Monday 22 September 2008

A Random Walk Off Wall St

I remember on “Black Monday” in October 1987 (when share prices fell by about 25% in a single day - puts the recent falls to shame) I was in Dusseldorf trying to agree a deal. As I walked around I saw screens in bank windows showing the price falls and feeling very out of touch; we had good meetings but the changed world made the deal irrelevant.

I felt just the same on Wednesday, the day after AIG was saved and Lloyds agreed to buy HBOS. I was in Newcastle catching odd glimpses into what was happening and feeling that what I was doing was irrelevant.

The positive spin from 1987 is that of course things recovered, new opportunities arose: in due course they will here as well.

The title comes from the book A Random Walk Down Wall St. It suggests share prices move like a random walk (aka a drunkards walk). In other words (and very simplistically), it is not possible to beat the market except by chance and that if you must invest you should get a representative mix of shares and just hold on. Fortunately for the financial industry, most private investors don’t believe this and waste their money trying to do better.

A quote from another book, The Go-Go Years , about the collapse of confidence in Wall St in the late 1960s shows little has changed and summarises what’s gone wrong in the past few years:

" America - with its deeply imprinted business ethic - no inherent stabilizer, moral or practical, is sufficiently strong .. to support the turning away of new business when competitors are taking it on. As a people, we would rather face chaos making potsfull of short term money than maintain long term order and sanity by profiting less. A former high SEC official, talking to me in 1969.., defended the SEC's relative passivity by describing its rightful function as that of being "an arbiter between powerful industry groups pulling in different directions".

Sounds familiar.

Saturday 20 September 2008

Finite Confundus, JK

Its shattering when someone you trust implicitly lets you down, does something so bad that you feel cast adrift.

I have been a Harry Potter fan for over 10 years since East Anglain Troy first recommended them. As well as enjoying the books I have admired the way JK Rowling has handled herself with the contrasting pressures of being a hard pressed single Mum to a very successful financial and personal life.

So the news today that she has given the Labour Party £1m, specifically endorsing Gordon Brown and criticising the Conservative's plans to improve the UK's broken social fabric, is hard to bear.

To be fair, rich sheltered celebrities are usually a very bad indicator of good policies. It's also probably good for the Conservatives that Labour keep Gordon Brown as Prime Minister, so any support for him is helpful. But it's such a shame that the Conservatives' long term plans to rebuild a stable society are traduced by JK as not supporting single parents, who of course do deserve serious support. (And who are not actually being helped by Labour).

Hence the title, drawn from a list of spells: it must be that Brown has put a confundus spell on her: Finite Confundus!

A parody on Today today suggested Brown as Voldemort - that is perhaps taking it too far. Pettigrew, maybe.

Thursday 18 September 2008

Caught Short

Apologies for another long blog on financial markets.

Its become fashionable to blame "short sellers" for share price falls. They have become a new evil.

I'm not sure why: if I want to buy a share I need someone to sell it. Short sellers are therefore very useful in making markets work. If there are as many buyers as sellers, then they can't force prices down.

It's as sensible to blame the rest of us for not buying shares as it is to blame those who sell.

(This is a bit simplistic: a short seller makes money from selling shares he doesn't have and buying them back later when the price is lower. Three things are needed for this tactic to make money:
- as above, there aren't enough buyers
- people who already own the shares (in most cases the people who manage our pensions) lend them to the short sellers so they can deliver them to get paid. Yes, the people who own shares facilitate people wanting prices to go down)
- in the long term, the company has to be overvalued: in fact, both the short seller and the people who didn't buy have made the right decision. And surely should not be criticised. There is one exception: when false rumours are spread. I am sure this happens occasionally. I'm also sure the impact is exaggerated because most people know when something is false, and the amounts of short sales just aren't enough to make a big difference. But when it does happen its illegal although almost impossible to prove.

So the conclusion above mostly remains: sharp price falls are the result of people not buying, not short sellers. And most analytical work has shown that if short selling is prevented it makes share prices more not less volatile.)

Post script: Since writing the above, the regulator (the FSA) has just announced a ban on new short selling; I haven't seen the detail but this has me more worried about markets than anything I've seen so far. It suggests an attempt at market manipulation, probably politically driven, which will make the eventual resolution of problems worse and longer than it need have been.

On a related subject, Antoine Kaletsky in the Times today suggests that the current action by the regulators may not be enough and that banks may have to be nationalised. This did of course happen in the Scandanavian countries in the 1990s. It mostly worked well: shareholders and managers lost out, depositiors, borrowers and tax payers didn't, and it allowed the banks to be restructured, the bad stuff to be gradually worked out and the normal business to be sold back into the private sector. If this happens, don't panic. It would be part of the solution.

Tuesday 16 September 2008

City Life

I stopped working in a City dealing room in mid-2002; until this week I hadn't really missed it.

But the gradual yet persistent bursting of over-priced asset bubbles is fascinating to watch, and would probably be even more fascinating from the inside. A doubling and halving of the price of a major company (HBOS) more than once in an hour is a rare event. Of course it was silly, it bore no relation to underlying values, but it reflected extreme uncertainity. The old phrase no gain without pain is true in this regard: things can only get better once asset prices are low enough for people to have confidence to regroup. I suspect there is a long way to go but at least the process is underway.

I'm pleased one bank, Lehman, has been allowed to go under:
- Lax Government regulation and central bank policy was a major cause of the problems. But poor risk and business management by the major banks was just as important. So it’s good to see shareholders and to a lesser extent management lose;
- It shows Governments will not always bail out failing institutions, which will encourage more careful behaviour;
- The financial industry needs to understand credit risk: it needs to really understand what happens as all the interconnected deals unwind. A major trading bank has not failed for decades and no-one knows how it will all be dealt with. This failure let us see how things unwind, it will identify problems and let them be sorted them out. This transparency will be help build confidence.

The US has also decided to save some institutions – but in those cases it has also ensured top management changes and ensured a major loss for shareholders. And in addition, in all cases it has acted quickly; their equivalent of the Chancellor has taken a leading role and its Central Bank has been quick to cut interest rates (reflecting the risk of recession) and to add liquidity to ease day to day trading between banks.

I think this contrasts with the UK. The Bank of England was slow to put in place a scheme to help add liquidity to help banks trade with each other – it was months after the European Central Bank and the Fed in the US. And their scheme expires at the end of September. Yet at the start of this week – when Lehman had failed, when the biggest insurance company in the world was in deep trouble - they had not announced a replacement or a renewal of the scheme. No wonder questions about HBOS’s liquidity were raised. The Bank has now extended the scheme till January – Stable doors being shut?

And then interest rates in the UK have not been cut because of (valid) concerns over inflation. But the Bank of England has been constrained by two things:
- the massive increase in UK Government borrowing over the last 10 years; and
- the way the Bank of England’s monetary policy committee was established, with the responsibility to look at inflation only. In the US the Fed has a dual responsibility, to manage inflation while maintaining a stable economy. The UK approach worked while things were benign and is in danger of failing now.

And another time when the authorities were slow to act: Northern Rock. Certainly, Northern Rock’s disregard for risk management as it expanded wildly was its own fault but once the problems were exposed the Government was slow to act – it was always behind the curve and didn’t finally nationalise it for almost 6 months. A little slower than the US in the same position. One reason was the complex system of tripartite responsibilities for regulation set up by Gordon Brown at the start of his Chancellorship. Again, it worked when it didn’t have to, but fell short when it was needed.

I agree the problems were not initiated by this Government. But the UK’s position has been made worse because the Government coasted on a global asset price boom while borrowing excessively and establishing inadequate structures, with the resulting slow responses once problems emerged. It’s worrying our direction is in the hands of a Government that is so internally focussed and has laid such a poor base for recovery. I am sure the Conservatives are right to let Labour implode – but I also hope they are giving serious thought to what they would do if they do form a Government in terms of:

- Financial regulatory structure;
- Spending control; and perhaps most importantly
- Tax reform

Saturday 13 September 2008

A botanical weekend

It started with a visit to an exhibition of lovely paintings set in a lovely garden. The only downside was the return of the rain (it's a weekend - what do you expect: as I noted a couple of months ago, weather really is worse at weekends) but that simply drove everyone into the old milking shed (?) where the paintings were all hanging. It was a good mixture of art and drink. You can have too much of either, but the mixture helps.

I say it started with the exhibition - it really started after a croquet training session. People were preparing Bamburgh Pavilion for the annual show, and suggested I enter. I got a list of the prizes to see if I could produce anything to enter, and then spent Saturday morning after the party (sorry exhibition) seeing if I had anything in the garden to enter. I had some potatoes - could I get 3 white round ones? or coloured kidney ones? And some tomatoes (4 required) and some peas (4 pods, although they weren't in good shape). And lastly a single rose: fortunately there was a prize for a single rose as I only had one undamaged one left in the garden.

Some of the other prizes obviously required a lot more preparation: Lady's spray and Gent's buttonhole; The Best Pet with Waggiest Tale; Dahlias for effect. I left my exhibits; they didn't look too bad; but I don't think I could watch the judges. So I went to play golf. And got a text at the end: my Peas had won!!!
I would have felt prouder had they not been the only entrant in that category. Instead I felt anger that my Tomatoes - which I thought were very cute - hadn't been up to scratch. But as the notice of the show said: THE JUDGES DECISION IS FINAL. I suspect its been questioned over the years.

Anyway, I left feeling committed to entering again next year. And reflecting on all the unseen work people do to keep alive this sort of social fabric.
At a tangent, it made me think about Post Office closures. They arise because the Government has failed to properly cost the hidden benefit the network brings to society, to many disadvantaged and older people in both rural and urban areas. As a result, the network is smaller, the social fabric tears a bit and on-going costs of care and support will have to be higher.
Essex County Council (Conservative controlled, by the way) has just announced it is reopening a Post Office; this sort of initiative is valuable in keeping the network alive. Northumberland's Council is silent on the issue (apart from token protests about how the Post Office carried out its closure programme). Bitter, moi?

Tuesday 9 September 2008

Why don't I like Sarah Palin?

I ought to. She is direct. She is transparent. She is hot.

But I don't. She strikes me as false in the same way Barack Obama doesn't.

I don't think its because I don't like the powerful woman thing. It doesn't usually scare me if women are powerful (I had a poster of Maragret Thatcher with a cane on my door at university, although admittedly I think it was a mock-up).

Some of it is her children's names. But I think most of all it is her certainty - an unimaginative certainty, which makes me think she is qualified to shoot moose and perhaps even to clean up Alaskan corruption. but not to handle the problems that life would throw at her as a VP. Life isn't black and white. Principles take you a long way. But the ability to understand and empathise with all of the issues is needed to get all of the way.

I'd also worry that her certainty is a short step away from an arrogant assumption of rightness, with the end then justifying any means. We may see some of that come out of the inevitable digging reporters will now be doing.

(To be fair, of course, she probably wouldn't like me).

Campaign revisited

During the County Council campaign I questioned the wisdom of having one unitary authority for Northumberland, and doubted whether the budget was sustainable.

Four months into the new Council, it is clear that there is a real problem with both the structure (they are going to have one oversight area covering Berwick, Alnwick and Morpeth: that's just too big to provide a proper service to people) and the budget (reports suggest a £55m shortfall over 4 years). The local government minister has tried to pretend that the public's rejection of Labour in Northumberland was nothing to do with the forced change, and one of the Labour councillors has even suggested that the decision is reversed.

Sadly, the reality is its too late and the focus has to be on properly managing the integration and trying to manage the budget without damaging services too much. And yet despite the problems there has been no structured feedback to Council taxpayers about what's going on. I always suspected that the main focus of Councillors would be their own internal issues. And that seems to be coming true.

Two other comments on issues from the campaign:

- the payoff to the Council's ex-Chief Executive (who is the one largely responsible for pushing the unitary authority) is still being kept secret. He must have had something on the relevant Councillors who took the decision to award him such figures, especially as he walked into a new job almost immediately.

- the Seahouses car park. It's now finished; it took until the middle of the holiday season, as predicted. It is now harder to use, has fewer disabled spaces and no residents spaces. I don't know what it cost: I do know that whatever it was, it was unecessary and unproductive. A model for much local spending?

Boy's Toys

Gadgets fascinate me - the trouble is, I also think they should serve a purpose and should be very easy to use*. If it needs an instruction book its not well designed.

So I've been interested for some time in the concept of e-books. I love books, I've got far too many of them. But they are a real nuisance when travelling. It would be good to be able to take loads of books without their weight and size.

So far, nothing has come close. An American colleague has a Kindle - a pad with a screen and mini typewriter. The weight is fine, the typeface on the screen is good. But its a bit too clever for its own good (ie not easy to use) and the keyboard is too obvious. The idea is you can browse the web and download books on the move: good in theory, but it gets in the way of reading.

Sony's new e book is a possibility. Waterstones are selling it - I went to have a look. It feels just right, and even has a cover like a real book. But I visited three branches, and in each one the model on display wasn't working. (A glitch in the battery, apparently).

That says the technology isn't reliable yet.

I thought there were two other flaws:

- you can buy a download for a price similar to a discounted book. But you don't get the book. You can't have a book and a download - even though you've "bought" the right to access it. If you buy a CD you can store it electronically - but not (yet) a book.

- only some books are available. And there isn't a common standard yet - different publishers/bookshops/manufacturers have different standards. My book of the year ( Wife in the North , of course) isn't available.

So although I was ready I don't think the gadget is - yet.

Ithink I'll look at the iphone instead.

* I used to annoy computer literate friends, and probably still do, with the comparison between a PC and a fridge. We just wouldn't accept the unreliable idiosyncracies of a PC from a fridge. And that to me suggests the PC is just not that important in our lives. Useful, yes, but not integral. When it is it will work properly.

Embrace a Bear

The problem of how to deal with Russia's reassertion of might is a bit beyond this blog. But it does remind me of the problem of knife crime and the famous phrase David Cameron didn't use, "Hug a Hoodie". (The phrase was invented a Labour spin doctor to try to discredit Cameron's ideas)

Both groups - the Russian political elite and the disenfranchised youth - have much in common. They want respect from others, but don't know how to earn it. They don't perhaps know they have to earn it. They believe instead that power is enough, and in the short term it often is. And the short term is probably time enough.

The other thing they have in common is that it is very hard for broadly libertarian Western Governments to deal with the problem they create. First, do we have the will to match force with force? Second, do we recognise the long term nature of the cause of the problem and therefore the long term nature of the solution?

Regarding Russia, the US's flawed invasion of Iraq has not only taken their eye off the ball in Pakistan/Afghanistan but has also lost them the moral high ground to be the world's policeman. As well as tiring their electorate of foreign adventures. Much of Europe - including the UK - has
become dependent on Russian oil and gas while at the same time trying to develop alternatives in Central Asia which in turn are dependent on Russia for protection or transit rights. And at the same time we preach the virtues of the West to Russia's old allies. In the long term, the use of alternative energy (by which I mean Nuclear and clean coal) and Russia's need for capital from the West will help. In the short term we have to recognise our limitations but also make it clear that Russia does not deserve respect and show we mean it - no G8, no WTO, no easy visas for the Russian elite. There's little chance (sadly) of Europe acting as one - but at the moment at least London is a place they want to visit and a source of capital, and we should do what we can.

Regarding the "underclass" of youth the last few decades (its not all New Labour's fault, although they have encouraged the trends) we have given up control of the streets, removed authority from parent and teacher and preached "rights" not "responsibilities". In the long term, IDS's work on Social Justice sets out some policy ideas and in the short term we need to increase the visibility of policing and improve the environment around people. (I have been in London for a couple of days and found the casual squalor and untidyness depressing).

Hug a Hoodie/Embrace a Bear is shorthand for trying to understand the underlying causes of problems - which is essential; but it's also important to try to set boundaries for acceptable behaviour. In both cases.

Thursday 4 September 2008

Don't just do something, stand there

Did Ronald Reagan ever actually say this? It fitted his philosophy that Governments often mess things up more than they improve them. And it's a phrase that really came to mind when I was reading last week about the slowly increasing number of companies seeking to base their HQ outside the UK because of the tax system - not so much the tax rates but more the lack of certainty about tax law and the increasing attempts to change the rules of the game.

A problem highlighted by next months publication of the UK's tax law: Tolley's 2008 tax handbook, which lists all the tax law, is more than twice the size of the 1997 guide. This constant change and expansion of complexity is a serious cost for business; the trouble is that it has a creeping effect and is slow to reverse. Companies take a long time to make a decision about location, and once made it is hard to get them back. And when they go our tax base reduces leaving the rest of us to make up the difference.

I remember when the Euro was being introduced Euro supporters suggested London as a financial centre (and as a massive contributor to the UK's wealth) would be damaged unless the UK joined the Euro. This always struck me as rubbish: London had many advantages of scale and expertise but most importantly it had a simple and understood governance structure - for regulation and tax. And for that reason London thrived. I always thought the only real threats would be things like Heathrow and travel chaos. I never thought the Government would mess up the governance process. But it is - especially by changing and complicating the tax system.

I suspect there are two reasons:
- the Treasury is desparate for cash and is trying to invent new ways of extracting it from people and business, and
- there are too many advisers and civil servants dreaming up new ways of doing things.

The moral: two, actually:

1. It is at least as important that a new Government simplifies the tax system to reuce its cost and to re-create a sense of fairness with tax payers as it is to reduce rates, and

2. Civil servants should very rarely try to do things. Much better that they just stand there.

Hospital Pass

The Scottish Government has decided to stop charges for parking at hospitals (except where centrally imposed PFI contracts make it impractical). In England, the Health Minister says this would not be a good use of resources.

I wonder.

I remember visiting my mother in hospital a couple of times when she was taken in as an emergency and having to find the change for parking, while not being sure just how long I would have to be there. I remember the charges never being round sum amounts, presumably to encourage over-payment or the opportunity to fine over-runners. I remember having to leave her in intensive care while I rushed down to feed the meter. And I remember thinking that it was not right, that the hospital was taking advantage of me and all the other visitors. Rather churlishly I also remember not leaving a donation or a gift because I thought it had screwed enough out of me.

I can see that an inner-city hospital may need some form of check to stop abuse of its parking spaces. But the majority of hospitals are there to serve a need not to make money out of incidentals. Patients need visitors as well as staff. Neither should be punished for being there.

My suspicion is that hospital managers see it as an easy and controllable form of revenue, they probably do not pay any charges themselves and they have not properly compared the costs of collecting the revenue and the revenue they could get from asking for donations with the parking revenue actually collected.

Not that this should be an economic decision. It should be about providing a service.

(Truth is) The Daughter of Time

Radio 4 is causing me to have real concerns about the Conservative Party. I learned at the weekend that it agrees with the other parties in wanting major cities to have mayors: I may write about that properly another day, but appointing egoists to run big cities without any serious control isn’t an appetising thought. (Example, London?)

But the real worry came when George Osborne appeared on Great Lives nominating Henry VII. And this was prefaced by Malcolm Paris suggesting he also would have picked him had he been guest not presenter.

Henry VII??? The Tudor usurper of England’s great lost King, Richard III???

The first great tax raiser, a power hungry centraliser who ruthlessly put down dissent, is not an encouraging example for a potential Chancellor.

Truth is the Daughter of Time - an explanation