Tag Archives: interest rate

Equity Euphoria. Why?

The Markets are in the wrong place. For about two years, I have been suggesting that market sentiment bears absolutely no relation to what is really happening in the real economy.

Yesterday’s Markit manufacturing figures clearly show that Europe’s manufacturing sector is in a mess. At 12% , Eurozone unemployment is at an all time high with further austerity measures to follow.

In spite of all that and with increasing hand-wringing from economists, the markets are buoyant at near-record and record highs, the euro is showing only modest losses and for Bond investors it’s business as usual!

19 million Eurozone unemployed with Germany’s PMI at 49.0,  France’s at  a three-month low of 44.0 ….which is even below Italy’s at 44.5 and Spain’s at 44.2! But the Markets grind on regardless.

What is going on?

One thing that we can see from the manufacturing figures is that there is quite a marked divergence between Germany and the rest. Although manufacturing activity is shrinking to 5-6 month lows, the so-called “financial fragmentation” across the Eurozone has become increasingly obvious. The Eurozone does NOT have a uniform monetary policy which means that Italian and Spanish banks, for instance, pay much higher funding costs than Germany. That means that certain manufacturers are paying much more than German ones for their cash. On the face of it, that seems to be anti-competitive – but that unfortunately is just one of the many anomalies of the Eurozone – in fact of the entire European Union.

The poorer you are, the more you pay for your heating fuel.”

This is the backdrop to a largely blinkered , almost “autistic” equities market where we appear to have reached the stage of self-amplification where , because of the abysmally low bank rates, EQUITIES is the only game in town. Self-amplifying? Yes – as more and more investors pile into stocks – mainly because they don’t want to lose out on a rally which they themselves are now fuelling.

The only cautionary note should be for investors who are only just coming into the market to ask themselves “What is the real likelihood of me making a profit?”

When will it stop? History shows us that rallies such as the current one can stop pretty suddenly!

There will come a point at which traders, especially those with short positions will decide “Enough!” – in spite of the fact that currently, there is no obvious level at which to climb out and possibly take a loss.

Once one jumps, the rest are sure to follow.

Mervyn’s little pump

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” Mervyn King”

Mervyn King and his band of funsters at the Bank of England are attending  their irrelevant monthly monetary policy “dither” committee again. Why “irrelevant”? Because it is the British Bankers Association ( known collectively as the Wunch”) that decides consumer interest rates. Any change in the Bank Base Rate is irrelevant  because the only direction that  the BBA will alter the rate in today’s climate is upwards.

The balloon of inflation has two pumps sticking in it.

The first is our own little pump which inflates and deflates the balloon through price and interest rate variations. This is the pump that Mervyn and his gang have a bit of control over when they are in the mood to get their hands dirty. (They spend three hours deciding whether or not to sit on the fence).

The bigger pump (by far) which has been growing over the last few years and has recently started inflating the balloon  at a great rate of knots is totally out of Mervyn’s (and the Government’s ) control. This is the massive steel stirrup pump of world commodity prices. Control of that pump is in the hands  of organisations such as OPEC, Governments such as Russia and the USA and individuals such as commodity traders and speculators.

Mervyn’s little plastic bike pump is fast becoming an irrelevance but I am sure that today after their game of bullshit tennis,  they will have a good lunch before Mervyn settles down at his battered old Remington and types “the letter” to Gordon Brown.

Dear Gordon,

Sorry mate but you know that 2% inflation nonsense that you used to bang on about? I think that it’s time to stick a “one” in front of the “two” because that’s where we really are.

The good news is that  the high figure does not apply to individuals who purchase a 42″ plasma TV every month.

Yours,

Merv

p.s. Sorry about the red ink. That’s all we use these days.

British economists are divided (?!) – depending whether they base their calculations on Keynesian Theory or the (currently favoured) back of a Marlborough packet.

In spite of the fact that they all rely on what is essentially the same computer model – half say that the rates should come down and the rest say that they should either stay at 5% or be increased.

Here’s a wake-up call boys:  It doesn’t matter.

When you have oil and commodity prices swinging by between 10% and 60%, a small 0.25% tinker with the BBR is not going to amount to anything at all.

It would be like John Prescott chipping an ice cube off the iceberg that sank the Titanic.  Or as it is known nowadays – New Labour.

Spygun  predicts zero action from Merv and the boys (and girls). Rates to remain at 5%.

Le Crunch and Hedge-cutting

 hedgemonkey.jpg Hedge Fund Manager

The primary driver behind the financial Chernobyl that we are currently experiencing is promiscuous lending by irresponsible mortgage “securitisers”.

The term Credit Crunch has been on our lips for several months now but it has joined phrases such as ” learning curve” , ” hedge fund” and “police intelligence” : phrases which we like the sound of but have no real idea what they mean.

Most of us survived the crash of 1987 and since then, Governments all over the world have become very adept at bailing out financial institutions and corporations by means of subsidised credit, warm words and as we have seen with Northern Rock – panic bailouts. The mere whispher of “Credit Crunch” instills blind panic – especially in politicians.

This is how a Credit Crunch works. Firstly, there is a shortage of money and the banks begin to run out of hard cash. Secondly, as a result , credit dries up. Thirdly, a recession takes place and  inflation cools. If you think about it – it is bound to cool – unless other unforeseen events conspire to upset the economists’ models.

However, in a Global Economy a Credit Crunch can lose some of its crunchiness because there is always money to be found somewhere. It is unusual NOT to be able to find money and until recently, you were able to buy-in money from somewhere in the world.  

It would cost you but the money was there. Unfortunately, several credit disasters soon put paid even to that.

Even those beacons of turbo-charged capitalism, the Hedge Funds are suffering. Here’s a quote from one:

“Current market volatility and lack of market liquidity with respect to subprime lending markets have caused adverse conditions with respect to the liquidity and market-risk exposures on the company’s underlying portfolio of investments.”

English Translation:

“We are in the shit because we cannot find any cheap money to buy any more dodgy investments and so we will have to rely on emergency funding which is expensive and we will also have to sell off some assets. That means that we’re not going to have much of a profit this year.”

There is a God!

Here in the UK, as well as the USA the situation has been complicated by two opposing forces which are muddying the picture and giving both politicians and economists a head pain:

The collapse in the property market is deflationary, whereas the rises in fuel  and food costs are inflationary.

Logically, if you take a long-enough time line, exceptional scenarios such as the current one are BOUND to occur from time-to-time.

The fan is being hit from all directions.

Economists all over the world panic because they still do not realise that the whole system is self-adjusting and like 1987, will soon become a mere blip on a chart .

The first thing that will happen is that OPEC will open the oil tap to “MAX” and everyone will fell a bit happier.

In years to come, reminiscent of the Normandy veterans of WW2 ; bankers, traders  and economists will go all misty-eyed as  they sit round the patio-heater and  recount the camaraderie and individual acts of gallantry during the “troubles” of 2008-2010. By then, these hard days will be remembered as but a fleeting moment when a large cloud temporarily blotted out the sun . 

95% of the world has bought into democratic capitalism as the way forward. This current crunch will test the ideology and durability of  the world’s political and economic will. Capitalism is not a stable entity and by its very nature will bite occasionally.

We are all now all riding the tiger. Currently, the tiger is unhappy and hungry.

Best not to climb off just yet. 

CRUNCH BANKS COIN IT.

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Banks will unveil billions of pounds in profits next week, while their cash-strapped customers battle with the credit crunch.

The banking giants are raking in up to £350 every SECOND in profit- more than a MILLION   pounds an hour, according to analysts.

The eye-watering sums prove hard-up Brits are shouldering the cost of the credit crunch, as greedy banks protect their profit margins by hiking up interest.

David Kuo of money website Fool.co.uk said: “The one thing that banks are good at is making money.  After all it’s dead easy to make money when you already have lots to begin with.  With the credit crunch, banks can’t easily lend more cash, so they are charging more for what they do lend.

Loans.

“They are they are hiking the cost of mortgages, credit cards and loans to try to sort out their balance sheets.”

HSBC is expected to win the income war by revealing profits of £5.5 BILLION in the first six months of the year- or £350 every second.

And next week Royal Bank of Scotland group, which includes NatWest is expected to report profits of £3.68 BILLION, or £234 a second.

Lloyds is predicted to notch up a £1.9 BILLION surplus, which is more than £10 million a day, or £120 every second.

And HBOS – which includes the Halifax and Bank of Scotland – is expected to reveal profits of £1.78 BILLION.  That’s 9.76 million every day, or £113 every second.

 Reproduced by kind permission of SOPHY RIDGE – News of the World

Money,money, money.

Great fun was had on the various stock exchanges around the world last week. Lots of  yoyo investment activity.  Shares were up and down like a bride’s nightie.

In the US, there was good news from banks such as JP Morgan and Wells Fargo but not so good from Lehman Brothers and Merrill Lynch. Citigroup was keeping its head down.

Fat Fannie Mae and Fulsome Freddie Mac are still sitting there in the corner, quivering and thinking “Feed me”.  Freddie is thinking of raising capital by selling something like 10 billion dollars worth of new shares which will be a good scam if they can pull it off , bearing in mind that in 2008 they managed to lose their investors about three-quarters of their money.

But if they were allowed to go to the wall , property prices would disintegrate and the US housing market would grind to a shuddering halt. Nice.

There is even  more fun and games over in the States  : the US securities regulators are issuing subpoenas for Deutsche bank, Goldman Sachs and Merrill Lynch . They are looking  at suspected manipulation of Lehman Brothers and Bear Stearns shares.

The banking sector has always been institutionally incompetent and now, to add to that wonderful endorsement, they are regarded as irresponsible, cynical and crooked. Gone are the days of the honest banker who had your interests at heart. There has been a  comparatively recent proliferation of sharp-suited self-serving MBAs  and other prats who have overcomplicated a venerable institution  and turned it into a financial all-singing all-dancing circus.

Many of these people do not have a clue how to deal with the sort of crisis that they are now emeshed-in because they have only experienced the “ups”. Many will crash and burn. Sorry – Many will negatively optimise.

There appears to be no good reason why Sovereign funds or anyone else should rush to the aid of these discredited institutions unless there is a substantial change in their governance and competence.

The word on the streets is that the recovery period of the banking sector is going to take much longer than was generally believed. In fact, put two bankers in a studio, ask them about “the downturn” and you will get three opinions – all of them different.

In spite of the fact that they deal in numbers, it is remarkable how much guesswork and conjecture they rely on in their day-to-day activities.

The mechanics and decision-making behind last week’s announcement by the Bank of England to maintain the bank base rate at five percent demonstrate that institutions such as the Bank of England are not adding to the creation of an economy- they are merely myopic observers.

They are like the 1993 Grand National starter who was waving his flag at the horses when they  false-started and were a hundred yards down the course.

The bank’s monetary policy committee consists of both bankers and proper economists. It was very interesting to note that one of the economists suggested that the base rate be raised by 25  basis points and the other wanted it lowered by the same amount.

Whether bank rates  are raised  by a quarter percent or lowered by quarter percent would make absolutely no difference to the economy because the Bank of England  is lagging behind the economy.

The equation should be quite simple. Inflation is a consequence of rising energy and food prices which in turn are a  function of too-rapid economic growth. We NEEDED a slow-down in economic growth because it was  and still is unsustainable.

Interest rates cannot control economic growth. One day, central banks will realise this.

Nevertheless, through habit more than logic or science, inflation is still regarded as enemy No 1 – the Bogeyman.

The United Kingdom budget deficit in the quarter ending June 2008  was £24.4 billion. That is the biggest deficit since just after World War II. House prices are falling at the  fastest rate since the Great Depression of the 1930s and United Kingdom share prices have fallen by 20 percent in the last 12 months.

The general feeling is that things will continue to head south to the end 2008 and possibly beyond. I reckon about 10 years beyond – with of course the occasional rally fired by bouts of illogical euphoria.

The whole scenario is not helped by the fact that currently the City wide boys have not only got themselves themselves into a right old state but have also managed to get themselves into a totally negative mindset.

Traditional thinking has it that in order to solve the problem, more money needs to be thrown at it . Imagine a small businessman on the verge of bankruptcy going to his bank and saying , ” OK, I screwed up. Let me have more money and I’ll see if I can sort it all out.”

Yet, that same small businessman is in the hands of an institution which dishes out business advice whilst losing millions. Takes your breath away! Plus that institution wants more money because it did not take its own advice!

The sad fact is that the banking system is run by incompetents who  in turn are regulated by ineffectuals.

We have a financial system that was a Frankenstein. We now have a financial system which is an ailing Frankenstein.

There is only one solution and that is to dismantle the whole system and start again. Sounds extreme but all that it needs is lots of legislation or possibly the repealing of the legislation which turned Banks into  a combination of Bank, Investment House, Building Society, Insurance Company and anything else to do with cash that you can think of.

The modern “name of the game” is called Client-bank Optimisation. That means that once you have a banking client, he is your prey and you can flog him anything! If you haven’t anything to sell him, invent something! That approach is a time-bomb which WILL eventually go off.

Having said all of that, there are still many in the city who are making money. Unfortunately, they are only making money for themselves and adding nothing to the general flow of the economy- apart, of course when they buy the next Aston Martin or penthouse pad.

Over the next few years, the  dying bodies of financial institutions  will finally float to the top.

There are some who at this moment are covering their losses and holes in the balance sheet thanks to either a fine Finance Director or CEO with a strong self-preservation instinct.

Their grey bloated bellies will finally be visible. They will be twitching in their death throes but as we have seen over the past few weeks, they will still be offering their grasping  fat hands and asking for more money to be inserted by the taxpayer.

Time to stop.

True Git

darling1.jpgQuestion:  “What is the collective noun for Bankers?”

Answer:  “A  Wunch.”

Yesterday, the Chancellor was snubbed by the bankers.

Several of the biggest players in the banking system were invited to come along an talk to the Chancellor about how they were going to help the poor borrowers who are unable to repay their mortgages.

Would he manage to persuade them to lower their interest rates or maybe tell them to be gentle with borrowers in arrears and not throw them out of their homes?

When the meeting finished, the follow-up publicity from the Treasury PR machine was very muted. It was muted because effectively, the Chancellor had been told to bugger off.

The banking fat-cats are untouchable plus Alistair Darling had made a very basic negotiating error. He had already asked the Bank of England to arrange a £50 billion handout and then expected something in return. What he should have done is to have had the meeting with some sort of “ace in the hole”. For instance:

” Listen guys – you lower the rates, give the “genuine hardship” mortgage borrowers a short payment holiday and I shall arrange to bail you out and   promise to pay off your collective gambling debts.”

Instead, this former Edinburgh Solicitor, up against some of the biggest sharks in commerce gave them the help that they needed and then thought that he could appeal to their good nature. It was a no-contest.

The wunch knew that the Government could not afford another U-turn so they went into the meeting with the Chancellor knowing full well that he would not risk the threat of withdrawing BoE support. They had him by the shorts.

Mr Darling was told it will take ‘quite some time’ for the BoE rescue package to make a difference.

and  ‘For now, mortgage pricing will remain high. If anything, it will increase in the short term.’

The ‘stubbornly high’ cost of raising money in the money markets was blamed.

This was from the guys who make the money markets.

Let’s get one thing straight – LIBOR is the London Inter Bank Offered rate and is the rate at which the Banks borrow money from each other. The rate is set by the British Bankers Association. It is a rate which is controlled by the banks and could be changed at any time. Once again, they have stitched-up the Chancellor.

Alistair Darling said he hoped that lenders would ‘continue to take their responsibilities towards customers seriously’.

While Alistair is “hoping”, the  fat-cat banker is lighting up another Monte Cristo as the houseboy counts the bonus. The banker is not thinking how he can help Mr “In the Shit” Borrower. He has far more important things on his mind. Those share options are not looking as attractive as they did a few months ago. Perhaps he should wait before cashing them. After all , once this free gift from the BoE takes effect, the share price should rise quite nicely……….

Time for a mortgage change.

There was reference on the TV News yesterday to homeowners being “hit” by negative equity. What the hell does that mean? You cannot be “hit” by negative equity.

The value of a house is not real money and borrowing more money on a mortgage is  exactly like selling shares. When you borrow more money on your house, you are selling a share in your house to a money lender (or Bank, as they prefer to be called).

Negative equity should not be houseowner’s problem  – it should be the moneylender’s problem. It would mean for instance, that if a moneylender is owed £100,000 and the property that he is lending money against has dropped in value to say, £90,000 – it should be him and not the borrower who is in trouble. Sure enough, he would not lend you any more money but that is not necessarily a bad thing.

One of the reasons that moneylenders will not lend you more than say 90% of the value of the property is because they need to see some “slack” just in case the value of the property falls and there has to be a forced sale.

I am now going to suggest something so radical that it will probably result in my arrest.

Banks, Building Societies and the various Financial bottom feeders who are now writing to us all offering more loans should share  risk with the borrowers. I will explain it very simply.

If a Bank lends 90% of the value of a property – it should remain at 90%.  That would have the dual effect of discouraging them from forcing a sale because they would incur a loss in a falling market but conversely, in a rising market they would be making a  profit.

For instance, you borrow £90,000 on a £100,000 property . In other words 90%. Assume that the value of your house then falls to £50,000. Nowadays, you still owe the Bank £90,000. Under the new system, the Bank’s share of your house would only be worth £45000, so it is in both yours and the Bank’s interest to sit tight and wait for the house market to turn. 

For a rising house market, we could add a clause into the mortgage deed to take care of any profit split between you and the Bank in the event of you selling the property and making a profit.

For example, you buy a house for £100,000 and then sell it a few years later for £150,000. The Bank lent you 90% and they still own 90% which is £135000. You are now thinking that this is not fair because they have made a bigger profit that you have.

How about adding a clause to the Mortgage Deed  which pre-agrees a profit split between you and the Bank. The interest rate that they charge is adjusted accordingly.

Because of very sophisticated accounting systems, there are far too many complicated mortgage products on the market: Fixed, variable, LIBOR-linked, discounted, offset, interest-only etc. etc. The same sophisticated systems could easily administer this new type of mortgage.

It is time to simplify and take some of the pressure away from the borrower.