September 28, 2007 | posted by Michael Baxter in IABN | comments (0) |

Oil surged again yesterday, this time hitting a new all-time high.

When we took our daily reading from the New York Mercantile Exchange, oil was valued at $83.14 a barrel, a full dollar higher than the second-highest reading, recorded 9 days ago.

The latest surge in oil came about as the senators in the United States seemed to be pressing for war against Iran. Yesterday the Senate voted 76-22 in favour of declaring Iran’s Revolutionary Guard a terrorist organization. Hillary Clinton was among senators who voted for the amendment.

With oil so high in price, you would think inflation will start to rise again soon, and that it is a form of lunacy to lower the rate of interest at this time, although this insanity falls well short of the madness of senators’ war mongering.

Then again, a high price of oil is not necessarily inflationary. Inflation is sustained rises in prices, and a jump in oil caused by one-off factors could actually have a similar impact on the economy as a rise in the rate of interest. After all, if oil is more expensive, then demand for other products should fall.

But this argument is only true up to a point. If oil is high in price because world-wide demand is high, then we are seeing a case of demand causing prices to rise, and the correct response should be higher interest rates.

It is true that the recent surge in oil has been caused by fears about security in the Middle East. But the underlying cause of high oil is surging demand, especially from China. And you can’t have it both ways. You can’t celebrate low prices caused by cheap imports from China, and then write off high commodity prices caused by rising demand from China as an external factor.

To an extent, the world outside of the US has been cushioned against the rising price of oil by the falling dollar. This morning’s price of $83.14 a barrel of oil actually works out at £41.11. Back in July last year, when oil reached a then all-time high of $78.10, it was worth £42.44. So yes the sterling price is high - but not quite a record. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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September 28, 2007 | posted by Michael Baxter in IABN | comments (0) |

Germans don’t like inflation. You may recall from your history, that during the pre war years, the country suffered from hyper inflation pushing the economy to its knees, and of course then creating an environment ripe for fascism.

In France, between the wars, just like in the UK, a bigger problem was high unemployment. And these different experiences helped define economics policies during the post war years.

For Germany, it was all about an independent central bank, keeping tight reins on inflation, while in the UK and France it was felt a little bit of inflation was a good thing - a price worth paying to keep unemployment under wraps.

The snag was economic policy had been to a large extent designed by Keynes- a brilliant man, but whose theories were developed in extreme circumstances, the depression. It’s true, that in an environment of low demand, and wasted capacity, it’s a good thing to pump money into the economy, but you can’t keep doing it.

But for much of the post war years that’s what we did, but in the longer term the effect of this was rising inflation and rising unemployment, stagflation. It’s a lesson we may have to learn all over again, as central banks respond to the latest crisis by pumping money in, - again.

In Germany, however, before re-unification the economy benefited hugely from the effect of its policy of maintaining low inflation.

Today, in the eurozone, the argument has re-surfaced. French president, nearly headless Nick Sarkozy, thinks too much emphasis s is placed on inflation. That the European Central Bank (ECB) is too keen to up rates, when inflation remains quite minor. In this regard, he has the backing of much of the French populace, and that’s why we feel that it is quite inaccurate to compare him Mrs Thatcher, a true anti inflation warrior.

But yesterday, news brought this debate into sharp focus, when it emerged that German inflation saw a massive jump in August, rising from 2 per cent to 2.7 per cent - for one month that is an extraordinary jump. To put this in context, the ECB defines price stability as below, but close to 2 per cent. Not only was the Headline inflation (HICP) soaring, but even the index with food, energy and tobacco taken out was sitting at 2 per cent, the highest level for a long time, in fact last October it was just 0.8 per cent

Now, the Germans, won’t like this at all. And the ECB will, as a result be placed under enormous pressure to up rates, leaving Mr Sarkozy, no doubt worrying about the ramifications of the credit crises, seething. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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September 28, 2007 | posted by Michael Baxter in IABN | comments (1) |

Yesterday the OECD published its latest review of the UK economy. It was good stuff, GDP per capita is now the third highest in the G7, compared with the lowest 10 years earlier. It said the United Kingdom’s welcoming approach to globalisation has contributed to a strong growth performance.

The positive note continued to ring out, when it said, “Despite offshoring, employment has grown steadily and unemployment is low.”

But then the doubt started to creep in. “The labour market position of many low-skilled workers needs to be further improved,” it said, and added, “The participation rate of some groups is low and others suffer from poor incentives to progress in work.”

And what is the solution to the downside to our economy? It could perhaps be best summed up by three words, education, education and education.

It seems we can never do enough; despite the claimed improvements brought in by the government, the OECD has homed-in on our education system. “Primary and secondary schools need to make sure all young people acquire core skills before leaving full-time education,” it said, “more needs to be done to improve education outcomes for young people from low socio-economic backgrounds” and a “faster transition to a more equitable allocation of school funding would help and more should be done to encourage the best teachers to move to the most disadvantaged schools.” As for when we leave school the OECD says, “Incentives to join the workforce and to progress in work should be improved for certain groups such as second-income earners, lone parents, and incapacity beneficiaries. This may require reducing marginal effective tax rates and providing greater access to childcare support. A slower rise in the minimum wage may also improve the employment prospects of the low-skilled.”
Most of us do, of course, have two feet, and so it appears the UK has two Achilles heels. For there’s another problem with the UK. It’s not just our education, it’s also land. We are a crowded island, but then again, not that much more crowded than Germany and Italy. And yet, a shortage of land supply is holding us back in so many ways. The OECD wants to see planning regulations give more weight to economic considerations to promote firm entry and says local plans should ensure that more land is freed up for development.
It also raised the alarm over our transport system. It said, no doubt after the report’s author had been stuck on the M25, that “sufficient levels of investment in the transport infrastructure should be ensured, while the potential for more extensive road-pricing to reduce congestion should be explored.”

It does seem that, moving forward, a challenge facing the UK is to find a way the economy can continue to grow without adding to the increasingly uneven distribution of income and wealth. Improving education for the less-fortunate, and freeing up more land for property development so that high house prices don’t mean wealth is distorted in favour of home owners, would be two important steps along this route. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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September 28, 2007 | posted by Michael Baxter in IABN | comments (0) |

Yesterday saw the first set of economic reports since the credit crisis first emerged. Meanwhile, in the US, markets were celebrating another day of gains as the Dow closed in on its all-time high.

Cast your mind back to the end of July and the first few weeks of August when the markets saw big slides. This was the period when the FTSE 100 saw its biggest one day drop for years, and at the close of play on August 14, the Dow Jones stood over 1,500 points below its peak from a month earlier.

With half the financial world on holiday, it seemed unclear whether it was just a piece of summertime madness, or whether there was a genuinely good reason for the fall. The weeks that followed told the story - no one seemed to know how much exposure anyone else had to US subprime debts - some departments within banks were even unsure how exposured other departments within the same bank were. Credit dried up - a certain British bank hit the rocks, and ‘crisis’ became one of the most commonly used words in the dictionary.

But yesterday, the Dow Jones passed the 13,900 market, and with a final score of 13,912.9, it finished the day less than 90 points shy of the record it set on 19 July. In fact there have only been six times when the index managed a higher reading - all on occasions in July this year,

The FTSE 100 is not quite so healthy - at 6,486 it finished yesterday 245 points down on the year-high set at the beginning of July. Even so, it’s 600 points above the low point it fell to on the 16 August.

According to a report on Bloomberg this morning, US corporate profits may well see their lowest growth in quarterly profit during the third quarter in six years - so maybe some more falls are ahead. But, on the other hand, it is still thought profits will be up; Bloomberg reckons around 3 per cent up on last year. It’s just that the US corporate scene had experienced 20 successive quarters in which year-on-year growth in profits was over 10 per cent.

So if markets are any guide at all, the crisis must be near its end now. Credit crises are like that; the LTCM-led crisis of 1998 was over in no time. In fact, even the 1987 crash, which saw the biggest peacetime fall in one day ever, soon turned, with shares passing their pre-crash prices within a few months.

Yesterday also saw the release of the first economic growth projections from the National Institute of Social and Economics Research (NIESR). “We expect the US economy to grow by 1.9 per cent this year and by 2 per cent in 2008, both forecasts having been revised downwards since our Spring report” said NIESR, yesterday.

As for the UK, it is predicting growth of by 2.9 per cent this year, by 2.2 per cent in 2008 and 2.5 per cent in 2009. It says the slowdown is led by a moderation in consumer spending growth due to a cooling housing market - even so, if they are right then the NIESR predictions are not bad at all, considering.

However, it did qualify the predictions somewhat, saying, “If the recent turmoil in financial markets were to prove more protracted than we have assumed then we should expect to see UK economic growth slow by more next year, as households and business respond to the associated uncertainty and increased cost of finance.”

As for the rest of the world, it is predicting growth next year in Germany of 2.2 per cent, 2.3 per cent in France , 1.5 per cent in Italy and 2 per cent in Japan. As for 2009, its is predicting growth of 2, 2.1, 1.7 and 1.7 per cent in Germany, France, Italy and Japan respectively.

Meanwhile, yesterday, the publishing company EMAP said that there had been no sign of a backing out from private Equity group APEX.

So, maybe then, that’s it. Maybe the crisis is over, and the 2007 credit crunch will show up in the history books as a tiny blip.

But then again, not so fast. Yesterday, Richard Syron, chief executive of giant US mortgage lender Freddie Mac, said there was now a 40 to 45 per cent chance of a US recession, soon, caused by the slowdown in the housing market.

Maybe the markets are simply rushing like lemmings to the edge of the cliff. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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September 27, 2007 | posted by Michael Baxter in IABN | comments (0) |

The CBI’s top man, Richard Lambert, used to be a member of the Bank of England Monetary Policy Committee. So it seems reasonable to assume he knows a thing or two about our central bank. Yesterday he launched a scathing attack on the government, the FSA and Bank of England.

Why didn’t the Bank of England move faster? He said, “Other financial institutions around the world have been buffeted around in this rough weather. Few of them have been holed.”

Mr Lambert also said the run on Northern Rock made the UK seem more like a “banana republic” and our reputation has been “tarnished.”

Talking at the CBI Northeast annual dinner, the CBI chief said, “The crisis has not been well handled by those responsible: the government and the City authorities.”

But perhaps the most significant thing Mr Lambert said was this. He disagreed with Alistair Darling’s call for return to old-fashioned banking. Instead he wants “good old-fashioned banking supervision…a world where you know beyond doubt who is in charge when trouble hits, and where that person has the power to do whatever is necessary, however brutal, to nail down trouble before it gets out of hand.”

We are not into the blame game and feel the Bank of England has been blamed unfairly, but, in calling for more supervision and in rejecting a return to old fashioned banking, Mr Lambert is right.

It’s the move away from good old-fashioned banking that has been a major factor behind the global economic boom of the last ten years. Debt per se is not necessarily a bad thing. In fact it can be a very good thing, but not for the reasons many are saying.

Gordon Brown and others say debt is manageable because our assets are worth more than our debt. This is a flawed argument because asset values can go down as well as up.

But, in order for the global economy to expand, in order for consumption to grow, demand must be sufficient to encourage growth. In effect, demand must be greater than supply or else there would be no incentive to increase supply. Debt is the engine of this growth. We acquire debt to stimulate growth by borrowing from future income streams to pay for economic expansion, which in turn creates even greater income streams.

A return to traditional banking would kill this growth, leaving it dead in its tracks, and the world suffering like it once did in the 1930s.

What we need is the right kind of debt. That does require supervision. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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September 27, 2007 | posted by Michael Baxter in IABN | comments (0) |

Well, we now know what a fickle lot we are. The run on Northern Rock just goes to show how easily the public can panic. Presumably then if one of the big banks, or one of the companies that regularly publishes a report on the housing market, was to start predicting gloom, then panic would occur in the housing industry.

You might want to bear those comments in mind while you hear what the Nationwide has just said. The credit crisis is serious said the bank, but it qualified this by in effect saying “it’s not that serious.” Sure, house price inflation will slow, but the real impact of all the happenings of the last few weeks is to “take some of the froth out of the market.”

The Nationwide had house prices jumping by 0.7 per cent in August, and by 9 per cent over the course of the last 12 months. The Nationwide said, “We are now ending a period
during which house price gains were particularly strong in 2006.” Last September it had house prices rising by 1.3 per cent, and by 1.4 per cent, followed by 1.2 per cent, in the last two months of last year. Inevitably then, as the more modest rises we are likely to see over the next few months occur, the annual figures will fall sharply.

The Nationwide did concede this point. “The message from lenders is clearly that from now on, risk must have its price,” so said its chief economist, Fionnuala Earley. “As a result,” she added, “highly leveraged borrowing will remain less attractive and lending volumes in this segment may decline.”

But then Ms Earley went into a much more positive mood. She glowed about the change in expectations over interest rates. It’s now thought rates will fall soon, and celebrated what she called a “falling swap rate.” Ms Earley said, “Mainstream borrowers with good credit and lower LTVs, (loan to value)” will still be able to obtain good mortgage deals since “credit conditions have not deteriorated as much as the headlines may suggest.” She added, “It also suggests that payment shock for borrowers who need to re-mortgage in 2008 may not be quite as large as previously anticipated. Although many lenders are now increasing margins, it is reasonable to assume that at least some of the decrease in swap rates will be reflected in fixed rate mortgage pricing.”

She concluded by saying, “Looking further ahead, the development of the wider economy and labour market will determine the trajectory of house prices. A slowdown in consumer demand now looks likely to pull economic growth below its trend rate in the coming quarters and take further froth out of the market. A worst case scenario is for the economy to stagnate or fall into recession, with large job losses forcing homeowners into unwanted sales. This is still very much an outside probability, but it would be complacent to claim that the odds have not increased recently. In light of these uncertainties, prospective buyers would be wise to think carefully about their financial position and the risks around it before entering into a house purchase decision.”If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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September 27, 2007 | posted by Michael Baxter in IABN | comments (0) |

When the Bank of England agreed to inject £10 billion of liquidity into the money markets, many accused it of wimping out. One moment it was saying it did not want to reward banks for their reckless ways and the next it’s printing money like there is no tomorrow. Even the Economist magazine talked about an extraordinary turnaround.

But here’s something even more extraordinary. The banks, which are supposed to be benefiting from the Bank of England loans, are saying, “No thank you.”

So that’s a relief then; the banks are doing so well, the liquidity crisis so very last week, that they don’t even need the handout. It’s not that much of a handout as the loans carry a 6.75 per cent interest charge.

The Bank of England explained the lack of enthusiasm by saying, “Since the announcement, there has been a significant fall in three-month interbank rates, which made the auction look expensive.” Even so, it is still pressing ahead with plans to supply more money, via auctions in three separate waves throughout October.

But, alas, there is another take on this. Maybe the reluctance from banks to take part in the auction has nothing to do with not needing, or wanting, the money. Rather they are running scared, they daren’t take the money in case they suffer a Northern Rock type run.

Many say the Bank of England was too soft on Northern Rock, that by bailing out the bank our central bank sent a message to the rest that risk taking was okay, since if things went wrong the Bank of England would step in. Well, if the theory that the Bank of England’s auction has failed because the banks are running scared is true, then it would be quite absurd to say Northern Rock was treated too kindly. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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September 27, 2007 | posted by Michael Baxter in IABN | comments (0) |

You may recall that when we first started hearing about the US subprime crisis, much of the news related to Bear Stearns, and how two of its hedge funds were set to collapse, so bad was their exposure to subprime.

Bear Stearns is the fifth biggest US securities firm. Until problems fell on the company, it was something of a star. From 2005 to 2007 it was voted Fortune magazine’s most admired securities firm, for example. But right now it’s in trouble. Just a few days ago it announced a 62 per cent collapse in its quarterly profits, falling to $171m.

What it could really do with is a nice injection of cash, and a white knight taking a sizeable chunk in the firm, to send out a message of stability.

Yesterday the rumour mill was grinding out talk that the most admired of all white knights was considering taking a stake; Warren Buffett, the man known as the Sage of Omaha, the guru of investing.

On the rumours, the share price in Bear Stearns shot up, and in the process Joe Lewis, the man who owns Tottenham Hotspur, made himself a paper profit of $135M. The British currency trader had bought a 7 per cent stake in the firm just a few weeks ago. Interestingly, at first it seemed like his investment was a bad move, since the big fall in profits was announced after he made his gamble.

Here’s a question for you to ponder. What do Bear Stearns’ CEO James E. Cayne, Joe Lewis and Warren Buffett have in common? Answer they are all fans of bridge. Some are suggesting that it’s this common interest that is bringing them together.

Then again, there are lots of reasons why Warren Buffett probably won’t take the stake. For one thing, the great man regularly says he won’t participate in bidding wars or acquisitions. Secondly, he has never been a great fan of investing in investment banking and when he did dip his fingers in, buying a stake in Salomon Brothers in 1987, the investment later became known as one of his less-shrewd moves. Besides, can you really imagine Warren Buffett investing in a company because he has played cards with the CEO a few times?

But, what’s more interesting about the rumours relating to Bear Stearns is this. The press have been focusing on Warren Buffett and have given only modest coverage to the fact that rumours also suggest that the China Construction Bank is considering taking a stake too.

China is taking a new approach to its foreign investment strategy. US treasury bills and other bonds are losing popularity and, instead, China and its companies, flush with cash, are looking to take equity stakes.

Moving forward, the change is highly significant. In recent years China may have been busy buying US, and indeed UK, assets, but they were safe, boring assets, offering lousy returns. US and British investors, on the other hand, were buying equity stakes in China. China may have been investing more money into us than we were into China, but our investments carried more long-term value.

This is changing, and in the long-term, as China reaps the rewards of its new investment strategy, the pound could come under severe pressure.

But, in the short-term, China is more akin to the US cavalry, coming over the hill, trumpet blaring out, while the Western banks sit in a circle, surrounded by panic and with limited ammunition in the form of liquidity, to fight back.

It has also occurred to us that China’s decision to push less money into the money markets may be a contributing factor behind the money markets’ panic. Now there’s a theory you won’t have read anywhere else. If, when the dust settles, it does appear China’s changing strategy was behind the money crises, then think of us, won’t you? If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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September 26, 2007 | posted by Michael Baxter in IABN | comments (0) |

Debt has value; debt that seems fairly safe, that is not beset with default and payments problems has even more value and, let’s face it, Northern Rock owns an awful lot of debt. Not its debt, understand, but the mortgage borrowers it has lent money to in the past.

The problem is this: the gap between the amount of money Northern Rock has lent out, and the amount it holds as deposits in its accounts, is £30 billion. So, in effect, it owns a £30 billion asset, but as things currently stand, it hasn’t paid for it.

But, and this really has got some people’s goat, the bank was still planning to make an interim dividend payment to its troubled shareholders. As recently as September 14 it confirmed it planned to pay out 14.2 pence a share. The current share price is 180 pence. It might have felt they deserved something back and, no doubt, senior management was especially keen as they had a lot to gain from such a dividend, but when you think about, it really does take the biscuit. To fly in the face of this public backlash and to pay out dividends, interim dividends at that, seemed to be either an incredibly brave, or a foolhardy move. That it would change its mind seemed inevitable.

You see, shareholders might once have thought their future stream of dividend payments was as solid as a rock; the trouble was, it was as solid as Northern Rock.

Now, the bank has at last said it is in “preliminary” takeover discussions. So it seems an offer will be on the table soon, and indeed at the time of writing the share price had gone up. But right now, Northern Rock is running a fire sale, and fire sales never bring the best price.
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September 26, 2007 | posted by Michael Baxter in IABN | comments (0) |

Earlier this year, analysts warned that should house prices stop rising, then the result could be recession. Falling house prices seemed unthinkable. And yet, things have got so much worse, but most are still saying recession can be avoided, and now they have started talking about mid-cycle blues.

Take a deep breath, here is the bad news.

According to the SP/Case-Shiller index, the median price of houses across the US fell by 3.9 per cent during the year to August. According to the National Association of Realtors there are now 4.58 million homes for sale in the US. That’s the highest ever. It amounts to the equivalent of ten months worth of supply. There are also enough unsold single family homes available to feed demand for 9.8 months, the highest level seen since May 1989.

Then there’s consumer confidence. For much of the year, the Conference Board’s survey of consumer confidence was busy defying all the predictions of a US economic slowdown. The consumer confidence index in July hit a six-year high at 11.9 points. It was as if the US consumer was divorced from all the talk of doom. Some suggested that the US subprime crisis would remain isolated and would have a minimal effect on middle America.

Even the August reading at 105.6 was surprisingly high, bearing in mind what was going on. But now, a month on, and it seems reality is hitting home. The consumer confidence index fell to 99.8, the lowest level in two years.

Okay, it wasn’t all bad news. While one survey had house prices down, the National Association of Realtors recorded a 0.2 per cent rise in median price, the first positive reading for some time.

It seems inevitable that the Fed will cut the rate of interest some more. It’s only by doing this that it can avoid recession in the US, but don’t forget what commodity guru Jim Rogers said earlier this week. “The clowns in Washington have signalled to the world they don’t care about the U.S. dollar,” he said. Mr Rogers reckons that the commodity rally may have another 15 years to run, and oil will hit $150 a barrel. He believes that agricultural products will shoot up in price too.

Earlier this week Federal Reserve Bank of Dallas President Richard Fisher said the Fed had some “wiggle room,” insofar as it could get away with cutting interest rates without creating inflation, but he questioned whether the wiggle room would be enough.

We are not sure there is sufficient space to wiggle. With commodity prices still so high, with demand from China and India pushing up prices and with the dollar falling, inflation could easily return. Once again, we may need to look towards China. If it does what the US wants and lets the yuan appreciate then inflation in the US will be the result. If the yuan stays where it is, then China itself will experience inflation, and at least some of this will be exported.

The underlying problem is this. Global demand, fed by Western debt, is outpacing global supply. Inflation is the inevitable consequence of this: inflation and too much debt. By reducing interest rates, the Fed may be reinforcing existing problems for the future. It seems that in order to solve the underlying issue, the global economy needs to slow. Will the US economy be able to manage to avoid recession when it adds this international pressure to its domestic woes?If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved