Remarkable headline of the day: "Euro breakup could wipe 50% off London house prices". The story is not in the Daily Mail, the usual home of obsessive house price paranoia; it's in the normally more level-headed Daily Telegraph. The dire prognostication is based on a report by a research company that suggests the foreign buying of high-end London homes that has driven prices to dizzy heights in recent years may become the market's worst enemy in the event that the Euro breaks up.
The report's authors believe that the initial impact of a Eurozone collapse would be to push prices even higher. However, they argue that once the bad news was absorbed, the incentive for the world's rich to seek a safe haven in London property would evaporate. Once that money began to leave, the top end of the London housing market would sink very quickly.*
In principle this is plausible -- "buy the rumour, sell the fact" is a well-established market axiom. However, if the Eurozone really did fall apart, the dire consequences would be likely to last for some considerable time, giving London property continuing support. It hardly seems likely that Russian and Middle Eastern billionaires would be rushing to buy homes in Paris or Madrid if the region was still in turmoil.
The really interesting thing, however, is how the Daily Mail parses this story for its readers. They love ever-rising house prices, and they love to hate the Euro. The idea that the hated Euro's survival could be a pre-requisite for more house price gains must be just too awful to contemplate.
* This is not the thesis I expected to find when I started reading the article. I assumed that the argument would be that problems in the European banking system would drive up banks' funding costs and force up mortgage rates, sending prices into reverse. This still seems to me to be a likely scenario, but the researchers here were looking at the class of buyers that doesn't need mortgages.
Thursday, 31 May 2012
Tuesday, 29 May 2012
Our once and future King (in his dreams)
Such a pleasure to see the Great Dissimulator, Tony Blair, back on our TV screens yesterday. Phoney Tony magnanimously took time out from his multitude of day jobs (among them, bringing peace to the Middle East and advising the senior management of JPMorgan; anyone have any updates on how those are going?) to appear before the long-running Leveson Inquiry into phone hacking. A bit greyer, and sporting a tasteful tan that he probably didn't lay down in Bognor Regis, he seemed otherwise to be little changed: still managing to appear self-assured and slightly unhinged at the same time.
There's a fascinating summary of the media coverage of Blair's testimony (and even more about his appearance and his mien) here, but it's worth taking a more detailed look at some of the things he actually said. Here's his explanation for why he decided to try to "manage" the relationship with the media (i.e. the Murdoch empire):
“The truth is that I felt that if I had taken on this issue, I would have been engaged in a titanic battle with immensely powerful media interests who would not have hesitated to go after me and my Government with everything at their disposal. It would have, to a large degree, dominated the agenda of the Government.”
That's pretty much a textbook definition of leadership, isn't it? Getting your capitulation in first. But at least he was doing it in the best interests of the country:
There's a fascinating summary of the media coverage of Blair's testimony (and even more about his appearance and his mien) here, but it's worth taking a more detailed look at some of the things he actually said. Here's his explanation for why he decided to try to "manage" the relationship with the media (i.e. the Murdoch empire):
“The truth is that I felt that if I had taken on this issue, I would have been engaged in a titanic battle with immensely powerful media interests who would not have hesitated to go after me and my Government with everything at their disposal. It would have, to a large degree, dominated the agenda of the Government.”
That's pretty much a textbook definition of leadership, isn't it? Getting your capitulation in first. But at least he was doing it in the best interests of the country:
“Our priority had to be around the economy, schools, health,
crime, security and foreign policy.”
Too bad, then, that those aren't the things the Blair years are likely to be remembered for, at least not in a good way. But never fear, it all turned out well in the end:
“I know Rupert Murdoch and his family far better today than
I did when I was Prime Minister. I would never have become godfather to their
child on the basis of my relationship in Government.”
Or, in the words of an old Irish ditty, "your reward you've won/for a job well done".
In recent weeks Blair has let it be known that he's interested in making a return to the UK political scene. Surely the only job he thinks suited to his exalted profile -- the one where you get to live in the big white palace at the end of The Mall -- is already spoken for, far into the future? But who knows? This being Blair, he may have put together some sort of deal with Prince William to squeeze the heir-apparent to one side. Which, come to think of it, might go down quite well with the voters.
Sunday, 27 May 2012
Taking the pizza
Is there any food that's been more thoroughly traduced than the humble pizza? The giant gloopy messes now sold as pizzas around the world bear about as much resemblance to the simple Italian original as I do to George Clooney.
And amazingly, people keep coming up with new abominations. You'd think it would be difficult to do much worse than the list of toppings available at just about every takeout pizzeria in the UK. Pineapple! Sweetcorn!! Tandoori chicken!!! But you'd be wrong. On our recent visit to Warsaw we ate at one place, otherwise quite decent and restrained, that set a new benchmark for bad taste with a pizza topped with....banana!
That benchmark lasted less than a week. In among the mail on the doormat when we got home was a flyer from Pizza Hut, bragging about their latest gourmet innovation. If the cheese-stuffed crust didn't quite do it for you, they were now offering a pizza with a crust stuffed with hot dogs (and just a soupcon of cheese sauce).
The flyer warned that this foodstuff of mass destruction would be available "for a limited time only", the limit presumably determined by how long it took for all of the customers to suffer massive coronaries. Mi dispiace!
And amazingly, people keep coming up with new abominations. You'd think it would be difficult to do much worse than the list of toppings available at just about every takeout pizzeria in the UK. Pineapple! Sweetcorn!! Tandoori chicken!!! But you'd be wrong. On our recent visit to Warsaw we ate at one place, otherwise quite decent and restrained, that set a new benchmark for bad taste with a pizza topped with....banana!
That benchmark lasted less than a week. In among the mail on the doormat when we got home was a flyer from Pizza Hut, bragging about their latest gourmet innovation. If the cheese-stuffed crust didn't quite do it for you, they were now offering a pizza with a crust stuffed with hot dogs (and just a soupcon of cheese sauce).
The flyer warned that this foodstuff of mass destruction would be available "for a limited time only", the limit presumably determined by how long it took for all of the customers to suffer massive coronaries. Mi dispiace!
Thursday, 24 May 2012
Face value
The legal wrangling over Facebook's initial public offering (IPO) -- or rather, over the abysmal performance of the stock since the flotation took place -- promises to provide hours of enjoyment for the neutral spectator in the weeks and months ahead. There are suggestions that the lead underwriter, Morgan Stanley, may not have told smaller investors that its analyst had downgraded his earnings estimates for the company after the flotation was announced. Even if that isn't the case -- and Morgan Stanley has been prompt and firm in denying it -- there will certainly be questions asked about whether the underwriters (and Facebook itself) got carried away by the pre-market hype, resulting in an offering that was too large and too expensive for the market to absorb.
I was never on the equity side of the securities business -- too much flim-flam for my taste -- but one thing I did understand was that when entrepreneurs undertake initial public offerings (IPOs), they're not doing it to make new investors rich. They're doing it either to raise new capital to invest in the business, or to enrich the investors who've financed the company up to the moment of the IPO. No company wants to see its shiny new stock sinking like a stone, of course, but the alternative is almost worse, at least from the viewpoint of the initial investors (i.e., in the case of Facebook, Mark Zuckerberg and his partners). If the stock goes up like a rocket as soon as it hits the market, you've left a whole lot of money on the table -- not a good feeling.
It may be that Morgan Stanley failed to control the hype, but it would be wrong to suggest that they created it. The business media, with CNBC maybe the worst culprits, were drooling with anticipation for weeks. Assuming all this comes to court, it will be interesting to see whether the ancient principle of caveat emptor wins out, which it certainly seems to me that it should: nobody twisted anybody's arm to make them buy this stuff. Then again, I didn't buy any of the stock, so I can afford to say that.
There's one other unusual aspect to this flotation: the movie "The Social Network". It's a fictionalised version of events, of course, but most viewers would surely have had the slightly queasy sensation that I had, as I found myself sympathising with the unlovely Winklevoss twins. Anyone who saw that movie and still thought the Facebook IPO would be a bargain really needs to give their head a shake.
I was never on the equity side of the securities business -- too much flim-flam for my taste -- but one thing I did understand was that when entrepreneurs undertake initial public offerings (IPOs), they're not doing it to make new investors rich. They're doing it either to raise new capital to invest in the business, or to enrich the investors who've financed the company up to the moment of the IPO. No company wants to see its shiny new stock sinking like a stone, of course, but the alternative is almost worse, at least from the viewpoint of the initial investors (i.e., in the case of Facebook, Mark Zuckerberg and his partners). If the stock goes up like a rocket as soon as it hits the market, you've left a whole lot of money on the table -- not a good feeling.
It may be that Morgan Stanley failed to control the hype, but it would be wrong to suggest that they created it. The business media, with CNBC maybe the worst culprits, were drooling with anticipation for weeks. Assuming all this comes to court, it will be interesting to see whether the ancient principle of caveat emptor wins out, which it certainly seems to me that it should: nobody twisted anybody's arm to make them buy this stuff. Then again, I didn't buy any of the stock, so I can afford to say that.
There's one other unusual aspect to this flotation: the movie "The Social Network". It's a fictionalised version of events, of course, but most viewers would surely have had the slightly queasy sensation that I had, as I found myself sympathising with the unlovely Winklevoss twins. Anyone who saw that movie and still thought the Facebook IPO would be a bargain really needs to give their head a shake.
Monday, 21 May 2012
The needy and the greedy
Defying mounting criticism from almost all sides, David Cameron has made it clear again in the last few days that fiscal austerity still overrides all other goals in his mind. The Treasury has asked spending ministries to identify possible targets for a further round of spending cuts in order to keep the deficit reduction programme on track.
Inevitably, the axe will fall heavily on social programmes -- unemployment benefits, welfare, pensions and the like. That's partly because those programmes account for such a large proportion of government spending, but it's also because Tories instinctively feel that a large proportion of spending on such things is wasted. But where are the cuts likely to fall? Despite the fiasco over the so-called "Granny Tax" in the recent budget, the pampered elderly (including yours truly) are likely to be largely exempt, mainly because we turn up at the polling stations in awkwardly large numbers at election time. So I, along with such impoverished souls as Sir Richard Branson, Sir Mick Jagger and Dame Helen Mirren, will continue to enjoy free bus travel, free prescription meds and the ludicrous "winter fuel allowance", without any attempt being made to check whether we actually need the money.
This morning on BBC Radio 5 Live, a call-in show offered a reminder of just how pervasive the sense of entitlement is. The subject du jour was a new think-tank report calling for more affordable child care. One of the callers was a gent who felt he wasn't getting nearly enough public help (read: money) to look after his three kids. It emerged that both he and his wife are top rate taxpayers, which implies that the family is comfortably in the top 10% of UK households in terms of income. The host, Victoria Derbyshire, who has kids of her own, and may also be a top-rate taxpayer, asked him "Why do you think you deserve more help?" To this he replied, "Well, I'm doing a lot for my children", prompting Victoria Derbyshire to blurt out "You're supposed to do that, you're their Dad!". You'd hope she spoke on behalf of a lot of the audience there, but to be honest, you wouldn't be sure of it.
So it goes. The elderly are largely untouchable, and the aggrieved middle classes are quick to take to the airwaves to demand more for themselves. That leaves the poor and disadvantaged to bear the brunt of the cuts, which is how we find ourselves with a newspaper story of the London borough of Newham, home of the Olympics, looking to ship its social housing tenants to Stoke-on-Trent because it can't afford to house them, side-by-side with a story that private landlords in the same borough are evicting long-standing tenants with a view to charging Olympics visitors up to £10,000 a week for accommodation during the Games.
Inevitably, the axe will fall heavily on social programmes -- unemployment benefits, welfare, pensions and the like. That's partly because those programmes account for such a large proportion of government spending, but it's also because Tories instinctively feel that a large proportion of spending on such things is wasted. But where are the cuts likely to fall? Despite the fiasco over the so-called "Granny Tax" in the recent budget, the pampered elderly (including yours truly) are likely to be largely exempt, mainly because we turn up at the polling stations in awkwardly large numbers at election time. So I, along with such impoverished souls as Sir Richard Branson, Sir Mick Jagger and Dame Helen Mirren, will continue to enjoy free bus travel, free prescription meds and the ludicrous "winter fuel allowance", without any attempt being made to check whether we actually need the money.
This morning on BBC Radio 5 Live, a call-in show offered a reminder of just how pervasive the sense of entitlement is. The subject du jour was a new think-tank report calling for more affordable child care. One of the callers was a gent who felt he wasn't getting nearly enough public help (read: money) to look after his three kids. It emerged that both he and his wife are top rate taxpayers, which implies that the family is comfortably in the top 10% of UK households in terms of income. The host, Victoria Derbyshire, who has kids of her own, and may also be a top-rate taxpayer, asked him "Why do you think you deserve more help?" To this he replied, "Well, I'm doing a lot for my children", prompting Victoria Derbyshire to blurt out "You're supposed to do that, you're their Dad!". You'd hope she spoke on behalf of a lot of the audience there, but to be honest, you wouldn't be sure of it.
So it goes. The elderly are largely untouchable, and the aggrieved middle classes are quick to take to the airwaves to demand more for themselves. That leaves the poor and disadvantaged to bear the brunt of the cuts, which is how we find ourselves with a newspaper story of the London borough of Newham, home of the Olympics, looking to ship its social housing tenants to Stoke-on-Trent because it can't afford to house them, side-by-side with a story that private landlords in the same borough are evicting long-standing tenants with a view to charging Olympics visitors up to £10,000 a week for accommodation during the Games.
Saturday, 19 May 2012
Irresponsibility
John Maynard Keynes famously batted away questions about the long term outlook by noting that "In the long run, we are all dead". Now Robert Chote, head of the OBR*, the UK Government's rather pointless "independent" forecasting agency, has concocted a variant, on the lines of "in the really long run, we're all up the creek".
According to Chote, the impact on the UK of a messy collapse of the Euro could be not just long term, but permanent:
“If you have a permanent impact on the productive potential of the economy, then it will have a permanent impact on the ability to raise tax revenue and a permanent impact on public finances,” he told the Daily Telegraph. (Full story here).
Oh, please. Over the past century, the UK has endured two world wars with shocking loss of life (and mass destruction of productive capacity and infrastructure in WW2); the Great Depression; loss of the Empire; and Sterling's demise as a global medium of exchange. And yet, living standards have risen sharply (if not steadily), and reached their highest level ever just before the financial crisis hit in 2008. Is Robert Chote really suggesting that recovery from a Euro collapse will not just take longer than recovery from all of those shattering events, but may in fact NEVER happen? Because that's what "permanent" means. It's a ridiculous assertion, and one that someone in Mr Chote's position should have known better than to make.
* Office for Budget Responsibility
According to Chote, the impact on the UK of a messy collapse of the Euro could be not just long term, but permanent:
“If you have a permanent impact on the productive potential of the economy, then it will have a permanent impact on the ability to raise tax revenue and a permanent impact on public finances,” he told the Daily Telegraph. (Full story here).
Oh, please. Over the past century, the UK has endured two world wars with shocking loss of life (and mass destruction of productive capacity and infrastructure in WW2); the Great Depression; loss of the Empire; and Sterling's demise as a global medium of exchange. And yet, living standards have risen sharply (if not steadily), and reached their highest level ever just before the financial crisis hit in 2008. Is Robert Chote really suggesting that recovery from a Euro collapse will not just take longer than recovery from all of those shattering events, but may in fact NEVER happen? Because that's what "permanent" means. It's a ridiculous assertion, and one that someone in Mr Chote's position should have known better than to make.
* Office for Budget Responsibility
Wednesday, 16 May 2012
Saints and sinners
All in a day's news....
* There's a story in The Times today (paywa££) about Sir/St Bob Geldof, who is still badgering people to give aid to Africa. And good for him. However, when the reporter ventured to suggest that Sir Bob's own tax arrangements might not bear scrutiny, he promptly went off on one: "How dare you lecture me about morality?" I assume the question wasn't meant ironically because really, Sir Bob, what have you been doing to the rest of us for the past three decades? You surely can't imagine that your fame is entirely due to your musical talents.
* Love the response of Charlie Brooks, husband of the flame-haired ex-News Corp. honcho Rebekah, to the news that his missus has been charged with conspiracy to pervert the course of justice -- with Charlie himself similarly accused, it must be added. According to Charlie, this is all a "witch-hunt". Well, given than nobody has shown fewer scruples about hounding the innocent than the newspapers for which Mrs Brooks was responsible, we can at least say that poetic justice is being served here.
* And moving right toward the diabolic end of the spectrum, we find Michael O'Leary of Ryanair. That company's website is to close down for two days this weekend, so if you're flying during that period, you have to print your boarding pass well ahead of time, or face a £60 charge for having one printed at the airport. Can there be any other company, anywhere in the world, that would use its systems upgrades as yet another opportunity to chisel even more money out of its customers?
* There's a story in The Times today (paywa££) about Sir/St Bob Geldof, who is still badgering people to give aid to Africa. And good for him. However, when the reporter ventured to suggest that Sir Bob's own tax arrangements might not bear scrutiny, he promptly went off on one: "How dare you lecture me about morality?" I assume the question wasn't meant ironically because really, Sir Bob, what have you been doing to the rest of us for the past three decades? You surely can't imagine that your fame is entirely due to your musical talents.
* Love the response of Charlie Brooks, husband of the flame-haired ex-News Corp. honcho Rebekah, to the news that his missus has been charged with conspiracy to pervert the course of justice -- with Charlie himself similarly accused, it must be added. According to Charlie, this is all a "witch-hunt". Well, given than nobody has shown fewer scruples about hounding the innocent than the newspapers for which Mrs Brooks was responsible, we can at least say that poetic justice is being served here.
* And moving right toward the diabolic end of the spectrum, we find Michael O'Leary of Ryanair. That company's website is to close down for two days this weekend, so if you're flying during that period, you have to print your boarding pass well ahead of time, or face a £60 charge for having one printed at the airport. Can there be any other company, anywhere in the world, that would use its systems upgrades as yet another opportunity to chisel even more money out of its customers?
Good numbers, bad outlook
What are we to make of this? Today, the Bank of England released its latest Quarterly Inflation Report, a document of Stygian gloom in which it admitted that inflation would stay above the 2% target for longer than previously expected (well, colour me surprised!), while GDP growth will reach only 0.8% for the year, down from a previous forecast of 1.2%. However, we also learned today of an unexpected 45,000 fall in unemployment during the first quarter -- a quarter during which, it should be remembered, the UK economy supposedly entered a double-dip recession.
Let's look first at the Inflation Report. The prospect of sticky inflation is, as usual, dismissed as something the Bank can't do anything about, even though it's the only part of the economic outlook that it has a specific target for. As for growth, the downward-revision of the forecast is partly a reflection of the problems in the Eurozone, but the Bank acknowledges other factors, including the "squeeze on household earnings", which is apparently in no way related to the fact that inflation has remained above target for so long!
The recent fall in global energy prices and the strength in Sterling, if sustained, hold out the prospect that inflation may fall somewhat faster than the Bank is now predicting, which would be good for domestic demand. However, it would be rash to suggest that the Bank is overstating the risks to UK growth posed by the crisis in the Eurozone, which Gov. King depicted as "tearing itself apart without any obvious solution".
Turning now to the unemployment data, a look beyond the headlines shows a mix of good and not-so-good news. The fall in the unemployment rate and the 105,000 rise in the number employed are of course welcome, as is the decline in the separate "claimant count" measure, which has been rising in recent times partly because of changes in the structure of welfare programmes. There was also a small decline in youth unemployment, though at 21.7%, this remains criminally high.
Less welcome is the fact that part-time jobs accounted for all of the improvement, rising 118,000 in the quarter. There are now signs that an increasing proportion of the part-time workforce is only working shorter hours because of a shortage of full-time jobs: the number of people saying they are in that situation rose by 73,000 in the quarter. (Even so, fully 82% of the people working part-time are quite happy about that fact). The number of long-term jobless (out of work for more than a year) continues to rise. Lastly, average earnings only rose 0.6% from a year earlier. The fact that this is so far below the rate of inflation indicates that even a turnaround in the jobs market may not be sufficient to give a lasting boost to domestic demand.
The fact that the jobs market improved at all during the first quarter suggests that the ONS GDP data, which have already come in for some strong criticism, must surely be flawed. (Compared to other national agencies, the ONS publishes its first GDP estimates much sooner, but spends much longer revising them, with the final story not told until years after the event. Time to rethink, perhaps?) At the same time, it would be wrong to see the numbers as a sign of a return to sustained growth. Even if falling inflation boosts consumers' real purchasing power, the increasingly doom-laden scenario for the Eurozone, and the prospect of renewed turmoil in financial markets, will weigh heavily on the UK for the rest of this year. The Bank's forecast that real GDP will not regain its 2008 peak until 2014 seems all too likely to be accurate.
Let's look first at the Inflation Report. The prospect of sticky inflation is, as usual, dismissed as something the Bank can't do anything about, even though it's the only part of the economic outlook that it has a specific target for. As for growth, the downward-revision of the forecast is partly a reflection of the problems in the Eurozone, but the Bank acknowledges other factors, including the "squeeze on household earnings", which is apparently in no way related to the fact that inflation has remained above target for so long!
The recent fall in global energy prices and the strength in Sterling, if sustained, hold out the prospect that inflation may fall somewhat faster than the Bank is now predicting, which would be good for domestic demand. However, it would be rash to suggest that the Bank is overstating the risks to UK growth posed by the crisis in the Eurozone, which Gov. King depicted as "tearing itself apart without any obvious solution".
Turning now to the unemployment data, a look beyond the headlines shows a mix of good and not-so-good news. The fall in the unemployment rate and the 105,000 rise in the number employed are of course welcome, as is the decline in the separate "claimant count" measure, which has been rising in recent times partly because of changes in the structure of welfare programmes. There was also a small decline in youth unemployment, though at 21.7%, this remains criminally high.
Less welcome is the fact that part-time jobs accounted for all of the improvement, rising 118,000 in the quarter. There are now signs that an increasing proportion of the part-time workforce is only working shorter hours because of a shortage of full-time jobs: the number of people saying they are in that situation rose by 73,000 in the quarter. (Even so, fully 82% of the people working part-time are quite happy about that fact). The number of long-term jobless (out of work for more than a year) continues to rise. Lastly, average earnings only rose 0.6% from a year earlier. The fact that this is so far below the rate of inflation indicates that even a turnaround in the jobs market may not be sufficient to give a lasting boost to domestic demand.
The fact that the jobs market improved at all during the first quarter suggests that the ONS GDP data, which have already come in for some strong criticism, must surely be flawed. (Compared to other national agencies, the ONS publishes its first GDP estimates much sooner, but spends much longer revising them, with the final story not told until years after the event. Time to rethink, perhaps?) At the same time, it would be wrong to see the numbers as a sign of a return to sustained growth. Even if falling inflation boosts consumers' real purchasing power, the increasingly doom-laden scenario for the Eurozone, and the prospect of renewed turmoil in financial markets, will weigh heavily on the UK for the rest of this year. The Bank's forecast that real GDP will not regain its 2008 peak until 2014 seems all too likely to be accurate.
Monday, 14 May 2012
Dim(on) and dimmer
Supposedly, Jamie Dimon of JPMorgan Chase has the distinction of being President Obama's favourite banker. (Who knew that accolade existed? And what does it say about Obama? A favourite basketball player or a favourite rapper or even a favourite Marx brother, maybe, but a favourite banker??) Anyway, being near the top of Barack's Christmas list doesn't seem to have curbed Dimon's behaviour very much. As we have learned over the last few days, JPM has racked up monster losses ($2 billion and counting) by continuing to indulge in the kind of trading practices that regulators have been vowing to curb ever since the financial crisis hit.
The exact details of the loss-making trades are not known, but they seem to have involved large positions in structured derivatives, including credit default swaps (CDS). The very name "credit default swaps" seems to imply that these are an instrument for hedging risk, but once you recall that the volumes of CDS outstanding far outstrip the volume of underlying bonds, you soon realise that the role of the market has moved way beyond risk hedging and into outright speculation.
In seeking to reform financial sector regulation in the aftermath of the crisis, the Obama administration's underlying principle has been that low-risk transactional banking activities should be kept separate from investment banking -- the so-called "Volcker rule". Despite his apparent closeness to the administration, Jamie Dimon has been among the leaders of Wall Street's steadfast opposition to the Volcker rule, or even to less stringent regulatory reform. The revelations of the last few days show that JPM has been flouting the spirit of the Volcker rule on a massive scale, booking gargantuan speculative trades in London while attempting to maintain the fiction that they were being undertaken for risk management purposes.
It's instructive that the announcement of a $2 billion loss has wiped $15 billion off the value of JPMorgan Chase's shares, while hitting confidence in banks generally. Dimon has admitted that the losses could well end up much higher, and markets are well aware of the oft-proved cockroach theory: there's never just one, and who knows whether the next one or six will crawl out at JPM or at one of its competitors? Meantime, all the hedgies on the other side of JPM's disastrous trades will be seeking to maximise their own profits by making it as hard and expensive as possible for JPM to unwind its positions. Thus does the financial services industry add to the sum of human happiness, or as Goldman's Lloyd Blankfein put it, "do God's work".
In an egregious piece of bad timing, David Cameron last week dismissed any attempts by the new French President, Francois Hollande, to impose curbs on the activities of the City of London, saying that Europeans were just "envious" of the UK's success. I'd say they're worried and angry about the UK's unwillingness to admit there's a problem, rather than envious. In the meantime, back in the US, the events at JPM have given a fresh impetus to the Volcker rule. Here, for example, is a cogent analysis, together with a set of specific proposals, from Eliot Spitzer. It contains one remarkable yet somehow unsurprising fact: Jamie Dimon is a member of the board of the New York Fed!
The exact details of the loss-making trades are not known, but they seem to have involved large positions in structured derivatives, including credit default swaps (CDS). The very name "credit default swaps" seems to imply that these are an instrument for hedging risk, but once you recall that the volumes of CDS outstanding far outstrip the volume of underlying bonds, you soon realise that the role of the market has moved way beyond risk hedging and into outright speculation.
In seeking to reform financial sector regulation in the aftermath of the crisis, the Obama administration's underlying principle has been that low-risk transactional banking activities should be kept separate from investment banking -- the so-called "Volcker rule". Despite his apparent closeness to the administration, Jamie Dimon has been among the leaders of Wall Street's steadfast opposition to the Volcker rule, or even to less stringent regulatory reform. The revelations of the last few days show that JPM has been flouting the spirit of the Volcker rule on a massive scale, booking gargantuan speculative trades in London while attempting to maintain the fiction that they were being undertaken for risk management purposes.
It's instructive that the announcement of a $2 billion loss has wiped $15 billion off the value of JPMorgan Chase's shares, while hitting confidence in banks generally. Dimon has admitted that the losses could well end up much higher, and markets are well aware of the oft-proved cockroach theory: there's never just one, and who knows whether the next one or six will crawl out at JPM or at one of its competitors? Meantime, all the hedgies on the other side of JPM's disastrous trades will be seeking to maximise their own profits by making it as hard and expensive as possible for JPM to unwind its positions. Thus does the financial services industry add to the sum of human happiness, or as Goldman's Lloyd Blankfein put it, "do God's work".
In an egregious piece of bad timing, David Cameron last week dismissed any attempts by the new French President, Francois Hollande, to impose curbs on the activities of the City of London, saying that Europeans were just "envious" of the UK's success. I'd say they're worried and angry about the UK's unwillingness to admit there's a problem, rather than envious. In the meantime, back in the US, the events at JPM have given a fresh impetus to the Volcker rule. Here, for example, is a cogent analysis, together with a set of specific proposals, from Eliot Spitzer. It contains one remarkable yet somehow unsurprising fact: Jamie Dimon is a member of the board of the New York Fed!
Saturday, 12 May 2012
Oxymoron
A good few years ago, the great goaltender for the New York Rangers hockey team, John Davidson, was asked by a reporter which team gave him the most trouble. His answer: the New York Rangers.
As we gasp at the crass behaviour of the US "intelligence" community in relation to the latest underwear bomb scare, you have to wonder if the brass at MI6 may be thinking on the same lines. Which country in the "war on terror" worries you the most, Mr Bond? Why, that would be the United States.
As we gasp at the crass behaviour of the US "intelligence" community in relation to the latest underwear bomb scare, you have to wonder if the brass at MI6 may be thinking on the same lines. Which country in the "war on terror" worries you the most, Mr Bond? Why, that would be the United States.
Thursday, 10 May 2012
Mr Yeats peruses the Rich List
A few weeks ago, the Sunday Times published one of those appalling "rich lists" that sends my blood pressure skyrocketing each year. They chose to make it their main front page headline for the day, too: something to the effect that "UK's rich get even richer". Next to that was a political story under the headline "Tories fall to 8-year low in public support". I was watching one of those "press preview" things on TV during the evening, and remarkably enough, neither of the two expert panellists sought to make any connection between the two stories, though that may have had something to do with the fact that one of them appeared to have indulged rather heavily in the "green room" before going on air. Well, it was a Saturday evening after all.
There surely is some connection, though, isn't there? We seem to be seeing a full-fledged shareholder revolt against "fat cat" pay in the UK. Bob "shine on you crazy" Diamond at Barclays managed to trouser his bonus, at the cost of some embarrassment, but others, including Sly Bailey at TrinityMirror and the CEO at Aviva, have had to bow out in the face of shareholder wrath. Bob and Sly and the Aviva guy may not be in the Abramovich/Mittal/Green stratosphere of wealth, but they're doing OK: newly-released data show that remuneration for FTSE-100 CEOs jumped more than 11% last year, while average earnings across the economy rose barely more than 1%. "All in this together", is it?
It's not just in the UK that this is happening. Even in the US, where greed is still mostly regarded as a virtue, eyebrows are starting to get raised by statistics showing a burgeoning wealth and income gap. Not so long ago, American CEOs used to earn about 40 times as much as their average employee; now it's closer to 400 times. And there can be little doubt that the "throw the buggers out" trend in recent European elections, which has now claimed President "bling-bling" Sarkozy in France, has its roots in voters' sense that the wrong people are bearing the costs of fixing the financial crisis.
There are moral arguments to be made about all this, of course: it is easier for a camel to pass through the eye of a needle than to for a rich man enter the Kingdom of Heaven, and so on. That sort of thing doesn't wash with most people in today's society, sad to say, but there are sound practical reasons to fret about the consequences of rising inequality.
Yesterday on CNBC's morning panel show, one gent (whose name I didn't catch) bravely argued the case that inequality in the US risks causing profound damage. The regular hosts, who never met a plutocrat they didn't like, tried their best to talk him to a standstill, but he held his ground admirably. His fundamental point was that if society becomes more and more polarised between rich and poor, then politics becomes more polarised too, until eventually you reach a point where it's almost impossible to agree on any moderate solutions. You can see how that works in the results of the recent Greek elections. Call it Yeatsian economics:
"Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity."
(W. B. Yeats: The Second Coming, 1921)
A further serious consequence of inequality is that it makes it ever harder to generate economic growth. Putting "a chicken in every pot" will ultimately result in a much greater lift to GDP than building another yacht for Larry Ellison. And growth is important. When overall income and wealth are rising, it's possible (though possibly ill-advised) for people to shrug wearily at the excesses of the plutocrats, but when ordinary people are feeling the squeeze, they get angry very quickly. Then you get riots and looting, and you see headlines like "Tories fall to 8-year low in public support".
Let's give the last word to Yeats and his wrist-slitting "Second Coming", with a question whose answer we can hope we never find out:
"And what rough beast, its hour come round at last,
Slouches toward Bethlehem to be born?"
There surely is some connection, though, isn't there? We seem to be seeing a full-fledged shareholder revolt against "fat cat" pay in the UK. Bob "shine on you crazy" Diamond at Barclays managed to trouser his bonus, at the cost of some embarrassment, but others, including Sly Bailey at TrinityMirror and the CEO at Aviva, have had to bow out in the face of shareholder wrath. Bob and Sly and the Aviva guy may not be in the Abramovich/Mittal/Green stratosphere of wealth, but they're doing OK: newly-released data show that remuneration for FTSE-100 CEOs jumped more than 11% last year, while average earnings across the economy rose barely more than 1%. "All in this together", is it?
It's not just in the UK that this is happening. Even in the US, where greed is still mostly regarded as a virtue, eyebrows are starting to get raised by statistics showing a burgeoning wealth and income gap. Not so long ago, American CEOs used to earn about 40 times as much as their average employee; now it's closer to 400 times. And there can be little doubt that the "throw the buggers out" trend in recent European elections, which has now claimed President "bling-bling" Sarkozy in France, has its roots in voters' sense that the wrong people are bearing the costs of fixing the financial crisis.
There are moral arguments to be made about all this, of course: it is easier for a camel to pass through the eye of a needle than to for a rich man enter the Kingdom of Heaven, and so on. That sort of thing doesn't wash with most people in today's society, sad to say, but there are sound practical reasons to fret about the consequences of rising inequality.
Yesterday on CNBC's morning panel show, one gent (whose name I didn't catch) bravely argued the case that inequality in the US risks causing profound damage. The regular hosts, who never met a plutocrat they didn't like, tried their best to talk him to a standstill, but he held his ground admirably. His fundamental point was that if society becomes more and more polarised between rich and poor, then politics becomes more polarised too, until eventually you reach a point where it's almost impossible to agree on any moderate solutions. You can see how that works in the results of the recent Greek elections. Call it Yeatsian economics:
"Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity."
(W. B. Yeats: The Second Coming, 1921)
A further serious consequence of inequality is that it makes it ever harder to generate economic growth. Putting "a chicken in every pot" will ultimately result in a much greater lift to GDP than building another yacht for Larry Ellison. And growth is important. When overall income and wealth are rising, it's possible (though possibly ill-advised) for people to shrug wearily at the excesses of the plutocrats, but when ordinary people are feeling the squeeze, they get angry very quickly. Then you get riots and looting, and you see headlines like "Tories fall to 8-year low in public support".
Let's give the last word to Yeats and his wrist-slitting "Second Coming", with a question whose answer we can hope we never find out:
"And what rough beast, its hour come round at last,
Slouches toward Bethlehem to be born?"
Monday, 7 May 2012
Pole position
Shamelessly squeezing one more post out of last week's trip to Warsaw....
Back in the dark days of the 1980s, when the martial law regime of General Jaruszelski was pitted against Lech Walesa's Soildarity movement, there was a joke doing the rounds about how Poland could solve its problems. Supposedly, an expert committee had been set up, and had come up with two solutions: a practical solution and a miracle solution. The practical solution: the Virgin Mary would come down from heaven and turn all of Poland's coal reserves into gold. The miracle solution: the Poles would stop fighting among themselves and get back to work.
It wasn't fair, of course. Even under the yoke of communism, the Poles had managed the almost superhuman task of reconstructing the major cities that had been laid waste by the Nazi occupation and the scorched-earth tactics of the fleeing Wehrmacht. And it's still not fair. Poland's coal is still black, yet the country is developing rapidly. The politics may be as fractious as ever, but that hasn't stopped Poland from being one of Europe's success stories of the past decade.
Warsaw bristles with construction cranes. The hideous Palace of Science and Culture is no longer the only skyscraper. The city's airport is spanking new. There's a subway, with a second line on the way. Roads that were potholed just a decade ago are now in excellent repair. There are new hotels and restaurants everywhere. There's a new national stadium, ready and waiting for the European nations tournament next month. There are benches in the parks that play Chopin when you sit on them.
As with the reconstruction in the 1950s, the Poles have done most of the hard work themselves. There has, however, been a big assist from the EU, partly in the form of hard cash, but more importantly in the opening up of markets, both for goods and for financing. Much of the impressive development that has taken place over the last decade or so has been a direct result of Poland's admission to the EU. And of course, it's not just Poland -- there are similar stories to be told all across eastern and southern Europe.
It's worth keeping that in mind as the Eurozone crisis enters its next phase. The Euro may look doomed -- though that's the fault of dissimulating and deal-making politicians, rather than of the technocrats who designed it -- and the Brussels bureaucracy may be oppressive and unaccountable, but the "European project" has still done a great deal more good than harm*. It would be very sad if a few feckless politicians and a bunch of greedy hedgies and bond vigilantes were to bring the whole thing to a screeching halt.
* UPDATE, 9 May: Wonder of wonders, the FT agrees!
Back in the dark days of the 1980s, when the martial law regime of General Jaruszelski was pitted against Lech Walesa's Soildarity movement, there was a joke doing the rounds about how Poland could solve its problems. Supposedly, an expert committee had been set up, and had come up with two solutions: a practical solution and a miracle solution. The practical solution: the Virgin Mary would come down from heaven and turn all of Poland's coal reserves into gold. The miracle solution: the Poles would stop fighting among themselves and get back to work.
It wasn't fair, of course. Even under the yoke of communism, the Poles had managed the almost superhuman task of reconstructing the major cities that had been laid waste by the Nazi occupation and the scorched-earth tactics of the fleeing Wehrmacht. And it's still not fair. Poland's coal is still black, yet the country is developing rapidly. The politics may be as fractious as ever, but that hasn't stopped Poland from being one of Europe's success stories of the past decade.
Warsaw bristles with construction cranes. The hideous Palace of Science and Culture is no longer the only skyscraper. The city's airport is spanking new. There's a subway, with a second line on the way. Roads that were potholed just a decade ago are now in excellent repair. There are new hotels and restaurants everywhere. There's a new national stadium, ready and waiting for the European nations tournament next month. There are benches in the parks that play Chopin when you sit on them.
As with the reconstruction in the 1950s, the Poles have done most of the hard work themselves. There has, however, been a big assist from the EU, partly in the form of hard cash, but more importantly in the opening up of markets, both for goods and for financing. Much of the impressive development that has taken place over the last decade or so has been a direct result of Poland's admission to the EU. And of course, it's not just Poland -- there are similar stories to be told all across eastern and southern Europe.
It's worth keeping that in mind as the Eurozone crisis enters its next phase. The Euro may look doomed -- though that's the fault of dissimulating and deal-making politicians, rather than of the technocrats who designed it -- and the Brussels bureaucracy may be oppressive and unaccountable, but the "European project" has still done a great deal more good than harm*. It would be very sad if a few feckless politicians and a bunch of greedy hedgies and bond vigilantes were to bring the whole thing to a screeching halt.
* UPDATE, 9 May: Wonder of wonders, the FT agrees!
Saturday, 5 May 2012
Pity the poor immigrant
Well, that wasn't so bad after all! Flights both to and from Warsaw right on time, and when we got back to Heathrow last evening, only a minimal queue at the immigration desk for UK and other EU citizens. We spent more time waiting for the steps to be attached to the aircraft than we did in the immigration line. There was a much longer queue for non-EU passengers, but every desk was staffed and the line seemed to be moving quite quickly.
There are suggestions that the Home Secretary, Theresa May, is about to risk embarrassment by scrapping the more stringent passport checks that she insisted on last year, and which seem to be the direct cause of the queues. This possibility has already fired up a few knuckle-draggers to cry foul. One genius warned darkly on the Daily Telegraph website that when we hear the "big bangs", which are apparently coming "very soon", we'll all regret that we relaxed the rules, just to save travellers a few minutes. Ah yes, I thought: how tragic it was that lax passport controls at Luton railway station allowed the 7/7 bombers to pass through unimpeded on that fateful morning back in 2005.
There is, of course, one very important reason why the immigration lines at UK airports are a lot longer than they are in the rest of Europe. The UK has steadfastly refused to join the "Schengen agreement" that allows EU citizens to pass between most countries without any passport or identity checks. If you fly from, say, Paris to Frankfurt, you can get straight off your plane and into a taxi, while passengers arriving from London have to queue up with those from all corners of the globe, usually in a less salubrious corner of the airport, to present their passports. Unless the UK signs up for Schengen, it will always need a lot more passport checkers at its airports than most of its neighbours do, and if it also insists on more rigorous document checks, there will always be a risk of big queues at busy times.
There doesn't seem to be any evidence that the UK's refusal to adopt the Schengen agreement has made the country any more secure than its European neighbours. However, the Telegraph's "big bangs" correspondent would doubtless be vehemently opposed to adopting it now, and would no doubt be supported in that by a good proportion of the population. Remarkably, the subject hasn't even been raised in all the recent carping about queues at Heathrow. It would solve the problems overnight, but it would be a brave politician that would dare to suggest it.
There are suggestions that the Home Secretary, Theresa May, is about to risk embarrassment by scrapping the more stringent passport checks that she insisted on last year, and which seem to be the direct cause of the queues. This possibility has already fired up a few knuckle-draggers to cry foul. One genius warned darkly on the Daily Telegraph website that when we hear the "big bangs", which are apparently coming "very soon", we'll all regret that we relaxed the rules, just to save travellers a few minutes. Ah yes, I thought: how tragic it was that lax passport controls at Luton railway station allowed the 7/7 bombers to pass through unimpeded on that fateful morning back in 2005.
There is, of course, one very important reason why the immigration lines at UK airports are a lot longer than they are in the rest of Europe. The UK has steadfastly refused to join the "Schengen agreement" that allows EU citizens to pass between most countries without any passport or identity checks. If you fly from, say, Paris to Frankfurt, you can get straight off your plane and into a taxi, while passengers arriving from London have to queue up with those from all corners of the globe, usually in a less salubrious corner of the airport, to present their passports. Unless the UK signs up for Schengen, it will always need a lot more passport checkers at its airports than most of its neighbours do, and if it also insists on more rigorous document checks, there will always be a risk of big queues at busy times.
There doesn't seem to be any evidence that the UK's refusal to adopt the Schengen agreement has made the country any more secure than its European neighbours. However, the Telegraph's "big bangs" correspondent would doubtless be vehemently opposed to adopting it now, and would no doubt be supported in that by a good proportion of the population. Remarkably, the subject hasn't even been raised in all the recent carping about queues at Heathrow. It would solve the problems overnight, but it would be a brave politician that would dare to suggest it.
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