Grown-up stuff, Part 1: Economics for Intelligent Punters

[Gordon McIvor Wilson]

Urgent dispatch from Our Correspondent in The City:

Well, as we can see the Governor has had a few digs at the European Central Bank ('ECB') - not, as has been reported, digs at the Chancellor.

As you know the ECB is meeting at the moment to sort out regulation and with the connivance of the French and German finance ministries is trying to put the fear of God into the British finance services system. They will not succeed, they need our system more than we need theirs.

One thing new from the Governor was that our finance services industry as a percentage of GDP is five times that of the US. That makes it even more incredible that our finance services industry hasn't been harder hit.

When it comes to regulation we should be very careful. One thing that isn't being publicised at the moment is the fact that many of the private Swiss banks are doing very nicely thank you. The fear of many Swiss people and foreign account holders is that the major Swiss banks are going to have to open up their secrets to the world, this has resulted in a flight of capital from the major Swiss banks to the private Swiss banks. Julius Baer, for example, is working flatout to overcome its sudden influx of new accounts. This is where the regulators are going to fall down again, they will allow Switzerland to continue with its 'beggar thy neighbour' economics, as long as the money looks all right we don't mind where it comes from. You can avoid paying your tax where you are domiciled as long as it benefits our banks and our economy.

As you can see, the Fed, ECB and Bank of England are all scrabbling around to find the most amenable way to regulate the banks. What is certain is that whatever the Fed comes up with we will follow with some influence from us but the Fed will not take any lessons from the ECB. [Quite right, bunch of Euros - Ed].

This is the first of an occasional series of informed comments from our Economics specialist, Neil von Runkel [that's enough Euro stuff now - Ed].

[Allan MacDonald]

Interesting times in Europe, City Correspondent. Other, little known/ discussed/ admissions/ facts, relate to the level of toxic debt still washing around in the German banking system. Tentative assessments (for limited public consumption) place it at a round one trillion US Dollars (Euros, Yen, Yuan, does it matter). Not so say the shrewdies, try circa 2 - 2.6 trillion. Either way, huge nay vast. This, of course, does not take into account 'normal' poncy bad debt.

So whither Europe? They know, the US shrewdies know, we refuse to recognise it, but the policy quickly adopted by G. Brown esq. was the most appropriate medicine for a sharp bout of debt poisoning. Furthermore, our highly efficient equity, bond, forex etc markets remain the most stable and attractive to their respective customers.

Unfortunately, as with all strong medicines there are side effects - lingering unemployment, consumer hardship, small business strangulations, deflation or worse stag-flation (neither, I am told, is pleasant or attractive in the older models of UK MAN!). But, I hear you say, what of our fellow Europeans? Worse is in store for Euro man, he is set to be true Euro trash, crashing almost as fast as his currency.

Germany is an exporter, sorry was. Struggling with its intransigent labour force and Laender & Fed law and a refusal to take the capitalist Brown pill, it will suffer longer, malingering and dragging Euro economic progress behind it. France ah, mon dieu; sacre bleu it is not possible - but it is, they are cliinging to their Teutonic neighbours life raft for dear life. The heady anti UK days of the ECSC of 1956 come to mind.

Another de Gaullesque farce may yet revisit us, as we cast ourselves adrift from the drowning, aboard our world leading financial markets battleship, unfettered by regulation US style and laden with volatility ( a high VIX is a true fix) and hungry traders. Or may be not.

Perhaps the green shoots so many speak of, and so few see, are nothing more than short term speculative blips and we are heading for a 'dead cat' bounce. If we are the smart money says it will be prolonged and debilitating, resulting in long term inflationary sickness.

Actually, the smart money is already in play and has been since February of last year. Remember the few US hedgies who speculated against the banks and won big time. Remember the hedgie who played a key part in expanding the levels of credit derivatives shooting round the world's markets, who resigned in 2006 so he could start a fund to short sell the very same banks he had help flood; in the process he made US$5billion in 18 months on that one way bet. Well, he and a few top drawer shrewdies rolled over their entire winnings (minus a few expenses, naturally) onto a major, that's MAJOR bet on inflation rising from 2010 until 2018 in a big way.

Once again, a one way bet I know of in time - the difference is this is one that I will join in with in my own small, very small way. Anchors up, as they say down nautical way!

[Gordon McIvor Wilson]

Ah, that's the stuff, serious trading opportunities starting to emerge from the global membership of The Sports Exchange. Signs of renewed financial activity amongst the punters observed in the Debenture enclosures at Wombledon, shady deals under shady brollies. Plus ca change...

[NEIL RUNKEL]

I was cut off -- our linked gilts may look more attractive than the eu bonds available.

[john Tuohy]

Good Stuff Chaps.

Please keep this going as it adds a lot of interest to the website.

[Allan MacDonald]

Word is beginning to reach us in Five Acre Wood that our City squirrel brethren are beginning to bring out their nuts for a polish and the usual bit of show. A well burnished nut can often provide the best conker, or so am I told.

Wooden proverbs aside, Eu bonds could be an interesting play, so too could UK gilts (long, very long), given a month or two when the in & out boys have had their shorting fun. However, I would be keener on going long cable as the Euro welters under the weight of its, as yet, unquantified debt burden.

Remember when you were a young strapling and you puffed on an illicit supply of your Father's best cigars and the pressure of wondering if he would notice the ever diminishing supply as you sold them on at school? It is this scenario 'Yarp' is facing. Until the debt burden is quantified and actions are perceived to be taken, or at least discussed, then the currency will wobble and struggle & be evermore worriesome - sheep don't like the unknown, after all 'it could be anything', or so the cry in Europe's bourses goes. So for now, leave the Euro well alone, I say.

In the meantime, the Yen is paralysed, Swissies are really only carry trade material (parity of interest rates with Japan have nullified any opportunity), the Yuan is too young, too volatile/unsure of its footing; very much like a child learning to walk - it has to fall on its arse a lot before it gets the hang of it, even then its feet can outrun its body and charge into clearly visible, solid objects headlong ( resulting tears all round and a re-evaluation of feet).

Were it not for Boris and his Duma buddies swearing allegiance to the Greenback, Sterling would have broken through $1.70 last week. This Russian intervention may have seemed jolly decent for BO, as we know 'him' from the big White House on the hill. Soon I fear, people will realise BO is not attractive and it is costly, best to get rid really and Boris & the boys had ulterior motives anyway, if you ask me.

Currency allegiance is as fickle as the love of a whore - great while the meter is constantly filling but, when the coins run out so do they, usually with a few nice piccies for 'memories' she will undoubtedly share with her closest friends - aka readers of the redtops and, for those unable to read - YouTube.

Anyhow, short the dollar, long Sterling. Why, I hear you say. RTFM I say.

Let us start with the obvious, V shaped recession or 'deadcat' bounce, it matters not, we will be out from this ahead of other first world economies. We started the treatment ahead of all the other patients. Our economy, like it or not, has a very much stripped (bare) look about it. What I mean by this is we can accommodate structural change quicker and better than our former WWII allies and foes: our legacy industries are no more. Of course, there will be collateral damage (more of this later and also paradigm shifts, if any interest is shown) but it was inevitable in the 80's, after our visit to the pawnbrokers at the IMF during the 70's, and so it is inevitable now.

When in contemplative mood, I think of the many and various economies of the world as tectonic plates (not a bad metaphor, for me anyway) constantly shifting, colliding and coalescing with one another to form new entities: whether it is the ECSC, NAFTA, SEAC or post war Sovietisation; in other words, the only constant is change. We are readily placed to enact, if not embrace, the next step in economic development (referencing 'paradigm shift' thoughts here) and define what the future shape of a developed economy will look like and what will be its staple providers.

Further, light touch regulation is the only way to gain an edge. Sarbanne Oxley has shafted, sorry, resulted in a stifling of swift, audacious transactions in the US. Listing and/or merging requires more paper work, validation and warranting than you get with an MFI DIY housebuilders kit! Who wants to list or deal with/into the US pool? Highly leveraged takeover? Share swap involving third party inter-state pension funds? Dual listing with ADRs? NO way Jose, or as I overheard the other day from the lips of a City blue-blood "...I think not Charles, I've been to Cuba before".

Considering any or all of the above is the equivalent these days, of asking the Board to draw straws to see who is set fair for ten stretches of bird end-to-end in a Yankee prison if it all goes tits up, or worse. Remember, the US now sees fit to extradite from ANYwhere on this planet and do you know its first port of call en-route to a show trial - no, not Guantanamo, Afghanistan. Yep, 'you better believe it pardner'.

Our light touch, nimble of foot system with one blind eye, is the perfect launch pad/ home for a deal, a veritable cauldron of nascent activity; with enought talented crooks to continue its ascendancy to number one in its field, or your field, or any field if the deal is structured and funded the right way, no wot I mean!.

UK economy equals Phoenix ashes metaphor, and rising again.

Thus, get and go long, long Sterling and short the Dollar; a wise Owl has told me that a ratio of 2:1 is being wrapped for Christmas by a white bearded, red suited bloke from up North who is also a pal of Rudolph and his extended family.

If the above rationales fail to convince, then get this.. a maiden of the Near East (former Soviet satellite), whose acquaintance I have had the good fortune to make, advises me her wealthy, and I mean wealthy, family are spending their days acquiring pounds by the sackful (literally), hoping to sell a few sacks around Yuletime to fund next springs planned acquisition spree of prime supra cheap, readily available British real estate - who let that 'dead cat' in again?

From the comfort of our small dray in the old Oak, I wish you a pleasant weekend.

[Gordon McIvor Wilson]

Wow, great content from the City nutkins, must have kept the Forest Community up all night. Deserves printing and a serious read between tennis moments this afternoon - sure beats The Economist, and saves the £4 for more deserving 'investments'.

[G Brown definition of 'investment': "the burning of mind-blowing sums of money on wages, managers and 'bonuses' for public sector jamborees with no measurable yield or dividend, ensuring the certainty that further brain-boggling sums will be needed immediately afterwards."

[john Tuohy]

Good Stuff chaps.

[Brian Ford]

JT - I thought you were a Gordo apologist and a new LieBor luvee!!?

[john Tuohy]

Well whatever, but its good to see a jolly debate going.

[Ron]

At least Gordon the borrower can credit himself with replacing Boom & Bust with Boom & Bankrupt which is more difficult than you may think. It takes the mind of a genius to think of transferring the unemployed into the public sector and then borrowing the money to pay them.

[Philip George Harfleet]

The speculators (gamblers) and oh-so-clever traders are rearing their ugly and greedy heads again. A punt on oil prices recently by a derivative broker cost his company £6million. Not a huge amount compared to other shennanigans by some earlier "deals" but this £6M punt caused a nigh-on 10% spike in oil prices!

Apparently, this dodgy dealer punt has been "unwound". Amazing how these things work, isn't it? If you've got enough bread, like the Russian woman mentioned in this blog, you can be more manipulative than a music-hall contortionist tying herself in knots in full view of the paying public.

And it is poor old Joe and Judy Soap who will, once again, get ripped off.

If I ruled the world (as Harry Seccombe once sang) I would bring back the Madame Guillotine for all gambling bankers, traders and their ilk. Madoff would be the first "head-off".

Have a nice day; off to watch Wimbledon now.

[NEIL RUNKEL]

Having read the last part of the oecd report it appears that there are many caveats to the stats provided. One interesting point is the concentration on the NAIRU. With the new attitude of employers towards not losing thee employees the caulation of the nairu becomes more problematic. It appears that our greater reliance on service industries is having a perverse but more predictable effect.Employers are more wary of discarding intellectual property even in the teeth of a recession. There is a greater investment in training in the larger companies and although it may be attractive to turf out the existing lot for a more malleable young graduate,the loss of intellectual capital is starting to matter. All the Japanese car manufacturers have taken this path having invested so much capital in training and building a culture where kaizens are more important for the long term future than the immediate bottom line. It is interesting to see so many employers choosing short term working or breaks even among british managed employers. It is finally dawning that where industries require greater inteelectual imput they are more reluctant to have to go through the long term training processes required by a hire and fire culture.the quickets way to be able to compete out of a recession is by using your existing intellectual property and enhancing it. A new version of the Phillips curve may be required where manufacturing is no longer the main economic thrust.