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.

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

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?

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.

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

Blowing in the Wind

The Government has just approved a wind farm at Middlemoor near Alnwick. (Subject to the MoD accepting that coastal radar defences are not affected).

This is a real shame. It will look horrible as people drive past on the A1 to one of England's most beautiful areas (North Northumberland); even worse it will be visible once they get there.

I don't think that's the worse problem, however. I even have a sneaky feeling that after a few years we may get used to the look of wind farms.

I think the real problem is the shocking waste of our money and the ineffectiveness of such wind farms in meeting targets for carbon reduction. The only reason the power companies are interested in wind farms is because the Government is over-subsidising them. In addition the infrastructure will have to be upgraded significantly around the country to collect and distribute what little power the wind farms produce, and because the power is unreliable we will still need substantial extra capacity.

And at the same time, while we fiddle with wind we face a real problem with our power capacity. We are decommissioning nuclear and coal power stations with little to replace them except imported gas. Events of the last few weeks show we should not rely on Russia as the prime source of our power generation.

Technology has permitted improved coal and nuclear power plants. We should be urgently investing in these to fill the gap in capacity and in the meantime use the money we are investing in current renewable energy projects:
a) to support householders in micro generation projects (there's certainly enough wind by my roof to reduce my power useage, but its not economic to instal something without help); and
b) invest in technology to seek alternative power sources. suspect in the long term the much maligned US will bring more solutions of this type.

It's frustrating to have seen so much money going into oil producing states indirectly financing terrorism, and to see so much money wasted on the "War on terror" in Iraq and Afghanistan. A proportion of those billions invested in alternative energy could have had much more effect. The same will apply with Russia and gas.

The answer, my friend, is not blowing in the wind.

08-08-08

What were you doing last Friday afternoon?

I was shopping in Newcastle (not for anything interesting: furnishings for houses for holiday rentals). There seemed to be as many people as normal. I didn't see any of them carrying portable TVs or peering into mobile phones. When I was in Currys no-one was looking at the TV screens - and in fact I don't think they were even tuned to the opening ceremony of the Olympics.

I suspect my experience in Newcastle was repeated around the country.

So can it really be right that the ceremony was watched by 4 billion people as Saturday's press suggested? Two thirds of the Earth's population? A lot of people are Chinese, which could help the numbers - but do they all have access to a TV? I seem to remember reading that most people in Beijing were not allowed to watch on public screens. And surely there are many other places -much of Africa, with almost another billion? - without easy access to TV.

So I just don't believe that glib headline that 4 billion people watched the opening ceremony. And sadly its just typical of the Olympic hype. I don't know when it all went wrong, but words like bloated, drug riddled, unnecessary come to mind. Even in China, they are having to bus in spectators.

I write like a grumpy old man because I'm horrified by the amount of money we are spending on the London Olympics - and this when our nearest neighbour, France, would have been only to happy to put on the show for us.

The Olympic site has thrown a number of businesses out of work and has closed dozens of informal sports grounds. The budget is out of control, with more and more money going on construction and less on the "legacy". The money is being taken from arts and sports clubs around the country. And for what? Well, perhaps its too soon to say, but my guess is that lots of people will avoid London while the games are on (as in Sydney and Athens) and lots of Londoners will leave the city. Leaving the half empty stadia for the IOC members in their luxury hotels and chauffered limos.

A cry for attention

I fell off a ladder.


Actually, the ladder slowly collapsed down the side of my house while I was cleaning a gutter - which meant I fell from about 20 feet onto concrete. My friends who have blogs find interesting things to do so they have things to write about. They visit air shows; they appear on Richard and Judy; they expose themselves (unwittingly) to National Express trains. Why did I have to fall off a ladder?


Actually, it was an interesting experience which has prompted me at last to re-energise my blog. It was a bit like a county council campaign: worth doing once for the experience but probably not worth doing again.

Top tips: don't clean gutters in the rain. Get a friend to hold a ladder if you climb one. Don't keep your hands on the ladder if it falls (I didn't). Hold ice to your head afterwards.


It was a strange feeling: all in slow motion. I felt the ladder give way, I felt it start to fall and thought. "Shit. This could be serious. What shall I do?" And then I hit the ground. I can still walk in a straight line, and I never could chew gum at the same time, so I guess I'm OK. But it was depressing. There's lots of things I could have done - slipped down the ladder quickly; tried to grap the drainpipe; jumped off just before the bottom. But my brain didn't think quickly enough.

I just fell, slowly, out of control.


I wonder if Gordon feels like that?

A fair weeks pay for a fair days work

Something I wrote a month ago: but still relevant



How could they? Were they so drunk with power that they just don’t care? So contemptuous of the people they represent that they calculate the outrage will soon be forgotten? Or so aware that their days in office are numbered that they have to maximise their take while they can?

Probably the last, given the numbers of Labour MPs including those on the Government payroll who voted to keep an excessive and untransparent expenses regime. They did show some constraint in terms of their pay increase but at the same time they avoided future conflicts by passing responsibility to an outside body. Thus ducking the issue and the responsibility.

The best blog on the issue is Guido, who lists those MPs who voted to continue with their current regime, and who neatly comments on the absurdity of some of the claims. I was ashamed to be in the same party as one of the conservative MPs who compared the hardship of having to vote on difficult issues with a clearly overpaid medic who only occasionally has to deal with life or death issues.

So I won’t repeat that. They self-parody sufficiently. But a couple of observations:
- As I noted before, increasingly MPs are ducking important decisions by passing them to outside bodies. So what purpose do MPs serve? And why do we then need so many of them? Would we not be better served with fewer MPs and more money going to Citizens Advice Bureaux (s?) to follow up the issues MPs assistants currently do?
- I don’t believe all politicians are bad. I even believe most initially go into it to try to serve rather than to make money out of their second homes. But it’s clear that power corrupts and that they slip into a framework where they live different lives from ordinary people and think they do not have to live by normal standards. (Evidence? Only one recently elected Tory MPs voted to keep the old system. Otherwise only those first elected in the last century did.) So, we need term limits. Three terms? Two? Perhaps with a one term extension for those in ministerial or shadow ministerial roles?
- MPs should have to vote on their pay (and that of Ministers). They should have that responsibility. But to provide some degree of approval by electors, they should vote at the end of each Parliament, fixing it for the next term. That way people know what they are voting for so there is some degree of check and balance. There is always a turnover of MPs so there is some degree of independence in the vote. And because the amount would be unchanged for the Parliament there would be a lot of incentive to keep inflation down.

Not my fault, Guv

Depressingly the Government has won the vote on its new planning proposals. The most important matter for me is allowing an unelected commission to decide major planning decisions, rather than a politician. Politicians have many flaws. But they are at least elected: they ultimately have to face voters.

It’s quite understandable that it should want to increase the speed of decisions for major infrastructure projects. Such projects cause costs which are easily identifiable at a local level or to single interest groups, and give benefits which can be longer term and spread across a large number of people. But ultimately, balancing conflicting issues is a matter of judgement. It’s not a matter of expertise which can be delegated: it’s political.

Passing difficult decisions to an independent body, politicians evade responsibility for them. Yes, it means short term electoral pressures don’t get in the way of a good long term decision. But who decides what is “good” and “long term”? That surely is why we have politicians, almost the only reason to have them rather than just efficient administrators: people who make judgement calls about tricky decisions. I find it ironic that MPs are demanding more cash at the same time as they do less.

The poster child for this approach has been delegating interest rate decisions to the Bank of England. That has largely worked (the lack of clarity about regulation highlighted by Northern Rock was typical of a Government initiative not being thought through in detail: it’s not related to the effectiveness of the Bank’s monetary policy). But setting interest rates really is a relatively short term econometric technical issue. It doesn’t set a good example for other matters.

That hospital closure? No, it’s the Primary Trust. That decision not to dual parts of the A1? No, that’s the regional highways agency. That new airport runway? Nothing to do with us.

But it is.

I wrote the above a few weeks ago. Before the SATS problems. Which have nothing to do with the minister responsible for education (who after all is a good friend of Gordon, and a potential party leader).

So a whole year of assessment for kids, the conclusion of a year’s efforts, turns out to be little better than random. And late. And the minister can duck responsibility because an independent (although Government established and appointed) agency hired a third party firm (with doubtful provenance) to do the work. With each of them taking costs and profits from taxpayers, with the amounts counting towards invstment in public services yet going nowhere near front line services.

The problem at the heart of Labour is delivery not presentation. They don’t know how to do anything. And perhaps even worse, they don’t care: they still care more about presentation.