Sunday, 31 May 2009

Welcome To Frengland

My series in The Sunday Times about the new capitalism finished this week wiht a look at the UK economy. The outlook is prety bleak. You can read it here.

A Quick Exit From QE

In my Money Week column, I've been arguing that central bankers need to figure out a way to stop printing money - and fast. Here's a taster.

A good rule in life is that whenever you start something, it is helpful to have a pretty firm idea of what your exit strategy is going to be. Neither Britain or the US had one in Iraq, and got bogged down in a difficult war for years longer than they planned. Now it looks as if the Federal Reserve and the Bank of England are intent upon making precisely the same mistake with their policy of quantitative easing, or what in plainer language used to be known as printing money.
They’ve started it, but there is no clear road map for getting out.
In truth QE should stand not for Quantitative Easing – but for Quick Exit.
As the policy unfolds, it is becoming increasingly clear that its main impact is going to be to stoke up another asset bubble. Central banks won’t be able to stop printing money without risking another collapse in asset prices. Even more seriously, all the asset markets now look to be largely controlled by the central banks, a dangerous situation that is hardly going to help restore healthy economic growth.
Britain, perhaps because of the scale of the problems within its banking industry, has been one of the most aggressive countries in the world when it comes to what is politely know as ‘unconventional’ monetary policy. The Bank of England has said it will pump £125 billion into the economy by printing more money. But other central banks have done the same, led by the Fed in the US. Even the conservative European Central Bank has joined the party.
It remains to be seen how effective that is at lessening the impact of what was always going to be a deep recession. There are signs it is stimulating growth, although whether it causes inflation as well we have yet to find out.
But you can’t keep printing money forever – at least not without turning into Zimbabwe. At some point, you’ll have to declare the job done, and call a halt. But when? And how?
In a speech last week Charles Bean, the Bank of England’s Deputy Governor, admitted the Bank faced a “tricky judgment” on when to exit its money-printing strategy. Perhaps most surprisingly, Bean suggested that the Bank might well start raising rates, while still printing money by buying up gilts and other assets. He also suggested the Bank might have to hold the assets it is buying until maturity, because of the risks associated with releasing them back onto the market. One thing was clear, however. The Bank doesn’t really know how to get out, or when. If it did, it wouldn’t have to discuss it.
This is more than an academic debate restricted to central bankers and economists. It matters to investors.
It is becoming increasingly clear that the rapid rise of the markets over the last two months owes a lot more to printing money than it does to any of the over-hyped ‘green shoots’ of economic recovery. The S&P is up by 35% since its February and March lows. Many of the Asian markets are up by more than 50%. As Morgan Stanley noted in an analysis last week, “as we see it, an important driver behind this rally has been the excess liquidity that central banks have pumped into the system through rate cuts and quantitative easing.”
Investors aren’t stupid. They can see that there isn’t much point in holding onto cash when central banks are printing more of the stuff by the billion. Its value is only going in one direction, and it isn’t upwards. They have been switching their cash into equities, property, gold or oil: anything that is likely to hold its value even as money becomes less and less attractive. QE was designed to push bond yields down to help stimulate the economy, but money is bit like an animal: once you release it into the wild, you have no way of knowing where it will go. In fact, much of the freshly minted cash looks to have been invested in other markets.
The trouble is, that means the prices of most assets are buoyed up artificially by the tricks the central banks are playing.
For much of the last decade, the bubble in equity markets was sustained by what was known on Wall Street as the ‘Greenspan put’. Put simply, the rule stated that it was perfectly safe to invest in equities, since if they fell the former Federal Reserve chairman Alan Greenspan would always wade into the markets with a series of interest rate cuts to bail them out.
Now we have something that looks like a ‘QE put’: when markets collapse, central bankers will keep printing more and more money until they get them moving again.
There are two problems with that, however.
First, as Bean puts it, central banks face a ‘tricky judgement’ on when to put the brakes on QE. But so do investors. At some point, the monetary authorities will have to stop printing money, and when it happens the results will be far from pretty. In effect, anyone trying to put together an investment strategy doesn’t really need to be looking at the future of company profits, trade flows, or new technologies. They mainly need to be worrying about when the central banks will pull the plug – and making sure they aren’t the suckers holding bonds or equities when it does.
Next, it causes massive distortion of capital markets. It is not just bond markets that will take a big hit when central banks stop printing money. So will equities, commodities and property. They are all being kept afloat in the same tide of new money. But in the end, the health of a capitalist economy depends on the markets allocating capital efficiently between different sectors of the economy – and yet right now, the prices of most assets are, in effect, being decided by the central banks.
In reality, that is the real reason why quantitative easing will turn out to be a mistake - because of the massive distortion of the capital markets it creates. It would be better for the central banks to get out now while they still can.

Monday, 25 May 2009

Welcome to BRICapitalism

In part two of my series on The New Capitalism for The Sunday Times, I've coined a new term, BRICapitalism. I wonder if it will catch on. Anyway, you can read about it here.

Blank Walks The Plank...

In Money Week, I've been writing about how chief executives are going to start getting a much rougher ride. And about time too....Here's a taster.

Nobody will be sorry to see Sir Victor Blank depart as the chairman of the newly-created Lloyds Banking Group, least of all its shareholders. The rushed merger with HBOS, cobbled together after a drink with Gordon Brown, will surely go down in British corporate history as one of the most spectacular financial catastrophes of all time. The only surprise is that he hung on to his job all the way to May rather than being forced out as soon as the mess he had made of the job became clear.
But Blank will be far from the last FTSE chief forced to walk the plank. Indeed, the next five years look set to be very rough for the pampered executive class. Heads will roll on a scale that would make even the most blood-fevered Jacobin revolutionary feel queasy. Chief executives and chairmen have grown used to hiding behind a booming economy, whilst lining their own pockets with salaries, pensions and bonuses that would make even a backbench MP feel embarrassed.
The far tougher economic conditions of the next five years will sort out the really skilled businessmen from the mere clock-watchers and time-servers.
Indeed, Blank himself is emblematic of the kind of executive who prospered during the great bubble. He was a skilled net-worker: just about everyone in the City will have been to one of the summer cricket matches at his Oxfordshire estate. But there was very little evidence of any real commercial talent. He started his career as a lawyer, becoming a partner in what was then Clifford Turner, before switching to corporate finance and dabbling with mostly non-executive roles. He was chairman of Trinity Mirror for many years, during which the Daily Mirror began its long descent into irrelevance. He was the architect of the merger with the Trinity local newspaper group, another catastrophe for shareholders. But it was at Lloyds that he really got found out.
It is probably a good rule that lawyers shouldn’t be put in charge of banks: another lawyer, Lord Alexander, was the chairman of NatWest for a decade in the 1990s, and that ended up being sold to Royal Bank of Scotland, with results that are now plain for everyone to see. Blank certainly seem to have very little idea what he was wading into when he took control of HBOS last autumn. Lloyds had sensibly avoided the worst excesses of the bubble. But years of careful management were blown in a few days with the £7.7 billion acquisition of HBOS.
A career banker would have been a lot more cautious: there were already plenty of stories circulating about wild and imprudent lending at HBOS. Blank’s naivety, and his lack of hands-on experience of retail banking, were cruelly exposed.
He will have plenty of company of the next few years, however.
This recession will sort out the smart business brains from the public relations men and networkers. In a bubble, all manner of weaknesses can be quietly swept under the carpet. All that is now about to change.
First, the bubble allowed lots of pretty ordinary businesses to look as if they were doing pretty well. Since it burst, we’ve discovered that British Telecom isn’t really a world-beating, science-based company on the cutting edge of technological change. It’s a fairly dull old utility, with some big pension problems. Marks & Spencer turned out not to be a brilliantly re-invented retail concept ready to conquer the world, but a slightly odd combination of an over-priced food chain with an underwear retailer added on (or maybe it’s the other way around). Plenty more chief executives will find the next few years a chastening experience. It wasn’t that hard to push up sales and profits in an economy growing at 3%-plus a year. It is a lot harder in one contracting by 3% a year.
Next, there isn’t going to be much leverage around to pep up performance. During the credit boom, plenty of chief executives borrowed some tricks from the private equity industry. Even if they company wasn’t doing that well, they could spice up returns by calling in some investment bankers and re-engineering the balance sheet. Debt could be pushed up. Properties could be sold off and leased back. With the money, you could raise dividends or launch share buy-back programmes. None of that is going to be possible for the next few years. The cash won’t be there.
On top of that, there isn’t much chance of an M&A boom. A mega-merger allowed companies to promise growth in the future. Even if that didn’t materialise, you could strip out a lot of costs, and grind out higher profits. GlaxoSmithKline has been playing that trick for years. But with the markets in no mood to finance any mega-deals, that won’t be on the table either.
Lastly, investors are about to get a lot more demanding. Capital will be scarce – and the huge borrowing requirements of every major government will suck up much of what money there is available. For much of the last decade, shareholder oversight of big companies has been largely a fiction. Company boards could essentially do whatever they liked. That too is about to change. Companies will have to pay close attention to what their shareholders want. If they don’t, they’ll find themselves quickly voted out of office.
Chief executives have done well out of the boom of the last decade. Million-plus salaries that once provoked headlines have become the norm. Pension packages were lavish. Bonuses were paid out regardless of whether they were any results to justify them. And yet of the British companies in the FTSE, only BP, HSBC, Tesco, Vodafone and RTZ could really be argued to have made much progress as global businesses in the last decade. The rest were just treading water, and that is putting it kindly.
The easy days are over. In the next five years, company directors will have to understand their businesses inside out. They will need to know how to create new products, expand into new markets, and deliver improved returns for shareholders. Otherwise, they’ll soon find themselves keeping Sir Victor Blank company in the ex-Chairman’s club.

Thursday, 21 May 2009

Great Timing

I've done a piece for The Spectator this week on the threat of a ratings cut for the UK. And, on the same day is comes out, S&P downgraded the UK's debt.

Sunday, 17 May 2009

The New Capitalism...

I've starrted a new series this week in The Sunday Times about The New Capitalism. You can overdo this stuff: capitalism will overcome this crisis as it has past ones. But it will look different, and the interesting bit is tryig to work out how. Anyway, you can read it here.

Saturday, 16 May 2009

The Rally Has Legs....

In Money Week this week, I've been arguing that the stockmarket rally can last for quite a while yet, although not for the reason most people think. Here's a taster....

Seldom can a stock market rally have been greeted with such universal scorn. As shares around the world picked themselves up off the floor, dusted themselves off, and started to show some signs of renewed life, they were greeted with a chorus of boos and catcalls.
All the usual caveats were duly trotted out. Sucker’s rally, the said. A bear market blip, warned the chart-wielding experts. Nothing more than a dead cat bounce, declared the sages. From the disdain heaped upon what was in fact a modest recovery, you’d think most people want the stock market to remain flat on its back.
Actually, they are dead wrong. The rally is real enough. There are plenty of good, solid reasons for stocks to start climbing again, and the investors who get behind it will do just fine. There is just one snag. The recovery is taking place for all the wrong reasons. It doesn’t signal that the global economy is in any better shape than it was a few months ago. It signals that inflation is heading down the line, that printing money is igniting a fresh bubble, and that the stock market is one of the very few places you can protect yourself against that.
There is no mistaking the way that shares have recovered.
In the US, the S&P 500 index staged its steepest nine-week rally since the 1930s, rising 37% from the twelve-year-low it reached back in March. Financial stocks led the way, with a 23% rise last week alone as the stress tests set by the Obama Administration were passed with ease.
The MSCI Asia Pacific Index is up by 38% since its low point back in March. The Hong Kong market by itself is up by 52%. Here in Europe, the FTSE 100 index has soared 27 percent from its March 3rd low, and is now just about in positive territory for the year. The Dow Jones Stoxx 600 Index, measuring the main European companies, is up by 33% since its March 9th low. It too has erased all its losses in the early part of the year.
That is not exactly ‘green shoots’. It is more like a whole garden blooming with daffodils and tulips. By any measure, it is a remarkable recovery, particularly since only at the start of the year we were being told the global economy was poised on the brink of the worst downturn since the 1930s.
Naturally, many people aren’t convinced. Many of the reasons put forward for the rally were about as convincing as an MP’s expenses claim. We were told that the US economy was still shrinking, only not quite so fast as it was a few weeks ago, which hardly seemed much of a cause for joyous celebration. Business leaders were lined up to argue that their sales weren’t quite as bad as they expected, which, again, hardly seemed enough to mark share prices up by a quarter. After all, economies are still getting smaller. Company profits are still getting hit.
There has certainly been no evidence of a return to robust growth to provide some solid foundations to the rally. Not surprisingly, that opened up a field day for stock market historians. Plenty of people were quick to remind us that US stocks bounced 50% in the first few months of Franklin Roosevelt’s reign, hardly am auspicious comparison.
And yet, the rally is perfectly justified. It is just that there is nothing comforting about it.
Investors have looked at the policies of ‘quantitative easing’ announced by central banks around the world. They have seen the way the Bank of England has just said it will pump and extra £50 billion in freshly minted pound notes into the economy in the next few months. And they have noticed that even the European Central Bank, previously heir to the stern anti-inflationary hawks of the Bundesbank, has joined the party, with its own plans to create more euros. And they have drawn the right conclusion. ‘QE’, or printing money as it should be called, is going to have two consequences, both of which will be good for equity prices.
The first is that it will create inflation further down the line. There is little escaping that conclusion – more money, poured into a shrinking economy, has to raise prices. The only refuge from that for investors is in real assets.
Gold is one possibility, although there is very little evidence left to suppose the metal has any monetary value. Property is another, although the markets are so depressed and the companies so debt-laded it may take them years to recover. That leaves blue-chip companies. In a climate of moderately accelerating inflation, where prices start pushing up 5% to 6% a year, which is what we are heading for, strong and powerful companies should be able to gently nudge up their prices, profits and dividends. Stocks will inflate along with everything else.
Indeed, we can already see that in the companies leading the way. The rally in the FTSE, for example, has been led by sectors such as industrial miners, banks and retailers – precisely the kind of companies that will do well out of inflation.
Next, there is already evidence that QE is spilling out into another asset bubble. If you print money, it has to go somewhere – nobody throws the stuff away. It was meant to be pushing down bond yields, but there isn’t much sign of that (bond yields have been rising modestly). In fact, all the fresh cash is slipping into the equity markets. Central banks are determined to re-flate the bubble. And it looks as if they are starting to succeed.
In truth, printing money is not going do much for the long-term health of the global economy. That will depend on the same things its has always depended on: free trade, deregulated markets, low-ish taxes, and the rate of technological progress. But it will create inflation, and it will create asset bubbles. And that’s a good basis for a stock market rally, even if it is bad news for everything else.

Monday, 11 May 2009


It is impossible not to like Obama as a person. But I'm nore sure about his economic policies, and it is on those that he will ultimately be judged. In Money Week this week I explain why. Here's a taster.

He speaks like an angel. His wife, everyone agrees, is poise, intelligence and grace personified. Even the first puppy, a Portuguese water dog called Bo, appears to have been blessed with the ability to charm cats, never mind the world’s media.
And yet, 100 days into his Presidency, the outlines of Barack Obama’s economic strategy are becoming clear. We have the key point of Obama-nomics. And there is just one snag. Rather than slowing down the global recession, or even turning it around, the steps the American President is taking appear more likely to prolong it.
Obama is in thrall to a very 1960s-style form of industrial policy. He is promoting mergers, rescues and ‘grand projets’ that would make a French enarque purr with pleasure.
But he is ignoring the real issues that caused the virtual meltdown of the global economy last autumn. And he is promoting a style of hyper-interventionism that is completely unsuited for the networked, decentralised economy of the 21st-century.
No one can doubt the energy and commitment of the President.
In his first three months in office, he has sunk hundreds of billions into vast spending packages, bailed out the collapsing American auto industry, and launched a swinging clampdown on offshore tax havens.
"We can't go back to an economy that's built on a pile of sand, on inflated home prices and maxed-out credit cards, on overleveraged banks and outdated regulations that allow recklessness of a few to threaten the prosperity of all," he said in a speech on the economy last week.
Ambitious stuff. The trouble is, the reality is lot murkier than some of the high-flown rhetoric.
Start with the auto industry. Last week, Obama pushed through a rescue for the auto giant Chrysler that, via bankruptcy, will create a new entity, jointly owned by the employee association, the American and Canadian governments, and Italy’s Fiat. Bond-holders and hedge fund manager who may have had stakes in the outcome were quickly hustled aside.
The Chrysler rescue package looks set to serve as a template for the much larger bail-out of General Motors, a company in just as poor shape as Chrysler but with even more jobs at stake. Fiat may well step up to the plate again – the Italian company looks set to take control of its European brands Vauxhall and Opel as part of that rescue.
Let’s put this as kindly as we can. If the answer to what’s wrong with the economy is Fiat, you must have been asking the wrong the question.
In reality, Chrysler has been a dog of a company for more than a generation. Ever since poorly engineered, gas-guzzling cars with built-in obsolescence went not-very-surprisingly out of fashion in the early 1970s it has struggled to come up with a new role for itself. Daimler Benz chewed its way through tens of billion of euros trying to re-invent it, and completely failed – and Daimler, let us remember, is, along with Toyota, the finest auto company in the world.
The idea that a combination of Fiat, the White House and the auto workers union can turn things around is absurd. That, however, is what is about to be attempted – first with Chrysler, and then, on a far larger scale, with GM.
The reality is that the Americans are not very good at making cars, and would be better off closing down their whole industry much as the British did in the 1980s. Autos are turning into a Japanese-German industry, just as, say, aerospace is an American-French industry, or banking an American-British industry. There is no point in sinking billions into denying that simple reality.
The big danger the world faces right now is a revival of protectionism. If Chrysler and GM are part-owned by the American government, and are still struggling to compete, how long will it be before there are demands for curbs on their competitors? How long before there are restrictions on those irritating European, Japanese and Korean cars people keep buying. Not long.
Worse, he is propping up an industry where everyone acknowledges there is too much capacity – and so postponing the inevitably moment when the industry is slimmed down to a handful of companies that can actually make money. As for an exit strategy, no one has mentioned it – but getting out of Iraq is likely to be child’s play compared with getting out of Chrysler and GM.
The same mistakes are likely to be played out elsewhere.
Obama had launched a crack-down on what he terms ‘tax avoidance’. In fact, it is just American companies shifting profits around the world. It doesn’t make any sense to treat the likes of Boeing or Microsoft of McDonald’s as US companies. They are multi-nationals that happen to do some business in America.
Whatever the problems of the global economy, they aren’t going to be fixed by either a retreat in protectionism or an attack on globalisation. But when you look past the rhetoric, that is precisely what is happening. Both are only going to postpone the eventual recovery from this recession – and leave the US economy that emerges a lot weaker.
Meanwhile, money is being squandered on French-style ‘grand projets’ such as attempting to introduce high-speed trains to the US. But trains struggle to make money even in small, densely populated countries: they have little chance of prospering in a huge, thinly populated one such as the US.
In truth, the root causes if the credit crunch are well-established. Monetary policy was too lax for too long. And the trade imbalances – mainly between the US and China – created a system in which too much capital was being re-cycled through the global capital markets than could be safely handled.
Nothing much, however, is being done to address either issue.
The rhetoric of Obama-nomics is sweetly judged. The reality is that many of the policies he is pushing are only going to deepen the problems of the global economy – and they certainly aren’t going to start fixing them.

Sunday, 10 May 2009

Death Force In Large Print

'Death Force' is now available in large print. You can buy a copy here.

Thursday, 7 May 2009

Charging for Websites

The old debate about charging for websites has stated again, with Rupert Murdoch talking about turning his back on the free model, and charging for The Times and Sunday Times content. They just don't get it do they. There isn't a newspaper out there that has a compelling enough product to charge for. The Sunday Times, one of the biggest and best-produced media brands in Britain, doesn't even have its own website. It's true that most newspaper websites don't make money, but that doesn't mean they can start charging. People will just go elsewhere. It looks increasingly as if none of the newspapers will survive the way the web is over-turning the news business.

The Great British Thriller Debate

Over on Book Army, there is a debate starting on the Curzon Group's campaign to kikc-start the Great British Thriller. There are some really interesting comments, so do take a look and chip in.

Tuesday, 5 May 2009

Those Green Shoots....

The phrase 'green shoots' is starting to get on my nerves (almost as much as 'the current climate'). Hence my column for Bloomberg today, which you can also read in The Times, or over at Real Clear Markets.

Monday, 4 May 2009

How To Re-Invent The City

In Money Week this week, I've been writing about how the City will need to re-invent itself. Here's a taster....

It has been a terrible year for the City of London. Half the British banking system has been nationalised, and the other half doesn’t look safe yet. The non-domicile tax rules that made it the magnet for the brightest young financiers from around Europe have been curbed. There are tough new rules on the way bankers are paid being proposed by the Financial Services Authority.
And now – presumably on the principle that you might as well finish a job once you have started it – the Government has just lifted the top rate of tax to 50%. It would have been hard to think of a more deadly final nail to hammer into an already wounded financial centre.
In response the City is going to have to re-invent itself all over again. For the last twenty years, it has flourished as a lightly-regulated, lightly-taxed global financial centre – Monaco without the yachts. That has now been shot to pieces. The City has re-invented itself several times in the past, and can no doubt do so again. It can find niches in stockbroking and financial re-structuring, as well as building on the UK’s historic ties with rising economic powers such as India. But the challenges are going to be immense – and there can be no certainty that the City will be able to rise to them.
There is no point in underestimating the gravity of the threat the City now faces. Its standing in the world has taken a terrible series of blows.
Whatever the Government may pretend, there UK has suffered more damage from the credit crunch than any other major economy. No other nation has seen runs on banks such as were witnessed at Northern Rock, nor has there been any calamity on the scale of the Royal Bank of Scotland.
The FSA Chairman Adair Turner has promised a tough new regime of regulation, stating bluntly “there’ll be fewer people earning less money”. No doubt that is true, but it suggests a regime that will be heavy-handed and intrusive.
Meanwhile, the non-doms who made London a magnet for ambitious young financiers will now have to pay a £30,000 annual charge, and, more worryingly, answer a lot of detailed questions. And now, a 50% top rate of tax, which will apply to any earnings from working at London-based bank or hedge fund regardless of whether you are British or not.
That will be the fourth highest top rate of tax in the developed world (Sweden, Denmark and the Netherlands are higher, in case you are wondering where you really don’t want to move to). It is simply inconceivable that ten of thousands of clever, ambitious young bankers, motivated principally by money, are going to up sticks and move to one of the highest-tax regimes in the world.
For the UK, that matters. In the 2007-09 financial year, the City provided 11% of total income tax payments, and 15% of corporation tax payments, making a total of £42 billion. Already that is reckoned to have at least halved, responsible by itself for much of the red ink splattered across the Government’s books. The British economy needs a thriving financial centre. It is one of the few things we are really good at.
But the City is going to have to re-invent itself. True, it is good at that: the Square Mile has scripted more triumphs over adversity than a Hollywood screenwriter. In the 1960s and 1970s, it created the offshore Eurodollar market, recycling dollars from the oil rich states to the rest of the world. In the wake of Big Bang, in 1986, it re-created itself as a global hub for largely foreign-owned banks. A combination of the non-dom rule, what in retrospect was excessively light regulation, and the traditional entrepreneurial spirits of its workforce, allowed it to see off challenges from Paris and Frankfurt to become the key European finance centre. Indeed, in the last three years, it was starting to pull ahead of New York as the global centre for the money markets.
All that is in the past. The foreigners will head back home. The American and European banks will be slimming down their operations. And the British banks will be shadows of their former selves.
There are opportunities out there.
Stockbroking, which was once one of the City’s core professions, is about to make a comeback. The credit crunch has left thousands of companies with shattered balance sheets. They will need to swap a lot of debt for equity, and that is going to mean patiently talking to shareholders and persuading them the business is worth backing. That is precisely the job stockbrokers used to do – and there will be a demand for them again.
Next, the government debt markets will be swilling with paper. The British government will soon be selling £200 billion of debt a year, and other governments will be placing similar amounts. The competition for capital will be intense. Any expertise in placing that – and the City has plenty – is going to be in demand.
Thirdly, the City is already the world’s major currency trading centre. The euro has survived the credit crunch so far, but whether countries such as Spain, Italy and Ireland can stand the pain of the recession without devaluing their currency remains to be seen. Splitting up the single currency could be a bonanza.
Lastly, the BRIC economies of Brazil, Russia, India and China are going to keep growing in importance. The City has always been the most international financial centre. It has already established itself as a bridge between Russia and the rest of the world. And it can do the same for India as well.
Even so, the City will be a far more English financial centre for a decade or more to come. It will be smaller, and less profitable. And it will be a long time before it claws back the prominence of the middle half of this decade.

Friday, 1 May 2009

A Great Review Of Death Force

There is a great review of Death Force on the Motorbar website. You can read it here...