Friday, 19 December 2008

Merry Christmas all

No more posts this year; this blogger is off to the Alps for a couple of weeks!

Wednesday, 17 December 2008

Obama elected, I think

On Monday (15-Dec-2008) this week Barack Hussein Obama was elected President of the United States - at least I think he was, there seems to have been a news blackout!

In theory the "electors" of each state should have met and done the actual voting and then reported the result to the current vice-president (Who he? Dick Cheney!) who will then make an annoucement to Congress on January 6th next year. Inauguration will be on January 20th.

So now he really is President-"Elect"; previously he wasn't.


US Federal Reserve adopts ZIRP

ZIRP is Zero Interest Rate Policy. The Fed has set its interest rate to 0% to 0.25% - they're not committing to a specific number anymore. The Fed can do this because, unlike the Bank of England, the Fed only sets a "target" rate, and then uses "Open Market Operations" to force commercial rates into line.

Of course to force down the rates they are trying to influence they must flood the country with cash; which they will naturally "print". If asked, they would assure you that at some point in the future, when the credit crunch is over, they will collect up all this "printed" money and "burn" it so that there is no long term loss of value to the dollar.

The question is: should we believe them?

Bank of England through the looking glass

November's CPI number was 4.1% - still more than twice the target of 2 percent.

The governor of the Bank of England has written his quarterly letter of apology to the Chancellor of the Exchequer (Link). In it he says he's going to be "looking through" all the current instability rather than actually doing anything about it.

In previous letters he was also "looking through" the situation; in fact he has always had a two-year horizon: "don't worry about now - it will all be fixed in two years!" He'll still be saying that in ten years' time.

UK unemployment tops the million

Today sees the release of figures showing that British unemployment has just passed the million; 1.07m to be precise.

However that comes nowhere near a full statement of the problem. There are actually 10 million people in the UK who are of working age but not in paid employment; of these we have:

1 million claiming jobseeker’s allowance

0.8 million seeking work but not qualifying for JSA (eg too young, or not paid enough NI.)

2.1 million want a job but not actively looking (hence don’t qualify for JSA but get other benefits.)

Here’s a breakdown...

Umempoyed by category


How much does it cost the taxpayer?

Job Seeker’s Allowance.............. £2.2bn
Housing Benefit..................... £1.5 bn
Council Tax Benefit................. £300m
Illness and Disability Benefits..... £18bn
Lone Parent Benefits................ £7.4bn

Those 2.3 million sick people are costing the lion's share of the bill. Most commentators reckon that at least 1m of them aren't really sick at all but have been "parked" by the government in that category to flatter the numbers.

However the total social security budget is nearly £150bn! That of course includes pensions at £120bn and running the infrastructure to distribute benefits.

Monday, 15 December 2008

Swimming naked when the tide goes out

Warren Buffet famously said, "It's not until the tide goes out that you can see who has been swimming naked."

The tide has well and truly gone out for Bernard Madoff who seems to have lost $50bn of his clients' money. It went out when he failed to find the $7bn he needed to meet redemption claims on his fund.

What's amazing is that he has been running investment funds since 1960, and the tide has gone out several times since then and he survived each time. It's not surprising then that his clients trusted him implicitly.

How does he feel today? Almost certainly relieved that the big lie is all over and it's all someone else's problem. He didn't bother denying his guilt to the FBI when they came knocking. He probably has a spring in his step he hasn't had for decades.

This just leaves us with the question: how many other hedge funds are swimming naked and can't make their redemptions?

Wednesday, 10 December 2008

Rioting in Greece

To understand the riots in Greece you need to watch this video clip. The mainstream media are all down-playing a certain aspect of the situation.

US T-bills now have negative interest rates

If you want to lend the US government some money you'll have to pay them for the privilege. Yes, the 3-month Treasury bill rate has dipped to -0.01 percent.

This isn't quite as mad as it seems. If you need a safe haven for a few billion US dollars you can't improve on Uncle Sam; he's got the printing press and can make new dollars if he runs out. Holding cash costs money for security; bank deposits have a return but with banks dropping like flies there's a risk of not getting your money back (above the $100K FDIC compensation limit) so paying the US government to hold your cash is actually sensible if you're totally risk averse.

Meanwhile the ten-year bills are a better deal; the interest rate is a big fat zero.


Edit: I'm told the FDIC insurance limit is now $250,000. The limit will return to $100,000 on the 1st Jan, 2010, except for certain types of account. (More)

Tuesday, 9 December 2008

Northumberland publican arrested for newspaper display


Meet Peter Mailer, owner of the Black Bull Hotel in Warkworth, Northumberland:

Peter Mailer, publican
Peter Mailer: Publican

Police raided the Black Bull on Tuesday, 2nd December, because an off-duty senior police officer from Nottingham had visited and seen a display of newspaper clippings Peter had put up.

They took down the clippings and arrested Peter. He was taken to Alnwick Police Station, along with the cuttings, where he was interviewed under caution. He has now been bailed to return to the station on December 23, when he will learn whether or not the Crown Prosecution Service will charge him.

What the clippings said I don't know. But they were all from nationally published newspapers.

But Peter's real crime of course is that he is a supporter of the British National Party. No doubt the unnamed senior police officer, who did not complain at the time of his visit to Peter's pub, just made a sneaky report later, will have earned many brownie points from his political masters for this underhand harassment.

(More here)

Monday, 8 December 2008

Preparing to print sterling

Further to my They can't print gold post it seems New Labour are gearing up to print sterling in some quantity.

There is a new Banking Act currently before Parliament. It contains the following clause:
223 Weekly return
Section 6 of the Bank Charter Act 1844 (Bank to produce weekly account) shall cease to have effect.

(This insidious little clause seems to have been first noticed by Guido Fawkes.)

Section 6 of the Bank Charter Act 1844 requires the Bank of England to publish a weekly account of the amount of money, notes, silver and gold, in circulation.

So the new banking bill, whose ostensible purpose is to provide a statutory regime for dealing with failing banks, in fact clears the way for secret money printing.

All of us who live and work in the UK rely on the value of sterling, and yet it seems possible that the government is planning to debauch the currency. Printing money can lead to hyperinflation; however it will take a while for the extra supply of money to become apparent to the markets, and until then the government will have free cash to spend.

Thursday, 4 December 2008

Gordon spews more of the taxpayers' money

Yesterday, after the Queen's Speech, Gordon Brown announced his latest cunning wheeze to buy votes for the next election. It's quite simple: if you have a mortgage up to £400,000 and your circumstances are reduced, eg your income goes down, you may postpone interest payments on your mortgage at the taxpayers' expense for two years.

The way it works is you pay reduced mortgage interest payments, or no payments at all, and the missing payments get added to your loan. The government guarantees these payments to the lender.

Apparently eight large banks have bought into the scheme so far; although only in principle. They were quite surprised yesterday to learn they were already totally on board. Of course the government-owned Northern Rock doesn't have much choice.

At first sight this scheme isn't so silly. A lot of people are very close to the finance edge; they have big loans and require both his and her incomes to make the payments. One loses his or her job and it's repossession time. And then the state would have to pick up the pieces with benefits and the like, especially if there are children. Even from the taxpayers' point of view it may be financially cheaper to pay (or at least offer guarantees) so the family can stay in their home.

Doubtless people working in property such as estate agents, lawyers, developers and the like are also hoping this scheme will put a floor under house prices and bring the market back to life.

And the whole scheme isn't expected to cost a lot of money: best case £100m, worst case £1bn. That's not much in the context of government planning to borrow £120bn this year.

However looked at in greater depth some problems become apparent. For example only the "first charge holder" can use the scheme because only they can extend the term of the mortgage, but most repossessions are due to second charge holders from other loans secured on the property calling in their marker.

In any event the big tsunami of repossessions coming soon isn't due to owner-occupiers not covering their mortgages, it's the buy-to-let market collapse where amateur landlords are out of their depth, unable to access any of the cheap loans now available because they don't have sufficient equity (or any equity) in the investment property. As the recession bites these landlords are also finding it increasingly difficult to find anyone to rent their properties. There are between 500,000 and a 1,000,000 empty homes in the United Kingdom so they are squeezed between a rock and a hard place - property value is falling, so equity is falling, hence mortgage costs are rising, meanwhile rent is falling because tenants are scarce.

The scheme is also open to abuse. Anyone who wants to live "rent" free can access the scheme before eventually allowing their house to be repossessed after a couple of years. This could be very attractive to people with mortgages far greater than the value of their homes, and remember 125% mortgages were not unheard of a couple of years ago. Factor in the near 20% reduction in values over the last year and run that forward a couple of years and people could easily be owing twice or even three times what their house is worth. Two years rent free followed by a wiping of the debt might seem like an easy option.

Another problem with the scheme is the banks have to find the money to fund it. Contrast this with a repossession and forced sales where the bank suddenly has a lot of money coming in. New loans are already thin on the ground. If this scheme is used on any scale the banks are going to be very short of cash. Let's look at some numbers.

We expect 75,000 repossessions next year (CML estimate) and let's assume an average mortgage of £100,000 costing 6,000 a year in interest payments. (Forget about capital repayments - that's so last century!) That's £450 million the banks haven't got. Assume each repossessee uses both years' of grace, that's £900m not being lent out in new mortgages. Hence money will get more expensive and push even more people into the scheme.

But the real problem with the scheme is the message it sends to everyone who isn't over-mortgaged. It says: you who have been prudent, cautious and sensible are now going to pay for those who were profligate. These prudent people are now struggling to get a 2% return on their savings while the feckless are getting a lot of free money thrown at them. It seems likely their money will be going abroad where it is no longer exposed to the falling sterling and a decent return can be had. The prudent people may be going with their money. And who can blame them? Why should they be expected to pay for the imprudent who borrowed without any thought of tomorrow?

This scheme also sends a bad message to the wider world; the world of people Gordon Brown needs to buy UK debt to fund his massive spending splurge. These people will see ever reducing interest rates as an indicator the government has no plans to defend the value of sterling and ever more debt-funded bail-out schemes as an indicator that the UK is bad place to be putting your investments. It's by no means clear that Gordon will be able to get the world to pay for his grandiose plans.

And it's not really likely that house prices will be stabilised by this measure. House prices are a function of the availability of credit and of jobs. Both of these are shrinking and this scheme won't stop that. And anyway, house prices need to fall; houses are currently far too expensive.

But viewed in purely political terms, this scheme makes sense. Plenty of people with large mortgages are afraid they may lose their jobs. The reassurance the scheme provides will inculcate a feel-good factor (alright, maybe just a feel-less-bad factor) by the protection it provides. Even from people not actually using the scheme that should be good for some votes.