Investment Reads

Untimely ripped

2012-02-06T23:29:04Z

A friend had a hysterectomy last week, for sound medical reasons. As I pointed out to her, because she missed the news while in hospital, she wasn't the only one to have something removed last week, although hers was by necessity, whereas Mr Goodwin's humiliation was totally unnecessary. According to some reports the Queen voiced misgivings before signing the order annulling Mr Goodwin's knighthood, not least because he was a trustee of her Silver Jubilee Trust, and had previously been active in The Prince's Trust, a well trodden route to curry favour with the biggest family in Berkshire.

Don't misunderstand me. I am no fan of Goodwin, who all accounts appears to be a self-seeking careerist who built up a lousy company (RBS) with a dreadful culture in his own image, which by all accounts had a management structure full of self seeking careerists with no great ability and even less consideration for their colleagues, customers or the rest of society. His Glaswegian chippiness meant that he though his team was excluded from the Premiership because he was based north of the border, but the reality was that, like the Old Firm, his team didn't have the talent to get through the first round of the Europa League.

But whilst I might not think much of him as a banker, I have to say that I think the way he has been treated over hi knighthood is a bit shabby. We might like to think that knighthoods are handed out to worthy people of standing in public life, and while that may be true of many recipients, there are just as many time serving civil servants, loyal (boring) backbench MPs, party donors and game show hosts who wangle a gong and a trip to the Palace, so what did Mr Goodwin do to deserve his medal and then deserve to lose it.

The first answer was that he was the managing director of one of the largest banks in the country, although that isn't a wholly satisfactory justification. Sir James Crosby, the equally inept MD of HBOS may have got one, but John Varley, the quietly spoken MD of Barclays managed to avoid getting one, although if 90% of your profits come from either avoiding tax on your banks profits or assisting others to do the same, the outcome is never going to be hard to guess. But Goodwin and Crosby has the advantage of running nominally Scottish banks at a time when the economy was supposedly run by Scotsmen, so Goodwins gong was a racing certainty.

Indeed Goodwin's case was improved when RBS made a hostile bid for NatWest 1999, turning RBS from a regional also ran into one of the biggest balance sheets in the known world. Of course making a hostile bid isn't always very wise, particularly when bidding for a bank. Banks aren't that much differentiated so the profit margins tend to be very slight compared to the asset or capital base, and in a hostile bid, there is a good chance that you might pick a wrong'un. Fortunately for Goodwin, NatWest was in a fairly sound condition, so tha by the time the marauding Scots had shoved their sgian-dubhs into the careers of the NatWest middle management, there was enough free cash to make the takeover a success and allow Mr Goodwin to book his trip to the palace.

Part of that success would have been attributable to the conservative nature of the previous NatWest management, and part would have been down to the proper supervision of NatWest.

Now the FSA may have changed its name in 1997, but it didn't take on its current regulatory powers until 2001, whereas the NatWest takeover took place while banks were still supervised by the Bank of England. One of the options not really open to the BoE was to say to RBS "hang on a minute, before you blow a wad of cash on NatWest, do you really know what you are doing?". Why? Because the BoE supervised NatWest, and as it turned out, seemed to have done a good job.

Now fast forward a few years and the acquisitive Goodwin tries to pull the same stunt on ABN, albeit that this time Goodwin makes a joint bid with other banks, aiming to split it up. As we all know by now, it all went horribly wrong, but we can still ask some questions about who was responsible. Sure enough Sir Fred deserves his share of the blame, but he wasn't able to commit RBS without the approval of his board. Where were they? And it should also require some sort of nod from the new regulator, the FSA. Where was John Tiner? And where was the question about "Do you really know what you are doing?" and the follow up "And who do you think is going to pick up the tab when your blind gamble goes belly up?", because this time the regulator didn't have a clue about what might be lurking under the ABN balance sheet - as it turned out a whole lot of nasties.

So Goodwin has some sympathy from me, not least because he wasn't the only one to blame, but mostly because he has obviously been used and abused by the politicians and public sector staff who are trying hard to divert attention away from their own shortcomings.

When a coin is worth a mint

2012-02-06T16:58:52Z

They say look after the pennies and the pounds will follow. That can certainly be true if you have the right coins. Those lucky enough to have a collection of rarities could be sitting on a fortune.

Image via BrentDPayne

Time is a strange thing. If they last long enough, objects once ordinary become something special almost as if they are being rewarded for not being destroyed. Rarities are treasured possessions and as such are the sort of things sought by collectors.

Of course rare doesn’t always mean old. There are coins that are in circulation for short periods of time or indeed those that were minted with some errors that become particularly precious.

Collecting is not always about the pursuit of financial gain but can also be an enjoyable hobby. Many individuals spend their time amassing a unique collection based on nothing but a love of the aesthetics of the coins themselves. There are of course many more specific ways to collect and challenges to set yourself as collectors.

Some collectors may choose to collect coins based on a particular year and wile away their time seeking out all denominations from their chosen era.

Others might take a more geographical approach, either trying to get a coin for every country on the planet or just focussing on one country examples of the coinage therein.

Many might prefer a more thematic approach, collecting coins that have a particular bird or animal represented on them.

While these hobby collectors make up the majority of coin collectors there are some who are a lot more serious and a collect the rarest of the rare. These coins can be worth a significant sum.

In this world, a penny can be worth a million dollars. That was the price gained by a one cent piece minted in 1793 as it went up for auction. This was the first year that the US produced its own coinage and this particular example featured no wear on its lettering depiction of the Liberty.

That coin is a rare example indeed but that doesn’t mean there aren’t those closer to home that are also worth a decent amount.

A UK 2p coin from 1983 has proved to be worth significantly more due to the incorrect wording on a batch minted in that year. When the 2p was introduced in 1971 they featured the words “new pence” but this practice ceased in 1982 when it was replaced with “two pence”.. These error coins are rare but sometimes slip through the net. This particular example can be worth up to £700.

Another example is the undated 20p coin which was regularly fetching £50 when discovered in 2009 but these are now even rarer and could fetch significantly more depending on how much somebody wants it.

Perhaps the rarest and most sought after coin is the 1933 Double Eagle gold coin which has sold at auction for a staggering $7.59 million. Almost half a million of these coins were minted but none went into circulation due to the discontinuance of the gold standard. All were ordered to be handed in to the government and so there should be none in circulation and most that are found are seized by the authorities. That example remains the only one in circulation.

It these fascinating stories and histories of coins that make the subject so fascinating to those who partake.

Do you collect coins? What’s your most valuable example? Tell us about it in the comments section below.

On QE

2012-02-06T15:06:45Z

The Bank of England is likely to announce more quantitative easing on Thursday. Six quick points:

1. Richard Murphy is basically right to say that this means that government debt is lower than official figures show, if we consider the government and Bank of England as a single entity. What’s happening is that government borrowing is being financed not by debt sales to the private sector but by an increase in base money. This is entirely consistent with the government budget constraint (pdf). Warren Buffett was quite correct to say that you cannot have a debt crisis if the authorities can print their own money.

2. Complaints that “printing money” is inflationary miss the point. It is meant to be so. As Sir Mervyn King said (p14 of this pdf):

we were concerned that, had we not made those asset purchases, the chances were that inflation might fall below the target.

3. The claim that QE will lead to very much higher inflation requires two assumptions:

- That QE gives a big stimulus to aggregate demand. This is questionable. There are several channels through which QE boosts demand - most obviously by raising asset prices (shares and corporate bonds as well as gilts) thus boost corporate demand for credit - but these are not strong. Bank of England economists estimate that the first £200bn of QE only raised real GDP by around 1.5% and inflation by up to 1.25%. This implies a rise in money GDP of less than £50bn - a quarter of the monetary injection.

- That the aggregate supply curve is vertical-ish, so higher nominal aggregate demand will lead to price rises rather than output increases. Whilst I agree that the recession has reduced capacity, and that there’s a mismatch between unemployed workers and job vacancies, the belief in a near-vertical curve seems rather strong.

4. It’s possible that QE will be reversed in coming years. As Sir Mervyn said, such a policy would be “exactly equivalent to the overfunding in the 1980s” - when the government issued more gilts than was necessary to finance the budget deficit with the intention of reducing monetary growth. Richard thinks this would be impossible, as it would - when combined with big budget deficits - swamp the market with gilts. However, there’s no reason why a reversal of QE couldn’t wait until deficits were smaller.

I suspect a bigger factor preventing negative QE is that - in contrast to the 1980s - bank lending will not be a force for great monetary growth, in which case negative QE would shrink the money stock, which would be a risky policy.

5. If “negative QE” has merely the opposite effect of QE, each £100bn of it would raise gilt yields by half a percentage point. Reversing all the QE we’re likely to get by the end of this year would thus add less than two percentage points to yields. This would take 10 year yields to around 4% - their summer 2008 levels. On top of this, yields are likely to rise because the circumstances in which the Bank reverses QE - a stronger economy - are circumstances in which investors will be switching away from safe haven assets (which gilts are perceived to be) into riskier ones such as equities.

6. Low gilt yields are NOT desirable in themselves. Insofar as they signify a weak economy, they are a bad thing. And insofar as they rise because of expectations of recovery, we should welcome this.

Results of the Semi-Annual FX Turnover Survey

2012-02-06T14:00:00Z

October 2011

Games Workshop in two minutes

2012-02-06T12:44:31Z

An updated two minute monologue.

What’s changed:

I’ve added more competition in the completion section.What it does: model soldiers

Games Workshop designs, manufactures, wholesales and retails war gaming miniatures, scenarios, craft materials, books and magazines for its Warhammer, Warhammer 40,000 and Lord of the Rings games set in fantasy worlds.

Category: stalwart

Although profits collapsed twice in two decades, most recently in 2007 when the company made a loss, Games Workshop is capable of steady growth and high profitability, while distributing surplus cash to shareholders.

The recent crisis was self-inflicted as the company expanded aggressively incurring unwarranted costs. But it has recovered and in the last two years returned over 20% on equity in-line with the 10 year average. Recent half year results reported growth in sales, profits, and profitability for the war gaming business and a large royalty payment from THQ, which makes Space Marine, a video game set in the Warhammer 40,000 universe.

More speculative aspects of the story include US expansion, more digital products, and more Lord of the Rings products to coincide with the release of The Hobbit film this year.

What needs to happen: cautious expansion

The company got into trouble using windfall profits from the Lord of the Rings game to open new hobby centres around the world, but many new customers were transient, attracted by the films. Now Games Workshop is expanding cautiously, focusing on increasing sales and profits in existing stores by giving customers what they want: a stream of novel miniatures at increasingly high levels of detail and intricacy and centres in which to play, model and learn. By nurturing committed gamers it’s growing by word of mouth (and Facebook).

What could go wrong:

competition
There isn’t much. Rival role playing games put the player in the shoes of an individual not a whole army. Warhammer’s scale means the modelling component is much greater, with battlefields to be constructed and painted.

Much smaller companies are championed by some gamers. Warmachine involves smaller battles. Kings of War miniatures are cheaper and can be used interchangeably with more generic Games Workshop figures.

Video games are an opportunity as well as a threat. Skylanders as an example of how miniatures and figurines and video might cross-over.

management
Tom Kirby, who masterminded Games Workshop’s rise and fall, is still chairman although he has ceded the chief executive’s chair to Mark Wells. Kirby is guardian of ‘The Hobby’ and his self-flagellation in the annual reports indicates he has learned from the mid-2000′s. Wells also wears a hair shirt. Both men have big shareholdings and prefer to focus on the business than City analysts, which is a good omen for long-term shareholders.

company finances
The company has no debt and modest lease commitments. Shareholders’ equity is 59% of total assets, including leases.

other: Lord of the Rings license
The six year license was extended in February last year and Games Workshop is uniquely able to produce and market the game, so I see little risk of the license being removed.

valuation
The share price is the biggest risk. At 515p, the ten year earnings yield is about 7.5%. There is a danger investors are paying too much for a modest return, but I expect Games Workshop to grow, so it remains in the Thrifty 30.
_

UK vacancies signalling economic resilience

2012-02-06T12:38:58Z

The view here that the UK will avoid a “double dip” is supported by recent strength in online job vacancies – a good coincident indicator.

The Monster employment index is a monthly tally of vacancies posted on job boards and career websites. The index tends to lead official vacancies numbers and is available earlier – a January figure was released on Friday. A further advantage is that the Monster measure is ignored by the consensus.

The first chart shows a monthly estimate of GDP derived from output data on services, industry and construction (99% of the economy) together with a seasonally-adjusted version of the Monster index. The Monster survey correctly signalled a collapse in output between February 2008 and March 2009 and a subsequent recovery to a high in early 2011.

The Monster index weakened during the middle of last year but reached a low in October – monthly GDP troughed in the same month, based on current output data. It has since recovered strongly, matching its January 2011 high last month, suggesting that GDP has opened 2012 above its fourth-quarter level.

The index also implies a reversal of the recent fall in employee numbers – second chart.

Oh Danny Boy

2012-02-06T11:00:51Z

In his article in the latest New Statesman, here, David "Danny" Blanchflower accuses me of being a "Tory cheerleader" for suggesting that the fourth quarter GDP figures, which showed a fall of 0.2%, were likely to revised higher. I...

T30 monthly review

2012-02-06T10:29:00Z

Monthly performance appraisal: Richard Beddard

True to form I’m not reviewing performance, how much money the portfolio is making and whether the shares in it have gone up or down, until the Thrifty 30 experiment has run its course in 2015. I cannot extrapolate meaning from monthly price movements, and guessing would be a waste of time.

The performance target I set at the beginning of the year wasn’t about making money directly, it was about increasing productivity, so that’s what I intend to report on.

I propose the more analysis you do, and the more skilfully you do it, the better your decisions will be, and in an attempt to inject more efficiency and rigour into my investing, I’m writing two minute monologues, which:

Force me to think clearly about a company by summarising why I like it, and what could go wrong in words a teenager could understand.
Start by considering the business before deciding it’s cheap!

The brevity of the analysis means my opinion cannot be superior to that of all other participants in the market. That sets the bar far too high and reminds me of a discussion I’m having right now with fellow value investors Calum and Lewis on Lewis’ blog.

We’re discussing what gives an investor his or her edge, which comes down to information, and the insights you glean from it. The more productive you can be in generating information and interpreting it, the more successful you will be.

But despite my best efforts I frequently come across research that is more thorough, more detailed, and demonstrates a better understanding of businesses than I have and the situation must be worse for investors in big companies. Books have been written about Marks & Spencer. There are probably more words written about Facebook in a day than I’ll write in my career.

The point I’m rambling slowly towards is that if having a permanent information edge is what it takes to beat the market then 99.9% of us are doomed to mediocrity.

So, in the absence of genius, how do the two minute monologues give me an edge? I’m falling back on those value investing stalwarts: being prepared to hold companies other people don’t like for longer than they would be willing to (i.e. contrarianism and patience).

But to hold on to such companies, to remain confident when other investors are not, you have to know enough. You have to understand enough of the business to be confident it sells something people want, it’s suitably financed, and you can trust management to operate in shareholders’ interests. You have to know enough so when something unexpected happens, you can tell whether it’s significant. Otherwise, at that point you’ll make an instinctive decision instead of an analytical one and it’s more likely to be wrong.

The two minute monologue is my way of checking I know enough, and of making sure I have the facts at hand when I need them.

So, here’s my monthly report: I wrote three two-minute monologues in January:

I’ll try to write more.

And here are some charts and tables that track the other kind of performance:

Global Manufacturing Steadies As She Goes, Or Does She?

2012-02-06T08:49:01Z

The year got off on a much better foot than might have been expected, at least as far as global manufacturing is concerned. As the JP Morgan report puts it:

“The global manufacturing sector continued to record belowtrend growth at the start of 2012. At 51.2 in January, the JPMorgan Global Manufacturing PMI™ rose to a sevenmonth high, but remained below its long-run average (51.8). Manufacturing output expanded for the second successive month in January, as new orders rose for the first time since last August”.

“The cyclically sensitive new orders-to-inventory ratio also moved higher, reaching a ten-month peak. Although rates of expansion for both output and new orders were the fastest since last June, they were still only modest at best. Growth of production was recorded in the US, Japan, Germany, the UK, India, Eastern-Europe, the Netherlands, Austria, Canada, Switzerland, Turkey, Brazil, South Africa and Denmark”.

“International trade volumes improved for the first time in six months during January. Growth of new export orders was led by India, the US and Turkey. China, Japan and the UK all reported modest increases, in contrast to the declines seen in the Eurozone, Russia, Canada, South Korea, Taiwan and Brazil”.

So the fall in global manufacturing has flattened out, even though the bounce back has more of a dead cat look about it than anything else. As usual in recent months the report was very much a mixed bag.

Core vs Periphery Monotony?

Euro Area results were divided between the core countries which moved timidly back towards expansion, and those on the periphery where conditions were simply less recessionary than they had been at the end of last year.

Surprisingly both Greece and Ireland bucked the trend and deteriorated, with the contraction in Greek output setting another series record for the country. Personally I have long held-and-expressed doubts that the people responsible for administering the Greek programme (namely the Troika) knew what they were doing, but I now find it hard to see how anyone else can still seriously maintain that they do. Avoiding Euro collapse, and total financial armageddon and all those horrid things are most worthy objectives, but I think the Greeks will simply have to learn to live with an economy whose back has been broken, and where possibilities of things getting back to normal are slim. Someone said to me this morning, but “time cures, doesn’t it Edward?” Unfortunately I think the responsible answer is that this time it won’t.

Then again, the Greek situation is not news to the Troika who have long claimed their programme wasn’t working because the Greeks weren’t cooperating, but the Irish result might have thrown a rather larger bucket of cold water over their hopes, since it suggests that despite all those optimistic pronouncements the country is a long way from being out of the woods.

In his comment on the Irish Manufacturing PMI survey data, Brian Devine, economist at NCB Stockbrokers said:

“The first NCB PMI of 2012 has got a familiar feel to it; domestic demand continues to drag and export orders continue to expand. The headline composite index contracted for the third month running (48.3 from 48.6), with output contracting more sharply than last month (47.3 from 48.7). New orders overall continued to contract (46.8), but export orders expanded once again (50.9). 2012 is going to be the fifth year in a row in which domestic demand will contract and if GDP is to expand, Ireland will need an improvement in the euro area economy in H2 2012.”

And I think this is the whole point all along the periphery, the excessive debt overhang makes their economies almost entirely export dependent, yet after years of credit-driven consumption-abuse their economies are totally distorted and their manufacturing industries are just not big enough to do the work. Ireland`s industrial base is in better shape than many, but even in this case expanding exports coupled with falling domestic demand simply means the economy flatlines. Ireland’s central bank now expects GDP to grow just 0.5% this year, while the fiscal deficit target is still a hefty 8.6% of GDP, so not much in the way of “bang for the buck” there. The country’s debt will now surely peak above the 118% currently anticipated by the IMF due to the lower growth expectation, and it is hard to see the country achieving debt sustainability without the kind of debt assistance being given to Greece, and which markets increasingly expect will be offered to Portugal.

Germany Not As Strong As It Might Be

Even the German manufacturing report gave reason to be cautious. The index reading was mainly up because the current output component was up, and this component was up because backlogs of work were reduced at a faster rate despite the fact that incoming new orders declined. And why did manufacturers reduce backlogs more quickly despite falling orders? Because they feel that the debt crisis has turned the corner, and that things will now improve. Despite the evident positive contribution made by the ECB 3yr LTRO they may well still be in for a rude awakening.

As the report says:

“The increase in the headline index was primarily driven by a robust rebound in output growth at the start of 2012. Production levels rose for the first time in four months and at the fastest pace since June 2011, led by an upturn in both intermediate and investment goods output. Higher output volumes were supported in part by greater work on unfinished business in the manufacturing sector. This was highlighted by backlogs of work falling in January for the fifth month in a row”.

“Meanwhile, new orders continued to decline at the start of the year, although the rate of contraction was relatively modest and the slowest in the current seven-month period of reduction. Latest data indicated that the decline was driven by a marked fall in new work received in the consumer goods sector”.

“A further solid drop in export sales contributed to the overall fall in new business levels in January. Lower levels of new work from abroad have been seen in each of the past seven months, largely reflecting weaker global demand and uncertainty about the economic outlook. In line with recent trends, lower new export orders were recorded across all three market groups monitored by the survey”.

And as Chris Williamson, Chief Economist at Markit puts it in his general Eurozone comment:

“Anecdotal evidence from survey respondents indicates that much of the improvement appears to be based on business and consumer confidence reviving, in the belief that the worst of the region’s debt problems are behind us and that a new credit squeeze may be averted. As such, the outlook remains very much dependent upon further progress in resolving the crisis.”

Chris Williamson is absolutely right the situation is extraordinarily fragile, and much depends on how the Euro debt crisis evolves. The ECB’s 3 year LTRO has stuck a finger in the dyke for the time being, but without more decisive moves to reform the Euro Area’s institutional architecture for how long will it last?

Booming EMs

Among emerging markets the situation is very different, and Brazil and India are now both showing real signs of recovery. The recovery in maufacturing is significant, but the composite indexes (which cover both services and manufacturing) show a really strong surge in activity.

Curiously, only this week the Columbian central bank started intervening in the currency markets again, buying dollars in an attempt to stem the rise in the peso which is starting to crimp export competitiveness.

Emerging market nations such as Colombia have faced a flood of cheap money in recent months as near-zero interest rates in developed markets prompt investors to seek higher yields, pushing up their currencies and strengthening their economies. The peso has firmed almost 7 percent this year, making it one of the best performing currencies among the world’s 36 most-traded, partly thanks to strong foreign direct investment inflows. The dollar purchase program, which previously ran through September 2011, would re-start on Monday, the bank said in a statement.

The Euro As A Global Funding Currency?

So as core European banks ramp up their deposits at the ECB, and credit conditions on the periphery continue to worsen, a lot of the extra liquidity being generated either at the ECB or the Fed is simply seeping out and fuelling demand in emerging markets, which is a plus for exports, as long as your manufacturing industry is big enough and competitive enough for this to matter. As I say, much of the European periphery is facing an outright credit crunch as banks tighten their credit standards. The FT’s John Dizard put it this way:

There was a lot of earnest chitchat last week about the ECB’s Euro Area Bank Lending Survey, which reported a tightening of lending standards and a decline in the demand for credit. The results, in the bureaucratic tradition of false precision, were reported to accuracies of one percentage point. So, for example, the report tells you that credit conditions were tightened on 42 per cent of long-term loans in the last quarter of 2011, compared to 20 per cent in the preceding quarter.

What the ECB’s survey did not tell you was what is meant by “tightening”, and exactly where in the euro area this undefined tightening occurred, and, where it did not occur. Let me put it this way: if you are a German machinery exporter, your bank just cut the cost of your receivables financing. If you are a Spanish commodities trader or Italian aircraft lessor who had a line of dollar credit from a French bank, you are probably out of luck.

In an article entitled “ECB ‘saves’ banks as economies sink” Edward Chancellor makes similar points:

Over the past couple of months, the cost of Italian two-year debt has fallen from 7 per cent to around 3 per cent. As investors’ fears abated, the share prices of European banks rebounded. The vicious cycle that gripped Europe’s financial system appears to have ground to a halt.

Unlimited access to ECB money means Europe’s banks will have cash on hand to repay any loans that become due this year. Since deposit outflows can quickly be replaced with ECB funds, the periphery is less vulnerable to bank runs. Now that the liability side of their balance sheets has stabilised, European banks will not be in such a rush to dispose of assets.

At around 1 per cent, LTRO money is also very cheap. Barclays estimates that lower funding costs will boost the earnings of eurozone banks by 4 per cent. Clever bankers may do even better – Italy’s Unicredit, for instance, is using money from the ECB to repurchase its own hybrid bonds at a large discount. Increased profits reduce the amount of equity capital that the banks will need to raise. More stable share prices diminish the risk of dilution for bank shareholders.

Mr Draghi’s largesse, however, cannot cure all of Europe’s woes. Within the eurozone, banks have becomes increasingly reluctant to lend across borders. Banks in the core of Europe are reportedly still looking to reduce exposure to the more spendthrift members of the currency union. On its own the LTRO is unlikely to reverse this financial Balkanisation. European banks remain massively leveraged. They will continue to shrink their balance sheets, albeit at a more measured pace.

Nor can a wave of Mr Draghi’s monetary wand remove the eurozone’s macroeconomic imbalances. Much of the periphery remains uncompetitive relative to Germany.

The latest Euro Area Bank Lending Survey reports that 35 per cent of banks tightened lending conditions to European non-financial corporations. The money supply in the periphery contracted by 4 per cent in the year to November. Spanish industrial production fell by 7 per cent over the same period. The dire economic prospects for the periphery are exacerbated by Germany’s insistence on fiscal austerity.

The ECB’s action has brought a liquidity crisis to an end. But it is unlikely to spur lending in the real economy. Until the economies of Europe’s periphery start to grow, concerns about their solvency will continue.

So what is happening? Well the massive liquidity easing engaged in by the Federal Reserve in the US and the Wall of Money sent out by the ECB has loosened credit conditions, but not in the intended economies. We have been here before during QE1 and QE2, but if you look at the first chart in this blog (the global manufacturing one) you will see that we are hardly getting a “mountain” of growth, indeed at this moment what we have is little more than a bump in the road (on aggregate).

Confidence is back globally, as fears of an imminent Euro unwind recede, and “risk” is “on again”. Cheap liquidity available for tapping in over-indebted developed economies is flowing into rapidly growing emerging markets again, risking yet more distortions in their developing economies. One sign of this is the Columbian iattempt to stem the rise in the peso which would furher crimp export competitiveness. In general “carry is king” once more, and the Euro has even becoming the funding currency of reference. To cite William Kemble-Diaz in the WSJ:

Canny foreign-exchange investors are increasingly tempted to borrow euros to fund bets in higher-yielding currencies, even though it is a lot cheaper to borrow dollars.

The combination of low European Central Bank interest rates that are likely to fall further, and growing confidence that the euro is set for a big slide this year, lines the currency up as a good bet to sell in search of juicier bets elsewhere. In the market’s parlance, that makes it a funding currency, equivalent to nailing a “for sale” sign on its fence.

It is an unusual role for the common currency, and one normally grabbed by the dollar and yen. While low, ECB interest rates at 1% are still four times higher than, say, the U.S. Federal Reserve’s, so when investors feel broadly confident the euro usually rises as traders are drawn to its higher returns. Now, though, a poor outlook for the currency’s value and quirks in the interbank borrowing market mean typical trading patterns are being turned on their head.
The three-month euro-dollar basis swap, which is a function of spot and forward foreign-exchange prices and prevailing interest rates as well as a bellwether for dollar funding stress, has improved to minus 86 basis points from as low as minus 165 basis points in late November, when worries about “another Lehman” filled the air.

But that figure remains deep in the red when, if all were well, it would be closer to zero. For market participants seeking a funding currency, that, combined with the euro’s weak outlook and slowing euro-zone economy, makes for an increasingly tantalizing combination.

(See Bloomberg’s Masaki Kondo and Hiroko Komiya on the same topic here).

China The Odd Man Out?

But even here we find yet another anomaly. While many emerging markets are beginning to boom, China (oddly) failed to spring back,. This suggests the country may really be feeling the housing slowdown/bust pinch.

This is a possibility that Global Insight’s Alistair Thornton definitely entertains.

In combination with better-than-expected numbers out of the United States and what would appear to be an improving situation in Europe, a relatively mild slowdown in China would prove a boon for global markets. Unfortunately, the situation is not entirely positive, despite some signs of resilience in China’s deceleration. IHS Global Insight has picked out a few “behind-the-scenes” indicators which give a slightly different take on the macro climate.

While it is important to note that micro indicators do not necessarily have macro implications, they can help shed light on nascent trends, particularly when there is a modicum of scepticism about the quality of Chinese data. Taking a cue from Vice-Premier Li Keqiang, who when Party Secretary of Liaoning joked that China’s provincial GDP figures were “man-made”, we first turn to freight volumes at major coastal ports. China’s export growth has been suffering under the weight of unravelling demand in advanced economies, and growth in freight volume sagged considerably in November—down to 8% y/y from October’s 16%. This suggests lacklustre demand both overseas and, to some extent, in China, which will drag on growth going forward.

To give him an indication of the state of domestic activity, Alistair took a look at cement production widely regarded as a key feeder for the nation’s property sector, which itself is a key component for investment and the wider economy. What he found was that cement production growth slid to 7% y/y in December (see chart above), down from 11% in November and 17% in October. T

This also fits in with data showing a recent contraction in real-estate construction and anecdotal evidence suggesting an extremely weak project pipeline. More worrying, he found that machine production and machinery sales indicate a severe contraction in construction activity to come.

While metal-cutting machines sound an obscure piece of kit, they are an integral part of China’s construction and investment economy. They are highly pro-cyclical, with the global downturn of 2008–09 pulling production growth to around -30% y/y, before ultra-loose credit policy and construction activity buoyed growth to over 50% in 2010. As of November, however, y/y production growth has been negative, with December’s figures sinking to -11%.

While this demonstrates receding construction activity, the pull-back in machine production has not yet reached the nadir seen in 2008–09. Sales of excavators, on the other hand, have fallen below those depths, reflecting the intense pressure stacked on the real-estate sector. With data from China Construction Machinery Business Online, smoothed using a three-month moving average, we can see that sales growth contracted almost 40% y/y in December.

Little Momentum In Non-Europe Developed Economies

Moving back to the developed world, Japan showed marginal growth, but far from sufficient to help the country overcome the growing sovereign debt problems. The strong yen and the weaker demand from both Europe and China is clearly taking its toll, despite many earlier predictions of a “V shaped” bounce back.

As Alex Hamilton, economist at Markit and author of the report said in his comment:

“January PMI data suggest that the sector has begun 2012 on a firmer footing following a year in which supply chain disruptions emanating from March’s earthquake and flooding in Thailand disrupted firms’ production plans. However, the survey findings paint a relatively flat growth picture, and demand for Japanese manufactured goods remains muted. Although new business and new export orders both returned to growth in January, rates of expansion were marginal. Companies cited sluggish demand from China and Europe as the principal drag on new export order growth. Some respondents also mentioned persistent yen strength, which made the cost of imported items relatively cheaper and by doing so contributed to an easing in the pace of input price inflation to a 15-month low.”

And finally, even while the US manufacturing sector continued to grow in January, the momentum behind the expansion remained far weaker than in earlier post-recession activity bursts. Hence the substantial fiscal deficit plus the promise of keeing interest rates near zero till at least the end of 2014 are still having a hard time producing output growth, with the implication that the Economic Cycle Research Institute US Recession call may not turn out to be as “loony” as many appear to think it is.


Related posts:

The Global Manufacturing Contraction Eases Again In June
The “Three Speed” Global Manufacturing Recovery Continues in February
The Global Manufacturing Contraction Stabilises In April



News Release - Portraits of Her Majesty The Queen from Bank of England banknotes feature on Royal Mail's Diamond Jubilee stamps
2012-02-06T06:00:00Z
Royal Mail is celebrating Her Majesty The Queen's Diamond Jubilee with a sheet of new 1st Class stamps, featuring images issued throughout the Queen's 60-year reign.


RBS and NatWest customers offered range of ethical choices
2012-02-06T01:21:26Z
February 6th, 2012 People approaching Royal Bank of Scotland and NatWest cash machines are increasingly likely to be confronted by a range of ethical choices before they’re able to withdraw their cash. Given the Edinburgh-based bank’s failure to properly reform itself in the wake of its October 2008 taxpayer-funded bailout, and its pariah-like status over [...]


To QE or not to QE? That is the question
2012-02-05T09:00:36Z
My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. The ducks, it seems, are all lined up in a row. Gross domestic product fell in the final quarter of last year, inflation is falling and...


Shadow MPC unanimous again on unchanged rates
2012-02-05T08:59:42Z
Following its most recent quarterly gathering on 17th January, the Shadow Monetary Policy Committee (SMPC) voted unanimously that UK Bank Rate should be held at ½% on Thursday 9th February. The main reason why SMPC members again voted without any...


The Left & the state
2012-02-04T13:17:59Z
If you ignore the mindless tittle-tattle, David Miliband’s New Statesman article raises a genuine issue: what should be the left’s attitude to the state? He writes:
The weaknesses of the "big society" should not blind us to the policy and political dead end of the "Big State". The public won't vote for the prescription that central government is the cure for all ills for the good reason that it isn't.
Although this is seen as “Blairite” it is also consistent with a more radical leftist tradition of scepticism about big government is a longstanding tradition on the left such as guild socialism, anarchism, market socialism or Marxism; the SWPer who asked his public choice lecturer “when did you become a Marxist?” was making a serious point.
And such scepticism is valid. In some respects (not all - I just highlight the flaws), the state does not promote leftist ideals:
- It is not very redistributive. The difference between the Gini coefficient for post-tax income (that is, income including benefits after direct and indirect tax) and original income is only seven percentage points: 38% vs. 45%. The tax rate for the middle quintile, at 27%, is not far short of the 32.6% on the top quintile. To a large extent, therefore, the state redistributes income within the working class. And this has an unpleasant effect. It leads to a “divide and rule” the working class, with some public workers and benefit “scroungers“ being stigmatized. 
- It is insufficient to protect the interests of the vulnerable. The state can be - and often is - captured by people hostile to the worst-off with the result that benefits are cut.
- The state serves the interests of the rich whilst attacking the poor.  A man who, in his mental distress, tries to kill himself is imprisoned for damaging property. A man who, with a more respectable mental disorder, wrecks the economy merely loses a knighthood; those who say Fred Goodwin broke no law miss the point - that there are no laws against capitalist vandalism.
- The state serves as a lightning conductor, which deflects criticism away from capitalism - for example, when the crisis is blamed upon Labour’s deficit or weak banking regulation rather than the flaws of capitalism itself. 
- The state is run according to the same dysfunctional ideology than runs business - hierarchical managerialism. However, in the private sector its flaws are mitigated by the forces of competition whereas they are much less so in government. The upshot is that the state offers indifferent value for money.
It is in light of these flaws that we should read Sunny’s claim that spending cuts won’t make the government unpopular. Very many working people are not opposed to cuts because they do not regard the big state as their friend. And this is for a good reason.
Granted, David’s analysis and solutions here would be rather different from mine. But he is posing a good question. The tragedy is that, in our anti-political political culture, this question will be ignored.


Weekend reading: Get a model education courtesy of Stanford University (for free)
2012-02-04T11:01:52Z

Good reading from around the Web.
I had no sooner published this week’s article questioning expensive university degrees when the emails and comments started to arrive.
That’s gratifying if you’re a writer, and most were very nice. One or two weren’t happy, and thought I was suggesting everyone had to start a business. (I’m not! I’m really not!)
Equally, it also turns out I have more entrepreneurial subscribers than I knew about before I wrote that article. Apparently more millionaires, too.
Several doubters asked where all this free learning I alluded to could be found.
I’m not quite sure how they managed to email me – what with them not having had access to a computer and the Internet since 1993, presumably   – but anyway, it’s out there, on the Web.
It’s everywhere!
Just this week I discovered (from the Simolean Sense blog) an upcoming free lecture course from the top table of US academia on model thinking.
This kind of model thinking isn’t: You can never be too rich or too thin.
Rather it refers to the mental frameworks extolled by Charlie Munger, the sidekick of Warren Buffett.
From the course outline:
We live in a complex world with diverse people, firms, and governments whose behaviors aggregate to produce novel, unexpected phenomena. We see political uprisings, market crashes, and a never ending array of social trends. How do we make sense of it?
Models. Evidence shows that people who think with models consistently outperform those who don’t. And, moreover people who think with lots of models outperform people who use only one.
Why do models make us better thinkers?
Models help us to better organize information – to make sense of that fire hose or hairball of data (choose your metaphor) available on the Internet. Models improve our abilities to make accurate forecasts. They help us make better decisions and adopt more effective strategies. They even can improve our ability to design institutions and procedures.
The lectures come from Coursera, a new initiative from Stanford University.
Yes, that Standford. I’ve already signed up.
I appreciate this isn’t everyone’s cup of tea on a Saturday morning – and that it’s not got much to do with saving for a rainy day.
But my point is this is the tip of the iceberg of what’s available on the Internet (it’s just one of many courses from Coursera alone) if you’re willing to do some self-directed learning.
(Or – as one wag lampooned the Internet to me – if you want to know a lot more about iPhones, naked women, and the funny things cats do   ).
From the blogs

Must read: Your money can work harder than you – Mr Money Moustache
Economics, a space-opera – Kaminska / FT Alphaville
The problem with the for-profit motive in finance – Fox / Harvard BR
Startup lessons from 17 hard-hitting quotes in ‘Moneyball’ – OnStartups
A feckless family fruitlessly frittering future away – Simple Living in Suffolk
Will actively-managed funds ever go away? – Canadian Finance Blog
The $100 billion Facebook IPO – Investing Caffeine
Limit orders, on the crumbling edge of behavioural finance – The Psy-Fi blog
How to clean up a portfolio [US specifics, but same gist] – Oblivious Investor
How to stop chronic dog barking [Not finance, but fun!] – Len Penzo

Deal of the week: In celebration of filthy lucre Valentine’s Day, Amazon is offering 20% off Kindle covers.
Mainstream media money and investing

The silliness of the Dow Jones Industrial Average – Roth / CBS
Why the Facebook IPO should not excite you – Swedroe / CBS
Is Facebook really a good business? – Slate
Hedge funds have grown too big and need pruning – FT
Same subject: Are hedge funds worthwhile investments? – Miyanville
Meet the ISA millionaires – Telegraph
Investors lose faith in equities [Silly billies!] – Telegraph
The pension fund guaranteed to lose money – Telegraph
Financial advice could cost £500 per hour after commission is scrapped – FT
Buy small companies for long-term gains – FT
Merryn: Water has the potential for conflict and wealth – FT
Lee: Building links on the golf course – FT
Dirty tricks in divorce can cost you big time – Independent
Why I’ve quit buy-to-let – The Guardian
The future of books is the stream – The Atlantic

Like these links? Subscribe to get them every weekend.


Further reading:
Weekend reading: Free your mind and your future with Free Capital
Weekend reading for investors: 25/4/09
Weekend reading: BP’s dividend and FTSE value






The unacceptable face of retail
2012-02-03T21:45:01Z
All about equity cash flow
With origins in mail-order, N Brown, which is mostly a women’s fashion retailer, may be adjusting to 21st century retailing more easily than its peers.
Some stats from Sharelockholmes.com:





Name
Cap £’m
PB
ROE%
ROE3%
ROE5%
ROE10%
E/A%
EY10


N Brown
653
1.8
20
21
22
19
49
11






 

On a price to book basis it doesn’t look particularly cheap, but its been highly profitable, and consistently so over the last decade (the return on equity columns show profitability averaged over one, three, five and ten years respectively), giving it an earnings yield of around 11%, just about cheap enough to contemplate. Especially as, at first glance, it has a conservative financial structure. N Brown owns half its assets, the rest is funded by debt of one kind or another.
 

And this is the exciting bit, at least for me. Many retailers fail to meet even that most basic of benchmarks of financial conservatism and, because they lease their shops and those leases aren’t recorded in the balance sheet, their financial situations are actually a good deal more precarious.
Normally I’d be looking at a company like N Brown and thinking about those leases. I’d be expecting to add them to the balance sheet, and discover the company’s equity is considerably less than half its assets (including leases).
But N Brown doesn’t have many stores. It owns some High and Mighty shops, and is trialling Simple Be concept stores, but in a January update it reported that online sales were close to 50% of total sales, up from 39% a couple of years ago. Most of its non-Internet revenue (I think) is from catalogues. And that means, few stores, and a relatively light lease burden.
In 2011, total obligations under non-cancellable operating leases were £23.1m. If we add that figure to total assets and liabilities we get total assets of £769.2m and total liabilities of £408.8m so shareholders equity (assets – liabilities) was £360.4m and the ratio of equity to assets was 0.47 or 47%. OK, slightly less than half but leases aren’t much of a worry at N Brown.
So all’s well then? Not quite, and if Sharelockholmes is right, it comes as a big disappointment. I’ve been building a great story about N Brown in my head as I run through my pre-analysis checklist:
The market has switched off this highly profitable company because its a retailer and we all know many high-street retailers are being annihilated by supermarkets and the Internet, while they’re tied into costly rental payments and upward-only reviews.
But N Brown is already an Internet retailer. It’s a kind of Next Directory aimed at larger and older women and since Next is another fashion/Internet success that’s a compliment. Even better, N Brown has very few leases. It’s a predator, not prey.
Virtually the last item on my pre-analysis check list is cash flow and according to Sharelockholmes.com in the thirteen years between 1999 and 2011 median adjusted earnings per share was 13p. Median cash flow per share was 10p, and median free-cash flow was 2p. Here’s the spreadsheet.
I can understand why, if a company is making big new investments, free-cash flow might be markedly below reported earnings, the cost of new investment isn’t fully reflected in historical accounting (it’s depreciated over time) but it is in the free cash flow figure.
But the (net) cash flow (from operations) figure ignores capital expenditure and I don’t know of a legitimate reason why it should be significantly lower than reported earnings over the long term. If I use the mean rather than median, and average over the last seven years the figures look a bit better but accounting profitability is still higher than cash profitability.
I feel I should check the figures in the annual reports, but at the same time I’m reluctant to go through a decade of them only to find out the data is right.
When I started researching N Brown, I was thinking the investment case was all about equity and it would be a strong one. Now I’m thinking it’s all about cash flow. And it’s weak.
Two words come to mind. The first is also the first word in a popular cocktail made from vodka, tomato juice and Worcestershire sauce. The second is ‘hell’.
The quest for the acceptable face of retail continues…


Avoid being stung by gym fees
2012-02-03T13:55:52Z
 
It has emerged that some gym contracts will be investigated by the Office of Fair Trading (OFT) over long contracts and unfair cancellation policies.
Even though the OFT will not name the companies implicated in the investigation, it can confirm that there have been concerns raised over the complicated terms that gyms can use to get their hands on your hard-earned cash for as long as possible.
Image by Farhad sh
This will no doubt be a sore point for many people at the moment, as those who hastily got themselves into a gym membership contract on the back of an ill-fated New Year’s resolution will now be paying the gym each month for a service they rarely, or never, use.
Now excuse me as I climb up onto my soap box here. I have nothing against gyms, and if that’s what you’re into and can stick with it, more power to you. However, they’re just not for me.
I would much rather go for a run in the fresh air for free than run on the spot and pay for the privilege.
However, gyms do have their uses. When I got injured last year I joined one for a month so I could use their cross training equipment, which worked out a lot cheaper than buying the kit myself. But as soon as I was feeling better, I was back outside again.
I was lucky in the way that I was able to find a gym that was willing to do a temporary membership, but I know that these are not always easy to come by. The latest OFT investigation just goes to prove that.
There is a lesson to be learned from this. My advice? Don’t just jump in with an annual gym membership – try and commit to as small a timescale as you can. It takes around 21 days to form a new habit, so a month’s membership is ideal to see if you can stick it out.
Or, even better, try and find forms of exercises that are free. Running in your local park is fun, refreshing and costs you diddly squat. If after a couple of month of regular sessions  you’re still desperate to pound the treadmill instead, then by all means, go ahead and get yourself signed up at a gym. You’ve already proved to yourself that you can commit to regular exercise, so it’s less likely that money will go to waste.
In short: don’t go for a gym membership unless you are 110% positive that you will follow through. Otherwise, you may find that it is just money down the (communal shower) drain.
Are you signed up at a gym but never use it? Do you have experience of a lengthy contract you didn’t want? Tell us your story in the comments below.



Personal Finance 2012: Guest Post from Kate of CurbYourConsumerism
2012-02-03T13:42:48Z
We’ve been busy lately at Cashzilla Towers! We’ve been talking to some of the best finance writers online, and this week we’re delighted to host their ideas and opinions about how to manage our personal finances and private banking in 2012.
Today’s guest writer is Kate from CurbYourConsumerism.com.
Image by o5com via flickr
I’m not a fan of the term “New Year, New You”. Don’t get me wrong I’m no neophobe, I love change. In fact, I need it to keep me motivated.
However, I prefer to be more realistic and incremental with making any changes, especially New Year changes.
It’s no different with financial planning, be honest with yourself, this time last year, did you have good intentions that you failed to implement fully? If you did, it’s not just your personal finances that need an overhaul, it’s the way in which you approach change.
Don’t just write the same list that you did last year. Instead, analyse why you failed to follow through with the changes. Were they unreasonable in practice, did you just forget to do it in the new way? It’s for this reason that I prefer the term New Year, new perspective. You know yourself and how you work, tweak that rather than resolve to revolutionise yourself completely.
A small change that can make a big difference to your personal finances, is the implementation of amortisation. This is the process of spreading the cost of purchases over a number of months so that there are no large spikes of expenditure over the year. Companies use this process so that their books look balanced and predictable, as opposed to erratic.
Most of us have a steady monthly income stream, and the problem with having large spikes of expenditure in your personal finances i.e. when the money for that holiday leaves your account, is that this activity can take you into the red. Putting amortisation into practice is a matter of estimating the big expenses that you are going to have over the year, and dividing that figure by 12. Siphon that money away into a separate account until the money is needed. This makes your finances easier to predict, and will give you a better understanding of your true disposable income.
Kate Edwards is a saving fanatic and blogger from the unashamedly sexy realm of personal finance. Through CurbYourConsumerism.com, she helps readers to eat well, live well, and prosper.
What are your thoughts on personal finance? Do you spread the big costs or do you take care of it in one go? Tell us your story in the comments below!



Service sector at 10-month high
2012-02-03T09:40:12Z
More good news for the economy with the purchasing managers' index for the service sector up from 54 in December to 56 in January, a 10-month high. This is what Markit said: "The UK service sector started 2012 in positive...


The media frenzy about RBS bonuses and Fred Goodwin’s knighthood is a sideshow
2012-02-02T16:45:58Z
By Ian Fraser Published: QFINANCE Date: February 2nd, 2012 Financial commentators are, suddenly, in demand and it’s largely down to the continuing failure of banks to properly reform themselves in the wake of the global financial crisis and the current public rage about bankers who continue to award themselves massive pay packages even though their [...]


News Release - Publication date of 2011 Q4 'Project Merlin' lending data
2012-02-02T15:40:00Z
The Bank intends to publish the data for 2011 Q4, alongside existing measures of gross and net lending reported by the major UK banks on the basis used in the Bank's Trends in Lending publication, on its website at 9:30am on Monday 13 February 2012.


The Bank Return - Figures for cob 1 February 2012
2012-02-02T15:00:00Z
Each week the Bank of England publishes a summary balance sheet showing its main assets and liabilities - the Bank Return.


China: no "hard landing" but economy subdued
2012-02-02T13:58:41Z
Concerns here about a Chinese “hard landing” eased in late 2011 as real money expansion revived on the back of policy actions and slowing inflation. Six-month growth in real M1, however, was still below average in December, suggesting moderate rather than strong economic prospects – see previous post.

Yesterday’s official manufacturing PMI results, showing the highest new orders reading since October, could be interpreted as supporting a more upbeat outlook. The official numbers, however, fluctuate seasonally, despite supposedly being adjusted for such variation. After applying Datastream’s seasonal adjustment algorithm, new orders slipped back in January – see chart. Based on the historical relationship, the current reading of a little over 50 is consistent with six-month industrial output expansion of about 5%, or 10-11% annualised – below a long-term average of 15-16%.

The “big picture”, therefore, is that China was in danger of a crash landing last summer but a subsequent easing of monetary conditions seems to have stabilised growth at a slightly below-trend pace. Such a scenario would be promising for markets, implying that China continues to contribute significantly to global economic expansion while domestic inflationary pressures ease at the margin, allowing further gradual policy loosening.



(Non) performativity in economics
2012-02-02T12:06:21Z
Aditya Chakrabortty writes:

Economists didn't just fail to spot the financial crisis – they helped create it. They provided the intellectual framework and drew up the policies that helped caused the boom – and the bust.

He gives the example of how (some) academics made the case for big bosses’ pay.
What he’s getting at here is the concept of performativity. Academic economics does not merely describe the world, but also helps create it. Markets in options, and index tracker funds, for example, are academic creations; see the work of Donald Mackenzie, such as his book, An Engine Not A Camera.
However, economics is not always performative.
Let’s take Aditya’s example - that economists have described “how markets work best when they are left alone.”
There is a large, old and powerful body of theory which shows that, under some (restrictive) conditions, this is true. Back in the 1950s, Gerald Debreu (pdf) and Kenneth Arrow showed that a set of complete state-contingent markets can be Pareto optimal. The converse is also true. As Greenwald and Stiglitz showed (pdf), an economy with incomplete markets will be sub-optimal.
If economics were always per formative, you would therefore expect there to be at least widespread markets in major contingencies.
And there are not. There’s a market for my labour (I hope), but not a market for my labour, contingent upon there being a great depression. Although I can insure my house losing value because of fire, I cannot insure against it losing value because of a fall in demand for houses in Rutland. I can insure against inflation, thanks to index-linked gilts, but not against recession or inequality. As Robert Shiller pointed out in his wonderful books, Macro Markets and The New Financial Order, markets for coping with major economic risks are lamentably under-developed.
This poses the question. How come economics is performative in some regards (option pricing, bosses’ pay) but not in others, such as contingent markets?
It’s certainly not because Arrow-Debreu theory is new or marginal. It is much older, and far more widely taught in universities than the work of Jensen and Murphy cited by Aditya.
Nor is it because state-contingent markets would be an obviously bad idea. Yes, we know from the theory of the second best that it is not necessarily efficient to remove a single market distortion, so it’s theoretically possible that the introduction of a few such markets would be sub-optimal. But whether this would be the case in practice takes some proving. And anyway, plenty worse ideas than these have been turned into economic reality.
There is, of course, a simple answer to this question. Economics is performative when it serves private interests, but not (necessarily) when it serves public ones. Traders immediately saw the usefulness of the Black-Scholes option pricing formula, and bosses quickly saw the use of Jensen and Murphy’s work. But the benefits of better state-contingent markets accrue to millions and cannot so easily be captured privately. They are an example of a Nordhausian innovation - one with high social benefits and low private benefits and which do not therefore exist. Paradoxically, markets are incomplete because of a market failure - that there’s a positive externality to creating complete markets.
I could, of course, put this more crudely. Economics is performative when it serves the interest of the powerful, and not performative when it doesn’t. In this sense, the problem is not with economics, but with a class structure that causes the “real world” to be a corrupted and perverted form of a market economy.


BBC Radio 4 World at One Programme, 01 February 2012
2012-02-02T11:29:42Z
Today I was interviewed on Radio 4’s World at One regarding Fred Goodwin being stripped of his knighthood.  We had a lively debate about whether it was right to take his honour away - I think not - and whether other people should have their honours stripped from them. The BBC interviewer pointed out to listeners that the RBS chairman did not receive his knighthood for services to banking and by implication it would not be appropriate for him to be treated in the same manner as Fred Goodwin. I did not have the time to point out that Anthony Blunt received his knighthood for services to art yet was stripped of it for spying. One person that clearly does stand out for scrutiny is Alan Greenspan.
You can listen to my interview here (commences at 20 minutes 55 seconds) and a full transcript is below.
SHAUN LEY: Presenter 
Well, Terry Smith is chief executive of Tullett Prebon, a money broker and Fundsmith, a fund management company.  He’s in the City now. Welcome to the programme.
What do you make of the decision to strip Fred Goodwin of his knighthood?
TERRY SMITH: Chief Executive, Tullett Prebon and Fundsmith
I think it’s deplorable.  He’s now been bracketed with traitors, dictators and convicted fraudsters.  If he did something wrong, I’d like to see some proceedings against him – civil or regulatory – and then if he is found to have done something wrong, strip him then but at the moment it looks like a deplorable, political willingness to go along with the sort of morals of a lynch mob.
SHAUN LEY:
But honours are discretionary: there’s no real criteria for rewarding them.  Why should there be any specific criteria for taking them away?  If they’re given by politicians why not allow politicians in response to public opinion, to strip them from those who’ve received them?
TERRY SMITH:
We could do that if people wish.  It would be a break with the way that this has been done in the past, of course – that’s not necessarily a bad thing – but historically, as I say, traitors, dictators and convicted fraudsters have been it so this is a complete change.  If we are going to strip them at discretion for failing though, I would like to suggest to you that the Buckingham Palace probably need a rather large cupboard for returns, because if everybody who fails has to hand back their honours there’ll be a lot.  If we take the specific case of Fred Goodwin, he didn’t make his decisions alone.  The chairman of his board and his board helped him – the chairman, by the way, was Sir Tom McKillop – and he’s in the regulated, highly regulated banking industry where the FSA basically approved what he was doing and that was chaired at the time by Sir Callum McCarthy.  So I presume if we’re going down that route, there will be a lot of other people rather than this lone individual singled out.
SEAN LEY:
I suppose I should say, just in passing, that Tom McKillop’s knighthood was for services to the pharmaceutical industry before he went to banking but I think your point is well made. 
TERRY SMITH:
Who cares what it was for?
SHAUN LEY:
Fair enough and on that basis, are you concerned that this might have an impact on the City, on the attractiveness of Britain for business, particularly this idea perhaps if you fail, which a lot of people do in business, even people who are subsequently successful, you’re going to get punished for it?
TERRY SMITH:
Yes, I think the only way to absolutely guarantee that you won’t fail, is not to try in the first place.  I think it will have a bad effect on people and I think people who either aspire to receive honours for whatever reason in their career, or those who like Stephen Hester, have taken on a job in the public sector who see that something that they were contractually received is taken away for political reasons, must surely think twice about ever taking something on like this again.  But going back to an earlier point: if we are going to take honours away from people because of their mistakes, could I suggest another one that should obviously be called into question?
SHAUN LEY:
Go on, briefly.
TERRY SMITH:
How about the 2002 honorary knighthood given to Alan Greenspan, the chairman of the Federal Reserve and the citation was “ for his contribution to global economic stability”.  I’ll believe that people are not on a witch hunt for a single man when they proceed against Alan Greenspan and strip him of his knighthood.
SHAUN LEY:
OK, Mr Terry Smith in the City: thanks very much for joining us.


Five ways to save on your mobile broadband bill
2012-02-02T10:18:01Z
 
We’ve got another guest post today! We’re all looking at ways to save money right now, and cutting back the costs involved with having a mobile broadband service is certainly one area where the are some definite savings to be made.
This has been kindly contributed by Rob Clymo on behalf of Broadband Genie.

Image: Benjamin Chun

One: compare and contrast
If you’re new to mobile broadband then the first thing to do is visit a comparison website.

This will allow you to check what deals are available and also compare all of the different prices and specifications before you sign up. With competition being so fierce at the moment, it means that there are plenty of mobile networks willing to throw everything they can at consumers to get them to sign up. So it’s worth doing your homework early on.
Two: Spot the deal
Central to save money on mobile broadband is to pick out the best deals and offers on the comparison websites. You’ll often find that for a limited period, some offers might come with free hardware and software, such as dongles for getting connected and all manner of other goodies that will add value to the package that you’re interested in. Check to see if you might also get free airtime, and perhaps some free calling minutes too, all of which

helps shave off cost in the long run.
Three: Check your data
If you’re the sort of person who is likely to be on the Internet a lot, and who also enjoys downloading quite a lot of digital content, then you’ll need to check that you pick a mobile broadband deal that will make allowances for this. There are limits on many mobile broadband deals, and often if you overstep these during a calendar month or similarly timed period then there could be extra charges. So check the small print of deals to see if the package you like will cover your needs.
Four: Get a free laptop
Keep an eye out for the free laptops that come with certain mobile broadband deals too. These can be a great way of getting some shiny new kit if you’re in need of a new computer. You’ll need to sign up for a slightly longer contract, usually two years or so, but at the end of this period the laptop will be yours to keep. It’s also a good way of getting a package deal that comes complete with everything needed to get up and running with a mobile broadband network.
Five: Check the small print
It may seem like the least attractive part of the signing up for mobile broadband process, but it’s vital to check the small print of any deal or offer that you like the look of. There can often be hidden charges involved, which if you don’t spot them before signing up for a contract, can prove costly in the long run. Another way around this and having a surefire answer to saving money on mobile broadband is to opt for a pay as you go package. That way you only pay for what you use and there’s no contract to worry about either.
Do you have any tips for shopping around for the bes deals? Share them with us in the comments below!



Are hedge funds and private equity funds fleecing their investors?
2012-02-02T10:02:37Z
By Ian Fraser Published: QFINANCE Date: February 1st, 2012 The Berkshire Hathaway chairman Warren Buffett (pictured above playing the ukelele) once famously quipped that a hedge fund is a “compensation scheme masquerading as an asset class”. The remark, a reference to the fact that many hedge funds provide investors with feeble returns whilst massively enriching intermediaries (the hedge fund [...]


Financial Times, Letter to the Editor - Should Greenspan be stripped of knighthood?
2012-02-02T09:33:46Z
Today’s Financial Times published my letter to the Editor concerning Fred Goodwin. Here is the letter in full.
From Mr T.C. Smith.
Sir, For Fred Goodwin to follow in the footsteps of traitors, dictators and fraudsters in being stripped of his knighthood seems extreme. He did not make the decisions that produced such a disastrous outcome for the Royal Bank of Scotland alone. He shared responsibility with the board chaired by Sir Tom McKillop, and the fateful acquisition of ABN Amro was approved by the RBS shareholders. Banking is also a highly regulated industry and his actions were supervised by the Financial Services Authority, then chaired by Sir Callum McCarthy.
But if the current mood is for those in the financial services industry who received honours in those times and who made mistakes to be stripped of their titles in order to “appease” the public, as UK prime minister David Cameron suggests, surely attention should now focus on the honorary knighthood bestowed upon Alan Greenspan in 2002 for his “contribution to global economic stability”.
T.C. Smith, 
Chief Executive, Tullett Prebon, 
Chief Executive, Fundsmith, 
London EC2, UK


Introductory remarks by Paul Tucker at the book launch for 'Investing in Change: The Reform of Europe's Financial Markets'
2012-02-01T19:00:00Z
Association of Financial Markets in Europe book launch.


News Release - Bank of England/GfK NOP Inflation Attitudes Survey: pre-notification of publication dates for 2012
2012-02-01T16:40:00Z
The Bank of England today announces the publication dates of its quarterly Inflation Attitudes Survey for 2012.


Eurozone credit crunch eased by ECB lending boost
2012-02-01T16:20:10Z
The ECB’s latest bank lending survey confirms a significant tightening of credit conditions but forward-looking components are marginally less grim, probably reflecting the ECB’s three-year lending operation.

The net percentage of banks tightening credit standards on business loans rose to 35% last quarter, the highest since 2009 and similar to the level in early 2008 before a collapse in industrial output – see chart. This confirms a message of weakness from last week’s monetary data – see previous post.

The balance planning to tighten standards in the current quarter, however, was lower, at 25%, reflecting an expectation of less difficult wholesale funding conditions following the ECB’s decision to extend the maturity of its liquidity support and loosen collateral requirements further. Banks, presumably, will have been encouraged by a thawing of markets since the survey was conducted in late December / early January, with the key three-month LIBOR / OIS spread subsiding from more than 90 to below 70 basis points.



Sky TV online coming soon
2012-02-01T14:41:16Z
 
With Netflix’s recent introduction into the on-demand streaming market in the UK, Sky have responded by launching their own service.
Image Via DaGoaty
The service which will target UK households who are currently not subscribers to their traditional TV package is expected to be launched within the next few months.
The initial launch will allow users to download movies, similar to offerings from Netflix and Lovefilm. The package will also give users access to Sky content including Sky Movies with entertainment and sport channels to be added in the future.
Details of packages have yet to be officially announced but it will include unlimited monthly access or pay-as-you-go. The service wouldn’t require a contract or satellite dish which will be the main selling point to customers. It’s also been suggested it will be offered on mobiles and games consoles as well as traditional PCs and laptops.
Some have questioned the move however. While there is a need to fend off competitors, there may be a danger of tempting higher valued existing customers to jump ship to a more flexible contract.
Competition increases for the nation’s most popular TV satellite provider as Youview is expected to enter the market this year too. Youview offers a catch-up and on-demand service with recording capabilities.
All of this puts another nail in the ever dwindling DVD market as the shift continues towards online and digital. For consumers though, more competition is healthy.

Without one monopoly dominating the industry, we might see lower prices as there is little to differentiate offerings from various services. It may even bring down the cost of the DVD.
Would you consider using Sky TV online? Are they offering more than the competitors? Tell us in the comments section below.



A good start for manufacturing
2012-02-01T14:00:33Z
The purchasing managers' index for manufacturing in January is strong and, in the circumstances, rather surprising. The index rose from 49.7 in December to 52.1 in January, pointing clearly to a resumption of the sector's expansion. Adding to the good...


Personal Finance 2012: Guest Post from Tim of Psyfitec.com
2012-02-01T11:44:05Z
 
We’ve been busy lately at Cashzilla Towers! We’ve been talking to some of the best finance writers online, and this week we’re delighted to host their ideas and opinions about how to manage our personal finances and private banking in 2012.
Today’s guest writer is Tim from Psyfitec.com.
Image by © Royalty-Free/Corbis
It’s an unfortunate fact of life that trying to predict financial markets is a futile occupation, primarily because the people that use them can’t be trusted to behave sensibly from one day to the next.
Even the new UK financial watchdog, the Financial Conduct Authority, has more or less admitted that it thinks we’re all too stupid to be trusted with our own money and has made it its self-appointed task to nanny us by making sure that we’re not mis-sold investments that are too complicated for us.
Information over instinct…
Unfortunately investor irrationality is far too ingrained to be eradicated by any regulator, no matter how well-meaning, so we can more or less predict that markets will continue to zig when we expect them to zag and flatline when we expect them to move.  As usual we should expect the unexpected.
At root markets are competitive places where we bet our capital against that of other people – every time we make a trade we deal with a counterparty that believes the exact opposite of what we do, and one of us must be wrong. When those counterparties are well-informed institutions or well-connected individuals the chances are that it’s us: as the old adage has it, if you’re playing poker and you don’t know who’s the sucker, it’s you.
Although as individual investors we’re probably less well informed and more inclined to behavioural bias than knowledgeable counterparties, we’re not without certain natural advantages, and we need to use these to gain a competitive advantage over other players in the marketplace.  Look at under-researched areas and try and specialise your knowledge.
Patience is a virtue…
Exploit the fact that you don’t need to make a turn every quarter – patience is a great quality for an investor, being sucked into regularly trading with better informed counterparties is not.
Finally, wait for the fat pitch when the market goes into one of its periodic depressive phases and liquidity is withdrawn from firms both good and bad, large and small.  This happens at least once a decade, and having spare capital around when it happens is always an advantage, if you’re brave enough to take advantage.
2012 will be no different from any other year; making money will be as much about overcoming our own psychological shortcomings as it is about making predictions.  Good luck!
Tim is a UK based technologist (career) and psychologist (academic) with a long-term interest in financial markets. The aim of the Psy-Fi Blog is to present the world of finance through the lens of psychology, replacing personal opinion with academic research and worthless assertion with logical argument. All while never losing a chance to raise a laugh at the madness of the markets.



Two minute Titon
2012-02-01T11:17:37Z
A two minute monologue
What it does: window furniture and ventilation systems
Titon manufactures (67% of 2011 turnover) and distributes window handles, hinges, vents, locks, and home ventilation systems. It has factories in Suffolk and South Korea. Its main market is the UK (80% of 2011 turnover). It also sells in Northern Europe and South Korea through a joint venture with a local distributor.

Category: asset/cyclical
Demand fluctuates with the demand for new houses, hospitals, schools, and commercial buildings as well as replacement and refurbishment by privately owned householders and local authorities. With the housing market moribund, and government spending constrained, Titon’s in a down-cycle.   
When demand recovers, so should Titon, but the shares are so cheap recovery may not be required. The shares may be worth less than the value of the company’s assets in liquidation.
What needs to happen
Titon is barely making a profit so it needs to raise profit margins by increasing sales and/or cutting costs while it waits for the economy to pick up. It’s:

Maintaining research and development, particularly in its ‘market leading’ mechanical ventilation heat recovery systems, which are required as homes become more air-tight due to building regulations.
Defending patents granted on its ventilation systems, allegedly infringed by larger rival Nuaire.
Investing in its South Korean joint venture. Revenues from South Korea have gone from zero to more than £2m (14% of total sales) in two years.
Still controlling costs. Nine employees, or about 5% of its workforce, were made redundant in 2011.

What could go wrong:
competition     
The biggest risk is competition. Window furniture is a commodity business, and it remains to be seen whether Titon can defend its patents and keep innovating as competitors flood the market. Nuaire is expanding its heat recovery range. Turnover was suffering, and Trident was reporting over capacity, in 2003, well before the credit crunch caused a collapse in house building. Other competitors include Villavent and Vent-Axia, which look larger and more diversified to me.Even so, I think the risk it will be out-competed before the market recovers and/or investment in R&D and South Korea delivers significant profit is mitigated by experienced management and sound finances…
In January 2012, Titon reported a 13% reduction in South Korean output due to project delays.
management     
Chairman, John Anderson founded Titon in 1972 and owns about 21% of the company so his long-term commitment and experience of prior cycles is reassuring. Although the contraction of the business is a sign of weakness, management acted promptly to downsize and increase its cash buffer in 2008, perhaps in the long-term interests of shareholders. In 2007, Anderson sacrificed his own dividend so Titon could pay a higher dividend to other shareholders.
company finances    
Titon has no debt, and net cash of about £2.4m giving it a modest buffer against possible future losses and the ability to continue investing while profits are low. Net cash has fallen from over £3m in 2010, but its still higher than its pre-crisis level of £1.7m in 2007.
valuation    
Assuming Titon survives and eventually recovers, there’s very little risk in the share price. It’s about 30% below current asset value and my estimation of liquidation value, making it a classic Ben Graham bargain stock. 
-
I added £1,000 worth of shares at 34.8p a share on Monday morning, the actual price quoted by my broker, after deducting £10 in fees and £5 in stamp duty. The Thrifty 30‘s total investment in Titon is worth about £1,800.
_
More on Titon.


Narrow Money (Notes and Coin) and Reserve Balances - January 2012
2012-02-01T09:30:00Z
Monthly release of growth rates, amounts outstanding and changes in notes and coin and M0 (notes and coin plus bankers' operational deposits at the Bank of England).


University has become an unaffordable luxury
2012-01-31T17:22:51Z

I think going to university is now too expensive, time consuming, restrictive and potentially soul-destroying for people with talent to bother with anymore.
University has become a terrible deal, and most ambitious people shouldn’t go.
There, I said it.
I don’t know why it’s taken me so long to admit to myself that tuition fees, student loans, and the fact that any muppet who can write his or her own name now goes to university means it’s a waste of time to do so.
I suppose it’s because education is one of the central beliefs of being middle class in the Britain today.
Coming from a more working class background – with parents who strongly believed in education – it feels like pissing on the family photo album to make the case against going to university.
So be it.
I was among the first generation of my family to go to university. I benefited from a grant, and I didn’t have to pay fees. I invested my student loans.
My father, in contrast, got a scholarship to grammar school but when the time came to discuss whether he’d go to university – he said it wasn’t even raised. All his life he worked alongside people with degrees and Phds, wishing he had one.
That’s not an appeal to bring out the tiny violins.
It is to stress that I don’t lightly challenge the ubiquitous goal of going to university for youngsters with a bit of ambition.
And it’s to explain that I’m not some elitist snob for thinking it’s a positive sign that the craving for a university education may be fading at last.
Warning: This is a strident piece, aimed at provoking and inspiring those who want to do something different with their lives (whether it’s start a business, get rich, be financially free, or something unrelated to money). If you want to be normal, go to university and get into debt.
How I wasted my time from 18 to 21
It’s not as if I didn’t have a strong hint from my own university experience that it could potentially be a waste of time.
Having never enjoyed school, the first thing I did when I arrived at my top-flight university was to confirm I didn’t need to show up everyday in order to stay there.
No class register, no need to turn up!
I then proceeded to spend most of the next three years discovering women, music, poetry, and London. I read the NME over lecture notes, and created my own magazines and fanzines.
When I did go to lectures, I was spectacularly uninspired by all but about three of my tutors. Most were nice, smart people, but they spent a long time getting through a small part of the vast volumes of textbooks the university obliged me to acquire. There was also lots of diversionary tutorial-style stuff which wasn’t in the textbooks or on the syllabus – theoretically an advantage of a top-tier university education, but not great for passing exams.
“I was spectacularly uninspired by all but about three of my tutors.”
I didn’t waste my time with that. Instead I mainly crammed three or four weeks before the exams, and came out with a good degree.
I did a science / engineering degree, by the way – a terrible mistake for me, personally, which is another reason why you shouldn’t ask a 16-year old to decide where they want to waste three years of their life at great cost. Anyway, it wasn’t a less time-consuming arts degree, let alone something deeply spurious like a photography course or a diploma in fashion, so I had plenty of lectures to go to.
I just didn’t attend them, and it has never mattered since.
This isn’t a story about how I’m so smart that I didn’t need to be educated by lecturers. I was an idiot who sometimes didn’t know what exam I faced that day. I thought I knew more about life through literature than living it, and I made plenty of mistakes. But I was smart enough to realise it was more efficient to learn what I needed to know to pass my degree from books and friends than by sitting in lecture halls.
I’m also not ranting against a bad education. My alma mater is regularly named as among the best couple of dozen or so places in the world to go to university.
I ate caviar from the top table of the education system. I would have been better off skipping it for noodles from a Thai street vendor.
You don’t skip three years of life if you skip University
What about the wider university experience?
You know, quoting Oscar Wilde to bosom buddies under the clock tower at midnight, or meeting pioneering researchers, or simply learning not to be a teenage moron?
I think educated people mistake the progress they make growing up from 18 to 21 or 22 or 23 for the virtues of attending university.
You’d have made most of that progress anyway, as long as you weren’t stuck stacking shelves or masturbating between World of Warcraft sessions.
You can listen to inspiring people at the free lectures that happen in London and elsewhere every single day, or simply watch the TED lectures.
There’s an embarrassment of material out there that’s better than you’ll get in 95% of universities. And the Internet has made it easy to connect with like-minded individuals, too, whatever you want to learn more about. Why study alongside the third-rate when you can learn and even work with the best?
It’s true I met really interesting and stimulating people when I was in university.
However, they were also all idiots, just like any other 18-year olds and just like I was. Better to have met them in a job when they were older and wiser, or better yet in the field pursuing the same passion as me.
True, I did extracurricular activities in university that eventually helped me escape my dumb degree choice.
But were those opportunities a good reason to go in the first place? Why not cut out the middleman?
Too smart or too dumb to make education worth it
I’m not saying you don’t need to go to university because life is easy.
The truth is it hasn’t been so challenging for the young to collect and pay for the baubles of a supposedly respectable life – money, a house, a life partner, kids and a pension – since at least the 1940s.
What I am saying is that for most young people, university is no longer useful in helping you get there.

Smart and tenacious people will waste three years when they could have been learning useful stuff in the real world (such as making contacts, and learning how to answer a phone in an office and be nice to workmates).


Average people will be helped in the short term, but at the cost of £50,000 or so of student debts and spending most of their 20s and 30s paying it off, when instead they might have been discovering how not to be an average person.


Intellectually mediocre people are probably better off chasing money from the start. There’s plenty of money out there in sales, various trades, or starting your own business and employing smart people who don’t know any better, or taking on average people with huge debts to service.


Lazy people will find £50,000 buys a lot more food and beer in the Far East.

Note that if instead of going to university you simply doss about town or take a minimum wage job and do nothing on the side, then it’s possible – though not guaranteed – that you’d have been better off getting a degree and a lot of debt.

The world is tough, and you need to compete in it.
I’m just saying a degree isn’t anything like a free pass to success anymore.
The people who SHOULD go to university
There are a few people who should go to university – even though everyone who tries a bit now goes, and even though it’ll cost most of them a small fortune they can’t afford and stifle them with debt.
People who should go to university include:

Rich kids without any better ideas.


The poorest kids who get much of the costs paid for them.


Anyone with a scholarship that pays for university, provided they are passionate (talented classical musicians, for example).


Someone who is ABSOLUTELY CERTAIN a particular career is for them, and that it needs a degree (would-be doctors, for instance).


University lecturers who get paid to turn up and teach students.


People who get paid to clean up after students and university lecturers.


Pretty girls with sugar daddies, to avoid being dull.


Anyone attending the conferences that universities host to make extra money.


Foreign students who help bring down our deficit by spending money here.

Almost everyone else should do something else.
Over-burdened bright young things
What if you’re especially academically gifted? Surely you should go to university?
If this were the 1960s, 1970s or even the 1980s, then I’d wholeheartedly agree.
Back then society, recognising your brains and your potential, would pluck you from the conveyor belt that was taking the others from cradle to grave via a mundane job for life, and expose you to new ideas, people, and opportunities.
And you wouldn’t even have to pay for it!
That’s the cherished cultural ideal of universities that makes it so hard for older people to admit that you shouldn’t rack up 5-10 years of your likely disposable income to pay off the debts you’ll get for going there today.
It was great back then. But it’s not like that anymore.
Today’s smart kids are so thoroughly brainwashed by the myth of educational excellence, so terrified of doing anything other than collecting qualifications and certificates, and so secretly fearful that everyone around them is cleverer and working harder than them, that they’d make a slave in a Siberian labour camp blush with guilt.
“That’s the cherished cultural ideal of universities that makes it so hard for older people to admit that you shouldn’t rack up 5-10 years disposable in debt.”
I’ve met these clever kids at the end of their university careers. They’re a weird mix of bewildered and arrogant, insecure and self-entitled. Many are borderline unemployable for a bit, and are more or less humoured in their first workplaces.
Oh most still go on to get decent jobs and so on, eventually. I’m not saying university is deadly, just that it’s dangerous, delusional, pointless, and wasteful – getting a degree is in that sense a bit like recreational drugs.
I can’t help thinking many of them would have been better off – certainly happier – if they’d skipped the whole farce.
I’m not sure what society gets out of it all, either. The innovation keeping us ahead of the Chinese and the Indians is mostly achieved by creative mavericks and dropouts, not by well-educated drones.
Maybe the mavericks need well-educated drones as workers? Or maybe we’d do better to encourage more mavericks.
Anyway, who cares what society needs.
This is your life we’re talking about, or the life of someone you care about. Think hard before you plump for over-education.
The rich dropouts
On the subject of mavericks and outsiders, I used to think university dropouts like Bill Gates, Steve Jobs, Mark Zuckerberg, Richard Branson, and the many others who achieve enormous wealth despite not learning to pass exams were the exceptions that proved the rule.
But as I’ve got older I’ve met a lot of self-made millionaires. I even count a handful among my friends.
Off the top of my head I can think of three millionaire friends or close associates who either went straight into work at 18 or else dropped out of university.
In contrast, I have one millionaire friend who dutifully did the super-educational thing. But he became a millionaire by being a banker, which is about the only way university still pays really big time, in the short run anyway.
Of course I know other people who completed university and became rich. My last boss is one, although the tens of millions he’s worth has nothing to do with his first class education.
He started his business on the side, while still at university, and that’s what made him rich.
Most of the other millionaire graduates I’ve met trace their success to taking a risk and doing something different – going into business, mainly – rather than to a degree.
Nearly all of these entrepreneurs could have started the careers at 18 and got the initial experience and contacts they used that way. A few could have simply read some books, got networking on the Internet, and skipped a first job in an office altogether.
University challenged
There are so many objections to the notion that university is a bad idea that it would take a university lecturer three months to drone through them all.
Let’s consider some.
How can I get a job without qualifications?
The sad truth is getting any job worth having is hard, and mainly comes down to experience and contacts. The sooner you can get those the better.
Kids choose fun but futile degrees in media or photography or fashion to try to get interesting jobs, but employers will still demand you work for free for months – if you’re very lucky – anyway.
Ignore the glossy university brochures. I’ve met many people who did these degrees, at great cost, who now work in the accounts department or similar.
Start doing what you want to do at 18, and be brilliant, if you must have a 9-5 job. Personally, I’d try finding some other way to make money.
What about jobs that demand qualifications?
It’s true that many businesses now recruit ‘graduates only’.
Given nearly everyone who can write and pay for a pint of milk is a graduate these days, that’s not exactly an intimidating hurdle – unless you’ve followed the advice of this article and skipped getting a degree altogether, in which case you’ll be momentarily stumped.
Ideally, I say avoid these sorts of jobs.
I saw on the news yesterday that Nestle is building an ‘academy’ at its new factory. If a chocolate maker feels it needs to train its own staff rather than leave it to universities, you should seriously wonder about the usefulness of what you’ll actually learn at them, as well as the competency of any company demanding evidence of a degree from you.
But if you must get a degree to do what you really want to do (are you sure?), then do it cheap by living with your parents, and having a part-time job instead of going to lectures. Read textbooks instead.
Or perhaps buy a degree on the Internet.
I want to do something that REALLY needs qualifications!
Okay, certain professions require teaching: I don’t want to have my heart operated on by someone who bluffed through exams using Wikipedia.
If you really want to be a vet, a doctor, or an architect – and I mean REALLY want to be one – then university is worth the cost.
You don’t need to necessarily start at 18, though.
One of my best friends did something really inspiring the other day. He left his cushy job in engineering – and a salary – to pursue his dream of a career in medicine.
At the age of 40! I was blown away.
How much better though that he does this at 40, when he knows what he wants, rather than sleepwalking at 18 into becoming an embittered box-ticking NHS robot who wishes he’d chosen to do something other than sticking his finger up bottoms all day.
I’ve met these lordly consultants and registrars, and I suspect many would be better for having lived a bit before becoming doctors, or at least for taking a career break.
My friend was an idiot at 18. No matter, I was there, and I was an idiot, too.
If you’re not taking advantage of what being 18 means and being a bit of a moron, then you’re doing something wrong.
Much more wrong than choosing not to waste £50,000 going to university.
I want to meet interesting people!
I have nothing against this aspiration, and I should pursue it more myself.
But it’s not a good reason to go to university.
You’ll notice heavyweight magazines like Prospect or The Economist or The London Review of Books don’t stuff their pages full of interviews with 18-year olds. Charlie Rose does not interview undergraduates. The opinions of first-year students are not called upon at economic summits, or celebrated by the Nobel Prize committee.
That’s because 18-year olds who’ve done nothing but study all their lives are pretty boring. Rich in many ways, but dull.
Reality TV programmes like Big Brother feature young men and women sitting about dissecting their mundane sexual woes while drinking endless cups of tea all day.
If that’s your idea of interesting people, you’ll love university.
You earn more if you’ve got a degree
This one is hard to argue, in that it’s statistically true. However, it’s also statistically meaningless. Only someone with a university education could think it was important.
Given that most of the brightest, ambitious people – not to mention the most privileged – go to university, it’s hardly surprising that the same cohort goes on to earn more money.
But this tells us nothing about the bright and ambitious people who do something else. We can only look to anecdotal evidence, like all the self-made entrepreneurs who seem to do just fine without spending three years being lectured by people who can’t do but do teach.
Besides, the education pay gap is shrinking every year. At this rate people who avoid university will end up financially ahead, once you take into account the cost of a degree.
That’ll be pretty funny – I can’t wait to hear the excuses.
Much-quoted data from the pre-fee charging era suggests an income premium over a working life for degree holders of £100,000. But that data didn’t factor in debts or fees, even before the recent massive hike.
So the jury is out on whether degrees will pay in the future, especially if you’re a man:

If tuition fees rise to £7000, degrees in the arts, humanities and non-economics social sciences will be bad investments for men. The cost of getting them will exceed the uplift in future earnings.
What’s more, at a higher discount rate on future earnings, or in the bottom 25% of graduate earnings, even degrees in science, technology and engineering will have negative pay-offs for men.

Most degrees still result in higher salaries for women according to the same research, but there are clearly a host of other factors at play here.
If you are set on getting a degree for money, do law or economics or similar, and try very hard to get a First!
I am passionately into something weird
There’s been this big invention in recent years. It’s called the Internet.
You no longer need to go to university if you’re a bit different or want to learn more about something weird. So don’t bother.
Being weird is brilliant and marketable these days, but it can’t be taught.
I want to transcend my poor / limiting background
I feel for you, I really do. There is still a class divide in this country, and I believe social mobility is declining.
Young people who grow up in wealthy households in the South East or in the privileged enclaves dotted around the country really have no idea how lucky they are, or how the other 90% live. If they are privately educated it’s even worse.
If you’re in a ‘bog standard’ comprehensive school on the outskirts of Middling Town, UK, your family probably doesn’t know lawyers or company CEOs – let alone the investment bankers, media geniuses, and entrepreneurs who are really doing well these days.
It’s very different for the lucky kids with high-flying aunts, uncles, and neighbours.
The rich are pulling away from the rest of society. The denigration of university education has taken away one of the few ways a clever, poorer young person could vault up the rungs.
From internships for the children of mates to crippling rents in London where the action is, opportunity is being closed down, not opened up, by these social trends.
I agree with all that. I just question whether a degree and a shedload of debt is going to help you. Especially if you do an arty degree and plan to work in media, fashion, music, design, or anything like that.
Your best bet escape route degree-wise is to do the most solid degree you can – preferably law, economics, science, or engineering-based – at one of the top universities in the country.
A degree in social science from somewhere nobody has heard of is going to land you back home on the shopfloor at Debenhams quicker than you can say: “Three years, £50,000 in debt, and all I’ve got is a chip on my shoulder”.
I want to be a grown up
The final recourse of the university defenders is it teaches kids how to be adults, and to live in the real world.
Such a laughable idea, I don’t know where to start.
Besides being grossly unfair to those poor dolts who skip university yet still somehow manage to drive cars and be polite to checkout assistants, it’s a pathetic justification for spending £50,000 moving from one town to another only to hang around with similar people learning lots of things you’ll never need to know again.
There are many more interesting ways to bridge the gap between self-obsessed 18-year old and a slightly less self-obsessed 21-year old than attending university.
There’s the now-ubiquitous gap year, for a start. I have come full circle on this – I thought it was a waste of time and money when I was a student, but 20 years on it seems like brilliant value.
People work all their lives so they can retire and take the trip of a lifetime. Why not take the trip when you’re 18, and learn to wash your own socks and make other people cups of tea along the way – just like in a hall of residence, but with better scenery?
Enjoy yourselves, then get a job, and count yourself £40,000 up on the deal.
University: A poor investment
I should have twigged the notion that everyone should go to university was a bad idea when it was championed by the last government.
Almost the definition of a good idea blown out of proportion is a modern socialist party’s manifesto – whether it’s state pensions, the NHS, worker’s rights, anti-discrimination, or the idea that everyone should be an A* student with a degree.
All brilliant ideas in theory – but absurd in extremis.
Cynics may say the Left’s championing of university is all part of some political game, but I’m prepared to give politicians the benefit of the doubt.
Most well-meaning people still think we need to send everyone possible to university. Practically everyone thought so 20 years ago, including me.
But times move on. The very popularity of the idea that everyone should get a degree has become its own downfall, by making degrees too expensive to teach and too trivial to count for much.
About the only thing that gives me pause in writing this piece is, as I said at the start, the thought of my parents, who glowed when I graduated and who spent some money on supporting me there, only for me to abstain from the whole debacle.
“The very popularity of the idea that everyone should leave school for university has become its own downfall.”
But we all make mistakes when we’re young.
It would be a bigger mistake to encourage more young people to waste their time and money getting a degree, out of some sense of guilt.
Remember: I didn’t even have to pay for my university education. Tuition was free, and a grant (and frugal habits) met most of my living expenses. Yet I still think it was a bad deal.
Imagine if I’d spent £50,000 on it!
Compound the £50,000 you’ll spend on university in a tracker fund for 50 years earning a little less than the average real return from UK shares of 5%, and you’ll have nearly £600,000!
Good luck beating that with your superior qualifications.
Unqualified opinion
Most young people won’t listen to me, which is fine – it leaves more room for those prepared to think different to seek the many other genuine opportunities out there.
Most of us are too old now to benefit from making a different choice anyway, whether you agree with me or not.
So it’s up to us to help the young at least think about their options.
Got children yourself, or plan to? According to research from the financial firm rplan, a child born this year will likely cost £123,000 to put through university.
My advice is to move somewhere vaguely affordable that has a decent university nearby, build your kids an annexe with its own entrance for when they’re 18, and encourage them to stay and study at home. You might just turn a liability into an asset.
Oh, and have one fewer child than you planned to. (You’ll be happier, anyway.)
If you agree with my argument that more young people shouldn’t go to university – not with all of it, but enough to give someone pause before starting adult life in hock to The Man – then please press the ‘Like’ button below, or Tweet it, or send it to some young person you know. You might just save a life!


Further reading:
Are you richer than your kids, or poorer than your grandchildren?






Mortgage Refusals in a Tight Market
2012-01-31T15:34:08Z
‘Just when you thought it was safe to get back in the water……..’ You think you have your mortgage ducks in a row but you still get a refusal.
The reasons for many of the current mortgage refusals include the lenders own problems, a perception of your status problems or a property related problem.

Above all you should read the messages and do something about what is hidden in the refusal.
Property related Problem

The structural survey is for your benefit but the interpretation is often left to the prospective lender. Their interpretation will be risk averse.
If the property is badly constructed perhaps from dangerous materials or with poor technique such as a wrongly pitched roof the lender may adjust the loan value down aggressively. They are saying BUYER BEWARE so take the hint!
The lender will know about problems and blights in a tight area such as flooding or subsidence risk and adjust the loan accordingly. Whilst they may be reluctant to tell you why for fear of being sued (what a litigious nation we have become)
Simple over valuation of a property can derail a mortgage.
Remember there are other properties and they may be more suitable or less risky for you so don’t shoot the messenger

Lender related Refusals

You can’t do a lot if the lenders national policy is sent down to a local branch eg we don’t want to lend to  people from a particular profession or for a type of property or our loan book is full.
Lenders who run out of money do not like to admit that fact and try to continue business as usual! Until the crunch and you get knocked back. 
Your face or profile fails their internal IT test.
Take you business elsewhere. The market is more lively than you may think!

Personal related Refusals

You may have seen it coming with a poor credit score, low deposit, uncertain income or whatever. Try match your aspirations with the right sort of lender.
Unexpected refusals should be explained. The explanation will allow you to study and correct the issues for your next  attempt to get a loan.
Outright refusals are unlikely to be reversed on appeal. 
Conditional refusals or approval on terrible terms may be subject to negotiation.

Common Reasons for Refusal

Overdue or missing your current mortgage repayments.
Becoming self-employed or changing job during loan negotiations.
Reducing your credit score.
Having too many outstanding loans and credit card debts.
Making errors or omissions on the application forms and documentation.

See also Mortgage refusals in a changing market






Peter Cummings’ ‘Aladdin’s Cave’
2012-01-31T13:34:45Z
January 31st, 2012 The man who destroyed the Bank of Scotland with a reckless and seemingly out-of-control corporate and real estate lending spree is in the media again. Mortgage Strategy has an article (Living in the age of less reason) which touches on the “pig on pork” or integrated finance model favoured by Peter Cummings, [...]


The macroeconomics of vajazzles
2012-01-31T13:34:25Z
The Sun says:

Fans of The Only Way Is Essex have led a £1.4billion high street bonanza. 
False nails and lashes, fake tans, vajazzles, white stilettos and watches have boomed as shoppers copy Amy Childs and her TOWIE pals…. 
The "TOWIE effect" is having a bigger impact than the Duchess of Cambridge — because men are also buying into it. The Sun told this month how women were spending an average £250 each on clothes, shoes and jewellery like Kate's — boosting the economy by £1billion.

Is this true? There’s a good reason to think not. This sort of story is the kind of anecdotal evidence that Jonathan Portes warned us against. Anecdotes might tell us that spending on vajazzle has increased. But this doesn’t necessarily mean the aggregate economy has received a boost. If women are spending more on vajazzles it could be because they are spending less on other things. If so, TOWIE has caused a change in the pattern of demand, but no boost to the economy overall.
Macroeconomic data can’t help us here. £1.4bn is only 0.15% of annual consumer spending, and so is lost in the margins of measurement error. And anyway, we can’t observe two otherwise identical economies, one with TOWIE and one without.
You might think the answer to the question is obvious. Entrepreneurship is good for economic growth. The invention of the vajazzle is entrepreneurship. Therefore, the vajazzle is good for growth.
Not necessarily. Pamela Mueller has shown that, in both the UK and Germany, the formation of new businesses, at least in poor areas, can actually reduce overall employment as it displaces more jobs than it creates; the destruction bit of creative destruction outweighs the creative bit. This echoes Ricardo’s opinion of another form of entrepreneurship, mechanization:

I am convinced, that the substitution of machinery for human labour, is often very injurious to the interests of the class of labourers.

You might object here that these are merely temporary effects and that unemployment should lead to lower wages and thus more jobs.
Not necessarily. From a macro perspective wage cuts mean lower consumer spending which impedes job creation. And from a micro perspective, gift exchange and efficiency wage models tell us that wage cuts are accompanied by lower actual or perceived productivity and hence no more hiring.
So, how can entrepreneurship of the sort that gave us the vajazzle boost growth?
One way it might do so is if spending on vajazzles increases aggregate consumer spending - say, if women reduce their savings or borrow more to pay for the vajazzle. Another way would be if policy-makers respond to job losses in non-vajazzle industries by cutting interest rates and thus boosting growth.
Either way, the vajazzle only boost the economy insofar as financial or monetary conditions permit. In a well-functioning economy, this will be the case. But the point is that entrepreneurship alone is not sufficient for growth.


UK monetary statistics: QE offset by bank retrenchment
2012-01-31T13:07:24Z
UK money supply figures for December are a mixed bag but suggest that the economy will continue to struggle during the first half of 2012. The positive monetary impact of QE has been offset by bank disposals of non-domestic assets, probably in response to funding difficulties and regulatory pressure to boost capital ratios. Rather than force feed more cash into the gilt market, the Bank of England should offer ECB-style longer-term liquidity support to stem further deleveraging.

Bears are likely to alight on a 2.1% fall (not annualised) in the M4 broad money supply during the fourth quarter but this measure continues to be badly distorted by falling deposits of “intermediate” financial corporations – institutions channeling interbank business whose activities have little relevance to the “real” economy. The Bank’s preferred “M4ex” measure excluding these deposits declined by 0.2% last quarter.

This latter drop, moreover, was accounted by a fall in non-intermediate financial companies’ deposits, largely due to securities dealers – probably temporary. M4 holdings of households and private non-financial corporations rose by 0.7% during the fourth quarter, implying no generalised liquidity squeeze.

These numbers, however, are disappointing against the backdrop of an estimated £50.9 billion of gilt purchases by the Bank last quarter, equivalent to 3.3% of the M4ex measure. The counterparts analysis of M4 changes indicates that the positive monetary impact of QE was offset by banks’ efforts to contract their balance sheets, specifically by cutting their net external and foreign currency assets – by £28.2 billion over the quarter. Domestic assets, by contrast, were spared, with M4ex lending actually rising by £15.8 billion or 0.8%.

Monetary trends are probably not recessionary but faster expansion is necessary to revive economic growth. Further QE is unlikely to achieve this goal without accompanying action to enable banks to fund their balance sheets. The Bank insiders who control monetary and financial policy, however, refuse to contemplate ECB-style lender-of-last-resort operations – despite their hardline approach having resulted in a worse banking crisis in the UK than elsewhere in 2008-09.
The more hostile policy environment for banks in the UK than in Euroland has been reflected in a continued grind higher in the sterling three-month LIBOR / OIS spread even as the equivalent euro spread has fallen sharply – see first chart. This divergence has been reflected in UK bank stocks recently underperforming their Eurozone equivalents, following a large relative gain last year – second chart.

 


Lending to Individuals - December 2011
2012-01-31T09:30:00Z
Monthly release of growth rates, amounts outstanding and changes in total lending to individuals, broken down into lending secured on dwellings and consumer credit.


Sectoral Breakdown of Aggregate M4 and M4 Lending - December 2011
2012-01-31T09:30:00Z
Monthly release of growth rates of and changes in M4 and M4 lending for the household sector, private non-financial corporations, and other financial corporations, together with the second release of growth rates of and changes in aggregate M4 and M4 lending.


Effective Interest Rates - December 2011
2012-01-31T09:30:00Z
The effective interest rate is the weighted average of all the interest rates across each type of deposit or loan account held by all the clients within an economic sector. The Bank calculates average effective rates as weighted averages of the effective interest rates supplied by each of the reporting institutions.


Analysis of Monetary Financial Institutions' Deposits from and Lending to UK Residents - December 2011
2012-01-31T09:30:00Z
Industrial analysis of deposits with, and borrowing from, monetary financial institutions in the UK by UK residents other than monetary financial institutions. The release contains growth rates, amounts outstanding and changes in deposits and borrowing, both in sterling and foreign currency.


(Bankstats) Monetary and Financial Statistics - January 2012
2012-01-31T09:30:00Z
Informally known as Bankstats. It consists of: money and lending; monetary financial institutions' balance sheets; further analyses of deposits and lending; external business of banks operating in the UK, public sector debt and the money markets (including gilt repo and stock lending); sterling commercial paper, other debt securities, capital issues; financial derivatives, interest and exchange rates and occasional background articles.


Trends in Lending selected data sets - December 2011
2012-01-31T09:30:00Z
These data, along with the Bank of England quarterly publication, present the Bank's assessment of the latest trends in lending to the UK economy.


Publication of book chapter by Paul Tucker
2012-01-31T09:00:00Z
Taken from 'Investing in Change', AFME.


Economic Good News
2012-01-31T08:35:54Z
‘Comparisons are as bad as cliches’ or so says the quote at the foot of my daily calendar on this last day of month one 2012.

 Not withstanding that I am in continued pursuit of good news for the economy and our personal finances.
Good News In the Month

The total amount of personal debt in the United Kingdom has continued to fall. The rate of fall did slow due to seasonal borrowing but the trend is in the right direction.
The total number of people in work has risen but unfortunately so has the number of unemployed.
National opinion poll (GfKNOP) market researchers report that consumer confidence rose 4 points in January. Optimism for the next 12 months also improved.
USA have started to report minor improvements in economic sentiment. This week it was an improvement in the amount of savings as more money was tucked away.

Less Good News of the Month

Politicians are getting more involved in the management of British banks via the ‘Bonus Shambles’. We were then taught a lesson by the markets who decimated the share price of the banks and reduced the value of the countries investment dramatically.
Europe and the Euro continue to vacillate about the politics of the solutions and our government seems to be uncertain bit players.
The barometer for unemployment looks set for more turbulent times.
Too many major issues and initiatives are still in the political melting pot eg Welfare reform, NHS organisational framework, delivery of the economic reform and debt reduction
The population is still concerned about MP’s moral compass and sleaze, nepotism, hypocrisy, probity etc are set to remain on the agenda. 

Wish List for David Cameron

Stand firm on Europe and keep looking to BIRC and the rest of the world.
Complete at least one reform with vision, energy and panache. No dithering or turning.
Make sure the pain of the present ‘delivers the goods.’







Personal Finance 2012: Guest Post from Ash of SterlingEffort.com
2012-01-31T06:00:58Z
 
We’ve been busy lately at Cashzilla Towers! We’ve been talking to some of the best finance writers online, and this week we’re delighted to host their ideas and opinions about how to manage our personal finances and private banking in 2012. Today’s guest writer is Ash from Sterling Effort.
Image via Sterling Effort
Save, save, save. Building a financial safety net is important at the best of times but right now it’s absolutely essential. The doomsayers would have us believe the sky will fall in 2012, so it’s prudent to have a roof above your head just in case they’re right!

Some suggest you should save enough cash to cover three months worth of living expenses, others say six months or longer. The important questions to ask yourself are “What would happen if I lost my job tomorrow?” and “Am I confident that I could find a new job by the time my cash runs out?”

No one can tell you exactly how much you should be saving, but we should all spend some time thinking about the answers to these questions, especially if we have other people depending on us for security.
This is basic money management, but for a nation of debtors, summoning up the determination to save can be difficult. After four years of these horrible economic conditions, I look around and I still see an army of people who would be financially destroyed should they be unfortunate enough to lose their only source of income. Don’t let that happen to you. Do what it takes to build your cash safety buffer. Spend less and try to think about ways to make some extra money on the side.
You don’t need to have a huge income. You just need to make some sacrifices and remain committed to ensuring your financial security. It doesn’t sound too sexy but it’s truly liberating. Bad times may be coming and being free to not worry about that is a wonderful thing.
Sterling Effort was created to stuff some financial knowledge into those of us who grew up without being taught how money really works; how to make it, save it and grow it. This site breaks down the task of understanding personal finance and private banking into simple and easy to swallow steps, giving you clear and concise information and hopefully providing some entertainment along the way.

Name	Cap £’m	PB	ROE%	ROE3%	ROE5%	ROE10%	E/A%	EY10
N Brown	653	1.8	20	21	22	19	49	11