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

“The focus over the last few months has very much been on subprime borrowers, but they are only the tip of the iceberg,” said Mintel yesterday.

And with those words Mintel put the Fear Of God up the UK property market.

Mintel reckons 9 per cent of mortgage holders in the UK are subprime, but that another 24 per cent were non-standard with irregular incomes.

And that’s a problem, says Mintel, because when these mortgageholders come to move, and need to get a new mortgage, or if they want to re-mortgage their property, they are going to find it a whole lot harder and more expensive than they were expecting.

“In today’s more-conservative lending climate, the unconventional financial situation of these homeowners means that they will now face higher repayments and increased lenders’ fees when remortgaging or moving house,” said Mintel.

It does seem to us that many economists have underestimated how serious the current credit crunch is. If you remove from people the ability to borrow in order to repay borrowings, then all of a sudden you may well find a rapid rise in possessions, which in turn could lead to a rush of cut-price properties coming on the market.

2008 is likely to see this partially reflected in house prices, but given the time lags entailed in property possessions, 2009 may well be the year when things hit bottom.

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

It’s good news for workers of India, while the Vietnamese and Chinese have reason to celebrate. Closer to home, Bulgarians and Turks should be laughing, but it’s not so good for the Brits, or indeed Germans and French.

Earlier this week, human resources group Mercer released its projections for wage increases next year. India should really be celebrating, because Mercer is predicting wage increases of 14.1 per cent in the economy of the sub-continent next year. Inflation in India is expected to run at 4.3 per cent, so even after allowing for inflation, wages will be rising at an impressive 9.8 per cent.

Meanwhile, Mercer is forecasting wage inflation of just 3.1 per cent in the UK, but after adjusting for an expected CPI rate of inflation of 2 per cent, your average Brit will be just 1 per cent better off.

Well, actually it will be even worse than that, because this CPI measure for inflation is really not that good. The Retail Price Index gives a much better idea of what is really happening, and last month this was rising at 4.2 per cent, so actually, it would appear that your average Brit will be worse off next year.

Global salaries are expected to rise by an average of 6 percent in 2008. 1.9 per cent above inflation, says Mercer. Countries that expected to see real wage rises in excess of 3 per cent include, India, Vietnam (5.6 per cent), Bulgaria (4.9 per cent), Turkey (4.5 per cent), China (4.3 per cent), South Korea (3.9 per cent) and Romania (3.3 per cent).

The US is expected to see wage rises after inflation of 1.9 per cent which is actually pretty good, so maybe the downward pressure created by subprime woes could be cancelled out by the upward effect of positive wage rises.

As for the UK, perhaps a more telling measure is disposable income. According to a recent report from Ernst and Young, our discretionary income is at its lowest level in five years. It says the average household now has £837.53 to spend each month after total fixed monthly outgoings, that’s after things like mortgages, council tax, petrol and utility bills, compared with £898.54 in 2003/04.

It seems that globalisation is having the effect of reducing the gap between workers in the developing world and workers in the developed world. Actually, the net effect is fairer, but it is worth bearing in mind that while the UK has benefited from globalisation, and while business has done well, your average worker in the UK is actually worse off.

In this globalised world, capital is enjoying better rewards, labour lower rewards. Only by ensuring the public benefit from greater corporate profitability, perhaps through holding stakes in business via their pensions, we can ensure that the greater wealth globalisation brings truly trickles to the average man and woman in the street.

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

As you may know, while the US totters and the UK starts watching its footing with trepidation, Germany seems to be returning as a major player on the world stage.

It has now pretty much paid off the cost of re-unification, and it has quite impressively managed to maintain its share of international trade, at a time when China has been muscling in on other countries’ turf.

The thing about Germany is that its recovery has been built on production. On producing and exporting its way to growth; the Germanic consumer has not gone out and spent like his Anglo Saxon cousins.

For example, yesterday saw the release of the latest survey on German business confidence, and the headline index is up. That was against expectations, too.

Okay, there are signs of an easing up. Business expectations, for example, are down to the lowest level since August 2005 but, even so, considering the doom and gloom flooding out of the US, it’s really pretty good.

But, there is a cloud on the horizon. The cloud is inflation: it shot up in November, to 3.3 per cent, the highest level since the German CPI figures were first introduced in 1997.

Okay, there are no prizes for guessing why the index went upwards. Energy inflation is taking its toll. The trouble is, at the beginning of this year, the German government pushed VAT upwards too, so that hasn’t helped either.

Germans don’t like inflation. And while there are reasons to think that some of the recent rises are one-offs, such a development will be received with dread by many in Frankfurt.

Bear in mind that the French premier, nearly-headless Nick Sarkozy, has been suggesting that the European Central Bank (ECB) has been too pre-occupied with inflation, and has been too willing to up interest rates, then you see a real division emerging in the Eurozone.

Before the formation of the euro, an independent central bank was considered almost sacrosanct in Germany. But recently, Mr Sarkozy talked about removing the independence of the ECB unless it becomes more open and accountable.

Or put it another way, unless the ECB objectively analyses the data, debates the issues of the day, and then, after a free and frank discussion amongst its members, independently agrees with Mr Sarkozy, then maybe it should lose its independence.

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

Right now, or so it would appear, we are entering the winter of discontent in the US. The latest news out yesterday was grim indeed.

The bard, after opening his play Richard III with his famous saying on discontent, went on to describe the central character as, “Deformed, unfinished, sent before his time into this breathing world, scarce half made up.” And yesterday, the latest data certainly painted an image of a most unpleasant face for Uncle Sam’s economy.

Actually, the bad news came in two forms. US consumer confidence and house prices.

The US Consumer Confidence Index fell to earth in November, dropping from a worrying 95.2, to a disastrous 87.3. The last time it was lower than that was in March 2004, but that was in the aftermath of Hurricane Katrina.

Bear this in mind. The US Conference Board, which releases these figures, has this habit of changing the data downwards when it announces the next batch. For example, last month it said the Consumer Confidence Index for October was 99.6, but now has October coming in at four points less than that. So, if it remains true to form, then next month we will discover that actually the index for November is much lower than we are currently being told. If that happens we will have to rewind the clock back an awfully long time to discover the last occasion it was so low.

Yesterday also saw the release of the latest Case-Shiller house price index from Standard and Poor’s. And boy, is it down.

The index for measuring house prices across the US fell by 0.9 per cent in just the one month period from September to October. As for peak to trough, well, the index peaked in July 2006, and is now 10.9 per cent down from that.

Not so long ago, pundits were predicting a mere slowdown for US house prices, with few expecting to see falls. So much for those predictions.

In fact, the US has seen bigger monthly drops before, but only just. We got our slide rules out and had a gander at the Standard and Poor’s data going back all the way to February 1987, and during that period, the monthly rate fall was higher than that on just three occasions, November 1990, and January and February 1991. But the peak to trough fall during that period was not so bad, with the Case-Shiller index falling 5.6 per cent from October 1989 to April 1991.

But if that sounds pretty bad, pity those poor old home owners living in the five worst afflicted areas. In Tampa Florida, the index is now down by over 11 per cent from peak to trough.

Furthermore, of the 20 regions the Case-Shiller index tracks, not one recorded a rise in the index over last month.

With mounting evidence to suggest that the credit crunch is far from over, it would take a brave soul to predict an imminent improvement in these figures. More falls are far more likely.

The National Association of Realtors will be publishing its figures on US median and mean house prices this week. Last month it revealed a 7.64 per cent drop from peak to trough.

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

There are always two extremes. One extreme says that Northern Rock should be bust by now. If it was a business operating in any other sector, or indeed if it was a business operating in any other region, it would be in administration by now. The other school of thought says that the government has an obligation to shareholders.

Of course normally, when a business struggles for survival, the government seems to care little for its shareholders. But this time it’s different.

Cast your mind back to October 1 1997 (I was still at school - ed!). That was the day that a building society with a loyal following in the North East became a bank. And with that, the building society’s borrowers and depositors found themselves with 500 shares, and those who were both (that’s depositor and borrower) had 1,000 shares. After day one, these shares were trading at 463p.

Now clearly, many of the 800,000 or so newly-formed shareholders went out and sold, but many stayed loyal. Investing is, after all, a long-term game, they were told. They thanked the government for their luck, and Labour MPs in the North East consistencies, where many of these shareholders lived, looked forward to many more years in parliament.

The workers were pleased too. Northern Rock is an important employer in the region and no doubt staff were delighted to see their employer so strong.

Today, it is all so different. The bank is, at it were, on the rocks. Sir Richard Branson’s offer might have the approval of the board, it might have the government celebrating the “get out of jail free card” Sir Richard has offered, and the deal might also represent a reasonable safeguard for jobs in the region, but shareholders are none too happy.

The Virgin supremo is planning a 1.3bn investment into the bank. The government likes it because the deal involves saving 6,000 jobs, and guarantees the repayment of £25bn of the Bank of England’s emergency loans over three years.

But some shareholders are spitting feathers. RAB Capital, the second-largest shareholder in Northern Rock, has said it is against the deal.

The trouble for shareholders is twofold. For one thing, the Branson deal represents a big fall in the valuation of the company: valuing the company at just £200 million, 40 per cent less than the company’s value at the start of the trading day, and less than a twentieth of the value in January.

Secondly, existing shareholders are going to be asked to stump up half the cash. In fact, Sir Richard is planning a rights issue. 6.2 new shares will be issued for every existing share. Reuters has calculated that means shareholders who acquired their stock as customers of the bank when it was floated and who still hold their 500 shares will be required to put up £770 each.

It’s no wonder, then, that shareholders are up in arms. But, what’s the alternative? At least the Branson deal still means existing shareholders get to keep around 45 per cent of the business.

If shareholders really believe in the company, and think the current share price grossly undervalues the business, then the Virgin deal provides them with the opportunity to see a return in the longer-term.

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

So how serious do you think debt is? Yesterday, PricewaterhouseCoopers deposited its pennyworth into the debate.

And its findings: this year the average adult now owes £33,000, compared with £17,000 in 2000.

It says, “Households have already stretched their borrowing capacity. Their finances will be further tested as many households that are currently benefiting from fixed-rate mortgage deals could see their average monthly mortgage repayment increase by around £140 if they do not re-finance their debt: this will put further pressure on default levels and could have an impact on consumer spending.”

Richard Thompson, partner at PricewaterhouseCoopers LLP, said, “There are tough times ahead for both consumers and credit card companies. Banks are continuing to take action in response to the rise in consumer debt by tightening their credit acceptance policies. Many consumers will find it increasingly difficult to obtain credit in the run-up to Christmas.”

The accountancy firm also reckons personal insolvencies could soar next year as a result of over-borrowing by consumers. It said, “While the trend in Individual Voluntary Arrangements (IVAs) has declined in recent quarters, this is partly due to a hold-up in the processing of IVAs due to ongoing fee discussions between banks and insolvency providers, as well as fairly flat levels of unsecured debt in the past two years. The expected increase in personal insolvencies next year could put further pressure on lenders’ bad debt charges.”

Actually, we would suggest that maybe the report has, if anything, understated the danger of a rise in insolvencies. A nasty disease has taken hold in the UK of late: borrowing to pay off borrowing. The disease has a cousin, a nasty virus which causes analysts and consumers to only take into account interest payments, and not capital repayments, when the affordability of a loan is calculated.

Next year the credit crunch and slowing housing market could exert a terrible double whammy on the UK. Borrowers will suddenly find it is much harder to get a top up on their mortgage in order to pay off other debts. This could lead to a much higher level of insolvencies not just in 2008, but in 2009 too.

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

It’s now a correction. Yesterday, the Dow Jones Industrial Average fell by another 237 points and all of a sudden the index is now more than 10 per cent below its year peak, seen on October 9. In fact the index is now 1,420 points from the record. That works out as just over 10 per cent.

Any fall from peak to trough of 10 per cent is dubbed a correction.

Curiously, the FTSE 100 has performed a lot better over the last few days, and as of last night was 8.1 per cent below its peak seen on July 2.

It appears that actually, reality has dawned on markets. For much of this year, fears that the US could hit recession have been growing and it felt like the biggest export from the US this year has been woe. Yet exuberance seems to permeate markets like soft sand, providing a comfortable place to bury one’s head.

Yesterday, it seemed that at last we had good news. Shopping numbers last Friday, the big shopping day after Thanksgiving were up. Phew. But then, analysts thought about it some more. Sure, volumes were up, more people were out there, but spending per person was down and, more to the point, perhaps the reason why numbers were up was because of the strong price discounting.

Bargains galore mean more shoppers, but it doesn’t necessarily mean more profit.

It seems there is now a growing chorus of pundits predicting a US recession next year. The shocking state of US housing, at a time of a record oil price, at a time when the US indigenous automobile industry is struggling for its very survival, is all proving rather a lot for Uncle Sam to carry on his broad shoulders.

But not everyone has gone all pessimistic. Last year, Capital Economics repeatedly warned that analysts had underestimated the seriousness of the US housing market, and predicted much tougher times ahead for the US. But it never suggested the economy would hit recession, and it is sticking to that prediction. Yesterday, its US economist Paul Ashworth said, “All things considered, it doesn’t look good. Nevertheless, we suspect that the economy will still avoid a recession, based on the widely-used definition of two consecutive quarters of negative growth, thanks to a partial rebound in the first three months of next year. Real incomes should be stabilising by then, unless energy prices continue to surge, and the inventory component should have a more benign effect.”

It does all seem to depend, though, on how serious you think US debt is, and from that you can draw your conclusion about the UK too. If you think the US consumer is suffering a mere hiccup, and that once the sub-prime mess has been sorted out, everything will go back to normal, and that once again US consumers will go out spending, then you probably think the current crisis is none too serious. A mere blip on the path to growth.

But if you think debt is a major problem, and that we simply are borrowing more than we can afford, then, no doubt, you think the current crisis is a taster of far worse things to come.

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

Two giants of the corporate world have found themselves on the receiving end of multi billion dollar investments from sovereign funds, this morning. The two companies are as different as you can get, but maybe the two announcements made yesterday signify something far deeper and far reaching, than the media and analysts say, with their pre-occupation with the short term.

One of the two companies is Citibank, the world’s second-largest bank by market valuation. The bank is in a right royal mess over sub-prime, massive write-downs, and the resulting departure of its boss Chuck Prince. But maybe $7.5 billion worth of new capital will help. The Abu Dhabi Investment Authority has thrown in the slug of money in return for an 11 per cent annual interest, and then conversion into shares in 2010 and 2011. The investment will ultimately furnish Abu Dhabi with a 4.9 per cent stake in the bank.

Win Bischoff, Citigroup’s acting CEO said, “This investment, from one of the world’s leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business.”

Meanwhile, in an economy and industry far, far away, sits another set of crises. Sony, the company which once had the world’s second most-famous brand name, almost has enough problems to make US banks feel smug. The consumer electronics industry seems to be sitting on a bubble of its own, with changes in technology coming so thick and fast that not even early adopters can keep pace. Usually in technology, new innovations bring in big bucks from small numbers, then as the price falls, the mass market takes an interest, until eventually the product becomes a type of commodity, leaving little room for unusual profits for any of the participants. But in the consumer electronics business, this cycle seems to be getting shorter, with the commoditization end of the cycle seemingly becoming ever more pervasive.

Sony also has this problem in the shape of a state-of-the-art games machine it spent billions in developing, being soundly thrashed by a clever little gismo with an unusual user interface.

But then, this morning, Dubai International Capital, a private equity firm owned by Dubai’s Sheikh Mohammed bin Rashid Al Maktoum, the prime minister of the United Arab Emirates and the ruler of Dubai has forked out $1.5 billion, buying shares in the Japanese giant.

The chairman of Dubai International Capital talked about Sony being “a compelling investment case” and talked about Sony’s “truly global brand.”

Today’s developments follow the recent announcement of a $622 million investment into Intel’s main rival, Advanced Micro Devices, by Dubai International Capital.

But we appear to be merely witnessing the latest examples of a trend that has been developing all year, what with Qatar’s investment into the London Stock Exchange, and China’s investment into US private equity giant Blackstone and Barclays Bank.

It seems these massive funds are no longer content with lousy returns on the bond markets. They want a real slice of the action, which is significant for this reason:

Up until now, the US and UK trade deficits have partially been funded by the more-savvy investment practices from British and American investors. While the Anglo Saxons invested in shares, bringing good healthy returns over the long-term, many overseas investors put their money into bonds. In the UK, for example, this meant our flow of money from abroad in the form of dividend and interest payments was greater than the flow moving away, and that despite the fact that there are more British assets held abroad than overseas assets that we hold.

But, it would appear the sovereign funds have become more discerning. They want more bang for their bucks and pounds, and it seems inevitable that over the longer-term this is what they will get.

We have already seen the dollar slide, but in the longer term, as our payments abroad to these sovereign fund investors increase, it seems the dollar may come under even more pressure, while the pound could end up looking as vulnerable as the dollar.

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

Phew, at last some good news from the US.

Friday, as you may know, was Black Friday. No, this name does not refer to a day of disaster, rather it was the day back after Thanksgiving, a day always known as Black Friday. It’s a big shopping day, so all eyes turned to the US; would yet more evidence be provided of the dire straits of the US economy?

And the answer was no. In fact, according to ShopperTrak RCT Corp, sales jumped 8.3 per cent on last year.

In fact what we seem to have seen on Friday was more shoppers, but with each one spending a little less. According to the National Retail Federation, 147 million people hit US stores; this was up 4.8 per cent from last year. Individual shoppers, however, spent 3.5 per cent less per person.

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

“Allow me to admit something,” said French President Nicolas Sarkozy in China yesterday.” It was not a big effort for me to accept your invitation. Because if you hadn’t invited me, I would have come anyway.”

What a difference a couple of hundred years can make. When Britain sent a trade mission to China in 1792, under the reign of George III, the UK was running an escalating trade deficit with China. Sound familiar? Britain wanted China’s silk, but all China seemed to want from Britain was its silver. Remember, this was an age when the Industrial Revolution was in top gear, Britain’s industry led the world, and yet all the Chinese Emperor would say was: “We have never valued ingenious articles, not do we have the slightest need of your country’s manufacturers.” Britain eventually solved the problem of China in what amounted to one of the most shameful sagas of Britain’s imperialist era. It did find a product China wanted; opium, and when the Chinese government tried to stop its import, war ensued, which Britain won, Hong Kong was handed over to Britain, and China was forced to accept the import of an addictive substance.

Forward wind the clock a couple of hundred years, and things are similar. The world’s most advanced industrial nation is running up a massive trade deficit with China, and in return China is content to obtain the modern day equivalent of Georgian silver, the US dollar.

And in the US, anti-Chinese paranoia is hitting frightening heights. The call for China to appreciate the yuan is reaching deafening proportions, and that, despite the fact that the economic arguments are far from clear cut. China is still a poor country. A recent report from the Asia Development Bank found there are still 300 million Chinese living on less than a dollar a day, and as a general rule of thumb, economists seem to think that countries suffering from abject poverty need a weaker, not stronger, currency. Besides, if China does let the yuan appreciate significantly, it seems Uncle Sam could be the biggest loser, as the end result will be higher inflation in the US caused by more expensive Chinese imports, meaning that interest rates at a time of severe economic crisis will have to rise.

Of late, the yuan has been appreciating against the dollar a little. So far this year it’s up around 5 per cent against the greenback but, as you know, the dollar has fallen massively against the euro.

There were 1.27 euros to the dollar on the first day of this year, while this morning there are 1.48 euros to the dollar. And so the net effect of a falling dollar while the Chinese currency remains more or less pegged to the US currency, is that the European currency has fallen by around 7 per cent against the yuan this year.

And Mr Sarkozy doesn’t like it. “We need to arrive at currency rates that are harmonious and fair,” he said yesterday at a joint press conference with China’s President Hu Jintao.

Now, Mr Sarkozy seems to have the knack of being able to get away with saying things like that. On his recent trip to the US he drew fine praise indeed from George W, and yet on the same trip warned of a danger of “economic war” with the US. Then again, while he was busy issuing warnings to the US, he also flattered the land of the free. “I get the distinct sense that it is France that has been welcomed so warmly, with so much friendship, so much love. When I say that the French people love the American people, that is the truth and nothing but the truth.”

And that seems to be a part of Mr Sarkozy’s strength. He can say things which, if they had come from anyone else, would have raised hackles, but he charms his way through. He warns of war, but says he loves you. In the presence of the Chinese president he calls for an appreciation of the yuan, and yet projects a degree of enthusiasm for China that other western leaders just can’t match.

And, or so it would appear, La Belle France is the winner, because this weekend he scored two major coups for French business interests in China.

First off, he has agreed an $11.9 billion deal for French state-owned nuclear power company, Areva, to supply two third-generation nuclear reactors to China.

Meanwhile, French utility Electricité de France is to take a 30 per cent stake in a Chinese company that operates the nuclear plants.

Okay, France is not alone is selling expertise on nuclear power to China. Westinghouse Electric Co, which is based in the US, but owned by Japan’s Toshiba, had previously agreed a slightly smaller deal.

But the potential size of this market is huge: easily big enough for both Areva and Westinghouse, and it would appear that both company’s are sitting pretty.

France does, of course, come under heavy criticism for its subsidies to industry. We are not immune to dishing out the criticism, too, often describing Sarkozy as the man carrying out Thatcherite reforms Harold Wilson would have been proud of. But it does appear that the policy of investing billions into the French nuclear power industry, subsidising it to a degree that would have been considered totally unacceptable in the UK, is now paying off.

While doubts still remain over the safety of nuclear power, it has been speculated that the next stage in the industry’s development – the fourth generation of nuclear power plants, are 100 per cent safe, and will be of zero interest to terrorists. And so, France stands as a world leader in what could become one of the most important means of generating energy over the course of this century.

And to really benefit France, half the money China is forking out for the nuclear reactors will be in the form of euros. Normally these deals are settled in dollars. One can speculate on the implications of this. Does it mean China is planning to move further away from the greenback? Does it mean China is listening to calls to allow the yuan to appreciate against the euro? Or does it just mean Sarkozy has oodles of charm?

All in all, then, a pretty successful trip so far for the French premier, but there is more.

For Nick also sold 160 Airbus planes in a deal worth more than $17 billion. Now just a few days ago, Airbus was giving dire warnings about how it was going to suffer from the falling dollar.

As Mr Sarkozy said, “if you hadn’t invited me, I would have come anyway.” You can see why.