Monthly Archives: March 2011

30th March 2011 – An inevitable Irish default…

The thought of Western governments defaulting on debt has been anathema to markets for a very long time.

Once a debtor can no longer service their debts then default becomes inevitable. This has always been true for individuals and companies, so why can’t the same be true for developed countries?

Robert Peston’s blog yesterday made extremely sobering reading. In “saving” (and nationalising) their banks, the Irish state has basically bankrupted itself.

I’ve maintained for a long time that solving a debt-created crisis with more debt, made little to no logical sense. It appears my prediction is about to become a reality.

Based on the figures Peston presents there can surely only be one outcome for the Irish; default.

Of course what happens after that is a vastly complicated issue. As a founding member of the Euro and the erstwhile Celtic Tiger the implications of an Irish default are horrendous.

To start with an Irish default could well be the trigger for a Greek and Portuguese default (and possibly a Spanish one). This could seriously threaten the existence of the Euro. If the Euro then fails then what would this mean for the rest of the great European Project? Continue reading

23rd March 2011 – Britain has a plan!

I like George Osborne.

There I’ve said it! I don’t care that he has a plum in his voice or that he can appear condescending. I don’t care where he goes on holiday or how much his family are worth. I don’t expect ever to be friends with the man or to go to the local pub and share a pint with him.

However I care greatly that he does a good job as Chancellor.

So far I think we all have to give him credit. While the Labour party continues to behave like a bunch of spoilt, spurned children the Coalition have continued chomping through the shit sandwich they were left behind with. They are even making a credible job of serving up portions of it to the rest of us!

There can be no doubt the Tory election strategy for the new General Election has been in full swing since last May. In short they are planning to get as much pain out of the way as quickly as they can, so as to benefit from an upturn from 2013 onwards. Along the way they will hope no doubt to include some sweeteners, but they cannot be accused of ducking any issues.

Yesterday’s Budget was just the latest step in this campaign. Although there were no “miracle rabbits” I loved the confidence of Osborne’s delivery declaring that “Britain has a plan”.

There are many factors beyond the Government’s control but it is encouraging to hear their clarity of purpose in reforming the British economy. If the Tories continue to make the progress they are I fully expect them to win an overall majority at the next election.

In fact this view is becoming a “trade” of mine. I am slowly building a position at odds of >2/1 that the Tories will win an overall majority. This might not be conventional, but I believe it a good plan on the basis of conditions.

22nd March – Expecting a British Rate hike

As I mentioned before I am not trading at the moment, while I sort my life out. However I have been keeping a close eye in recent months on certain price moves.

One, which particularly caught my attention, has been the rise of Sterling since last summer. I’ve written before, but I have long felt that currency market movements are a decent proxy for how well a Government is performing domestically. Given the scale of the mess that the Coalition inherited from the profligate wastrels that made up our last Government, Cameron and Co have very little room for error in their handling of the economy.

During their first 10 months in charge Sterling has been brought back from the edge of the precipice it was so precariously hanging over. Although the Pound has not recovered to anywhere near its previous highs versus any currency, it has at least managed to stay ahead of the Turkish Lira and Zimbabwean Dollar – OK so I am being a little unfair and Sterling’s performance has been modestly respectable.

Today, however, has complicated the situation greatly.   

News out this afternoon has shown that inflation has increased up to 4.4% Continue reading

18th March – Business as usual

Had I been writing a year or so ago I imagine I would be very angry. Now I feel a bit sad, but surprisingly optimistic.

Bankers’ behaviour and bonuses have been perhaps the most depressing features of the Credit Crisis. Investment banks are meant to attract the brightest and best young people. To an extent there is some truth to this in that most of the high earners are some of the best educated and most intelligent people on the planet. They have every advantage in life and, more importantly, the opportunity and resources to make a better world.

This is what makes me most sad. These people should know better. They should have an implicit understanding of the social importance of their roles and show leadership. They should put the good of others before their own greed. But they don’t.

Rather than serve the common good, they exclusively serve themselves.

News out today is yet more confirmation of this view.

A golden chance was missed in 2008 when the banks were on their knees. Politicians and policy makers could have enforced root and branch reform. They baulked at this and allowed themselves to be persuaded that the financial system had to be saved at any cost. What followed was trillions in stimulus money.

I have a certain grudging admiration at how the financial sector managed to play such an incredibly weak hand, but this is tempered by the outcome. The bonuses paid to bankers in the last two years have been obscene.

I have written and will continue to write that this will only end badly. Corruption (financial or moral) cannot endure. When the inevitable reckoning comes, my only hope is that we as a society will develop a new system that aspires for more for our young people than the pursuit of self gain.

16th March – The abnormality of normality

Unprecedented events in the financial world have now become so commonplace I find myself increasingly inured to the unexpected.

Starting with the Russian default and Asian financial crises in 1997, we then suffered the Dotcom Crash, the housing bubble, the commodities boom, the Credit Crisis and the War on Terror.

The financial system is now built on shocks. In fact I increasingly wonder whether or not it is advisable simply to create one’s own investment plan around outlier events. In short save some money, ride the portion of a wave, exit, wait for a collapse and then pile back in. OK so this approach may lack a certain degree of finesse at the moment, but I have the feeling this could be the beginning of a good idea.

Bubbles seem to spring up everywhere with alarmingly regularity. As they are regular so are they also consistent. Eventually they pop. The money floods out of them into another asset class or region and the process begins again. Meanwhile the survivors from the popped bubble are oversold to such an extent that they become attractive long term buys.

I keep reading about the importance of the BRIC (Brazil, Russia, India, China) countries to the World’s recovery. Without having examined them too closely, my immediate impression is that they are surely the obvious candidates for the next bubble trade.

However I think it would also be foolish to ignore the British and American stock markets. The Bull Run in the last couple of years has been entirely driven by stimulus money. At some point this will have to end. Once this support is removed from the market the notion of “recovery” will be tested to the limit. While we may not see a repeat of the carnage of 2008/09 things could still get pretty ugly. The smart money will seek to buy at this point.

12th March 2011 – Japanese earthquake

I decided last week that I wasn’t going to write about the oil price’s reaction to events in the Middle East. I feel increasingly less easy writing about such events in the context of markets. The thought of human grief leading to buying opportunities is abhorrent to me. I imagine if I ever remove myself from this arena completely it will be because of this.

But while I continue to write I cannot ignore the impact momentous events have. Last night’s earthquake in Japan is, sadly, one such occasion.

It is impossible yet to examine the full extent of the damage but I expect we will see a huge sell off in Japanese stocks. I believe this will be an overreaction as the damage in Japan looks to be contained in the North-East of the country. From what I can see this appears to be a relatively sparsely populated area of the country.

Had the earthquake occurred a couple of hundred miles to the south and Tokyo had borne the brunt of it, then situation could have been very different. Continue reading

10th March 2011 – Was it worth saving the banks?

Throughout the last three or four years there have been two consistent themes. The first has been the dogged determination of policy makers to prop up the financial system, by whatever fiscal means possible. The second has been the rapid resumption of the bonus culture, which had previously infested the banking sector. While bankers have been intent to continue gorging themselves on the stimulus money, which saved them, politicians, regulators and central bankers have been united in their woefully inadequate and meek responses to this predatory behaviour.   

The bonus culture still matters, because it goes straight to the heart of the issue of the role of finance in the modern World. Greed is not good and a system based on it ultimately has to fail. Time and again financial crises in the last Century have been caused by rampant self-interest and profligate behaviour.

Yet still we are told that banks are too important to our daily lives, they are too big to fail. But is this true? Continue reading

7th March 2011 — Back again and what’s changed?

Well a six week break quickly turned into a 14 month absence! Now I find myself back here again. The emphasis of my blog is going to change from now on. I am going to move towards an analysis of general conditions to help influence my future decisions.

In a year of deep personal change I’ve kept half an eye on World and economic events. What’s struck me most is how little progress has been achieved. While trillions of dollars, pounds, euros and Yen have been created and pumped into the financial system, the Credit Crisis still rumbles on. Society is faced with the same troubling questions it was a year or so ago.

In August 2009 I asked three questions

  1. What will happen when the fiscal stimulus comes to an end?
  2. What will happen when interest rates go up?
  3. What will happen as unemployment continues to increase?

Eighteen months later and there are no satisfactory answers. Continue reading