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.

Madoff, unlike Brown, has apologised.

Gordon’s “Favourite Banker” Has £14 Million+ RBS Pension

Derek Wanless – Gordon Brown’s most trusted banker – who chaired Northern Rock’s audit and risk committees, also has a multi-million pound pension paid for by the taxpayer. Vince Cable railed at the “collapse of Northern Rock; a product of greed and reckless gambling by overpaid executives”.

It was Wanless who failed in his responsibility to rein in that reckless gambling.

The government’s holding company, UK Financial Investments Ltd, is the majority shareholder in both RBS and Northern Rock. Based on the pensions data below, the taxpaying public as shareholders are funding a £14 million plus pension for Wanless. Does Brown think his friend Derek Wanless should be so rewarded given his catastrophic failure in his responsibility to exercise oversight of the risk?

Graphic credit : Paul Waugh

*Based on standard 20 x multiple.

In Defence of Some Banker’s Bonuses

Brokers and Traders have contracts like everyone else, they usually have performance related pay. When Guido was a trader he was recompensed with a share of the profits. There was no basic salary, no pension plan, no company car, no expense account, medical plan, per diem allowance, subsidised bar, subsidised restaurant, mileage allowance, staffing allowance, additional costs allowance, John Lewis list, nothing but a share of the profits and losses. No complaints, Guido ate what he killed and mostly ate well.

If the mortgage traders and derivatives traders have lost billions for an investment bank and the stock brokers and commodity traders have made millions, than why should the winning traders be punished for the losses of the losing traders? Are politicians now in favour of some form of collective punishment?

Do any of the politicians currently bashing the bankers really think banks can break contracts with traders just because politicians says so? The banks would be sued in court and lose. Cameron says “it is insulting to take money from taxpayers to use for their bonuses” – the taxpayer would be worse off if the profitable traders left and reduced the banks future profitability or, worse still, sued. He should know better, he probably does, yet he is just reflecting populist rage. Not his finest moment of leadership.

UPDATE : Given the state of the economy for which they are responible, presumably Hector Sants of the FSA, Mervyn King of the Bank of England and the numerous Treasury mandarins who monitor our economic well being will forgo the millions in bonuses due to be to be paid to them this year? Go on set an example, Gordon has it in his power to order it so.

NIESR Dismisses Brown/Darling 2009 Recovery Predictions

Propeller-Head Wonk Watch: The National Institute of Economic and Social Research is predicting the UK economy will shrink until the fourth quarter of this year, contradicting the Chancellor’s optimistic forecast for the economy to come out of recession in July. Gross domestic product will fall 2.7% in 2009 the NIESR propellor-heads reckon. Even when the economy stops declining, unemployment will still continue to increase into 2010. Guido predicts it will be half-way through a Cameron government before the economy returns to 2007 peaks. So that is two predictions for the price of one…

UPDATE : Nationwide’s Consumer Confidence Index figure has just come out. It shows that consumer confidence has hit a record low during January, dropping to 40 points. Which is half the level it was at before Jonah became PM.

Can You Hear this IMF Warning Gordon?

Gordon keeps muttering about how the world needs an economic early warning system. Despite the existence of the IMF, OECD and countless private sector sources of threat warnings already. Do we need another international bureaucracy?

Gordon ignored the last six IMF warnings, so perhaps he will ignore the IMF forecast that Britain will suffer a worse recession than any other advanced economy. The IMF is projecting that the UK is to contract by 2.8%, the worst performance of any major advanced nation for which the IMF publishes data.

Guido suspects the UK won’t end up going to the IMF because the national debt is sterling denominated, which is just as well because IMF Chief Dominique Strauss-Kahn told Die Zeit this morning;

“Several states are already queueing at our doors… At the moment, we have enough money. But if we actually have to help them, the lion’s share of our resources will be consumed in six to eight months…”

The fund might be empty by the time Britain went…

UPDATE : Things must be really bad. Billionaire George Soros took a commercial flight to Davos. No news as to if he went economy…

What are the Chances of the IMF Bailing Out Britain?

Brown says Cameron is “ridiculous” to talk about the possibility of the International Monetary Fund being called in to bail-out Britain. Brown reckons that is impossible.

The money markets though say different, clearly they think it is a possibility. How probable is a bail-out? Guido listened on Wednesday to Gerard Lyons, Chief Economist at Standard Chartered, Geoffrey Wood, an economist at Cass Business School and Paul Ormerod, author of Why Most Things Fail: Evolution, Extinction and Economics talk at a Policy Exchange seminar on the Credit Crunch. They were far more sanguine about the economic prospects than Guido. Essentially they thought the recession would run its course over a year or two and we would come out of it with a huge bill in terms of the national debt. The consensus was that Britain probably wouldn’t be humiliated at the IMF again, but it wasn’t impossible. Some joked that if we were going to have to go to the IMF we should get to the front of the queue.

Given most of Britain’s external debt is denominated in pounds, the way to avoid going completely bust is to print more money and devalue the debt. Which is what the markets expect to happen, hence they are dumping pounds…

Economics is a dismal science, but playing www.BailoutBrown.com is a bit more fun. Enjoy throwing your money at Brown for a change…

UPDATE 26 Jan, ’09 : Paul Ormerod emails to correct the impression that he isn’t pessimistic:

I am a great fan of your site. I am sorry you thought I wasn’t pessimistic enough at the Policy Exchange, I thought I was being. I did, for example talk about a 6 per cent switch in GDP purely through consumer attitudes, and on top of this is the impact of tight credit on the corporate sector. So I think things are pretty grim.

Barclays Shares Down 25%

Most of the losses occurred in the last hour of trading. The City is awash with rumours as to why. With the Treasury looking at a second round of bank bail-outs it looks like the taxpayer is going to need a lot of lube for another big shafting. Admittedly it could just be an old-fashioned bear ambush now shorting financial stocks is permitted again…

*Guido covered his gilt short anyway, when fear grips the markets government bonds tend to rally. Will short gilts again later…

Growing Unease About Old Lady’s Secrecy

Remember Something Odd in the Banking Bill from early December? Guido was suspicious about the removal of the requirement of the Bank of England to tell us how much money it is printing:
The 1844 Banking Bill ensured transparency in the operations of the Bank of England. It has been good enough for over 164 years.


Surely it can’t be that they don’t want us to know how fast the Bank of England’s printing presses are going to be running?

The Telegraph’s economics editor has just cottoned on to the dodge:

The Government is set to throw out the 165-year old law that obliges the Bank to publish a weekly account of its balance sheet – a move that will allow it theoretically to embark covertly on so-called quantitative easing. The Banking Bill, which is currently passing through Parliament, abolishes a key section of the law laid down by Robert Peel’s Government in 1844 which originally granted the Bank the sole right to print UK money.

… Debating the issue in the House of Lords recently, Lord James of Blackheath, a Conservative peer, said: “Remove [this] control and there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses. If we went down that path we would be following a road which starts in Weimar, goes on through Harare and must not end in Westminster and London. That is the great fear that the abolition of that section will bring about – but the Bill abolishes it.”

You read it here first…

UPDATE 12 Jan : The FT is calling it Quantitative Easing Confidential. Guido is quite chuffed to have beaten the FT to the story.

So Much for the Santa Claus Rally

Those of you who have been following Guido’s trading on the right will have seen it jump substantially last week. Guido was short Dow and FTSE futures which collapsed after the auto-bailout deal in Washington failed midweek, closed all the positions before the yanks could cobble together some compromise. Booked profits for the trading for the last three months are 97% – Mrs Fawkes hinted that perhaps going back to full-time trading might be more lucrative than blogging. Perhaps, however this was performance off a small amount of capital, the Value-at-Risk was sometimes leveraged 20 times, it was pure risk money and Guido got lucky.

Basically the trades were shorting the pound versus the euro, selling rallies in the Dow and FTSE, quickly covering after significant drops. Somehow Guido managed to lose money twice trading from the long side on Gold futures just before retracements rather than just buying and holding. Sir Michael White sneered at Guido for recommending buying gold as we shift towards Mugabonomics and the Bank of England sets the printing presses rolling. Gold is the safest refuge and the cost of carry with interest rates tending towards zero is ever more favourable to passive holders of the metal.

Sterling investors who bought gold at the beginning of the year have seen it rise 28% from £424 to £544 an ounce. If in 2009 we see “quantitative easing” (printing money), holding gold will be insurance as much as an investment. If you have apocalyptic fears, holding physical gold coins is reassuring.

Won’t be keeping a diary of trades on the blog next year, because this is a politics blog and some (not all) readers find it boring and/or self indulgent. Not bothered about being self indulgent (it is a personal blog) but being boring won’t do.

German Finance Minister Mocks Brown’s “Great Rescue Plan”

“All this will do is raise Britain’s debt to a level that will take a whole generation to work off” says Peer Steinbrück, the German finance minister. He isn’t a conservative finance minister from Merkel’s CDU, he is a Social Democrat member of the coalition government.

Worth reading the full interview in Newsweek. Devastating.

UPDATE : Ed Balls lying on Sky this morning basically says Peer doesn’t really mean it and is only saying it because of “internal coalition politics”. Which makes absolutely no sense. Total Balls.

+++ US Treasury Bills Trade at Negative Yields +++

For the first time in history, not even in 1929, $27 billion of three-month bills were sold at a discount rate of 0.005% and are now trading at negative yields. Investors will get back less than they pay for them for the security of actually being repaid.
[…] Read the rest

+ READ MORE +

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