The Government's choice of Sir Philip Green as its advisor on how to cut spending is curious in the extreme. Sir Philip seems to be a good retailer, if your taste runs to cheaply-produced mass market clothing, but he's conspicuously not a man who shares the lifestyle of his customers or wears much of the stuff he sells in his stores.
There's no reason whatsoever to think that he has any great insight into saving money in the public sector. The people working in the public sector know better than anyone how to run it more efficiently -- they just need the incentives to do it. I suspect Sir Philip's money saving achievements in his own businesses have mostly involved moving production offshore, and that is (thankfully) a non-starter for most public services.
Sir Philip is also a long-term tax avoider, which I'd have thought makes him a risky partner for the new government as it tries to convince the taxpaying public that "we're all in this together". No offence meant, Sir Philip, but if we're going to look to a shopkeeper for help run the country, I'd prefer it to be one who lives above the shop.
Sunday, 15 August 2010
Tuesday, 10 August 2010
Houses of cards
The doom and gloomsters in the UK media are having a field day with the July house prices report from the Royal Institute of Chartered Surveyors (RICS), which in the headline writers' interpretation shows that house prices fell in the month for the first time in a year. Actually, that's not what the survey says. This is one of those rather dodgy statistics in which respondents are asked what they think is happening, rather than anyone taking the trouble actually to measure what is happening; the risible monthly survey by the ever-shrill but rarely correct British Retail Consortium is another such.
What the RICS does is to ask a small sample of estate agents (fewer than 300 -- I think we have more than that in my town alone!) whether in the past month they have seen prices falling, rising or staying the same. The balance between those reporting rising and falling prices becomes the headline figure. (If you care, this sort of measure is called a "diffusion index"). In July 64% of the RICS's respondents saw no change in prices, with 11% seeing increases and 25% seeing falls. So the overall picture is slightly negative, though given the preponderance of "no change" readings, not unduly so -- which of course could never stop the doom mongers.
To be fair to the RICS, their own press release (you can read it here) is scrupulously balanced. They note that despite the small negative reading for July, most estate agents continue to look for some increase in house prices over the remainder of the year. While acknowledging that fears over the impact of public spending cuts and continuing restrictions on the availability of mortgage finance may be starting to weigh on the market, they suggest that the proximate cause of the fall in July may have been an increase in the supply of home son the market, as a result of the abolition of the ill-fated HIPs programme.
Many in the media, of course, want to believe otherwise, pointing the finger instead at the nasty banks and their unwillingness to open the lending taps again. One of the Sunday money supplements this past weekend used as a case study a young lady of 22, implausibly described as a "legal executive", who had been turned down for a mortgage because she had only a 10% deposit.
By implication, it's wrong for a bank to refuse to give someone with at best a short credit history and a small downpayment a loan equal to several times her annual salary. Funny, I thought it was exactly that kind of "Hail Mary" lending that got banks all around the world into so much trouble a couple of years back.
The former head of the FSA, Lord Turner, recently presented a remarkable paper in which he pointed out that well over 70% of lending by UK banks goes into either residential or commercial property. Even more surprising than the raw figure is the fact that very little of this goes into financing new development. It's almost all used for refinancing of existing properties. The clear implication of this is that the rising price of residential property in the UK for most of the past two decades had very little to do with supply and demand, and almost everything to do with the blind willingness of banks to lend against it. (I think this is an example of what George Soros has been trying to get at with his tortuous "reflexivity" theory).
Unless you think house prices are back to an equilibrium level of some sort (and if you do think that, you're pretty much on your own), it's hard to see how they can go much higher without a return to irresponsible lending by the banks. If we have a choice between a stagnant housing market and wobbly banks, I know which I'd prefer.
What the RICS does is to ask a small sample of estate agents (fewer than 300 -- I think we have more than that in my town alone!) whether in the past month they have seen prices falling, rising or staying the same. The balance between those reporting rising and falling prices becomes the headline figure. (If you care, this sort of measure is called a "diffusion index"). In July 64% of the RICS's respondents saw no change in prices, with 11% seeing increases and 25% seeing falls. So the overall picture is slightly negative, though given the preponderance of "no change" readings, not unduly so -- which of course could never stop the doom mongers.
To be fair to the RICS, their own press release (you can read it here) is scrupulously balanced. They note that despite the small negative reading for July, most estate agents continue to look for some increase in house prices over the remainder of the year. While acknowledging that fears over the impact of public spending cuts and continuing restrictions on the availability of mortgage finance may be starting to weigh on the market, they suggest that the proximate cause of the fall in July may have been an increase in the supply of home son the market, as a result of the abolition of the ill-fated HIPs programme.
Many in the media, of course, want to believe otherwise, pointing the finger instead at the nasty banks and their unwillingness to open the lending taps again. One of the Sunday money supplements this past weekend used as a case study a young lady of 22, implausibly described as a "legal executive", who had been turned down for a mortgage because she had only a 10% deposit.
By implication, it's wrong for a bank to refuse to give someone with at best a short credit history and a small downpayment a loan equal to several times her annual salary. Funny, I thought it was exactly that kind of "Hail Mary" lending that got banks all around the world into so much trouble a couple of years back.
The former head of the FSA, Lord Turner, recently presented a remarkable paper in which he pointed out that well over 70% of lending by UK banks goes into either residential or commercial property. Even more surprising than the raw figure is the fact that very little of this goes into financing new development. It's almost all used for refinancing of existing properties. The clear implication of this is that the rising price of residential property in the UK for most of the past two decades had very little to do with supply and demand, and almost everything to do with the blind willingness of banks to lend against it. (I think this is an example of what George Soros has been trying to get at with his tortuous "reflexivity" theory).
Unless you think house prices are back to an equilibrium level of some sort (and if you do think that, you're pretty much on your own), it's hard to see how they can go much higher without a return to irresponsible lending by the banks. If we have a choice between a stagnant housing market and wobbly banks, I know which I'd prefer.
Thursday, 5 August 2010
The end of the world is nigh (-ish) (possibly)
A few postings ago ("If it wasn't for bad news....) I took issue with the economics editor of The Times, who was enthusiastically talking up a double-dip recession for the UK even as evidence emerged of rapid growth, falling unemployment, rising car sales, etc etc. The Times is still at it, and today it's been joined by the Daily Telegraph. This headline appears in chunky type over an article in today's Telegraph business pages:
US economy 'on the road to deflation', warns Pimco boss El-Erian
But immediately below that -- immediately below, not separated by any tedious text or photos, it says in smaller type:
Mohamed El-Erian, the head the world's largest bond fund, has said the United States faces a one in four chance of suffering deflation and a double-dip recession.
And then after a picture of a US banknote, the article proper starts with this sentence:
“I do not think the deflation and double-dip is the baseline scenario, but I think it’s the risk scenario,” Mr El-Erian, chief executive officer at Pacific Investment Management Co. (Pimco), told reporters in Tokyo on Thursday.
So, pace the Telegraph's headline writer, El-Erian's forecast is in fact that the US economy is very likely to avoid the dreaded double dip, although there are some downside risks. As, of course, there always are.
What the hell kind of journalism is this? Mind you, El-Erian doesn't exactly help himself. Check this out: "If you wonder how meaningful 25pc is, ask yourself the following question: if I offered you that I would drive you back to work, but there's a one in four chance that I get into a big accident, would you come with me?"
Well actually, Mo, if you told me the odds of a big accident were 5%, I'm pretty sure I'd be taking the bus back to work, although I'm aware that public transportation is not exactly thick on the ground around Pimco HQ in Newport Beach, Ca. So I don't think that's a helpful analogy at all.
There's nothing new about gleefully gloomy press reporting on the economic outlook. It reminds me of the people you used to see on the streets carrying those "The end of the world is nigh" placards (nowadays they usually have "Giant golf sale" on the other side). One day one of those guys will be right, but that doesn't mean that everyone who's ever carried one of those placards can be counted as a good forecaster. The same goes for the business reporters of The Times and the Telegraph.
US economy 'on the road to deflation', warns Pimco boss El-Erian
But immediately below that -- immediately below, not separated by any tedious text or photos, it says in smaller type:
Mohamed El-Erian, the head the world's largest bond fund, has said the United States faces a one in four chance of suffering deflation and a double-dip recession.
And then after a picture of a US banknote, the article proper starts with this sentence:
“I do not think the deflation and double-dip is the baseline scenario, but I think it’s the risk scenario,” Mr El-Erian, chief executive officer at Pacific Investment Management Co. (Pimco), told reporters in Tokyo on Thursday.
So, pace the Telegraph's headline writer, El-Erian's forecast is in fact that the US economy is very likely to avoid the dreaded double dip, although there are some downside risks. As, of course, there always are.
What the hell kind of journalism is this? Mind you, El-Erian doesn't exactly help himself. Check this out: "If you wonder how meaningful 25pc is, ask yourself the following question: if I offered you that I would drive you back to work, but there's a one in four chance that I get into a big accident, would you come with me?"
Well actually, Mo, if you told me the odds of a big accident were 5%, I'm pretty sure I'd be taking the bus back to work, although I'm aware that public transportation is not exactly thick on the ground around Pimco HQ in Newport Beach, Ca. So I don't think that's a helpful analogy at all.
There's nothing new about gleefully gloomy press reporting on the economic outlook. It reminds me of the people you used to see on the streets carrying those "The end of the world is nigh" placards (nowadays they usually have "Giant golf sale" on the other side). One day one of those guys will be right, but that doesn't mean that everyone who's ever carried one of those placards can be counted as a good forecaster. The same goes for the business reporters of The Times and the Telegraph.
Friday, 30 July 2010
Baby boomers and the lump of labour
The UK is set to abolish its compulsory retirement age of 65 in October 2011. The CBI frets that this will reduce opportunities for younger workers -- job blocking, which is kind of like "bed blocking" in hospitals, I suppose -- but most media commentators seem to be in favour.
Many of these commentators are citing the "lump of labour" fallacy, an oldie but goodie in the economist's armoury. The fallacy is that there is a fixed amount of employment in the economy, with the result that if one person has a job, someone else is deprived of the chance of employment. The reason this is deemed fallacious is that employed people spend their earnings, which in turn creates employment for others.
As the great Baltimore economist Stringer Bell might put it, "true dat". But it's not the whole story. Sure, it's true in a macro sense, but there's quite a lot of devil in the details. A 70-year old finance director at a major corporation might well be spending his money like water, but the jobs he's creating are mainly in the restaurants he frequents or at the Mercedes factory. Meantime the 55-year old chief accountant is spinning his wheels and so are all the people in the chain behind him, till at the very lowest level the firm decides there's no need to hire a new entrant in the finance department this year -- and the potential new entrant then finds himself serving the finance director his after-work cocktail instead.
But hey, the new entrant has a job of sorts, so lump of labour is still a fallacy and none of this really matters, right? I'm not so sure. Experience tells me that there won't be many binmen or coal miners blocking jobs by hanging around after the age of 65. But there'll be lots of public servants and accountants and economists and suchlike. It's the skilled professions where the jobs will get blocked. At a time when it's already very difficult for young graduates to make a start on their careers, is this really what we want?
One of the few objections that I've seen to the end of compulsory retirement came from someone who saw it as yet another move by the baby boomers (My Generation, baby) to rewrite the rules of society in their own favour, regardless of the consequences for anyone else. Me and Stringer Bell are as one on this: "mos' def".
Many of these commentators are citing the "lump of labour" fallacy, an oldie but goodie in the economist's armoury. The fallacy is that there is a fixed amount of employment in the economy, with the result that if one person has a job, someone else is deprived of the chance of employment. The reason this is deemed fallacious is that employed people spend their earnings, which in turn creates employment for others.
As the great Baltimore economist Stringer Bell might put it, "true dat". But it's not the whole story. Sure, it's true in a macro sense, but there's quite a lot of devil in the details. A 70-year old finance director at a major corporation might well be spending his money like water, but the jobs he's creating are mainly in the restaurants he frequents or at the Mercedes factory. Meantime the 55-year old chief accountant is spinning his wheels and so are all the people in the chain behind him, till at the very lowest level the firm decides there's no need to hire a new entrant in the finance department this year -- and the potential new entrant then finds himself serving the finance director his after-work cocktail instead.
But hey, the new entrant has a job of sorts, so lump of labour is still a fallacy and none of this really matters, right? I'm not so sure. Experience tells me that there won't be many binmen or coal miners blocking jobs by hanging around after the age of 65. But there'll be lots of public servants and accountants and economists and suchlike. It's the skilled professions where the jobs will get blocked. At a time when it's already very difficult for young graduates to make a start on their careers, is this really what we want?
One of the few objections that I've seen to the end of compulsory retirement came from someone who saw it as yet another move by the baby boomers (My Generation, baby) to rewrite the rules of society in their own favour, regardless of the consequences for anyone else. Me and Stringer Bell are as one on this: "mos' def".
Monday, 26 July 2010
The perils of cheap money
Banks in the UK paying a nice round return (0%) on most of their accounts; National Savings cutting its rates and taking its inflation-beating certificates off the market. What's the beleaguered saver to do?
Well, he/she can always turn to the investment pages of the weekend newspapers, because they're up to their old tricks again. Yes, the folks who cheerfully touted the attractions of Icelandic banks even as they careered over the precipice are at it again. The location of the favoured institutions has changed: ICICI is still there from pre-crisis days, but now it's been joined by Bank of Baroda. I know abolutely nothing about either of these fine institutions, but that's precisely my point. You tart your money about for the highest rate, and as long as you don't put more than £50,000 into any one institution you've never heard of, you've nothing to worried about, because the Government (or rather the taxpayer) will be there to bail you out if it all goes T.U.
These money pages really are the apotheosis of the moral hazard that Mervyn King used to fret about until someone told him to pipe down. It's highly irresponsible of the "upmarket" newspapers to encourage this kind of behaviour.....
....but not as irresponsible as this. On another page of this past weekend's Sunday Times, an array of professional investors were asked for their best current money-making wheezes. One that the paper really liked -- because it highlighted it at the top of the article -- was a suggestion to buy distressed real estate in the US or maybe in Spain, and finance the purchase with a Yen-denominated mortgage!
Look, I'm a former investment banker. I understand this trade; I can see that it has an awful lot of moving parts. Maybe I'm underestimating the readers of the Sunday papers, but I'm wondering how many of them will see the risks inherent in something like this. This is the sort of trade that professionals may be able to recommend to sophisticated investors as a bit of "juice" in a diversified portfolio. It shouldn't just be dangled in front of regular savers who are mostly looking for alternatives to bank deposits.
I suppose there will be no harm done, because no individual could put a transaction of this sort together without taking professional advice. Still, as with touting the Bank of Baroda and its ilk, you wonder just what the editors of these money sections are trying to achieve. The longer we stay in today's cheap money regime, the likelier it is that people will be tempted into something much riskier than they realise; and it won't be the Sunday papers that have to bail them out.
Well, he/she can always turn to the investment pages of the weekend newspapers, because they're up to their old tricks again. Yes, the folks who cheerfully touted the attractions of Icelandic banks even as they careered over the precipice are at it again. The location of the favoured institutions has changed: ICICI is still there from pre-crisis days, but now it's been joined by Bank of Baroda. I know abolutely nothing about either of these fine institutions, but that's precisely my point. You tart your money about for the highest rate, and as long as you don't put more than £50,000 into any one institution you've never heard of, you've nothing to worried about, because the Government (or rather the taxpayer) will be there to bail you out if it all goes T.U.
These money pages really are the apotheosis of the moral hazard that Mervyn King used to fret about until someone told him to pipe down. It's highly irresponsible of the "upmarket" newspapers to encourage this kind of behaviour.....
....but not as irresponsible as this. On another page of this past weekend's Sunday Times, an array of professional investors were asked for their best current money-making wheezes. One that the paper really liked -- because it highlighted it at the top of the article -- was a suggestion to buy distressed real estate in the US or maybe in Spain, and finance the purchase with a Yen-denominated mortgage!
Look, I'm a former investment banker. I understand this trade; I can see that it has an awful lot of moving parts. Maybe I'm underestimating the readers of the Sunday papers, but I'm wondering how many of them will see the risks inherent in something like this. This is the sort of trade that professionals may be able to recommend to sophisticated investors as a bit of "juice" in a diversified portfolio. It shouldn't just be dangled in front of regular savers who are mostly looking for alternatives to bank deposits.
I suppose there will be no harm done, because no individual could put a transaction of this sort together without taking professional advice. Still, as with touting the Bank of Baroda and its ilk, you wonder just what the editors of these money sections are trying to achieve. The longer we stay in today's cheap money regime, the likelier it is that people will be tempted into something much riskier than they realise; and it won't be the Sunday papers that have to bail them out.
If it wasn't for bad news, wouldn't have no news at all
Amazing first sentence from an article by the Times economics correspondent, Grainne Gilmore, today:
Gloom over the economy will deepen today with evidence stacking up that the recovery is losing momentum.
Well, I suppose that's one way of looking at it. I mean, in the last two weeks we've seen reports of an unexpectedly strong rise in employment; huge gains in car production and car sales; a strong rise in retail sales in June; and a 1.1% rise in GDP in the second quarter, almost twice the gain that markets had expected.
But enough of the boring hard facts! Ms Gilmore is basing her gloom on an couple of sentiment surveys, including one by the British Retail Consortium, arguably the UK's leading peddler of junk statistics.
The economy will face plenty of headwinds once we get into 2011, but for the moment things are about as good as they're likely to get. It would be nice if the press would focus on what's actually happening, rather than trying to talk the economy back into recession.
Gloom over the economy will deepen today with evidence stacking up that the recovery is losing momentum.
Well, I suppose that's one way of looking at it. I mean, in the last two weeks we've seen reports of an unexpectedly strong rise in employment; huge gains in car production and car sales; a strong rise in retail sales in June; and a 1.1% rise in GDP in the second quarter, almost twice the gain that markets had expected.
But enough of the boring hard facts! Ms Gilmore is basing her gloom on an couple of sentiment surveys, including one by the British Retail Consortium, arguably the UK's leading peddler of junk statistics.
The economy will face plenty of headwinds once we get into 2011, but for the moment things are about as good as they're likely to get. It would be nice if the press would focus on what's actually happening, rather than trying to talk the economy back into recession.
Sunday, 25 July 2010
Digby's big idea
I see where Lord Digby Jones (former head of the CBI, in case you've forgotten, as I trust you have) is calling for British universities to cut back on the academic stuff and offer more in the way of vocational courses.
What a great and original idea! Of course, if enough universities sign up, we might have to think of a new name for them. We could call them, oh I don't know, "polytechnics" or something like that.
What a great and original idea! Of course, if enough universities sign up, we might have to think of a new name for them. We could call them, oh I don't know, "polytechnics" or something like that.
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