Economics for 7 Year Olds

Above is an easy to understand venn-diagram for readers who are not into the dismal science.  The big circle shows all 20 members of the G20, the left-hand set comprises those members who are out of recession, the small right hand set contains those countries still in recession.  This is one chart you won’t see on Will Straw’s Left Foot Forward…

Embarrassingly for Gordon Brown, who sees himself as financial saviour and leader of the world, the only member country of the G20 still in recession is the UK.  Gordon is currently chairing the G20, which adds to the embarrassment.  The Times of India blames the UK’s debt burden for the divergent performance.  Who do we blame for the the debt burden?

Quote of the Day

Barclays Capital told clients 3 weeks ago…

“We recommend a long position in Dubai sovereign credit and see today’s negative price actions as an opportunity to buy.”

Yo Dude, Where's the Deflation?

Guido was more than sceptical when politicians and Labour luvvie economists like Gavyn Davies started talking up the bogeyman of deflation at the same time as the government was running up massive fiscal deficits.  It seemed too handy a coincidence that they would print money on a scale never seen before at the same time as issuing debt on a scale never seen before.  They subsequently, coincidentally, bought the debt using the money they had just printed.

This we were told was to stave off deflation which it was emphasised was very bad.  Goods becoming less expensive was somehow worse than goods becoming more expensive.  If we got deflation it would be the end of the good times for ever according to even monetarist economists.  Guido was sceptical that deflation was necessarily bad, history shows that there have been times of increasing prosperity that coincided with deflation.  Deflation happened several times in the nineteenth century.  During that era of rapid economic development there were no central banks and money was calculated as a certain quantity of gold or silver.

Deflation was not necessarily a threat to our prosperity, in a situation where the money supply is stable it is the manifestation of prosperity and pensioners know that their standard of living would have improved.  With inflation now upticking this experiment in Mugabenomics* has to be reversed without setting off hyper-inflation or collapsing the government debt market.  The policy authorities have figured out how to prop up the gilt market – they are changing the regulations to force banks to buy government debt to the tune of hundreds of billions. It remains to be seen if they can avoid an inflationary catastrophe, surging record gold prices suggest the markets suspect not…

*©Vince Cable, who was against QE before he was in favour of it.  God knows what he thinks now.

Cameron References the Jonah Jinx

Yesterday in the chamber Cameron made a jibe that Tony Blair’s campaign to become EU president was going well until the moment the Prime Mentalist backed him, ensuring the “curse of the one eyed son of the manse” doomed Blair’s ambitions.

The more significant evidence of the curse and something that is symbolic of the end of the twentieth century Anglo-American dominance of the world, is the purchase by the Indian Central Bank of  200 tonnes of gold from the IMF.  The Indian Central Bank paid an average of $1040 per ounce, Gordon and Balls sold the Bank of England’s gold at an average of $275 an ounce.  So cack-handed were the gold sales that Brown and Balls gave advance notice to the gold market and the trade is now famously known as “the Brown Bottom”.  It was an act of short-term, self inflicted imprudence that has cost untold billions.

As quantitative easing drives the dollar and pound down in value the cost of that blunder becomes clearer.  India is heading towards becoming the new English speaking superpower and Britain is heading towards becoming a bankrupt state with a devalued currency.   Gordon has jinxed generations to come with government debt…

Osborne's Command and Control Economics

osborne_lecternGeorge Osborne is off to Canary Wharf this morning to make anti-Banker noises at the Reuters HQ.   His speech will call for the successful to be penalised as an act of collective punishment for the mistakes of senior management.  No word as to what punishment the Bank of England Governor and Chairman of the FSA will face, Guido suspects none.

The argument is that now the government is the owner of banks it should set the pay and conditions of staff to satisfy the democratic will.  Shareholders are of course entitled to exercise control.  However if Guido was a proprietary trader at RBS contractually promised 10% of the profits he wins for the firm, only to be told that the Chancellor wants to breach the contract and unilaterally cut the bonus, Guido would first call his lawyer.  Secondly, Guido would start looking at renting office space in Dubai or another financial centre with a zero rate of income tax.

Bonuses are taxed, so next year half the £6 billion bonus pool could be lost to the exchequer.  The successful traders who make profits for their firms help the banks re-build their balance sheets, why drive them overseas?   Punishing successful City folk after the event is a displacement activity when they should be punishing those responsible for the crisis – central bankers, regulators and those few bankers who actually had direct responsibility for the crisis.

Bonuses are a form of deferred performance related pay, no profit, no bonus.  The easiest way to clamp down on bonuses is to have a moribund economy…

UPDATE : Labour’s Lord Myners, who really ought to know better, is now (Thick of It style) pushing a rival plan this morning.  Forcing investment banks to reduce their fees for capital raising.  He seems to want to further erode bank profits. How are the banks expected to rebuild their balance sheets?

Pound Whacked After Mervyn King Admits : QE Isn't Working

Mervyn Wacks PoundThe pound is getting whacked after Mervyn King implicitly admitted that despite printing £175 billion of he might still need to cut rates or even effectively charge banks for putting cash on deposit with the central bank.

We are entering into a monetary policy twilight zone where the governor of the Bank of England, in the words of the FT, has to “entertain more outlandish concepts like negative rates”The QE disaster unfolds…

Suckering Sid?

SidThe FT reckons the Tories are eyeing up a shares sale of some of some of the UKFI Ltd portfolio, this follows Myners on the weekend claiming to Adam Boulton that the taxpayer was sitting on a little nest egg investment in the banking system.  Perhaps, if you ignore the financial black hole that is Northern Crock.

Don’t get too excited.  Moodys has just released research suggesting we will see further losses of around £130 billion from the loan books and securities portfolios of rated UK financial institutions.  The UK economy is nowhere near out of the hole yet:

  • We are in a fifth consecutive quarter of recession.
  • Real GDP fell 0.8% quarter-on-quarter.
  • Output has fallen 5.6% year-on-year, the worst since records began in 1955.
  • The Bank of England base rate at 0.5%, is the lowest rate since the central bank was founded in 1694.
  • The Old Lady has eased £125 billion of new electronic money into the economy to create a false market in government gilts.
  • Nevertheless, the efforts thus far have met with little success: net bank lending to individuals fell to a fresh record low in June, net lending to U.K. businesses has slipped into negative territory in recent months, as repayments exceeded new loans. Sid is saving to pay down debt – unlike Gordon.

Guido’s advice to Sid: buy a little gold for insurance, invest in inflation linked securities  and neither the great British pound or the U.S. dollar are great places to be. Pop one of Gordon’s happy pills, we ain’t out of it yet…

Double Digit Inflation is a Black Swan

The Bank of England and most consensus economists, including most right-of-centre monetarists, are stoking deflation fears. The MPC voted to print £50 billion more this month.  Which is very convenient for Gordon Brown and Alastair Darling, it allows them to justify printing money, which they can then use to buy their own escalating government debts.  Which is a little like eating your own leg to stop you starving.

The economic debate on this is confusing, the data is mixed and to some extent depends on your time frame.  The drop in oil prices and other commodities post-crunch had a deflationary effect.  Against this you have U.S. and U.K. government debt levels which are extraordinary.  Terrifying.  Gilt yields (interest rates) are being held down by the Bank of England printing billions of pounds to buy gilts from the Treasury and artificially hold up gilt prices.

The Bank of England’s own pension fund however is heavily invested in inflation protected securities – which is odd given their public stance is that deflation, not inflation is the threat.  Consensus economists are sheep and we need not worry too much about their bleating, more surprisingly some right-wing monetarist economists, such as those on the IEA’s shadow monetary policy committee (who tend to work in the City for investment banks) are also believers in deflation.  Guido’s theory is that the reason they have supported expanding the money supply so drastically is they panicked, remember all those articles in the Guardian and the FT about the “end of capitalism”and the end of investment banking as we know it?  Their morale was low, they were afraid.  Printing money and flooding the market with liquidity would be a short term fix that would shore up the banks and save their jobs.  Hence all these right-wing economists became born again Keynesians and could be found all over the Square Mile screaming at the Bank of England to turn on the printing presses.

Well capitalism survives and thrives.  Some of those economists are now wondering about the wisdom of printing all that money.  Nigel Lawson’s biographer, Eamonn Butler of the Adam Smith Institute, changed his mind on quantitative easing a few months ago, the IEA’s shadow MPC is no longer unanimously in favour of quantitative easing.

black-swanNassim Nicholas Taleb yesterday warned of the inflation threat, Cameron conceded the possibility of a British debt crisis.  Guido thinks it highly unlikely Britain would ever default on it’s debt so long as it has a sovereign currency – we would just devalue and pay foreigners in devalued pounds.  Though Britain could have, as Cameron said, foreign investors demanding higher risk premia, higher yields.  That could see mortgage rates above 10% again – both here and in the U.S.

Warren Buffet yesterday was quoting John Maynard Keynes’ road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Protect yourself from the coming inflation.  Like the Bank of England’s pension fund…

Drunk Trading

Guido had lunch a couple of weeks ago with a reader who had promised to buy him a decent bottle for slotting Damian McBride.

This co-conspirator happens to be one of the most successful traders in the City and a wine buff, so when he says a “decent bottle of wine” we are talking a bottle that you can get a mortgage on.

Over lunch he said that his big break in the early days was trading drunk, a few drinks gave him the confidence to take risk. Guido explained that his drunk trading merely got him carried out the back door of the dealing room by worried co-workers back in his investment banking days.

Anyway, this Friday after a few bottles of rosé* Guido finally steeled himself to short the stockmarket rally via U.S. stock futures. They subsequently rallied into the close taking about 20% of this year’s trading profits with them. Damn the Bloomberg for Blackberry app, damn being able to enter trades from your Blackberry when tipsy.

Anyway the holiday has not been completely blighted, stock markets are going south today. Who knows, Guido might even make a profit…

*People knock rosé wine, including the farmer who is our neighbour here. There are some cracking underestimated varieties which suit Guido’s palate – they go very well with salads. Honestly. Not too bad on their own, in a deck chair, in the shade.

Half-Year Portfolio Report

For the seven or so readers who are interested in Guido’s financial market trading (and you seem intensely interested) here is the half-year report.

The portfolio was up 30.6% at the half-way mark for the year, not too shabby considering the FTSE was off some 10% over the same period.  Currently up 46% Year-To-Date.

It has been up as much as 60%.  Alas when trading is going well, Guido pushes his luck – too much.  God knows what the Sharpe ratio is, but basically this is a small amount of capital over-leveraged (up to 20 times) in the futures markets.   With regular 10% swings in net asset value daily, this volatility is not for widows and orphans. When it is going badly Guido de-leverages.  Two big hits were betting heavily gold would break  out over $1000 (it didn’t) and selling into the recent gilt spike and getting stopped out.  Have decided to leave gold alone because of prospective IMF selling, still playing the gilt market from the short side.  Am basically flat, short or double short gilts for the forseeable future.

In the last six months Guido has had 33 positions.  Mrs Fawkes thinks that since blogging is not as lucrative as the bond market she would very much rather that Guido went back to professional bond trading and amateur blogging rather than the other way round. You never know…

Mervyn on the Economic Shambles

Mervyn King’s testimony yesterday was shocking, he made public that the Bank of England was not consulted on Alistair Darling’s plans for the reform of banking regulation.  Call Guido old fashioned, but he somehow thinks that it might be a tad useful if the former student Trotskyite turned Chancellor, Alastair Darling, consulted the professor of economics turned career central banker, Mervyn King.  This is not mere student politics, this is the trillion dollar question of the moment.  Mervyn confirmed that the current tri-partite regulatory regime designed by Balls and Brown “was a mess”.

As if that wasn’t bad enough figures released yesterday showed that Britain has the biggest budget deficit in the world.  The best placed economy to weather the global crisis (© G. Brown) had government borrowing hit £20 billion in May, which means the government is overspending by nearly £30 million an hour. Gordon is spending way beyond our means and putting our children into debt at an unheard of rate.  He actually boasts that he is going to spend, spend, spend…

Mervyn basically testified yesterday that the government needed to cut spending much more dramatically than it is planning to do or else we will be ruined.  If Gordon is hoping for a recovery (as Alastair officially predicts) to save him in time for a general election the news from the OECD will not be encouraging.  The OECD said yesterday that Britain is in “severe recession” and that it was downgrading it’s expectations for the UK economy, predicting it will shrink by 4.3% this year…

Government Paying Banks to Help Sell Gilts

You might have got the impression that the economy is turning. In reality the debt crisis is now in phase two and the government can’t easily find buyers for gilts.* In what is a rare shame for a triple-A rated nation, HM Treasury was forced this morning to ask banks for help selling the debt paper.  Barclays, Goldman Sachs, HSBC and RBS are looking for buyers of £5 billion of Gordon’s gilts round the market with generous yields being offered.   Not quite a buy-one-get-one-free offer.  Not yet anyway…

When Gordon set up the Debt Management Office it was supposed to handle gilt sales for the government. The tidal wave of government debt flooding the market has made that more difficult…

See also: S&P Downgrades UK Government Debt

*Full disclosure, Guido sold gilt futures before breakfast this morning.

+++ S&P Downgrades UK Government Debt +++

Gilts have tumbled on the news that the debt rating agency Standard & Poor’s has just lowered its credit outlook on the U.K. to negative, from stable, in view of the government debt crisis.

S&P has so far kept the Triple “A” rating intact, but the outlook change signals that the the UK’s credit rating could be lowered:

“We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100% of GDP and remain near that level in the medium term…”

Note the use of the term “general government debt”. That is because government uses discredited debt definitions to make out that Britain has lower government debt than it really does.  The markets simply don’t believe the government’s figures.

Last October Guido “Asked the PM” via video (creatively using Ms Fawkes’ crayons and sticky backed plastic) about how Gordon added up the national debt:

And he, errm, cheerily trotted out a very disingenuous line:



The markets didn’t believe him and now neither do the ratings agencies…

So Much for the "End of Capitalism"…

PM SinghAfter record gains in 2004 India’s communists were close to power.  They derailed India’s economic liberalisation, curbed further deregulation, opposed moves to make the labour market more flexible, and prevented privatisation.   Now the 700 million strong electorate has comprehensively rejected them and their left-wing allies.

The decisive victory of Prime Minister Manmohan Singh, a committed supporter of  globalisation, has led the Bombay market to surge 10% on the open this morning.  The American century has passed with the Anglo-American investment banking model  stumbling, so it looks like the Anglo-Indian model of capitalism will drive the rise of the next economic superpower.  Private capital is going to flood into India again.  Capitalism is still the greatest way for humanity to raise standards of living and reduce poverty.

France Cuts Tax on Booze to Boost Economy

Guido is looking forward to summering at the Maison Secondaire even more this year. France has just cut booze and restaurant sales tax from 19.6% to to 5.5%. Booze taxes are already reasonable in France, this makes going out even more reasonable.  A three course meal in the best restaurant in the town near Chez Fawkes costs about the same as a starter in London or Dublin.  We all have to do our bit to boost international trade…

Bailout : Gordon's £1.4 Trillion Fail

giltsHere is the futures price chart for the generic Gilt.  All that is stopping that chart going further south faster is that the Bank of England is printing money (though printing isn’t the way it done nowadays, the Bank just changes amounts in the electronic ledger).  Some of that money is recycled into mopping up gilts.  It won’t work for ever.

Gordon has convinced fellow members of the IMF to sell the fund’s gold reserves, this visibly holds down the gold price as the relative value of paper money is destroyed.   There will be an awful day of reckoning.

The gilt market will revolt sooner or later.   Darling’s fantasy forecasts will be rejected by those of us in the reality-based financial markets.   The numbers are horrific.  Bloomberg’s Andrew MacAskill has totted up the cost of the bailout as £1.4 trillion.  That is over 100% of GDP.

The Death and Rebirth of Sound Money

Guido has had a call round the centre-right think-tanks and found that traditional support for sound money policies is now non-existent.  Even the Institute of Economic Affairs’  shadow MPC unanimously supports quantitative easing.

The IEA is London’s spiritual home of Friedrich von Hayek and Milton Friedman, and it was the IEA which in the middle of the 1976 global monetary crisis produced a pamphlet by Hayek; Denationalisation of Money.   Guido has an original edition, it was in this groundbreaking work that Hayek argued that the government monopoly of money must be abolished to stop recurring bouts of inflation and deflation.  How he must be turning in his grave to see the IEA advocate what he spent his life opposing.

Hayek MoneySound money was the traditional cry of conservatives the world over, Cameron even used the phrase in his speech to the Conservative Party conference as recently as last year.  It is clear however that Osborne and Cameron have, in the face of a wider intellectual retreat, given up on sound money and are going along with quantitative easing – a mistake as momentous as their acceptance of Gordon’s spending levels.  In all of Westminster’s Wonkland surveyed by Guido, only Madsen Pirie of the Adam Smith Institute is opposed to QE (also known as printing money).  Policy Exchange’s newly hired chief economist, Andrew Lilico, told Guido there was no other choice.  Lilico also told Guido that if QE was successful inflation and interest rates would be as low as 10% each in a couple of years – some success.

So Guido is looking forward to James Tyler’s speech tonight at Policy Exchange.  Little known outside the City’s money markets – in which he is one of the largest and most invisible players – he is going to sound the cry for sound money in terms that Hayek would approve. All is not lost – Russian and Chinese economic policy makers have read their Hayek – and are said to be preparing to propose a new, more Hayekian monetary order after this credit crisis has abated.  Sometimes it takes a crisis to precipitate a solution…

Bank of England Pension Fund Surges Betting on Inflation

Bank of England Pension FundGuido is one of the small number of British market commentators who does not buy into the deflation scenario – Liam Halligan is another – it is just too convenient an excuse for politicians to print money.

The Bank of England pension fund is managed on behalf of a very select and savvy group of people with access to a lot of market insight – the employees of the central bank.  With great market timing the fund sold out of equities entirely at the end of 2006 cutting a 21.6% holding down to 0.1%, thus avoiding a 35%  drop in UK equities since that time.  Awesome market timing, the fund was consequently up 12% last year when all around markets crashed.

The fund’s holding of Index Linked Gilts has shot up from 25.6% of assets to a 70.7% proportion of assets during the same period.  That is a big bet of the pension pot owned by everyone who works at the Bank of England.  Index Linked Gilts are linked to RPI – the inflation rate – you buy them if you are worried about inflation.  They are a hedge against inflation.

Hold on, if deflation is (as the political elite and their client media commentators claim) the big threat, why is the Bank of England’s pension fund betting 3/5 of the £2.2 billion pot on hedging against inflation?  This is their personal pension fund.  Money talks.

Source : Bank of England Pension Report [pdf]

Hat-tip : Peter Oborne

Queen and King

Queen & King A governor of the Bank of England has never had an audience with the Queen before.  King had just told a stunned Westminster that there is no more money for another fiscal splurge.  Perhaps Her Majesty is worried that the currency adorned by her face is being recklessly devalued.  If she next calls in the generals for an audience our unelected, unmandated Prime Minister should really get worried…

Ponzi State

Jeff Randall in the Telegraph nails it:

Q: What’s the difference between Bernard Madoff and Gordon Brown?

A: One has drained fortunes from gullible victims, plundering their income and savings to create an illusion of prosperity. The other is going to jail.

[…] Read the rest

+ READ MORE +



Tip offs: 0709 284 0531
team@Order-order.com

Quote of the Day

Radio Derby: “Do you know what a mugwump is?”

Theresa May: “What I recognise is that what we need in this country is strong and stable leadership.”

Sponsors

Guidogram: Sign up

Subscribe to the most succinct 7 days a week daily email read by thousands of Westminster insiders.

Facebook

Zac Back? Watch Our Guy News Special Zac Back? Watch Our Guy News Special
Campaign Report: 43 Days To Go Campaign Report: 43 Days To Go
Gallery Guido’s PMQs Sketch Gallery Guido’s PMQs Sketch
Farron U-Turns and Sacks David Ward Farron U-Turns and Sacks David Ward
‘Spring’ Breaks: Jolyon’s Short-Lived New Party ‘Spring’ Breaks: Jolyon’s Short-Lived New Party
More Selection Shenanigans More Selection Shenanigans
Bouattia Ousted Bouattia Ousted
David Ward Becoming a Problem for Farron David Ward Becoming a Problem for Farron
Clive Lewis Slammed by ICM for Fake News Poll Clive Lewis Slammed by ICM for Fake News Poll
Radio 4 Gossips Link Peston to Today Radio 4 Gossips Link Peston to Today
Mirror Chicken Fattened for Election Slaughter Mirror Chicken Fattened for Election Slaughter
Len Tries to Stitch Up Liverpool Walton for His Bag Carrier Len Tries to Stitch Up Liverpool Walton for His Bag Carrier
Starmer on Corbyn: Then and Now Starmer on Corbyn: Then and Now
Updates: Who’s Standing? Who’s Standing Down? Updates: Who’s Standing? Who’s Standing Down?
Banks Bottles It Banks Bottles It
Corbynista Unfurls “Farron Hates Gays” Placard Corbynista Unfurls “Farron Hates Gays” Placard
Esther McVey for Tatton Esther McVey for Tatton
Zac Back? Zac Back?
UKIP’s Islamo-Banifesto UKIP’s Islamo-Banifesto
Karen Danczuk Seeks Selection in Bury Karen Danczuk Seeks Selection in Bury