June 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

When Gordon Brown made the Bank of England independent he still had one ace up his sleeve. He chooses the nine members who make up the Interest rate setting Monetary Policy Committee. Some say that even that should change, and that the selection should be down to an independent panel, - which of course begs the question, who would choose the members of the independent panel.

Up to now, the Bank of England has kept largely quiet on the issue. But tensions are mounting, or so it would appear.

The committee is supposed to have nine members, it’s currently down to seven. Although, as one member, David Walton, tragically died last week, this lack of numbers is not entirely the fault of Gordon.

But the criticisms mount. A recent appointee, David Blanchflower, is based in the US, and has to fly over to Blightey every time the MPC meets. Some say that he can’t really make a qualified judgement about the UK, given his US economic lineage. On the other hand, maybe, he can take a more objective view.

But now, Bank of England governor, Mervyn King, has spoken out, and yesterday he did something unprecedented. He criticised the chancellor saying: “We have something that is informal and seems to result in appointments being made at the last minute. I don’t think anyone benefits from that. I would expect a more systematic process.”

June 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Gold rose back above $600 an ounce yesterday, and oil stood at $73.60 on the New York Mercantile Exchange last night, the highest level for some time.

Considering that commodities are supposed to have crashed, and the great gold recovery is over, it’s not doing half bad.

In fact gold is now almost $40 up from the level it fell to on June 13th. As for oil, with the likes of BP’s Lord Browne talking about the long-term price of oil expected to fall to below $40, it was just beginning to look as if the worst was over. But now it’s back.

For some time we have speculated that gold could see an even bigger comeback, thanks to the declining importance of the dollar. Even Warren Buffet expects the dollar to fall in the long term, and one assumes that the likes of China will eventually sell their dollar reserves and buy something else, and gold has to be a contender.

June 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

It’s funny how things happen. For years Japan was in disarray. Deflation, high unemployment, the economy of the rising sun seemed to be suffering from permanent sunset. And yet, despite the woe from the world’s number two economy, the global economy did all right.

Now at last things are changing. It would appear that the beast known as deflation has finally been slain. The latest stats reveal a 0.6% rise in core prices over the year to May, while unemployment at 4% is at a seven year low, and the ratio of vacancies to job seekers is the highest since 1992.

And yet, recovering Japan is a part of the problem we have seen over the last six weeks. For, with the outlook improving, the Bank of Japan is expected to start hiking rates soon.

This is a particular problem because of what’s called the carry trade. This is where people borrow from Japan at next to nothing interest, and lend abroad at a much higher rate. Some believe this practice is behind the ever growing level of credit that is available, and they fear that higher interest in Japan will lead to tougher mortgage lending criteria, with a possible fall in house prices across the Anglo Saxon world.

June 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Yesterday, Aussie bank Macquarie and its consortium rolled over, leaving Goldman Sachs a clear run. Last week, the world’s largest securities firm offered £2.8bn for Associated British Ports, and it was just too much for the consortium from down under.

The British ports company owns 21 ports across the land, including in Ipswich, Southampton, Hull and Swansea. Like its peers in the industry, the company is doing very nicely at the moment. Over the last five years profits have doubled to just £100,000 short of a cool £100mn.

Recently Peninsular Oriental was bought by Dubai DP for £6.8bn while the UK’s Mersey Docks and PD Ports was bought out in December last year.

Associated has recently signed a lucrative deal with Australia’s BHP Billiton Ltd.

As for Goldman, still smarting from its failure to scoop BAA, shares rose last night. It might have lost the battle for control of the air, but at least it’s got a foothold in the great sea battle which is raging. With world trade increasing every year, ports are big business again.

Macquarie Drops AB Ports Bid, Clears Way for Goldman Bloomberg

June 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Markets soared on a wing and a prayer yesterday, as the Dow put on over 200 points, enjoying its biggest daily rise for over a year, and yet the euphoria seemed to be a good deal more irrational than anything the dot com era could have thrown up.

A lot of the problem at the moment, say some people, lies with Ben Bernanke. The new Fed governor is spreading confusion and markets reacted the way they did yesterday because of a couple of ever so slightly optimistic words the Fed uttered.

They criticise Bernanke for sending out mixed messages. Gone are the days of Alan Greenspan, when everyone knew that they didn’t know where they stood. Instead today, they are just not sure, and that, say the blamemongers, is why the markets are in such a state.

The truth is, however, markets and the analysts who blame “Blunt Speaking Ben” are the ones being inconsistent, or at least showing little understanding of a basic law of economics.

The law they don’t get is this: Economics is not an exact science. Ben Bernanke probably knows his economics better than almost anyone, but he doesn’t have all the answers. Mr Bernanke says what he thinks, but his thoughts, like those of any objective economist, are based on possibility and probability levels, and are far from certain. Markets don’t like it when they find that out.

Alan Greenspan, on the other hand, liked to keep markets guessing, but kept his doubts to himself. At the time, they criticised him for being too subtle, and not open enough. Ben’s big mistake is this: he isn’t God, and he has as good as admitted it. There are limitations to his prescience, and rather than hide this, and use a veil of subtlety to keep markets thinking he knows more than he does, he says it like it is.

Yesterday the Fed did what most expected it to do, and upped rates a quarter of a percent. “Phew,” said the markets, “rates didn’t rise by half a percent, which we really weren’t expecting anyway and, as a result, let’s go out and buy.”

The statement from the Fed said: “Ongoing productivity gains have held down the rise in unit labour costs, and inflation expectations remain contained, and economic growth is moderating.” Markets really liked those comments, (although the statement said nothing we didn’t already know) and went out and bought even more.

The Fed also said: “However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.” Or in other words, there are still strong inflation risks, and we might well up rates again. Markets chose to ignore those implications.

Inflation really does matter. If it continues to mount, and the rate of interest is forced to rise to counteract the threat of rising prices, then it will be a nasty shock for the economy and all those debtors who borrowed when rates were rock bottom. The savvy investor will keep his or her eye on this, and not jump every time the Fed snorts.

June 29, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Here’s a good title for an economics essay. Inflation isn’t a problem, it’s a symptom of a different problem. Discuss.

Today’s the day that Ben Bernanke and his chums at the Fed decide upon the rate of interest until when next they meet. You would have to look hard to find a commentator that does not expect to see a rate rise from the current level of 5 percent. Some even think a half a percent rise could be on the cards.

Inflation in the US is picking up, passing 4% recently, and even hitting 5% in May. And Mr Bernanke, just like Greenspan in 1987 when he took over, and Paul Volcker in 1979, is upping the rate of interest; he is demonstrating his inflation fighting credentials.

But if you are a believer in the idea that inflation, as Milton Friedman put it, is always a monetary phenomenon, here’s some news to make markets shudder.

According to a survey carried out by Bloomberg, economists reckon the US money supply grew by 8.8% from a year earlier, matching the rise seen last month.

According to Friedman, that makes inflation a foregone certainty. And according to CNNMoney, Bernanke is a Friedman advocate.

Put two and two together, and unlike banking, which will often go out and create more money from its holdings, you get four. And in this case, four means inflationary pressures are mounting in the US. No wonder many fear today’s almost certain rise, will be followed by several more.

For further information

European Money-Supply Growth Probably Ran at a Three-Year High Bloomberg

Bernanke flexes his muscles CNNMoney

June 29, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

In France it’s a one-way street, but the Brits are just trying to be friendly. Last year, the UK topped the charts for the receipt of Direct Foreign Investment, says the OECD. In all, the UK was on the receiving end of 165 billion of FDI from OECD countries in 2005; that’s a massive jump from the mere $56bn the UK enjoyed in 2004.

Meanwhile, France, sat as it is behind its new Maginot line of business defence, was the world’s most active outward investor in 2005, with aggregate flows totalling 116 billion.

According to the OECD, the rise in FDI in the UK was due in part to the restructuring of multi-national firms, such as Royal Dutch Shell, and in part due to several large cross-border mergers and acquisitions, such as the takeover of Peninsular Oriental Steam Navigation Company by Dubai Ports World of the United Arab Emirates for USD 8.2 billion.

Actually then, considering some of the UK performance was down to restructuring of Royal Dutch Shell, then at least some of the UK performance was artificial. Even so, removing the Shell shenanigans, the UK was still top.

The OECD report also said that “outside the OECD area, China continues to hit new records. In 2005 its total FDI inflows reached USD 72 billion - their highest level ever, and world wide exceeded only by the United Kingdom and United States. Outward investment from China is also rising. Chinese official figures estimate the 2005 outflows at close to USD 7 billion. Outward investors appear to have broadened their interests from previously targeting the resource and raw materials sectors to investing in a range of high-tech activities as well.”

The UK and France might be neighbours but the channel separating them in terms of attitude to overseas takeovers is more like an ocean. The UK is now a paragon of openness, while France likes to play football on pitches with no goalposts in the French half; a tactic they have no doubt discussed as a possible winner against Brazil. From a national selfishness point of view, it’s debatable which approach is right. The French, with their mass unemployment and their love of CAP-style protectionism, obviously think their way works. The Brits, on the other hand, with the star economy of the Eurozone, believe that their openness, which brings with it a business culture more likely to learn from other ideas, is equally effective.

For further information

FDI into OECD countries jumps 27% in 2005 OECD

June 29, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

What have Julius Caesar and the BBC got in common? Answer: they have both crossed the Rubicon. The Roman went first. As Suetonius wrote, when Caesar forded the river in northern Italy in 49BC, the die was cast. The BBC, on the other hand, didn’t cross the river in quite such a literal sense. In fact, what the broadcaster really did was start to sell advertising on its Global Services and BBC World. As a result, said John Smith, the chief executive of BBC Worldwide, the decision announced yesterday that the BEEB is to sell ads on the international version of its web site is not so dramatic. After all, he said: “We have already crossed the Rubicon.”

This is the BBC, so there will be no grubby banner ads or worse still pop ups. Instead just simple static ads placed subtly between editorial.

Many are crying foul. It’s just not fair they say. When the Asterix’s of the web-publishing world produce a web site, they have to make it pay through advertising. But as the BBC expands across the globe, with its legions spreading its content, it has been given that nice head start - the licensing fee.

There are two ways to look at this. Some say, the BBC can’t have both. It can’t have ad revenue and a fee from license payers. But then the British license payers are actually winning from this move. The ads only appear on international sites - the BBC’s empire will be, in effect, funding the British license payer.

For all that, as we move to TV over the Internet, and content providers abound like barbarians at the gate, we can’t help but feel the rationale for a TV license will diminish. How can you justify such a fee, when the BBC is one among many, and you will be able to watch TV from your mobile phone, computer, and who knows, one day, from your sonic screwdriver.

Editor’s note: Did you know the word barbarian comes from the Greek for sheep? It relates to the sound foreign languages appeared to made to the Greek ear.

June 29, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

This has of course got nothing to do with ego. It could be argued that this is a business ruled by ego, from the stars it promotes to the business executives that count the money. You would need a harpoon gun if you wanted to catch some of the bigger egos swimming in the shark infested waters of the music business. It’s just that eminently logical merger of EMI and Warner Music seems to all boil down to which man will be the boss.

EMI has had its eyes set on buying up Warner Music for some time. The tale kicked off in 2000, when EMI wanted to buy Warner Music from its then parent company Time Warner, but competition authorities said no. But today it’s different. After all BMG and Sony’s music subsidiaries have pulled together to form the world’s second largest music publisher, and an EMI and Warner combo would still only be number three in global rankings of the industry, with Vivendi number one.

Chapter 2 of the EMI Warner saga took place in 2003, when the British company tried again, but were pegged when Warner Music was bought by Edgar Bronfman Jr, who along with his private equity backers owns 75% of the company today.

But then the pace quickened. May 3 saw Chapter 3 unfold, with EMI making a new $4.2bn bid for the smaller US company, which currently stands one place behind at fourth largest company in the industry. Their advantage is that they have a bigger share of the US market.

Two weeks later, and Warner turned the tables, and offered to buy EMI. Thus began Chapter 4.

Yesterday we saw a flurry of bids and counter bids, as first Warner upped its offer, and then EMI offered more for Warner. The Warner tactic is known as a Pacman defence, after the video game, in which the two adversaries try to eat each other.

If EMI is successful, then its boss, Eric Nicoli, will rule the new company. Mr Nicoli is a physicist, who armed with his scientific knowledge, worked in the food industry for most of his working life, before joining EMI.

Edgar Bronfman Jr on the other hand was, among other things, a songwriter who found himself owning his father’s company, Seagram, which he moved into entertainment before selling.

Who will be successful? The two sides each have their advantages and disadvantages. If EMI is successful, their bid will be funded by a £1bn rights issue, and the sale of the Warner subsidiary publishing business, Warner/Chappell.

The Warner bid will be funded by debt. Bronfman has done a good job for Warner so far. Will his backers feel that his success to date will merit even greater backing, or will they want to get out, while the going is good?

But as the frenzy of activity mounts, the markets expect to see many more chapters unfold. The current Warner share price is still above the level EMI most recently offered (although the offer carries a 40% premium on the price earlier in the spring). Most expect the British company that represents artists including Robbie Williams and the US firm, which boasts Madonna on its books, will merge. Let’’s hope we haven’t reached Chapter 11 by then.

For further information

Edgar Bronfman, JrWikipedia

EMI rejects Warner takeover bid BBC

June 28, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Headlines and reality: sometimes they appear to have nothing in common with each other at all. Take the latest data from the British Bankers Association on mortgage approvals. The Guardian headlined:” Housing market shows signs of life” and went on to say: “The housing market upturn appears to be strengthening again as the number of mortgage approvals last month jumped by a fifth.”

The FT led in equally bullish fashion saying “UK mortgage approvals show ‘healthy’ activity in May”, but that’s when the reality starts to set in.

Although mortgage approvals were indeed up 8% on a year ago, hitting 68,296 in May, and although the value was up by an impressive 28%, the changes had more to do with the timing of Easter than signs of a renewed strength in the market.

Capitol Economics, for example, said: “Once we adjust for seasonal factors, and putting aside the Easter-related blip…the conclusion is that mortgage
demand remains pretty stable - neither rising nor falling to any meaningful degree.”

In fact the economic think-tank went on to say: “The balance of evidence suggests to us that overall mortgage demand will remain in its current holding pattern for the next 1-2 months. However, we continue to believe that stretched affordability and rising unemployment will be factors behind a downward drift in mortgage demand in the second half of the year.”