the euro zone. Voters in Munich and Eindhoven already seem outraged by paying for the Greeks and Portuguese. When they get told that the transfers are permanent, and will rise steadily over time, they will surely refuse to pay. The scary truth is that even the one plausibly fix for the euro crisis doesn’t work.
What does the euro need to make it work better? The most common answer is that it needs to be turned into a fiscal union, with large-scale transfers from the richer regions to the poorer. It is the conventional wisdom of every editorial, and City pundit. Until it becomes a ‘transfer union’ it doesn’t stand a chance of succeeding.
A caveat or two is usually thrown in. The political obstacles are formidable. The Germans might never agree to their taxes being sent to bail-out Greece or Portugal. The treaties might need to be re-written, and that would require the agreement of all the European Union’s members. Still, if only those obstacles could be overcome, a fiscal union would smooth out most of the problems.
The trouble is, no one seems to have stepped back and questioned the fundamental assumption. The evidence suggests it may well be wrong. Europe has another monetary union between countries at very different stages of economic development. It is called the UK, and the currency is sterling. Reverse the polarities – the UK has a rich south, and a poor north, rather than a rich north and a struggling south – and the sterling area has many similarities to the euro area. It is made up of group of countries with very different levels of prosperity. And it has huge transfers between the richer regions and the poorer.
And the result? It doesn’t do any good at all. True, it holds the currency area together. But it only does so at the cost of creating regions that are ever more dependent on state aid. The truth is, a transfer union won’t save the euro even if it was politically feasible. Nothing will. The project is doomed.
That doesn’t stop people from trying, The most common critique of the single currency is that is an economic union without a political union. George Soros has argued for a year that without a single government the currency won’t survive. The President of the European Central Bank Jean-Claude Trichet has called for a European finance ministry.
The UK’s experience, however, suggests that even if it happened, it wouldn’t work. Britain used to be a fairly homogenous economy, with wealth relatively evenly spread out across its major industrial centres, much as it is in modern Germany. Not any more. Post-industrial Britain has a very, very prosperous capital, surrounded by equally wealthy suburbs. The Midlands and East are doing fine. The rest of the country has been falling behind at an increasingly rapid rate. The result is that there are huge disparities between output per head in the South and Wales, Scotland and Northern Ireland. It isn’t quite as dramatic as the gulf between Germany and Greece – but it isn’t that far off.
That gets fixed by fiscal transfers. The UK, which has of course a single government, and single finance ministry, shuttles large sums of money from the richer regions to the poorer. Oxford Economics, the consultancy firm, has calculated the amount the British government spends per person employed – per taxpayer, in other words - for the different parts of the country. In the prosperous South-East, the government spent £14,100 per working person. In Northern Ireland, it spent £21,200. Wales, Scotland and the North-East were all way above average. The East, East Midlands, and London were all below average – although London, which has pockets of real poverty amidst its wealth, not by as much as you might think. It also looked at expenditure relative to gross value added, that is the actual output of the region. Taking the average for the UK as 100, Northern Ireland scored 155 and the South-East just 84. In other words, a lot of the wealth from the South-East gets sent to the ‘periphery’.
The UK is, therefore, a monetary union with very significant transfers between its richer and poorer regions. The trouble for the euro’s would-be fiscal unifiers is that there is very little evidence that it fixes the problem. Northern Ireland for example has had a consistently lower growth rate than the UK as a whole – this year, it will grow by 1.1% compared with 1.7% for the UK according to estimates by Northern Bank. Much the same is true of Wales and the North-East. The regions with the biggest fiscal transfers have grown consistently more slowly than the rest of the UK, with the result that the ratio of state spending relative to their local economies has grown steadily over time. Between 1999 and 2010 state spending rose from 50% of the Welsh economy to 69%, according to calculations by the Centre for Economics and Business Research.
Fiscal transfers can hold a monetary union together. There is no sign of the sterling area breaking up, although the Scots might eventually decide to go their own way. But they won’t close the gap between the richer regions and their poorer neighbours. They are a permanent subsidy – and one that will probably grow over time.
If anything, the fiscal transfers probably make the problem worse. They crowd out private investment – after all, why would anyone in Northern Ireland set up a business when they are relatively few industries where it has much strength, and when they could just get on a plane to London, or else get a secure job in the public sector? It creates whole regions where the fiscal transfers are the only thing that keeps the economy afloat.
That just about works in the UK. It has been a unified state for several hundred years, and has close ties of language, culture and family between its regions – although it remains to be seen whether the Tory voters of the south-east will accept the deal forever. But it is very hard to see it working for the euro zone. Voters in Munich and Eindhoven already seem outraged by paying for the Greeks and Portuguese. When they get told that the transfers are permanent, and will rise steadily over time, they will surely refuse to pay. The scary truth is that even the one plausibly fix for the euro crisis doesn’t work.
How The Euro Will End....
How will the euro actually come apart. I've been exploring that in my Market Watch column this week. You can read it here.
Greece Isn't Lehman Brothers. It is Worse Than That...
In my Money Week column this week, I've been writing about why Greece is even worse for the markets than Lehman Brothers. Here's a taster....
If the Greeks had a euro for every City analyst and financial reporter who has solemnly warned that the country’s debt crisis risks being ‘another Lehman moment’ for the financial markets, their economy would probably be in far better shape than it is. It has become the most over-used cliché of the last few weeks – and like every tired cliché, simply shows that the people using it have stopped thinking clearly for themselves.
In truth, the Greek crisis is nothing like the Lehman collapse. It is far worse than that. Lehman was a short, sharp shock for the global markets, and although it caused massive damage to the global economy, it was over relatively quickly.
The sovereign debt crisis, by contrast, is going to be a long, drawn-out and messy affair, with no clean resolution. It will depress investment, economic output and equity market for years to come.
Over the course of the last week, the Greek crisis has prompted a global sell- off in every kind of asset – and rightly so. The government of the beleaguered Greek premier George Papandreou looks on its last legs. The Germans have been wrangling with the European Central Bank over the terms of a fresh bail-out. Protestors have been marching across Greece, fighting yet more austerity. There were certainly reasons to fear that Greece might be forced into a sudden default – and that would pose huge risks for the European banking system. Greek debt is hidden on balance sheets right across the financial system. No one really knows where the losses will come out.
Even so, it is nothing like Lehman Brothers. When the Wall Street investment bank collapsed in 2008, the US Treasury and the Federal Reserve had no real idea it would pose a systemic risk to the financial system. If they had, they wouldn’t have let it go down. They would have stepped in to rescue it instead. The crisis it provoked was largely unexpected.
That isn’t true of Greece. Germany’s Chancellor Angela Merkel and France’s President Nicolas Sarkozy are well aware of the threat a Greek collapse poses to the financial system. They aren’t going to let it happen until their experts have reassured them their banks can survive. After all, they aren’t stupid. They are not going to let their financial system blow up. If they have to find a few more tens of billions of euros to prop up their wayward southern neighbour for another year they will. It’s better than the alternative.
There isn’t going to be a sudden collapse. The risks are all flagged up, and everyone will work hard to avoid them.
The trouble is, Greece is just the tip of a much larger iceberg. The sovereign debt crisis is going to depress economies, deter investment, and keep a lid on assets prices for a long time yet.
Greece has been running massive budget deficits for years. So have most of the other peripheral countries, such as Portugal, Ireland, Spain and Ireland. France shows very little sign of getting its deficit under control. Neither does the US. The UK is making some progress, but lower than expected growth means we are unlikely to meet our targets. The sovereign debt crisis is not just a Greek issue. It is hitting most of the developed world.
That is going to impact the markets in three ways.
First, it is going to depress economic growth. There is only one real way to bring deficits under control, and that is to make deep and painful cuts in government spending. Nothing else works. But as governments everywhere scale back on their expenditure, growth is going to be hit. Over the medium-term, a smaller state allows the private sector to grow faster. It is a mistake to fall for the simplistic Keynesian mistake of thinking state borrowing and spending promotes growth. It doesn’t. Cuts allow the economy to grow faster – eventually. But it takes time for that to happen. And in the medium-term, the economy will be more sluggish than it otherwise would be.
Next, the debt crisis is going to deter investment. Who would want to build a new factory or sales office in any of the peripheral euro-zone countries right now? You have no idea what the economies will look like, or even what currencies they might be using in three or four years time. You are likely to face years of grinding austerity programmes as governments struggle to stay in the euro. And yet investment is the lifeblood of economic growth. If companies don’t invest, then economies are not going to be able to grow.
Finally, it is going to depress asset prices. For all the reasons outlined above, the debt crisis is going to slow global growth. That is bad for just about every class of asset, from equities, to bonds, to commodities (although probably not for gold, which is usually the one clear beneficiary of a monetary crisis). Clearly enough, that is going to depress the markets as well. But it is also means investors are going to be very cautious. The constant threat of defaults, the worries that it will lead to a fresh banking crisis, and the nervousness over which country is likely to be targeted next, will all make any kind of bull market very hard to sustain. And the lower asset prices are, the lower growth will be as well.
In many ways, we’d be better off with a Lehman moment. A quick, sharp crisis that ended with Greece defaulting on its debt, re-establishing its own currency, and one or two over-exposed banks being bailed out, would be better than a saga that drags on for years with no clear resolution. But it isn’t going to happen. The global economy suffered from the Lehman collapse – but was able to start recovering the following year. Unfortunately, this crisis will take far longer to resolve.
If the Greeks had a euro for every City analyst and financial reporter who has solemnly warned that the country’s debt crisis risks being ‘another Lehman moment’ for the financial markets, their economy would probably be in far better shape than it is. It has become the most over-used cliché of the last few weeks – and like every tired cliché, simply shows that the people using it have stopped thinking clearly for themselves.
In truth, the Greek crisis is nothing like the Lehman collapse. It is far worse than that. Lehman was a short, sharp shock for the global markets, and although it caused massive damage to the global economy, it was over relatively quickly.
The sovereign debt crisis, by contrast, is going to be a long, drawn-out and messy affair, with no clean resolution. It will depress investment, economic output and equity market for years to come.
Over the course of the last week, the Greek crisis has prompted a global sell- off in every kind of asset – and rightly so. The government of the beleaguered Greek premier George Papandreou looks on its last legs. The Germans have been wrangling with the European Central Bank over the terms of a fresh bail-out. Protestors have been marching across Greece, fighting yet more austerity. There were certainly reasons to fear that Greece might be forced into a sudden default – and that would pose huge risks for the European banking system. Greek debt is hidden on balance sheets right across the financial system. No one really knows where the losses will come out.
Even so, it is nothing like Lehman Brothers. When the Wall Street investment bank collapsed in 2008, the US Treasury and the Federal Reserve had no real idea it would pose a systemic risk to the financial system. If they had, they wouldn’t have let it go down. They would have stepped in to rescue it instead. The crisis it provoked was largely unexpected.
That isn’t true of Greece. Germany’s Chancellor Angela Merkel and France’s President Nicolas Sarkozy are well aware of the threat a Greek collapse poses to the financial system. They aren’t going to let it happen until their experts have reassured them their banks can survive. After all, they aren’t stupid. They are not going to let their financial system blow up. If they have to find a few more tens of billions of euros to prop up their wayward southern neighbour for another year they will. It’s better than the alternative.
There isn’t going to be a sudden collapse. The risks are all flagged up, and everyone will work hard to avoid them.
The trouble is, Greece is just the tip of a much larger iceberg. The sovereign debt crisis is going to depress economies, deter investment, and keep a lid on assets prices for a long time yet.
Greece has been running massive budget deficits for years. So have most of the other peripheral countries, such as Portugal, Ireland, Spain and Ireland. France shows very little sign of getting its deficit under control. Neither does the US. The UK is making some progress, but lower than expected growth means we are unlikely to meet our targets. The sovereign debt crisis is not just a Greek issue. It is hitting most of the developed world.
That is going to impact the markets in three ways.
First, it is going to depress economic growth. There is only one real way to bring deficits under control, and that is to make deep and painful cuts in government spending. Nothing else works. But as governments everywhere scale back on their expenditure, growth is going to be hit. Over the medium-term, a smaller state allows the private sector to grow faster. It is a mistake to fall for the simplistic Keynesian mistake of thinking state borrowing and spending promotes growth. It doesn’t. Cuts allow the economy to grow faster – eventually. But it takes time for that to happen. And in the medium-term, the economy will be more sluggish than it otherwise would be.
Next, the debt crisis is going to deter investment. Who would want to build a new factory or sales office in any of the peripheral euro-zone countries right now? You have no idea what the economies will look like, or even what currencies they might be using in three or four years time. You are likely to face years of grinding austerity programmes as governments struggle to stay in the euro. And yet investment is the lifeblood of economic growth. If companies don’t invest, then economies are not going to be able to grow.
Finally, it is going to depress asset prices. For all the reasons outlined above, the debt crisis is going to slow global growth. That is bad for just about every class of asset, from equities, to bonds, to commodities (although probably not for gold, which is usually the one clear beneficiary of a monetary crisis). Clearly enough, that is going to depress the markets as well. But it is also means investors are going to be very cautious. The constant threat of defaults, the worries that it will lead to a fresh banking crisis, and the nervousness over which country is likely to be targeted next, will all make any kind of bull market very hard to sustain. And the lower asset prices are, the lower growth will be as well.
In many ways, we’d be better off with a Lehman moment. A quick, sharp crisis that ended with Greece defaulting on its debt, re-establishing its own currency, and one or two over-exposed banks being bailed out, would be better than a saga that drags on for years with no clear resolution. But it isn’t going to happen. The global economy suffered from the Lehman collapse – but was able to start recovering the following year. Unfortunately, this crisis will take far longer to resolve.
Wednesday, 22 June 2011
Why Aren't There More Sports Thrillers?
Over on the Curzon blog, our newest member Emlyn Rees has written an interesting post about his plans for a Wimbledon thriller. That set me to thinking about an interesting question. Why aren't there more sports thrillers?
Dick Francis, of course, made a great career of writing about horse racing. But there are very few thrillers about football, tennis, boxing, formula one, and so on. It is odd. Sport is full of drama and conflict and double-dealing, all the stuff of stories, and has a huge following.
Maybe no one has really tried. One of the projects in my drawer is a football thriller that Random House made a very low offer on at the same time as I started the Death Force series for Headline. So maybe it is just a matter of waiting for the right author to come along. But maybe its because it is impossible to write about sport in a way that doesn't seem flat compared to the real thing? The spectacle itself is so dramatic, it is hard for a writer to match the intensity of the contest. If so, there never will be a really great sports thriller.
Dick Francis, of course, made a great career of writing about horse racing. But there are very few thrillers about football, tennis, boxing, formula one, and so on. It is odd. Sport is full of drama and conflict and double-dealing, all the stuff of stories, and has a huge following.
Maybe no one has really tried. One of the projects in my drawer is a football thriller that Random House made a very low offer on at the same time as I started the Death Force series for Headline. So maybe it is just a matter of waiting for the right author to come along. But maybe its because it is impossible to write about sport in a way that doesn't seem flat compared to the real thing? The spectacle itself is so dramatic, it is hard for a writer to match the intensity of the contest. If so, there never will be a really great sports thriller.
Thursday, 16 June 2011
The Greek Default
In my MarketWatch column this week, I've been looking at what will happen to the markets if Greece defaults. You can read it here.
Monday, 13 June 2011
What Would Happen To The Markets If Mobiles Did Give You Cancer?
In my Money Week column this week I've been looking at what it would mean for the markets if mobiles did give you cancer. Here's a taster....
There is no shortage of stuff out there to make investors feel nervous. The euro could get blown apart if a long hot summer of protest in Greece and Spain boils over into civil unrest. The Chinese economy might suddenly turn down, removing just about the only source of global growth. Inflation might suddenly rip out of control, provoking central banks to sharply raise interest rates.
But there is one risk that most people probably haven’t thought about at all.
What if mobiles really do give you can cancer?
Speculation of a link between cellular technology and brain diseases has been running for a decade or more. But last week the World Health Organisation said its latest studies suggested there was a possible link between talking on your mobile and cancer.
Leave aside the medical implications for a second – although there are serious enough. This is a huge issue for the markets as well. Just think about the hundreds of billions of investment now tied up in keeping everyone texting and talking on their phones all day. From the operators, to the equipment suppliers to the handset manufacturers, to the computer and software industries, many of the largest companies in the world could be devastated if a meaningful link was ever proved.
Mobile technology has the potential to be another tobacco – a huge and powerful industry that was just about destroyed by the unfortunate fact that it killed people.
Of course, there is still no proven link between mobiles and brain disease. The WHO is not claiming that there is. It’s International Agency for Research on Cancer gathered together 31 experts to meeting in Lyon last week to review the available evidence. It concluded that there was ‘a possible’ link between mobiles and a type of cancer called glioma. The WHO has five rankings of cancer risk, ranging from ‘carcinogenic’ to ‘probably not carcinogenic’. The ‘possible’ ranking is right in the middle of the range. So it is not saying it is definite. And it isn’t ruling it our either.
For anyone tracking the industry, that isn’t particularly helpful. Lots of studies have been done of potential links to cancer, and none of them have been very conclusive so far. Mobiles appear to have some health impact. Against that, there has been no big increase in the rates of brain cancer in the twenty years or so since mobiles became a ubiquitous part of everyday life. And it is difficult for anyone to assess the data accurately because brain caner is a relatively rare condition, so there are not very many people to study.
But just because cancer rates haven’t taken off yet, it doesn’t mean they won’t. People were smoking heavily for a long time before the damage that tobacco does to your health became apparent. Asbestos was widely used in building for decades until the risks with that material were discovered. Right now, all that anyone can say is that there is some form of risk, which the medical experts will need to keep an eye on.
What we do know for certain is that if a link were ever proved, or were simply to move up from possible to probable, then the economic implications would be huge.
This is a massive industry. According to the International Telecommunication Union, there are now 5.3 billion mobile subscriptions. That is 77% of the world’s population. More than a billion handsets are being sold every year. Vast quantities of capital have been poured into building those networks. The rise of smartphones means that even more is being spent each year, and people are doing more, and spending more money on their phones. Tablet computers will only send those figures even higher.
On just about every major bourse, the big mobile players are among the leading companies. Vodafone – with a market value of £83 billion – is a giant of the FTSE. France Telecom, which owns Orange, is one of the largest businesses on the CAC-40. The world’s largest mobile operator, China Mobile, is one of the world’s biggest companies. Nokia may be struggling to re-invent itself, but it is still the world’s major handset manufacturer, and worth $25 billion. Much of the South Korean stock market depends on the mobile divisions of Samsung and LG. New players such as Taiwan’s HTC have soaring share prices (indeed, it recently overtook Nokia in value). And, of course, Apple, which is now critically dependent on its iPhone, is now the third biggest company in the world.
It doesn’t even stop there. Microsoft and Google have invested fortunes in creating mobile software divisions. Chips and other components manufacturers help sustain the commodities boom. Many retailers depend on the sales of phones. So do the new generation of app writers.
In short, mobiles have fuelled much of the growth of the world economy in the past decade. A cancer link would be an economic catastrophe as well as a medical one.
There is not a great deal investors can do about it. But they should be monitoring the medical data, and keeping up with the latest developments. And they should be preparing an exit strategy. If a link is ever decisively proved you don’t want to be holding the shares or bonds of any of the main players in the industry. You might no want to be holding equities full stop – the knock-on effects for the rest of the markets would be severe.
Meanwhile, don’t give up on some fairly old-fashioned technologies. Fixed-line operators such as British Telecom could be set for one of the greatest bounce backs of all time – and with the shares yielding 4%, it might be worth tucking a few of those away. If we all decide to get rid of our mobiles and start calling one another on the landline again, they will soar in value.
There is no shortage of stuff out there to make investors feel nervous. The euro could get blown apart if a long hot summer of protest in Greece and Spain boils over into civil unrest. The Chinese economy might suddenly turn down, removing just about the only source of global growth. Inflation might suddenly rip out of control, provoking central banks to sharply raise interest rates.
But there is one risk that most people probably haven’t thought about at all.
What if mobiles really do give you can cancer?
Speculation of a link between cellular technology and brain diseases has been running for a decade or more. But last week the World Health Organisation said its latest studies suggested there was a possible link between talking on your mobile and cancer.
Leave aside the medical implications for a second – although there are serious enough. This is a huge issue for the markets as well. Just think about the hundreds of billions of investment now tied up in keeping everyone texting and talking on their phones all day. From the operators, to the equipment suppliers to the handset manufacturers, to the computer and software industries, many of the largest companies in the world could be devastated if a meaningful link was ever proved.
Mobile technology has the potential to be another tobacco – a huge and powerful industry that was just about destroyed by the unfortunate fact that it killed people.
Of course, there is still no proven link between mobiles and brain disease. The WHO is not claiming that there is. It’s International Agency for Research on Cancer gathered together 31 experts to meeting in Lyon last week to review the available evidence. It concluded that there was ‘a possible’ link between mobiles and a type of cancer called glioma. The WHO has five rankings of cancer risk, ranging from ‘carcinogenic’ to ‘probably not carcinogenic’. The ‘possible’ ranking is right in the middle of the range. So it is not saying it is definite. And it isn’t ruling it our either.
For anyone tracking the industry, that isn’t particularly helpful. Lots of studies have been done of potential links to cancer, and none of them have been very conclusive so far. Mobiles appear to have some health impact. Against that, there has been no big increase in the rates of brain cancer in the twenty years or so since mobiles became a ubiquitous part of everyday life. And it is difficult for anyone to assess the data accurately because brain caner is a relatively rare condition, so there are not very many people to study.
But just because cancer rates haven’t taken off yet, it doesn’t mean they won’t. People were smoking heavily for a long time before the damage that tobacco does to your health became apparent. Asbestos was widely used in building for decades until the risks with that material were discovered. Right now, all that anyone can say is that there is some form of risk, which the medical experts will need to keep an eye on.
What we do know for certain is that if a link were ever proved, or were simply to move up from possible to probable, then the economic implications would be huge.
This is a massive industry. According to the International Telecommunication Union, there are now 5.3 billion mobile subscriptions. That is 77% of the world’s population. More than a billion handsets are being sold every year. Vast quantities of capital have been poured into building those networks. The rise of smartphones means that even more is being spent each year, and people are doing more, and spending more money on their phones. Tablet computers will only send those figures even higher.
On just about every major bourse, the big mobile players are among the leading companies. Vodafone – with a market value of £83 billion – is a giant of the FTSE. France Telecom, which owns Orange, is one of the largest businesses on the CAC-40. The world’s largest mobile operator, China Mobile, is one of the world’s biggest companies. Nokia may be struggling to re-invent itself, but it is still the world’s major handset manufacturer, and worth $25 billion. Much of the South Korean stock market depends on the mobile divisions of Samsung and LG. New players such as Taiwan’s HTC have soaring share prices (indeed, it recently overtook Nokia in value). And, of course, Apple, which is now critically dependent on its iPhone, is now the third biggest company in the world.
It doesn’t even stop there. Microsoft and Google have invested fortunes in creating mobile software divisions. Chips and other components manufacturers help sustain the commodities boom. Many retailers depend on the sales of phones. So do the new generation of app writers.
In short, mobiles have fuelled much of the growth of the world economy in the past decade. A cancer link would be an economic catastrophe as well as a medical one.
There is not a great deal investors can do about it. But they should be monitoring the medical data, and keeping up with the latest developments. And they should be preparing an exit strategy. If a link is ever decisively proved you don’t want to be holding the shares or bonds of any of the main players in the industry. You might no want to be holding equities full stop – the knock-on effects for the rest of the markets would be severe.
Meanwhile, don’t give up on some fairly old-fashioned technologies. Fixed-line operators such as British Telecom could be set for one of the greatest bounce backs of all time – and with the shares yielding 4%, it might be worth tucking a few of those away. If we all decide to get rid of our mobiles and start calling one another on the landline again, they will soar in value.
Wednesday, 8 June 2011
Writing On Trains...
I seem to have been on a lot of trains recently, which may help explain why I haven't had much time to blog recently. I went to Scotland to promote the Death Force books, and my book on the euro crisis is coming out in Germany soon, so I went there to help promote that. I don't really like flying very much, so in both cases I got the train.
It's a pleasant way to travel, although rather unexpectedly the German train broke down somewhere between Brussels and the border, which meant I had to get a bus the rest of the way to Cologne. Still, it's not as if planes don't get delayed all the time...and when a plane breaks down, it has a tendency to drop out of the sky.
But the best thing about trains is that they give you a chance to write.
I can write pretty well most places. I know some writers like to be in the same place all the time, but I'm quite happy to write in a cafe, or at home, or on a hotel balcony.
Overall, however, I think trains are my favourite.
There is something about the steady motion that aids the creative process. Looking out of the window creates a sense of the world going by, of events unfolding, which makes it very easy to create a similar sense of movement on the page. You can can pause, look out of the window for a while, then crack on with the next sentence. It is just the right amount of distraction. Not too little, but not too much either.
I suspect if I bought a euro-rail ticket and spent six months writing my next book on trains the effect would wear off.
But I got a lot of work done on those two trips.
It's a pleasant way to travel, although rather unexpectedly the German train broke down somewhere between Brussels and the border, which meant I had to get a bus the rest of the way to Cologne. Still, it's not as if planes don't get delayed all the time...and when a plane breaks down, it has a tendency to drop out of the sky.
But the best thing about trains is that they give you a chance to write.
I can write pretty well most places. I know some writers like to be in the same place all the time, but I'm quite happy to write in a cafe, or at home, or on a hotel balcony.
Overall, however, I think trains are my favourite.
There is something about the steady motion that aids the creative process. Looking out of the window creates a sense of the world going by, of events unfolding, which makes it very easy to create a similar sense of movement on the page. You can can pause, look out of the window for a while, then crack on with the next sentence. It is just the right amount of distraction. Not too little, but not too much either.
I suspect if I bought a euro-rail ticket and spent six months writing my next book on trains the effect would wear off.
But I got a lot of work done on those two trips.
Monday, 6 June 2011
Is Now The Time To Sell Gold?
I've kicked off a new column on the Wall Street Journal's Marketwatch site today with a piece about gold. Seems to be getting plenty of hits and feedback from readers. you can read it here.
The Decline of the IPO....
In my Money Week column this week I've been looking at the decline of the IPO. Here's a taster...
The City, just like every other tight-knit profession, observes its own omerta: an unwritten code that whatever arguments may break out within the community, you don’t make them public. So when major institutions start falling out with each other in a very public way, it is time to take notice.
Last week, the fund manager BlackRock launched a biting attack on the way IPO’s were handled. The fees, they complained, were outrageous. The bankers were actively deterring new companies from coming to the market.
The point was a good one – and long overdue.
The number of new companies listing has been declining for years. But raising money for new companies is the fundamental purpose of a stock market - if it doesn't do that, it is really just a casino. What the IPO market needs is new banks that get it right - because the existing players have clearly forgotten what a stockmarket is actually for.
In a letter sent last week, Luke Chappell and James Macpherson, two of BlackRock’s most senior UK executives, laid into the banks arranging new listings with both barrels of a metaphorical shotgun. “It is in all of our interests for London to remain at the centre of a thriving capital market,” they wrote. “We are always keen to invest in companies that need equity to develop their businesses, particularly in opportunities that we are currently unable to access. However, recent developments in the IPO market have, at times, been frustrating.”
Specifically, they accused the banks of being too aggressive on price, demanding fees that were way to high, and not allowing fund managers enough time to get to know a business before they invest in it.
Given that BlackRock, with assets under management of more than £2 billion, is the single largest investor in the UK stock market, its complaints will have carried plenty of weight.
And the record of recent IPOs suggests they are onto something. Glencore, a mega-IPO that because of its size was always going to vault straight into the upper reaches of the FTSE-100 index, managed to get its IPO away, but the shares immediately sank below the issue price. Betfair, the online betting company that staged one of the biggest IPOs of last year, jumped to a premium on its first few days of trading, but is now well below its issue price. Other new issues have had to be pulled because the demand for the shares just wasn’t there.
That matters. When fund managers buy into an IPO they want to see the share price going up steadily for at least a couple of years. Everyone understands that the prospects for a company can change. But if the idea becomes fixed in investors minds that IPO prices are unreasonably hyped-up, and whoever gets suckered into buying into them is going to end up losing money, then it won’t be any great surprise if they increasingly steer clear of new issues.
The figures suggest that is already happening. The numbers of new companies joining the stock market is, as a percentage of the economy, declining all the time. According to the World Federation of Exchanges, the number of quoted companies has been roughly static – at around 45,000 businesses globally – since 2005. In the Americas, it is going down, whilst in Europe it is only going up fractionally (0.1% over five years). Since the world economy has been expanding at around 4% a year, apart from the recession of 2009, you would expect the number of quoted companies to be growing at 4% to 5% annually. But it’s not. Some high-profile names aren’t even bothering with the hassle of a quotation. Facebook, for example, chose to sell shares privately, rather than go to the bother of an IPO.
So, overall, the number of listed companies is going down, or standing still. And yet the number of trades has roughly doubled in this period. So investors are, in effect, trading less and less ever more frantically.
That is hardly a happy situation for the long-term health of a market.
First, new companies are the lifeblood of any bourse. Young companies are where the real growth is going to come from. If they can’t be bothered to join the stock market, or they find the process too expensive, then the main indices are just going to become a collection of older and older businesses. They won’t be able to grow as fast as the economy – and eventually investors will have to find some other way to buy into corporate growth.
Next, raising capital for companies is what a stock market exists for. It is why they were created in the first place – to allow new business to raise money on a scale they could never hope to get hold of whilst remaining private. If they don’t do that, then they really are, as their critics maintain, just casino tables without the bight lights and cocktails. Without any real purpose, nobody should be surprised if they get regulated out of existence.
The core problem is that the investment banks have forgotten how to build and maintain long-term relationships, both with the companies they bring to the market, and the investors that buy shares in them.
Two changes need to be made. First, the sponsoring bank should take a lot more time getting to know the businesses they are bringing to the market, understanding the medium-term prospects of each one, and figuring out how to price it accordingly. Ideally, the shares would deliver a steady 10-15% a year for at least three years after the IPO. Investors would then feel reasonably confident the IPO was worth supporting.
Perhaps the main investment banks don’t want to do that. They may have become so immersed in a short-term, quick profits culture that they no longer find it possible to build relationships over five years. If so, new players should emerge to take their place – because if they don’t, eventually equity markets are going to fade away.
The City, just like every other tight-knit profession, observes its own omerta: an unwritten code that whatever arguments may break out within the community, you don’t make them public. So when major institutions start falling out with each other in a very public way, it is time to take notice.
Last week, the fund manager BlackRock launched a biting attack on the way IPO’s were handled. The fees, they complained, were outrageous. The bankers were actively deterring new companies from coming to the market.
The point was a good one – and long overdue.
The number of new companies listing has been declining for years. But raising money for new companies is the fundamental purpose of a stock market - if it doesn't do that, it is really just a casino. What the IPO market needs is new banks that get it right - because the existing players have clearly forgotten what a stockmarket is actually for.
In a letter sent last week, Luke Chappell and James Macpherson, two of BlackRock’s most senior UK executives, laid into the banks arranging new listings with both barrels of a metaphorical shotgun. “It is in all of our interests for London to remain at the centre of a thriving capital market,” they wrote. “We are always keen to invest in companies that need equity to develop their businesses, particularly in opportunities that we are currently unable to access. However, recent developments in the IPO market have, at times, been frustrating.”
Specifically, they accused the banks of being too aggressive on price, demanding fees that were way to high, and not allowing fund managers enough time to get to know a business before they invest in it.
Given that BlackRock, with assets under management of more than £2 billion, is the single largest investor in the UK stock market, its complaints will have carried plenty of weight.
And the record of recent IPOs suggests they are onto something. Glencore, a mega-IPO that because of its size was always going to vault straight into the upper reaches of the FTSE-100 index, managed to get its IPO away, but the shares immediately sank below the issue price. Betfair, the online betting company that staged one of the biggest IPOs of last year, jumped to a premium on its first few days of trading, but is now well below its issue price. Other new issues have had to be pulled because the demand for the shares just wasn’t there.
That matters. When fund managers buy into an IPO they want to see the share price going up steadily for at least a couple of years. Everyone understands that the prospects for a company can change. But if the idea becomes fixed in investors minds that IPO prices are unreasonably hyped-up, and whoever gets suckered into buying into them is going to end up losing money, then it won’t be any great surprise if they increasingly steer clear of new issues.
The figures suggest that is already happening. The numbers of new companies joining the stock market is, as a percentage of the economy, declining all the time. According to the World Federation of Exchanges, the number of quoted companies has been roughly static – at around 45,000 businesses globally – since 2005. In the Americas, it is going down, whilst in Europe it is only going up fractionally (0.1% over five years). Since the world economy has been expanding at around 4% a year, apart from the recession of 2009, you would expect the number of quoted companies to be growing at 4% to 5% annually. But it’s not. Some high-profile names aren’t even bothering with the hassle of a quotation. Facebook, for example, chose to sell shares privately, rather than go to the bother of an IPO.
So, overall, the number of listed companies is going down, or standing still. And yet the number of trades has roughly doubled in this period. So investors are, in effect, trading less and less ever more frantically.
That is hardly a happy situation for the long-term health of a market.
First, new companies are the lifeblood of any bourse. Young companies are where the real growth is going to come from. If they can’t be bothered to join the stock market, or they find the process too expensive, then the main indices are just going to become a collection of older and older businesses. They won’t be able to grow as fast as the economy – and eventually investors will have to find some other way to buy into corporate growth.
Next, raising capital for companies is what a stock market exists for. It is why they were created in the first place – to allow new business to raise money on a scale they could never hope to get hold of whilst remaining private. If they don’t do that, then they really are, as their critics maintain, just casino tables without the bight lights and cocktails. Without any real purpose, nobody should be surprised if they get regulated out of existence.
The core problem is that the investment banks have forgotten how to build and maintain long-term relationships, both with the companies they bring to the market, and the investors that buy shares in them.
Two changes need to be made. First, the sponsoring bank should take a lot more time getting to know the businesses they are bringing to the market, understanding the medium-term prospects of each one, and figuring out how to price it accordingly. Ideally, the shares would deliver a steady 10-15% a year for at least three years after the IPO. Investors would then feel reasonably confident the IPO was worth supporting.
Perhaps the main investment banks don’t want to do that. They may have become so immersed in a short-term, quick profits culture that they no longer find it possible to build relationships over five years. If so, new players should emerge to take their place – because if they don’t, eventually equity markets are going to fade away.
Monday, 30 May 2011
The Decline of Home Ownership
In my Money Week column this week, I've been looking at the decline of home ownership, and what it means. Here's a taster....
There aren’t many things that everyone in the country can agree on. We’re not likely to win the Euro 2012 championship with Fabio Capello still in charge of the team perhaps. Possibly that Pippa Middleton has a stunning, er, figure. And, of course, that owning your own house is what everyone aspires to – and the bigger the house, and the smaller the mortgage, the better.
Except that now even that last one might have to be scratched from the list. After nearly half a century during which the British increasingly owned their own homes, and when home ownership has been held up as the summit of social aspiration, fewer of us now own the place we live in every year.
Home ownership is now falling sharply in the UK, as it is in the US as well. That trend is well-established, and likely to accelerate over the coming decade. For the financial services industry that has huge implications it has barely even begun to take on board yet. The banking and savings industry is largely built around helping people to own their own home, and allowing them to borrow money against it once they do. If that is no longer a mainstream aspiration, it will have to re-organise itself completely.
The decline in home ownership is already well-established. The peak in owner-occupation was reached all the way back in 2003, when it hit 70.9% of English households. Since then, it has been going down at a steady rate of about 0.5% a year, which has bought it down to 67.5% for 2010, the latest date for which numbers are available. Owner occupation is now back to the same levels it was in 1991, so in effect there has been no growth for 20 years.
Don’t expect that to change soon – if anything the trend is likely to accelerate.
For starters, government subsidies have been steadily withdrawn. You used to get tax relief on mortgage interest payments, so that in effect the government paid part of your mortgage for you. That was steadily withdrawn, and finally abolished about ten years ago. These days, steadily rising council taxes and stamp duties mean that far from subsidising home ownership, the government now actively penalises it.
Next, houses are still very expensive. The long-term figures suggest the average house should be worth 3.5 times the average salary. They are still way above that. One reason why people aren’t buying homes any more is that they are too expensive – and until that starts to change, owner occupation rates aren’t going to rise.
Thirdly, and most importantly, the days of easy debt are well and truly over. The housing boom was largely fuelled by borrowed money, but that too is now much harder to come by. In the UK, the average deposit on a first home is £26,000, a big sum when there are student debts to pay, and real wages are falling. Pushing owner-occupation levels up to 70%-plus was only really possible when there were 125% self-cert mortgages available – in other words by lending money to people who couldn’t really afford it. The banks are not going to be doing that again for a long time – and that means that ownership will be restricted to a narrower range of people.
Take all those three factors together, and it is hardly surprising that owning your own house is less popular than it used to be. Where the numbers will settle exactly, we don’t know yet. But it is not going to be anything like the levels we were used to.
So what does that mean for financial services? There are three big points.
First, mortgage lending is not going to be the dominant force it once was. Mortgages have been a huge industry in the UK, employing tens of thousands of brokers, advisers and solicitors. It has been the major revenue source for the High Street banks and the building societies. But lower home ownership means fewer new mortgages. It’s already happening. Back in 2001, 41% of households had a mortgage. It is already down to 35%, and on current trends it is going to keep on falling. There will be less business for everyone in the industry. A lot of those jobs are going to disappear, and the profits with them
Second, lending is going to be a lot harder. Banks won’t be able to dish out money against people’s houses the way they used to. Fewer people will own their house, and those that do will probably be higher up the income scale, and so won’t need credit the way younger, cash-strapped people do. A lot of the personal lending industry is going to vanish. That which remains will have to find new and smarter ways of judging whether people are a good credit risk or not – because they won’t simply be able to take a charge over people’s houses and threaten to take them it if they don’t pay.
Lastly, and perhaps most importantly, renting will be a huge growth industry. Just because home ownerships is in decline it doesn’t mean people are going to start sleeping rough. They’ll still be living in apartments and houses, it is just that other people will own them, and they’ll be paying rent instead of mortgages. There are already more people in private rented property than local authority or social housing. The buy-to-let sector, which took such a knock during the credit crunch, is going to bounce back strongly. New private rental corporations, owning huge numbers of properties, are going to start emerging. The banks will need to start lending to them. And many of the brokers will need to turn themselves into letting agents instead.
There will be opportunities as well as threats, just as there are with any big social change. The traditional building societies will be hit hardest: their entire business was about helping ordinary people onto the property ladder. But the whole financial services industry is going to be knocked – unless it finds a way to re-invent itself fast.
There aren’t many things that everyone in the country can agree on. We’re not likely to win the Euro 2012 championship with Fabio Capello still in charge of the team perhaps. Possibly that Pippa Middleton has a stunning, er, figure. And, of course, that owning your own house is what everyone aspires to – and the bigger the house, and the smaller the mortgage, the better.
Except that now even that last one might have to be scratched from the list. After nearly half a century during which the British increasingly owned their own homes, and when home ownership has been held up as the summit of social aspiration, fewer of us now own the place we live in every year.
Home ownership is now falling sharply in the UK, as it is in the US as well. That trend is well-established, and likely to accelerate over the coming decade. For the financial services industry that has huge implications it has barely even begun to take on board yet. The banking and savings industry is largely built around helping people to own their own home, and allowing them to borrow money against it once they do. If that is no longer a mainstream aspiration, it will have to re-organise itself completely.
The decline in home ownership is already well-established. The peak in owner-occupation was reached all the way back in 2003, when it hit 70.9% of English households. Since then, it has been going down at a steady rate of about 0.5% a year, which has bought it down to 67.5% for 2010, the latest date for which numbers are available. Owner occupation is now back to the same levels it was in 1991, so in effect there has been no growth for 20 years.
Don’t expect that to change soon – if anything the trend is likely to accelerate.
For starters, government subsidies have been steadily withdrawn. You used to get tax relief on mortgage interest payments, so that in effect the government paid part of your mortgage for you. That was steadily withdrawn, and finally abolished about ten years ago. These days, steadily rising council taxes and stamp duties mean that far from subsidising home ownership, the government now actively penalises it.
Next, houses are still very expensive. The long-term figures suggest the average house should be worth 3.5 times the average salary. They are still way above that. One reason why people aren’t buying homes any more is that they are too expensive – and until that starts to change, owner occupation rates aren’t going to rise.
Thirdly, and most importantly, the days of easy debt are well and truly over. The housing boom was largely fuelled by borrowed money, but that too is now much harder to come by. In the UK, the average deposit on a first home is £26,000, a big sum when there are student debts to pay, and real wages are falling. Pushing owner-occupation levels up to 70%-plus was only really possible when there were 125% self-cert mortgages available – in other words by lending money to people who couldn’t really afford it. The banks are not going to be doing that again for a long time – and that means that ownership will be restricted to a narrower range of people.
Take all those three factors together, and it is hardly surprising that owning your own house is less popular than it used to be. Where the numbers will settle exactly, we don’t know yet. But it is not going to be anything like the levels we were used to.
So what does that mean for financial services? There are three big points.
First, mortgage lending is not going to be the dominant force it once was. Mortgages have been a huge industry in the UK, employing tens of thousands of brokers, advisers and solicitors. It has been the major revenue source for the High Street banks and the building societies. But lower home ownership means fewer new mortgages. It’s already happening. Back in 2001, 41% of households had a mortgage. It is already down to 35%, and on current trends it is going to keep on falling. There will be less business for everyone in the industry. A lot of those jobs are going to disappear, and the profits with them
Second, lending is going to be a lot harder. Banks won’t be able to dish out money against people’s houses the way they used to. Fewer people will own their house, and those that do will probably be higher up the income scale, and so won’t need credit the way younger, cash-strapped people do. A lot of the personal lending industry is going to vanish. That which remains will have to find new and smarter ways of judging whether people are a good credit risk or not – because they won’t simply be able to take a charge over people’s houses and threaten to take them it if they don’t pay.
Lastly, and perhaps most importantly, renting will be a huge growth industry. Just because home ownerships is in decline it doesn’t mean people are going to start sleeping rough. They’ll still be living in apartments and houses, it is just that other people will own them, and they’ll be paying rent instead of mortgages. There are already more people in private rented property than local authority or social housing. The buy-to-let sector, which took such a knock during the credit crunch, is going to bounce back strongly. New private rental corporations, owning huge numbers of properties, are going to start emerging. The banks will need to start lending to them. And many of the brokers will need to turn themselves into letting agents instead.
There will be opportunities as well as threats, just as there are with any big social change. The traditional building societies will be hit hardest: their entire business was about helping ordinary people onto the property ladder. But the whole financial services industry is going to be knocked – unless it finds a way to re-invent itself fast.
Sunday, 1 May 2011
How To Make Money From Writing,,,,,
It might not always feel like it, but there is money in the thriller writing business….eventually. The TV channel Alibi has put together a list of the highest-earning crime and thriller writers, on both sides of the Atlantic. Ian Fleming is top of the British list, with earnings of a £100 million-plus, followed by Agatha Christie, and then by Jeffrey Archer (although I don’t think of him as a thriller writer).
Over in the US, it is headed by John Grisham on an extraordinary $600 million, followed by Dan Brown on $400 million – although I reckon if work it out per book, Brown has done better.
Are there any lessons in this for the rest of us writers? Two, I think. The first is that it takes a long time. All the writers on both lists have been writing for a long time – even Dan Brown published his first book in 1998 and it was a while before he had any success.
The second is that you have to write a lot. All the writers on the list are prolific, knocking out book after book. There are no one-hit wonders.
Anyway, I guess the moral is to keep plugging away. Riches await….although hopefully not after I’m dead.
Over in the US, it is headed by John Grisham on an extraordinary $600 million, followed by Dan Brown on $400 million – although I reckon if work it out per book, Brown has done better.
Are there any lessons in this for the rest of us writers? Two, I think. The first is that it takes a long time. All the writers on both lists have been writing for a long time – even Dan Brown published his first book in 1998 and it was a while before he had any success.
The second is that you have to write a lot. All the writers on the list are prolific, knocking out book after book. There are no one-hit wonders.
Anyway, I guess the moral is to keep plugging away. Riches await….although hopefully not after I’m dead.
Monday, 25 April 2011
To Be A Better Trader, Try Being Happier.
In my Money Week column this week, I'm looking at how you can become a better trader - just by being happier. Here's a taster.
What makes a successful trader or fund manager? An all-encompassing view of how the global economy is developing? An instinct for a bargain? A fleetness of foot, and the confidence to take bold positions? A willingness to ignore the herd, and buy the stuff everyone else is selling? Or the patience and perseverance of a tortoise?
They are all perfectly reasonable suggestions, and there are many great traders and investors who have made fortunes through one or other of qualities.
But actually the answer may be a lot simpler.
Just try being a bit happier.
According to research released this month by the French business school Insead, the happier people are, the better they are at predicting the future – and the more depressed they are, the worse they are.
The implication is clear, both for banks and fund managers. Just make sure your traders and stock-pickers are cheerful and positive, and their performance will improve. The trouble is, however, they are caught in a classic Catch-22. Everything about the way most people in the financial markets work is guaranteed to make them miserable – and therefore to make them worse at their jobs.
The Insead research provided a fascinating insight into what makes people good at predicting future events – and what makes them bad at it as well. It has long been noted that more cheerful people tend to have a more optimistic view of the future, whilst the more miserable, not very surprisingly, are usually more pessimistic. In the markets, the optimists are usually bulls, while the pessimists are bears.
The Insead study went a lot deeper than that. It took 1,100 people, and asked them to predict the results of games during the 2010 World Cup. They weren’t particularly being optimistic or pessimistic – they weren’t making predictions for their own nations - they were just forecasting what was likely to happen. As an incentive to try and get it right, there was a cash prize for getting it right.
Interestingly, the more depressed the people were, the less likely they were to make accurate predictions. Indeed, many of the most down in the dumps did worse than they would have done just by picking winners from a hat. And they were significantly more likely to make ridiculous predictions, such as forecasting that North Korea would win the whole tournament.
The Insead team is now taking the same methods, and applying then directly to the emotional states of stock and commodity traders. But the implications are already clear enough. If being happy or depressed has a bearing on your ability to forecast the outcome of events, then it follows that happier fund managers or traders will be better at their jobs than their more morose colleagues.
The snag is, how do you influence the happiness of your staff?
Well, in truth, it isn’t that hard.
We have a fairly good understanding of what makes people feel good about life, and what make them depressed. Most of the key points were summarised by the ‘Action for Happiness’ campaign launched earlier this month by Professor Richard Layard, the guru of happiness economics, among others.
Happiness, it turns out, comes down to a few fairly simple things. Do things for other people. Take care of your body. Notice the world around you. Keep learning new things. Be part of something bigger. Have goals to look forward to. They may sound fairly like being in favour of motherhood and apple pie, yet, despite sounding platitudinous, they are certainly likely to make people more balanced and positive, and significantly less likely to suffer bouts of depression.
Here’s the catch, however.
They are not the kind of values promoted within the average bank or fund management firm.
If anything, the financial markets do precisely the opposite of what is likely to make people happy.
They concentrate on paying out huge cash bonuses, usually tied to demanding performance criteria, even though there is very little evidence to suggest that beyond a certain minimum level having more money actually makes people any happier.
They promote a ruthless competition between staff, and between companies, constantly benchmarking their performance against their peers. In fund management, for example, you have failed if you haven’t managed to beat the guy doing the same job at the next fund, even though you may have made plenty of money for your investors. And yet that is only likely to make their staff feel anxious and insecure.
And they promote a relentless short-termism, continually shortening the time to come up with results, even though it is usually far better to concentrate on medium-term performance, and more satisfying for the staff as well.
In short, if they were deliberately setting out to make their traders and stock-pickers depressed, it is hard to see how they could be doing a better job.
But, of course, the more depressed their staff are, the worse they will be at their jobs. In fact, it is a classic Catch-22. To trade well, you have to be happy, but everything about the work is likely to make you depressed, so you’ll end up being a very bad trader – the kind of person who thinks North Korea will win the World Cup, or that oil will be trading back at $20 a barrel by the end of next year.
Is there a way out of that? Perhaps.
Maybe investors should stop looking at all those charts that banks and fund managers love to produce showing how they out-performed their peers over the last there months. And maybe they should stop listening to all those boastful adverts about how the pay of staff is linked to performance.
Instead, just ask if the traders and stock-pickers are cheerful, feeling good about themselves, and are well looked after. Who knows, over the medium-term it might even produce better results.
What makes a successful trader or fund manager? An all-encompassing view of how the global economy is developing? An instinct for a bargain? A fleetness of foot, and the confidence to take bold positions? A willingness to ignore the herd, and buy the stuff everyone else is selling? Or the patience and perseverance of a tortoise?
They are all perfectly reasonable suggestions, and there are many great traders and investors who have made fortunes through one or other of qualities.
But actually the answer may be a lot simpler.
Just try being a bit happier.
According to research released this month by the French business school Insead, the happier people are, the better they are at predicting the future – and the more depressed they are, the worse they are.
The implication is clear, both for banks and fund managers. Just make sure your traders and stock-pickers are cheerful and positive, and their performance will improve. The trouble is, however, they are caught in a classic Catch-22. Everything about the way most people in the financial markets work is guaranteed to make them miserable – and therefore to make them worse at their jobs.
The Insead research provided a fascinating insight into what makes people good at predicting future events – and what makes them bad at it as well. It has long been noted that more cheerful people tend to have a more optimistic view of the future, whilst the more miserable, not very surprisingly, are usually more pessimistic. In the markets, the optimists are usually bulls, while the pessimists are bears.
The Insead study went a lot deeper than that. It took 1,100 people, and asked them to predict the results of games during the 2010 World Cup. They weren’t particularly being optimistic or pessimistic – they weren’t making predictions for their own nations - they were just forecasting what was likely to happen. As an incentive to try and get it right, there was a cash prize for getting it right.
Interestingly, the more depressed the people were, the less likely they were to make accurate predictions. Indeed, many of the most down in the dumps did worse than they would have done just by picking winners from a hat. And they were significantly more likely to make ridiculous predictions, such as forecasting that North Korea would win the whole tournament.
The Insead team is now taking the same methods, and applying then directly to the emotional states of stock and commodity traders. But the implications are already clear enough. If being happy or depressed has a bearing on your ability to forecast the outcome of events, then it follows that happier fund managers or traders will be better at their jobs than their more morose colleagues.
The snag is, how do you influence the happiness of your staff?
Well, in truth, it isn’t that hard.
We have a fairly good understanding of what makes people feel good about life, and what make them depressed. Most of the key points were summarised by the ‘Action for Happiness’ campaign launched earlier this month by Professor Richard Layard, the guru of happiness economics, among others.
Happiness, it turns out, comes down to a few fairly simple things. Do things for other people. Take care of your body. Notice the world around you. Keep learning new things. Be part of something bigger. Have goals to look forward to. They may sound fairly like being in favour of motherhood and apple pie, yet, despite sounding platitudinous, they are certainly likely to make people more balanced and positive, and significantly less likely to suffer bouts of depression.
Here’s the catch, however.
They are not the kind of values promoted within the average bank or fund management firm.
If anything, the financial markets do precisely the opposite of what is likely to make people happy.
They concentrate on paying out huge cash bonuses, usually tied to demanding performance criteria, even though there is very little evidence to suggest that beyond a certain minimum level having more money actually makes people any happier.
They promote a ruthless competition between staff, and between companies, constantly benchmarking their performance against their peers. In fund management, for example, you have failed if you haven’t managed to beat the guy doing the same job at the next fund, even though you may have made plenty of money for your investors. And yet that is only likely to make their staff feel anxious and insecure.
And they promote a relentless short-termism, continually shortening the time to come up with results, even though it is usually far better to concentrate on medium-term performance, and more satisfying for the staff as well.
In short, if they were deliberately setting out to make their traders and stock-pickers depressed, it is hard to see how they could be doing a better job.
But, of course, the more depressed their staff are, the worse they will be at their jobs. In fact, it is a classic Catch-22. To trade well, you have to be happy, but everything about the work is likely to make you depressed, so you’ll end up being a very bad trader – the kind of person who thinks North Korea will win the World Cup, or that oil will be trading back at $20 a barrel by the end of next year.
Is there a way out of that? Perhaps.
Maybe investors should stop looking at all those charts that banks and fund managers love to produce showing how they out-performed their peers over the last there months. And maybe they should stop listening to all those boastful adverts about how the pay of staff is linked to performance.
Instead, just ask if the traders and stock-pickers are cheerful, feeling good about themselves, and are well looked after. Who knows, over the medium-term it might even produce better results.
Monday, 18 April 2011
Great Review Of Shadow Force...from Aus.
There is a great review of Shadow Force from ABC Brisbane in Australia. "It's loud, it's fast and it's extremely aggressive.....Action, adventure and lots of guns combined with an excellent political sub-plot. For teenage boys or simply for those men who don't want to grow up, Shadow Force is a cracking read. Intellectually stimulating it ain't; fantastic fun it most certainly is."
You can read the whole thing here.
You can read the whole thing here.
How Much Research Is Enough?
Over at the International Thriller Writers site, I'm taking part in a round table on how much research is enough. Here's what I had to say - but take a look at the rest of the discussion.
I think research is one of those things where it helps to have experience. As CE Lawrence quite rightly points out, it is easy for the research to show too much on the page. A writer needs to know their subject, and to have a real feel for it. They need to know their characters as well, and have a real feel for the kinds of things they would think and feel and say as well. But they don’t have to have a text-book knowledge of everything they are writing about.
I suspect that attitudes to research have changed over the years as well. When I was writing ‘Fire Force’, which is a book set amongst mercenaries in Africa, I went back and re-read some of the classics of the genre. For example, I re-read ‘The Dogs of War’ by Frederick Forsyth. I can remember reading it when it came out, when I would have been about ten, and loving it. But today it seems like a really dull book, mainly because there is just too much research in it. The hero spends ages and ages setting up the mission. He regularly travels to Brussels to set up false bank accounts – by train and ferry, for Heaven’s sake, which takes up many pages. He doesn’t even get a plane. In the end, it just makes for what today seems a really dull read.
By contrast, ‘The Da Vinci Code’ is a poorly researched book. There are plenty or mistakes. Indeed, Westminster Abbey in London even had to issue a guidebook for tourists correcting some of the factual errors because so many tourists came in asking about them. But who cares? It’s a really good book – and it certainly sold well.
Thirty years ago, I think people expected thrillers to be very research-driven. But not right now. Today the key is to create your characters, and your story, and then do the research that is necessary to get things right. But this is fiction – its the plot and the people that really count.
I think research is one of those things where it helps to have experience. As CE Lawrence quite rightly points out, it is easy for the research to show too much on the page. A writer needs to know their subject, and to have a real feel for it. They need to know their characters as well, and have a real feel for the kinds of things they would think and feel and say as well. But they don’t have to have a text-book knowledge of everything they are writing about.
I suspect that attitudes to research have changed over the years as well. When I was writing ‘Fire Force’, which is a book set amongst mercenaries in Africa, I went back and re-read some of the classics of the genre. For example, I re-read ‘The Dogs of War’ by Frederick Forsyth. I can remember reading it when it came out, when I would have been about ten, and loving it. But today it seems like a really dull book, mainly because there is just too much research in it. The hero spends ages and ages setting up the mission. He regularly travels to Brussels to set up false bank accounts – by train and ferry, for Heaven’s sake, which takes up many pages. He doesn’t even get a plane. In the end, it just makes for what today seems a really dull read.
By contrast, ‘The Da Vinci Code’ is a poorly researched book. There are plenty or mistakes. Indeed, Westminster Abbey in London even had to issue a guidebook for tourists correcting some of the factual errors because so many tourists came in asking about them. But who cares? It’s a really good book – and it certainly sold well.
Thirty years ago, I think people expected thrillers to be very research-driven. But not right now. Today the key is to create your characters, and your story, and then do the research that is necessary to get things right. But this is fiction – its the plot and the people that really count.
Sunday, 17 April 2011
Bust is Shortlisted for Best Business Book....
I'm getting a lot of awards right now. 'Bust' has just been short-listed for the Spear's Book Awards Business Book of the Year award. The results are announced in June. Fingers crossed.
SABEW Award
My Bloomberg column has been awarded a prize for best opinion writer by the Society of American Business Writers and Editors.
The Vickers Whitewash....
In this week's Money Week column, I've been looking at the Vickers Report, and how it let the banks off the hook. Here's a taster....
This year, the UK had a Goldilocks moment to get to grips with its over-mighty finance industry. Two years ago, the banks were still too weak. You can’t put a patient in for major heart surgery when they are still recovering from a car crash. In the immediate wake of the credit crunch, the banks could not have survived radical restructuring. And in another two years, the banks will all be making big profits again, paying lots of corporation tax, and paying big donations to political parties. The memory of the credit crunch will have faded, and the political will to break then up will have evaporated.
But right now, the banks are strong enough to take some punishment. And the desire to make sure the events of 2008 are never repeated is still there. As Goldilocks would put it, it is neither too hot nor too cold – but just right.
Despite that, Sir John Vickers and his colleagues on the Independent Banking Commission blew it. Last Monday’s report on the future of the British financial services industry was the dampest possible squib. Its response was so feeble, and so irrelevant, that it now looks the British banks have in effect escaped from the worst series of collapses in a century or more without any meaningful reform to the way they operate.
No one can be in much doubt that Britain’s banking industry is in need of a major structural overhaul. Put simply, this country’s banks have become too big, and too risky, for the size of the economy that ultimately underpins them.
The point was well illustrated in a research note published by UBS last month. Barclays now has a balance sheet worth 100% of GDP. For a comparison, JP Morgan has a balance sheet worth 24% of US GDP. In effect, Britain is host to three very large banks – Barclays, HSBC and Royal Bank of Scotland – each of which has the potential to quite literally bankrupt the country.
We have already seen how Iceland and Ireland were ruined by the recklessness of their financiers. The same could easily happen to this country. It is a threat, and one the Commission had a duty to take seriously.
And yet, probably under the influence of lobbying from the banking industry, it has largely ignored it. The report singles out Lloyds for its main attention – when, in fact, it is the bank that poses the least threat to the stability of the financial system.
Lloyds will be forced to sell off more branches, over and above the 600 the EU is already making it get rid of. It is certainly true that Gordon Brown’s decision to bounced Lloyds into merging with HBOS was one of the former Prime Minister’s many catastrophic mistakes. It ruined a fairly sound bank, and dramatically reduced the competition in the mortgage and savings market. If reducing its size creates some space for new players in the financial services industry that will certainly be a good thing.
Yet, it is crazy to imagine that will make the financial system more stable. There is simply no evidence to suggest that too little competition between the banks is what led up to the credit crunch. Indeed, through 2006 and 2007 there were arguably too many lenders crowding into the British market. They were throwing around self-cert buy-to-let mortgages like confetti. More competition in a market is always a good thing. It creates more choice, and better service, with better prices. But anyone who thinks it is going to make the system safer is simply kidding themselves.
If the Commission was too harsh on Lloyds, it was too soft on RBS, Barclays and HSBC. It proposes stricter capital requirements, and dividing lines between the retail and investment banking units, so that the investment bank can safely be allowed to go bust, whilst the retail arm will be protected.
The trouble is, neither is going to fix the real issues.
The banks didn’t go bust because they had too little capital. A bigger buffer against financial shocks will help, but a reckless bonus system, too many complex products, and mindless expansion into markets they didn’t understand were the underlying causes of the crisis. Would RBS have survived with a couple of percent more capital? Almost certainly not. Neither would any of the other banks.
Nor is ‘ring-fencing’ the banks retails arms going to make a great deal of difference. It is very hard to believe that any kind of structure can be created that will make it certain that a collapse of the investment banking arm won’t bring down the retail bank as well. Bankers are very good at shifting money around a balance sheet. If there is a way of making the retail unit subsidise the rest of the bank, someone will find it and exploit it. For the system to work, you have to believe that the regulators are smarter and more knowledgeable than the people working in the banks – and the chances of that are just about zero.
Vickers had a one-off chance to do something really radical. He should have proposed a complete split between retail and investment banking. The retail banks would be safe, fairly dull institutions, and they could be fully protected by the government from failure. . The investment banks could take all the risks they liked, in much the same way that the hedge funds do, and if they went bust it wouldn’t matter very much to anyone apart from their staff.
Barclays might opt to move to New York. HSBC might decide to go back to Hong Kong, or to Shanghai. But so what? It matters much less than most people suppose whether a bank is domiciled in this country. The Commission had a duty to think seriously about whether it was responsible to host massive banks in the UK. It failed completely. The moment to protect the country from another massive banking collapse has passed – it won’t come again.
This year, the UK had a Goldilocks moment to get to grips with its over-mighty finance industry. Two years ago, the banks were still too weak. You can’t put a patient in for major heart surgery when they are still recovering from a car crash. In the immediate wake of the credit crunch, the banks could not have survived radical restructuring. And in another two years, the banks will all be making big profits again, paying lots of corporation tax, and paying big donations to political parties. The memory of the credit crunch will have faded, and the political will to break then up will have evaporated.
But right now, the banks are strong enough to take some punishment. And the desire to make sure the events of 2008 are never repeated is still there. As Goldilocks would put it, it is neither too hot nor too cold – but just right.
Despite that, Sir John Vickers and his colleagues on the Independent Banking Commission blew it. Last Monday’s report on the future of the British financial services industry was the dampest possible squib. Its response was so feeble, and so irrelevant, that it now looks the British banks have in effect escaped from the worst series of collapses in a century or more without any meaningful reform to the way they operate.
No one can be in much doubt that Britain’s banking industry is in need of a major structural overhaul. Put simply, this country’s banks have become too big, and too risky, for the size of the economy that ultimately underpins them.
The point was well illustrated in a research note published by UBS last month. Barclays now has a balance sheet worth 100% of GDP. For a comparison, JP Morgan has a balance sheet worth 24% of US GDP. In effect, Britain is host to three very large banks – Barclays, HSBC and Royal Bank of Scotland – each of which has the potential to quite literally bankrupt the country.
We have already seen how Iceland and Ireland were ruined by the recklessness of their financiers. The same could easily happen to this country. It is a threat, and one the Commission had a duty to take seriously.
And yet, probably under the influence of lobbying from the banking industry, it has largely ignored it. The report singles out Lloyds for its main attention – when, in fact, it is the bank that poses the least threat to the stability of the financial system.
Lloyds will be forced to sell off more branches, over and above the 600 the EU is already making it get rid of. It is certainly true that Gordon Brown’s decision to bounced Lloyds into merging with HBOS was one of the former Prime Minister’s many catastrophic mistakes. It ruined a fairly sound bank, and dramatically reduced the competition in the mortgage and savings market. If reducing its size creates some space for new players in the financial services industry that will certainly be a good thing.
Yet, it is crazy to imagine that will make the financial system more stable. There is simply no evidence to suggest that too little competition between the banks is what led up to the credit crunch. Indeed, through 2006 and 2007 there were arguably too many lenders crowding into the British market. They were throwing around self-cert buy-to-let mortgages like confetti. More competition in a market is always a good thing. It creates more choice, and better service, with better prices. But anyone who thinks it is going to make the system safer is simply kidding themselves.
If the Commission was too harsh on Lloyds, it was too soft on RBS, Barclays and HSBC. It proposes stricter capital requirements, and dividing lines between the retail and investment banking units, so that the investment bank can safely be allowed to go bust, whilst the retail arm will be protected.
The trouble is, neither is going to fix the real issues.
The banks didn’t go bust because they had too little capital. A bigger buffer against financial shocks will help, but a reckless bonus system, too many complex products, and mindless expansion into markets they didn’t understand were the underlying causes of the crisis. Would RBS have survived with a couple of percent more capital? Almost certainly not. Neither would any of the other banks.
Nor is ‘ring-fencing’ the banks retails arms going to make a great deal of difference. It is very hard to believe that any kind of structure can be created that will make it certain that a collapse of the investment banking arm won’t bring down the retail bank as well. Bankers are very good at shifting money around a balance sheet. If there is a way of making the retail unit subsidise the rest of the bank, someone will find it and exploit it. For the system to work, you have to believe that the regulators are smarter and more knowledgeable than the people working in the banks – and the chances of that are just about zero.
Vickers had a one-off chance to do something really radical. He should have proposed a complete split between retail and investment banking. The retail banks would be safe, fairly dull institutions, and they could be fully protected by the government from failure. . The investment banks could take all the risks they liked, in much the same way that the hedge funds do, and if they went bust it wouldn’t matter very much to anyone apart from their staff.
Barclays might opt to move to New York. HSBC might decide to go back to Hong Kong, or to Shanghai. But so what? It matters much less than most people suppose whether a bank is domiciled in this country. The Commission had a duty to think seriously about whether it was responsible to host massive banks in the UK. It failed completely. The moment to protect the country from another massive banking collapse has passed – it won’t come again.
London's Great Economic Escape....
In my Money Week column last week, I looked at how London escaped the recession, and what lessons we should learn from that. Here's a taster.
The classic 1960s war film ‘The Great Escape’ was based on the break-out of a group of Allied prisoners from a camp in the town of Zagen, in what was then Germany but is now Poland. But if you wanted to re-make it, with a financial rather than military escape, you’d probably set it in London.
At the height of the credit crunch, everyone was forecasting that London’s economy was doomed. The City, and the ancillary industries that fed off it, would come crashing down to earth. The rich would flee, and the bankers would soon be applying for jobs at MacDonald’s.
It hasn’t happened. The financial services sector has recovered sharply. London has emerged from the recession in better shape than the rest of Britain. Employment is stronger, growth is better, and house prices have bounced back. If anything the gulf between London and rest of the UK has grown wider.
There are important lessons in that. If the rest of the British economy was anything like as strong as London and the South-East, the whole country would be roaring ahead. Instead of talking about re-balancing the UK economy, we should be learning the lessons of London’s success, and trying to get the rest of the country to perform as well as it does.
The figures make it quite clear that, of all the regions in the UK, London and the South-East, have emerged best from the downturn. A CBI report released on Monday showed that financial services firms expanded strongly in the latest quarter. The big banks such as HSBC and Barclays are making huge profits again, and the City is doing well. A study by the London School of Economics, led by Henry Overman, the director of its Spatial Economics Research Centre, concluded that London had comes back stronger from the recession than any other region, and it suffered less in the downturn as well.
For example, London’s income per capita fell by 2.5% between 2008 and 2009, while it fell by 2.9% in England as a whole – and of course London was already a lot richer before the recession began. There were fewer job losses as well. The UK saw peak-to-trough falls in employment of 3.9%, whereas London saw only a 2.6% fall. And house prices bounced back quicker than anywhere else in the country. Indeed, Savills reports that prime London properties grew in value by 5% this year, whilst prices were still stagnant or falling in the rest of the country.
True, London benefited a little from government policy. The Olympics is a massive building project. The bail-out of the banks primarily helped the London economy rather than anywhere else. Against that, the massive run up in government spending did nothing for London. The South-East has far lower government spending as a percentage of the economy than other regions: in Wales for example, state spending accounts for more than 70% of the economy, whereas in the South-East it is around half that, at an estimated 36%. And of course London is harder hit by the tax rises than other parts of Britain – the new 50% rate will hit a lot of Londoners but not many people elsewhere.
In fact, the evidence of the recession is that London and the South-East have a hyper-resilient, hugely competitive economy. What we need to do is try and make the rest of Britain more like London.
There are four important lessons from the capital’s success.
First, and most obviously, London is plugged into the global economy far more than any other part of the UK economy. What happens to the rest of Britain or indeed Europe doesn’t matter that much. London’s bankers, lawyers, consultants and accountants are servicing the BRIC economies more than anything else. Russian and Far Eastern companies are flocking to raise capital on London’s markets, and that means paying lots of expensive fees. London had connected itself into booming markets – not locked itself into declining ones.
Next, London has specialised in professional services, and made itself a world-leader in selling those to the rest of the world. There is a lot of talk about reviving specialist manufacturing or creating other new industries for the UK. But the truth is, we don’t have many sectors where we can compete with Germany on quality, nor where we can compete with Eastern Europe on manufacturing costs. Maybe the best policy would be to recognize where our strengths lie – and get the rest of the country to try and do more of the things that London does so well.
Thirdly, London has a highly-skilled and hyper-flexible labour market. According to the Labour Force Survey, for England as a whole, professional and service occupations were hit less badly by the recession than administrative, trade and basic occupations. That was good for London, since professional occupations account for a larger proportion of its labour force – nearly 50%, compared with under 40% in the Midlands and the North. There was more flexibility on wages as well, partly because bonuses (which go down as well as up) are a bigger part of pay. That helped London’s workers keep their jobs through the downturn.
Finally, the state accounts for a far lower share of the London and South-East economy than it does for the rest of the country. Working for the government may be relatively secure during a recession, and that provides some protection for the regions. But the state sector also has low productivity, low growth, and it doesn’t export anything. It consumes rather than generates wealth – and it is only in London and South-East that it is small enough to allow the rest of the economy to flourish.
Forget everything you read a couple of years ago about how this would be a middle-class recession that hit London harder than anywhere else. It just hasn’t happened. Instead, London is pulling further ahead – and as the government spending cuts start to bite, that will become more and more obvious. But there is nothing that special about London. It is part of the same country as Manchester and Cardiff and Birmingham. If those regions could learn where the capital was doing so well, the UK would be doing a lot better than it is.
The classic 1960s war film ‘The Great Escape’ was based on the break-out of a group of Allied prisoners from a camp in the town of Zagen, in what was then Germany but is now Poland. But if you wanted to re-make it, with a financial rather than military escape, you’d probably set it in London.
At the height of the credit crunch, everyone was forecasting that London’s economy was doomed. The City, and the ancillary industries that fed off it, would come crashing down to earth. The rich would flee, and the bankers would soon be applying for jobs at MacDonald’s.
It hasn’t happened. The financial services sector has recovered sharply. London has emerged from the recession in better shape than the rest of Britain. Employment is stronger, growth is better, and house prices have bounced back. If anything the gulf between London and rest of the UK has grown wider.
There are important lessons in that. If the rest of the British economy was anything like as strong as London and the South-East, the whole country would be roaring ahead. Instead of talking about re-balancing the UK economy, we should be learning the lessons of London’s success, and trying to get the rest of the country to perform as well as it does.
The figures make it quite clear that, of all the regions in the UK, London and the South-East, have emerged best from the downturn. A CBI report released on Monday showed that financial services firms expanded strongly in the latest quarter. The big banks such as HSBC and Barclays are making huge profits again, and the City is doing well. A study by the London School of Economics, led by Henry Overman, the director of its Spatial Economics Research Centre, concluded that London had comes back stronger from the recession than any other region, and it suffered less in the downturn as well.
For example, London’s income per capita fell by 2.5% between 2008 and 2009, while it fell by 2.9% in England as a whole – and of course London was already a lot richer before the recession began. There were fewer job losses as well. The UK saw peak-to-trough falls in employment of 3.9%, whereas London saw only a 2.6% fall. And house prices bounced back quicker than anywhere else in the country. Indeed, Savills reports that prime London properties grew in value by 5% this year, whilst prices were still stagnant or falling in the rest of the country.
True, London benefited a little from government policy. The Olympics is a massive building project. The bail-out of the banks primarily helped the London economy rather than anywhere else. Against that, the massive run up in government spending did nothing for London. The South-East has far lower government spending as a percentage of the economy than other regions: in Wales for example, state spending accounts for more than 70% of the economy, whereas in the South-East it is around half that, at an estimated 36%. And of course London is harder hit by the tax rises than other parts of Britain – the new 50% rate will hit a lot of Londoners but not many people elsewhere.
In fact, the evidence of the recession is that London and the South-East have a hyper-resilient, hugely competitive economy. What we need to do is try and make the rest of Britain more like London.
There are four important lessons from the capital’s success.
First, and most obviously, London is plugged into the global economy far more than any other part of the UK economy. What happens to the rest of Britain or indeed Europe doesn’t matter that much. London’s bankers, lawyers, consultants and accountants are servicing the BRIC economies more than anything else. Russian and Far Eastern companies are flocking to raise capital on London’s markets, and that means paying lots of expensive fees. London had connected itself into booming markets – not locked itself into declining ones.
Next, London has specialised in professional services, and made itself a world-leader in selling those to the rest of the world. There is a lot of talk about reviving specialist manufacturing or creating other new industries for the UK. But the truth is, we don’t have many sectors where we can compete with Germany on quality, nor where we can compete with Eastern Europe on manufacturing costs. Maybe the best policy would be to recognize where our strengths lie – and get the rest of the country to try and do more of the things that London does so well.
Thirdly, London has a highly-skilled and hyper-flexible labour market. According to the Labour Force Survey, for England as a whole, professional and service occupations were hit less badly by the recession than administrative, trade and basic occupations. That was good for London, since professional occupations account for a larger proportion of its labour force – nearly 50%, compared with under 40% in the Midlands and the North. There was more flexibility on wages as well, partly because bonuses (which go down as well as up) are a bigger part of pay. That helped London’s workers keep their jobs through the downturn.
Finally, the state accounts for a far lower share of the London and South-East economy than it does for the rest of the country. Working for the government may be relatively secure during a recession, and that provides some protection for the regions. But the state sector also has low productivity, low growth, and it doesn’t export anything. It consumes rather than generates wealth – and it is only in London and South-East that it is small enough to allow the rest of the economy to flourish.
Forget everything you read a couple of years ago about how this would be a middle-class recession that hit London harder than anywhere else. It just hasn’t happened. Instead, London is pulling further ahead – and as the government spending cuts start to bite, that will become more and more obvious. But there is nothing that special about London. It is part of the same country as Manchester and Cardiff and Birmingham. If those regions could learn where the capital was doing so well, the UK would be doing a lot better than it is.
Friday, 8 April 2011
Shadow Force In The Northern Echo
There's a great review of Shadow Force in The Northern Echo by Nigel Burton. A few choice quotes.
"IF you're a fan of modern military thrillers you're going to have fun with anything Matt Lynn writes..."
"I'm not ashamed to say that I read Shadow Force in one sitting - starting at 6pm I couldn't put it down until the last page shortly after midnight.
Great stuff.
"IF you're a fan of modern military thrillers you're going to have fun with anything Matt Lynn writes..."
"I'm not ashamed to say that I read Shadow Force in one sitting - starting at 6pm I couldn't put it down until the last page shortly after midnight.
Great stuff.
Saturday, 2 April 2011
Goudhurst Prison Blues
One of my favourite records of all time is the Johnny Cash ‘Live At San Quentin’ album: a set that captures the rugged, outlaw sound of the man to perfection. So I couldn’t help thinking about that as I did my first prison gig a couple of weeks ago.
I wasn’t actually in San Quentin. I was at Goudhurst Prison, which is my local jail down here in Kent. It’s actually set among idyllic English countryside, and is in a pleasant enough old building, but the fact it has barbed wire all around it, and you have to hand in your mobile and show your passport at the door to get in, reminds you that this is indeed a jail.
I resisted the temptation to bounce onto stage saying, “Hello, my name is Matt Lynn’ before kicking into the opening chords of ‘Wanted Man’.
Instead, I just gave a version of my standard library talk, where I chat for a while about where the ideas for the ‘Death Force’ series of books came about, how they get written, how publishing works, and all the usual things that people like authors to talk about.
It was a different audience, however. They were younger, and, of course, all men. Quite a few of them had read the books, and enjoyed them which was gratifying, and the library service had bought some books to give away as a competition prize, which made a nice end to the event. They were more interested in money and contracts than most audiences, and maybe that says something about the kind of people they are.
I was struck by how intelligent most of the men were, and how articulate. Obviously something had gone wrong with their lives to end up in prison, but they were men with a lot of potential.
I came away, as one does from these kind of experiences, thinking about how narrow the line is between the safe, comfortable, easy lives that most of us lead, and the far darker, more troubled routes that some people take.
I wasn’t actually in San Quentin. I was at Goudhurst Prison, which is my local jail down here in Kent. It’s actually set among idyllic English countryside, and is in a pleasant enough old building, but the fact it has barbed wire all around it, and you have to hand in your mobile and show your passport at the door to get in, reminds you that this is indeed a jail.
I resisted the temptation to bounce onto stage saying, “Hello, my name is Matt Lynn’ before kicking into the opening chords of ‘Wanted Man’.
Instead, I just gave a version of my standard library talk, where I chat for a while about where the ideas for the ‘Death Force’ series of books came about, how they get written, how publishing works, and all the usual things that people like authors to talk about.
It was a different audience, however. They were younger, and, of course, all men. Quite a few of them had read the books, and enjoyed them which was gratifying, and the library service had bought some books to give away as a competition prize, which made a nice end to the event. They were more interested in money and contracts than most audiences, and maybe that says something about the kind of people they are.
I was struck by how intelligent most of the men were, and how articulate. Obviously something had gone wrong with their lives to end up in prison, but they were men with a lot of potential.
I came away, as one does from these kind of experiences, thinking about how narrow the line is between the safe, comfortable, easy lives that most of us lead, and the far darker, more troubled routes that some people take.
How People Power Can Curb Bonuses
In my Money Week column this week, I'm looking at how people power may be able to curb bonuses. Here's a taster....
Banking bonuses are like cockroaches. Nobody much likes them. They can do a lot of damage. And short of an all-out nuclear war, they appear to be just about indestructible.
The financial collapse of 2008 didn’t do anything to curb the way the financial sector rewards itself. Nor have the attempts at greater regulation made much progress. Even higher taxes don’t work.
But how about people power?
In Holland, ING was forced to abandon a bonus scheme after a Twitter-led campaign against the bank that threaten to turn into a mass boycott. In France, last year, the former footballer Eric Cantona led a campaign for mass withdrawals from the banks. In this country, the UK Uncut campaign, has achieved a lot of impact with its protests against financial institutions.
In the end, banking pay, like just about anything, needs permission from society. Banks can’t operate unless millions of ordinary people are willing to put money into them, and use them to shift funds around. It may be that only direct action from ordinary people can finally bring the banking industry back under control.
There is little question that financial sector pay has got out of hand. The sector routinely pays its staff rewards that are far and above what other people earn, and which bear little realistic relation either to the success of the banks they work for, or to the contribution they make to the economy.
Just take a look at the latest revelations about pay at The Royal Bank of Scotland. Last month, the bank revealed that it paid out around £1 billion in bonuses. More than a hundred of its staff were paid more than £1 million. And this is despite the fact that RBS went spectacularly bust, is still majority-owned by the tax-payer, and is still losing money. It is far from alone. HSBC revealed that it paid 253 of its staff more than £1 million last year, 89 of them in London. Right across the board, bonuses have bounced straight back to 2007 and 2008 levels.
There is nothing wrong, of course, with people earning lots of money. If they are working hard and creating wealth they deserve it. But all the evidence suggests that the banking industry has become a cartel that operates against the public interest. The banks are too big, they take on too much risk, they require too much in the way of hidden subsidies from the taxpayer, and they pay themselves too generously. According to research by Harry Huizinga, an economics professor at the University of Tilburg in the Netherlands, twelve banks have liabilities of more than $1 trillion, and thirty banks have a ratio of liabilities to GDP in excess of 0.5, meaning in effect that if they go bust they may well bring down the country with them. Furthermore, the same banks pay consistently lower returns to shareholders than banks that are smaller, and less systematically important. In short, the mega banks aren’t very useful to anyone, except for their lavishly paid staff. We’d be better off without them.
But how do we bring them under control? There have been plenty of regulatory initiatives but none of them seem to get anywhere. Governments don’t appear very effective – they are too easily brow-beaten by the argument that the banks are vital for the economy.
But maybe people power can make a difference.
In Holland, ING last week agreed to scrap a bonus scheme that would have paid its chief executive Jan Hommen 1.25 million euros. ING was bailed-out by the Dutch government in 2008, and although it has since re-paid five billion euros of the money it received, there is still another five billion euros to pay back. The sober-minded Dutch objected to the sight of bankers who still owed the government billions paying themselves vast rewards. A Twitter-led campaign mobilised public opinion against the bank. People were threatening mass withdrawals from their accounts, creating the potential for a run on the bank. Although by last week only a few hundred people had taken their money out, it was enough to rattle ING. By the end of last week, it had decided to withdraw its bonus scheme, replacing it with something far more modest.
The footballer Eric Cantona tried something similar in France. At the end of last year, he launched the ‘Bankrun 2010’ campaign. The campaign threatened a mass withdrawal of money from the banks. Tens of thousands of people signed up for the Facebook campaign, in France, Britain, the US and elsewhere. The French banking unions warned of an economic catastrophe if it happened. In the end, the event was a bit of a damp squib. Some accounts were closed. But no banks went out of business. And probably those accounts that were closed were opened up somewhere else a few days later.
Still, there are signs that things are stirring.
There is no question that ordinary people feel deeply uneasy about the way that the financial sector rewards itself. They don’t buy into the argument that the banks are engaged in a fierce war for talent that means they have to pay everyone huge salaries. And they suspect, almost certainly correctly, that the way the banks reward themselves makes the system more risky, not less – and that they may have to end up paying for it.
Most of all, they feel powerless to do very much about it. But that, of course, isn’t really true. A bank such as RBS depends on its millions of retail depositors. Without them, it would be sunk. A pure investment bank depends less on ordinary customers, but there are not many of those left – and, in truth, the retail banks are the original source of the money the investment bankers play with.
The Cantona campaign didn’t work. But the ING protest was far more successful. And if the idea of depositors mobilising against banks take off, it could pose the most potent threat yet to the system. After all, for any bank there is nothing scarier than a run. Regulation won’t curb bonuses. It is unlikely that politicians or central bankers will manage to either. But people power might just do the trick.
Banking bonuses are like cockroaches. Nobody much likes them. They can do a lot of damage. And short of an all-out nuclear war, they appear to be just about indestructible.
The financial collapse of 2008 didn’t do anything to curb the way the financial sector rewards itself. Nor have the attempts at greater regulation made much progress. Even higher taxes don’t work.
But how about people power?
In Holland, ING was forced to abandon a bonus scheme after a Twitter-led campaign against the bank that threaten to turn into a mass boycott. In France, last year, the former footballer Eric Cantona led a campaign for mass withdrawals from the banks. In this country, the UK Uncut campaign, has achieved a lot of impact with its protests against financial institutions.
In the end, banking pay, like just about anything, needs permission from society. Banks can’t operate unless millions of ordinary people are willing to put money into them, and use them to shift funds around. It may be that only direct action from ordinary people can finally bring the banking industry back under control.
There is little question that financial sector pay has got out of hand. The sector routinely pays its staff rewards that are far and above what other people earn, and which bear little realistic relation either to the success of the banks they work for, or to the contribution they make to the economy.
Just take a look at the latest revelations about pay at The Royal Bank of Scotland. Last month, the bank revealed that it paid out around £1 billion in bonuses. More than a hundred of its staff were paid more than £1 million. And this is despite the fact that RBS went spectacularly bust, is still majority-owned by the tax-payer, and is still losing money. It is far from alone. HSBC revealed that it paid 253 of its staff more than £1 million last year, 89 of them in London. Right across the board, bonuses have bounced straight back to 2007 and 2008 levels.
There is nothing wrong, of course, with people earning lots of money. If they are working hard and creating wealth they deserve it. But all the evidence suggests that the banking industry has become a cartel that operates against the public interest. The banks are too big, they take on too much risk, they require too much in the way of hidden subsidies from the taxpayer, and they pay themselves too generously. According to research by Harry Huizinga, an economics professor at the University of Tilburg in the Netherlands, twelve banks have liabilities of more than $1 trillion, and thirty banks have a ratio of liabilities to GDP in excess of 0.5, meaning in effect that if they go bust they may well bring down the country with them. Furthermore, the same banks pay consistently lower returns to shareholders than banks that are smaller, and less systematically important. In short, the mega banks aren’t very useful to anyone, except for their lavishly paid staff. We’d be better off without them.
But how do we bring them under control? There have been plenty of regulatory initiatives but none of them seem to get anywhere. Governments don’t appear very effective – they are too easily brow-beaten by the argument that the banks are vital for the economy.
But maybe people power can make a difference.
In Holland, ING last week agreed to scrap a bonus scheme that would have paid its chief executive Jan Hommen 1.25 million euros. ING was bailed-out by the Dutch government in 2008, and although it has since re-paid five billion euros of the money it received, there is still another five billion euros to pay back. The sober-minded Dutch objected to the sight of bankers who still owed the government billions paying themselves vast rewards. A Twitter-led campaign mobilised public opinion against the bank. People were threatening mass withdrawals from their accounts, creating the potential for a run on the bank. Although by last week only a few hundred people had taken their money out, it was enough to rattle ING. By the end of last week, it had decided to withdraw its bonus scheme, replacing it with something far more modest.
The footballer Eric Cantona tried something similar in France. At the end of last year, he launched the ‘Bankrun 2010’ campaign. The campaign threatened a mass withdrawal of money from the banks. Tens of thousands of people signed up for the Facebook campaign, in France, Britain, the US and elsewhere. The French banking unions warned of an economic catastrophe if it happened. In the end, the event was a bit of a damp squib. Some accounts were closed. But no banks went out of business. And probably those accounts that were closed were opened up somewhere else a few days later.
Still, there are signs that things are stirring.
There is no question that ordinary people feel deeply uneasy about the way that the financial sector rewards itself. They don’t buy into the argument that the banks are engaged in a fierce war for talent that means they have to pay everyone huge salaries. And they suspect, almost certainly correctly, that the way the banks reward themselves makes the system more risky, not less – and that they may have to end up paying for it.
Most of all, they feel powerless to do very much about it. But that, of course, isn’t really true. A bank such as RBS depends on its millions of retail depositors. Without them, it would be sunk. A pure investment bank depends less on ordinary customers, but there are not many of those left – and, in truth, the retail banks are the original source of the money the investment bankers play with.
The Cantona campaign didn’t work. But the ING protest was far more successful. And if the idea of depositors mobilising against banks take off, it could pose the most potent threat yet to the system. After all, for any bank there is nothing scarier than a run. Regulation won’t curb bonuses. It is unlikely that politicians or central bankers will manage to either. But people power might just do the trick.
Monday, 28 March 2011
Great Review of Bust
There is a great review of Bust in Canada's Financial Post. "Public finance seldom makes for a juicy read. But Matthew Lynn, a financial journalist who, as a sideline, writes military thrillers, turns central banking into a seesaw of ghastly revelations and roaring hilarity," it says. "Bust is solid macroeconomics, practical trade theory, and fiscal policy that anybody can understand. It’s valuable reading for anyone investing in euro-denominated assets and a morality tale too."
Tuesday, 8 March 2011
Amazon Reviews....
There’s a lovely piece in The Guardian today by Christina Martin about Amazon reviews. Apparently, there has been more controversy about authors writing their own reviews (how could they – the cads!) and whether the reviews are really reliable.
She makes the valuable point that they may or may not be real. It doesn’t really matter. You can fairly easily tell which ones are genuine and which ones are fakes by the way they are written, and whether the person has reviewed similar books. And they open up the debate about books to lots of new voices. After all, before we had to rely on the reviews on the back of book jackets – and they were often fairly fictitious as well.
Most authors have an ambivalent attitude to Amazon and other online reviews. Personally I like them. I’ve had good ones and stinkers, and although none of us like being criticised, I can take that in good spirit. The internet is full of nasty stuff, and there is no reason why authors should be exempt. Online reviews are one of the few ways we have of getting feedback on our work, and of judging how much impact it is making on the world.
The more of them the better – even if they aren’t real.
She makes the valuable point that they may or may not be real. It doesn’t really matter. You can fairly easily tell which ones are genuine and which ones are fakes by the way they are written, and whether the person has reviewed similar books. And they open up the debate about books to lots of new voices. After all, before we had to rely on the reviews on the back of book jackets – and they were often fairly fictitious as well.
Most authors have an ambivalent attitude to Amazon and other online reviews. Personally I like them. I’ve had good ones and stinkers, and although none of us like being criticised, I can take that in good spirit. The internet is full of nasty stuff, and there is no reason why authors should be exempt. Online reviews are one of the few ways we have of getting feedback on our work, and of judging how much impact it is making on the world.
The more of them the better – even if they aren’t real.
Why Investors Should Prefer Democracies...
In my Money Week column this week, I've been looking at why investors should prefer democracies to autocracies. Here's a taster....
For anyone investing in the Middle Eastern markets, the last few weeks have been a heck of a ride. The Dubai market, one of the more developed in the region, plunged all the way back to 2004 levels during the past month. The Saudi market was shakier than a palm tree in a hurricane. The Egyptian stock market closed as the country ousted its long-serving President Hosni Mubarak, and won’t re-open for another week.
Right across the world, investors have pulled back from emerging and frontier markets. The darlings of the global investment community until a few weeks ago, they are now about as popular as Colonel Qaddafi in Benghazi.
There is a lesson to be learned from that. It is far better to invest in democracies than autocracies. In the last few years, the markets have fallen for the idea that autocratic governments are more stable and more efficient. There may be some truth in that in the short-run. In the medium-term, however, a revolution will destroy your investment. In practical terms, that means avoiding China and much of the Middle East, staying suspicious of Russia, and focussing instead on India, Eastern Europe and South Africa as well.
Before the tidal wave of change swept across the Middle East investors could be forgiven for believing that the nature of the regime didn’t make much difference to the case for putting money into a country. True, the people in charge of a country might be a shady bunch of gangsters and thugs, but so long as oil was being pumped, minerals dug out of the ground, and new factories getting built, it didn’t matter very much.
Emerging and frontier markets have been booming for the last ten years, pretty much regardless of whether the government in question was stable or not. According to calculations by IJ Partners, the Pakistani market rose by 449% in the last decade, measured in dollar terms. The Egyptian market rose by 430% over the same period. That was a better performance than gold or oil, and way better than traditional stock markets. The FTSE-100 was only up by only 12% over the same period and the S&P 500 by just 2%. And yet Pakistan is widely regarded as a failed state. And the Egyptian government has just collapsed.
The premium that investors used to demand to invest in emerging markets all but disappeared over the 2000s. We all know the reasons for that. Growth has largely ground to a halt in the developed economies. It was only by taking on more and more debt that the illusion of prosperity was maintained. The frontier markets offered far better prospects. They were growing fast, they had healthy demographics, and usually high savings ratios and low deficits as well. They looked a far more attractive home for your money.
But investors forgot the one thing that in the past kept them out of emerging markets – political risk. After all the 400%-plus gains you might make in a market such as Egypt don’t count for much if the bourse then gets shut down, and a new revolutionary government seizes foreign assets. You can only invest where there are secure property rights – and that ultimately depends on a stable government.
That lesson is being re-learnt very quickly. Globally, investors poured $95 billion into emerging markets funds during 2010. In the first week of February alone, as the Middle East crisis broke, they pulled more than $7 billion of that back, the biggest withdrawal in more than three years. Where once investors were piling indiscriminately into new territories, now they are abandoning them just as rapidly.
Neither is the right response.
What investors need to do is discriminate between stable and unstable emerging markets – and remember that in the medium-term it is only democracies that offer security.
There is a temptation to look at an autocracy and think it is rock solid. After all, a leader such as Mubarak hung around in power for three decades. Dictators are usually pro-business and anti-union. There is none of the messy business of populist politicians demanding tax rises, or threatening to take control of foreign investments.
But it is an illusion. Under the surface, terrible tensions are always building up. When they break to the surface, there is violence and chaos. A very radical, anti-capitalist regime can easily emerge.
It is far better to focus on the democracies – and avoid the remaining autocracies. True, the democracies might appear messier. But so long as there is a commitment to free speech, fair elections, and property is protected, over the medium-term they are far more stable. It is very rare for a democracy to be thrown out by a revolution – and it is very rare for an autocracy not to be.
So, be wary of China. True, it has great growth prospects. But it is still ruled by an authoritarian Communist Party that shows little sign of relaxing its grip on power. There are tensions between regions that are growing at very different rates. The whole of the Middle East looks off-limits as well. States such as Saudi Arabia and Dubai will face their own revolutions in time, no matter how wealthy they might appear to be. And stay suspicious of Russia. It is slowing slipping from democracy back towards autocracy, and that will make it less stable in the medium-term.
Against that, India has been a remarkably successful democracy for a very long time, particularly considering its size and relative backwardness. Brazil is a reasonably free country and so are South Africa and Turkey. Nearly all of Eastern Europe, although its markets have not shone in the past couple of years, is far more democratic than anywhere in the Middle or Far East.
There will be bumps along the way, and elections that hit the markets. But over the medium-term, it is only countries that have already created functioning democracies that offer any chance of decent returns.
For anyone investing in the Middle Eastern markets, the last few weeks have been a heck of a ride. The Dubai market, one of the more developed in the region, plunged all the way back to 2004 levels during the past month. The Saudi market was shakier than a palm tree in a hurricane. The Egyptian stock market closed as the country ousted its long-serving President Hosni Mubarak, and won’t re-open for another week.
Right across the world, investors have pulled back from emerging and frontier markets. The darlings of the global investment community until a few weeks ago, they are now about as popular as Colonel Qaddafi in Benghazi.
There is a lesson to be learned from that. It is far better to invest in democracies than autocracies. In the last few years, the markets have fallen for the idea that autocratic governments are more stable and more efficient. There may be some truth in that in the short-run. In the medium-term, however, a revolution will destroy your investment. In practical terms, that means avoiding China and much of the Middle East, staying suspicious of Russia, and focussing instead on India, Eastern Europe and South Africa as well.
Before the tidal wave of change swept across the Middle East investors could be forgiven for believing that the nature of the regime didn’t make much difference to the case for putting money into a country. True, the people in charge of a country might be a shady bunch of gangsters and thugs, but so long as oil was being pumped, minerals dug out of the ground, and new factories getting built, it didn’t matter very much.
Emerging and frontier markets have been booming for the last ten years, pretty much regardless of whether the government in question was stable or not. According to calculations by IJ Partners, the Pakistani market rose by 449% in the last decade, measured in dollar terms. The Egyptian market rose by 430% over the same period. That was a better performance than gold or oil, and way better than traditional stock markets. The FTSE-100 was only up by only 12% over the same period and the S&P 500 by just 2%. And yet Pakistan is widely regarded as a failed state. And the Egyptian government has just collapsed.
The premium that investors used to demand to invest in emerging markets all but disappeared over the 2000s. We all know the reasons for that. Growth has largely ground to a halt in the developed economies. It was only by taking on more and more debt that the illusion of prosperity was maintained. The frontier markets offered far better prospects. They were growing fast, they had healthy demographics, and usually high savings ratios and low deficits as well. They looked a far more attractive home for your money.
But investors forgot the one thing that in the past kept them out of emerging markets – political risk. After all the 400%-plus gains you might make in a market such as Egypt don’t count for much if the bourse then gets shut down, and a new revolutionary government seizes foreign assets. You can only invest where there are secure property rights – and that ultimately depends on a stable government.
That lesson is being re-learnt very quickly. Globally, investors poured $95 billion into emerging markets funds during 2010. In the first week of February alone, as the Middle East crisis broke, they pulled more than $7 billion of that back, the biggest withdrawal in more than three years. Where once investors were piling indiscriminately into new territories, now they are abandoning them just as rapidly.
Neither is the right response.
What investors need to do is discriminate between stable and unstable emerging markets – and remember that in the medium-term it is only democracies that offer security.
There is a temptation to look at an autocracy and think it is rock solid. After all, a leader such as Mubarak hung around in power for three decades. Dictators are usually pro-business and anti-union. There is none of the messy business of populist politicians demanding tax rises, or threatening to take control of foreign investments.
But it is an illusion. Under the surface, terrible tensions are always building up. When they break to the surface, there is violence and chaos. A very radical, anti-capitalist regime can easily emerge.
It is far better to focus on the democracies – and avoid the remaining autocracies. True, the democracies might appear messier. But so long as there is a commitment to free speech, fair elections, and property is protected, over the medium-term they are far more stable. It is very rare for a democracy to be thrown out by a revolution – and it is very rare for an autocracy not to be.
So, be wary of China. True, it has great growth prospects. But it is still ruled by an authoritarian Communist Party that shows little sign of relaxing its grip on power. There are tensions between regions that are growing at very different rates. The whole of the Middle East looks off-limits as well. States such as Saudi Arabia and Dubai will face their own revolutions in time, no matter how wealthy they might appear to be. And stay suspicious of Russia. It is slowing slipping from democracy back towards autocracy, and that will make it less stable in the medium-term.
Against that, India has been a remarkably successful democracy for a very long time, particularly considering its size and relative backwardness. Brazil is a reasonably free country and so are South Africa and Turkey. Nearly all of Eastern Europe, although its markets have not shone in the past couple of years, is far more democratic than anywhere in the Middle or Far East.
There will be bumps along the way, and elections that hit the markets. But over the medium-term, it is only countries that have already created functioning democracies that offer any chance of decent returns.
Monday, 28 February 2011
A Letter to Mervyn King....
In my Money Week column this week, I've drafted the letter that George Osborne should send to Mervyn King next time the Bank misses its inflation target. Here's a taster....
British economic life has acquired a new ritual. Every three months the Governor of the Bank of England writes a letter to the Chancellor of the Exchequer explaining why he has had missed the inflation target. And, on the same day, the Chancellor responds with an anodyne, sympathetic reply, accepting the Governor’s excuses without so much as a word of criticism.
We saw it played out this month. No doubt we’ll see it a couple more times before the year is out. The Bank has given up on hitting its 2% inflation target. With prices rises at 4% a year on the official figures, and significantly more on the kinds of things that people actually notice they are spending money on, there is little chance of getting back within range soon.
But, in any normal business, if you gave up on hitting the target your employer set for you, you’d expect a monstering. Next time around, George Osborne should rip up the rule-book. He should write Mervyn King a proper letter. Here’s what it should say.
“Dear Mervyn,
Thank you for your letter.
I am disappointed that inflation has yet again significantly exceeded the target set for the Bank of England by the government. I should remind you that meeting this target is a legal requirement. I accept that a target won’t be met every month. That is why some flexibility is allowed. But I am worried that you are not really trying.
I am frankly puzzled by some of the arguments put forward in your letter
I believe there must be something wrong with the forecasting model the Bank of England is using. In the letters sent both to me, and to my predecessor Mr. Darling, you have been consistently predicting that inflation will fall. For example, in your letter of May 17th last year, you argued that the rise in VAT and the drop in the value of sterling were the main reasons why you’d missed the target. “The effects on inflation can be expected to wane over time,” you stated. “As this happens, the MPC expects that inflation will fall back.”
It didn’t happen, did it? In fact, inflation has accelerated since then. If a model keeps producing the wrong forecasts, then it is time to get a new model. I would like you to ask the Bank’s economists to start working on that – and stop sending me wrong predictions.
As for your ‘explanations’, they sound more like excuses. Stop going on about the ‘output gap’. This is intellectual nonsense, and it is time you realised it. The idea that the Bank knows precisely what the ‘right’ level of output for the British economy is, and how much we are currently below it, is the kind of thing that even the Gosplan economists in Moscow in 1970 might have considered a little arrogant. In reality, we have no precise idea what the UK can produce, or how far below that we might be right now – and certainly not to within a couple of percentage points. This so-called ‘output gap’ doesn’t exist. It clearly isn’t bearing down on inflation in any meaningful way. So stop talking about it.
Next, stop blaming imported inflation. True, commodity prices are going up around that world – mainly because your friend Ben Bernanke over in Washington is running the Fed in the same incompetent way you are running the Bank. Of course global inflation impacts us here in Britain. But it is mediated through the exchange rate. If sterling was stronger, then the rising price of oil wouldn’t make any difference to the amount ordinary people have to pay at the pumps. Nor would the price of food or clothing be going up the way it is.
The Bank can certainly influence the exchange rate. Higher interest rates would strengthen sterling, and so change the inflation outlook. If you pledged that there would be no more QE, that too would help the pound. Both together would make sure we weren’t importing inflation anymore.
Finally, I would like you to read more widely. You used to be an academic economist (indeed you were one of the 364 economists who famously attacked another new Conservative Chancellor in 1981). You must be aware that there is plenty of economic theory to suggest that running negative real interests of 3.5% and printing money by the barrow load is a sure way to create inflation. Please re-acquaint yourself with the literature. In your next letter I’d like you to explain why the Bank’s policies of ultra-low interest rates and quantitative easing are not responsible for the inflation we are seeing now.
Most of all, I am worried by the air of defeatism that seems to have overcome you. Never believe that inflation is outside your control, or that it is an acceptable way of working our way out of our debts. In the inflationary 1970s, and early 1980s, when prices around the world were soaring ahead, and the price of oil more than quadrupled, one country never experienced any significant inflation. Germany. Even through the worst of the 1970s, the Bundesbank managed to keep the average German inflation rate at just 4.9% a year. In the 1980s, the average rate was just 2.1%. Please explain why the Bundesbank was able to achieve that in far more difficult global circumstance and the Bank of England can’t.
I am prepared to give you one more chance. But the Governor of the Bank of England can’t expect to be the only person in the country who is not judged by their results. Inflation makes life hard for ordinary people. Real wages are already falling. Families are struggling to make ends meet. The Bank is close to the point of losing credibility. Once that happens, there is a real risk of interest rates having to rise very sharply to bring prices under control again.
Your next letter should be your last. If you can’t find a way of getting the inflation rate back within the target, then I’m sure you will accept that it is time we found someone who can.
With best wishes,
George.”
British economic life has acquired a new ritual. Every three months the Governor of the Bank of England writes a letter to the Chancellor of the Exchequer explaining why he has had missed the inflation target. And, on the same day, the Chancellor responds with an anodyne, sympathetic reply, accepting the Governor’s excuses without so much as a word of criticism.
We saw it played out this month. No doubt we’ll see it a couple more times before the year is out. The Bank has given up on hitting its 2% inflation target. With prices rises at 4% a year on the official figures, and significantly more on the kinds of things that people actually notice they are spending money on, there is little chance of getting back within range soon.
But, in any normal business, if you gave up on hitting the target your employer set for you, you’d expect a monstering. Next time around, George Osborne should rip up the rule-book. He should write Mervyn King a proper letter. Here’s what it should say.
“Dear Mervyn,
Thank you for your letter.
I am disappointed that inflation has yet again significantly exceeded the target set for the Bank of England by the government. I should remind you that meeting this target is a legal requirement. I accept that a target won’t be met every month. That is why some flexibility is allowed. But I am worried that you are not really trying.
I am frankly puzzled by some of the arguments put forward in your letter
I believe there must be something wrong with the forecasting model the Bank of England is using. In the letters sent both to me, and to my predecessor Mr. Darling, you have been consistently predicting that inflation will fall. For example, in your letter of May 17th last year, you argued that the rise in VAT and the drop in the value of sterling were the main reasons why you’d missed the target. “The effects on inflation can be expected to wane over time,” you stated. “As this happens, the MPC expects that inflation will fall back.”
It didn’t happen, did it? In fact, inflation has accelerated since then. If a model keeps producing the wrong forecasts, then it is time to get a new model. I would like you to ask the Bank’s economists to start working on that – and stop sending me wrong predictions.
As for your ‘explanations’, they sound more like excuses. Stop going on about the ‘output gap’. This is intellectual nonsense, and it is time you realised it. The idea that the Bank knows precisely what the ‘right’ level of output for the British economy is, and how much we are currently below it, is the kind of thing that even the Gosplan economists in Moscow in 1970 might have considered a little arrogant. In reality, we have no precise idea what the UK can produce, or how far below that we might be right now – and certainly not to within a couple of percentage points. This so-called ‘output gap’ doesn’t exist. It clearly isn’t bearing down on inflation in any meaningful way. So stop talking about it.
Next, stop blaming imported inflation. True, commodity prices are going up around that world – mainly because your friend Ben Bernanke over in Washington is running the Fed in the same incompetent way you are running the Bank. Of course global inflation impacts us here in Britain. But it is mediated through the exchange rate. If sterling was stronger, then the rising price of oil wouldn’t make any difference to the amount ordinary people have to pay at the pumps. Nor would the price of food or clothing be going up the way it is.
The Bank can certainly influence the exchange rate. Higher interest rates would strengthen sterling, and so change the inflation outlook. If you pledged that there would be no more QE, that too would help the pound. Both together would make sure we weren’t importing inflation anymore.
Finally, I would like you to read more widely. You used to be an academic economist (indeed you were one of the 364 economists who famously attacked another new Conservative Chancellor in 1981). You must be aware that there is plenty of economic theory to suggest that running negative real interests of 3.5% and printing money by the barrow load is a sure way to create inflation. Please re-acquaint yourself with the literature. In your next letter I’d like you to explain why the Bank’s policies of ultra-low interest rates and quantitative easing are not responsible for the inflation we are seeing now.
Most of all, I am worried by the air of defeatism that seems to have overcome you. Never believe that inflation is outside your control, or that it is an acceptable way of working our way out of our debts. In the inflationary 1970s, and early 1980s, when prices around the world were soaring ahead, and the price of oil more than quadrupled, one country never experienced any significant inflation. Germany. Even through the worst of the 1970s, the Bundesbank managed to keep the average German inflation rate at just 4.9% a year. In the 1980s, the average rate was just 2.1%. Please explain why the Bundesbank was able to achieve that in far more difficult global circumstance and the Bank of England can’t.
I am prepared to give you one more chance. But the Governor of the Bank of England can’t expect to be the only person in the country who is not judged by their results. Inflation makes life hard for ordinary people. Real wages are already falling. Families are struggling to make ends meet. The Bank is close to the point of losing credibility. Once that happens, there is a real risk of interest rates having to rise very sharply to bring prices under control again.
Your next letter should be your last. If you can’t find a way of getting the inflation rate back within the target, then I’m sure you will accept that it is time we found someone who can.
With best wishes,
George.”
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