Archive for October, 2012

City of London Rapes Pensioners

The British Government has little room for error if it is to get the economy ready for expansion. I have written on several occasions about our growing debt problem and its long term negative implications….  Never have so many owed so much, because so few did so little  ……  Will the next Italy step forward  …… Where is all this money coming from?    were some of my earliest blogs on the subject. Since then my fears for the budget deficit have been well founded as it continues to be way above target. The UK is running out of time if it is to achieve the re balancing of the economy which will eventually lead to growth. Many coalition ministers have talked about shifting the economy more towards manufacturing/Engineering but little has been done. As I have stated before, Sterling vs the Dollar and the Euro has been a problem but more importantly red tape from Europe and a complete lack of business acumen from our politicians. As a point in case, the wind generation industry. Britain has more than 50% of the worlds (yes! the worlds, 2.7 gigawatts out of 5 gigs total) wind turbine capacity so you would think that it has a dominance in the productive side of the industry. NO! It has virtually no capacity whatsoever, instead over half have come from Siemens in Germany, a third from Vestas in Denmark with the rest from a German subsidiary of an Indian company. What absolute b—-cks is that. All I hear from politicians of all persuasion is spend more on infrastructure and housing, throw money at it! YET MORE B—OCKS! If they were to look at a major road project for instance, they would see (mentioned in UK Debt blog)  around 85% of the machinery was imported and over 50% of the labour could hardly speak English. So why raise more debt to help other countries! We need to target our spending where it will have a chance of paying back in the future. Just throwing it at short term projects helps the immediate economic statistics but it will not build a sustainable future. We must realise the debt pile is getting bigger and all we are doing is feeding other countries employment. Employment in the UK is on the face of it going up but believe me the quality of that employment is diminishing rapidly. Just because you create another few thousand coffee shop jobs (very topical re Starbucks)  it does not mean all is rosy. Just take a look at the significant profit warnings from some of the UK largest engineering companies in the last few weeks.

So, why the title of the blog? Well, I want to highlight the demise one of the main growth engines (of the past three decades) to the UK economy. The City of London post Big Bang was responsible for most of the growth in the UK economy over that period. WOOOWWW I hear you say, how on earth can you make that claim. Well having worked in the City from 1974 (Keyser Ullman Merchant Bank) to sometime in the next millennium, I have a clear idea of how it grew. That still does not make me qualified to make such a claim.  So what makes me think that. Velocity of money is why (Velocity explained in Where is all the Money coming from?)  Post big bang a new system was introduced for the transaction or trading of shares. It was called Dual Capacity and it has been a cancer which has stripped the City of the very moral fibre with which it was built. The motto of the London Stock Exchange was `My Word is My Bond`. Post big bang that was thrown out with the bath water. The old system `Single Capacity`had very strong demarcation lines between the various aspects of City life. I worked, at some stage in my career, for all of those various aspects. The responsibility of position taking in shares was the sole responsibility of stock jobbers (I worked for Akroyd & Smithers) . These partnerships had a limited capital base so were very responsible when it came to risk. They also knew the companies, in which they traded, very well, having a detailed knowledge of the various industries. The brokers were the middle men as Jobbers were not allowed contact with investors. Brokerage firms traded on behalf of both public and corporate customers. They researched companies and advised clients. The Merchant (British term) or Investment Bank (US term) were the deal makers with corporate action their bread and butter. Investment management companies were sometimes linked to the banks but on the whole were separate entities. Post big-bang (not a cigarette interlude between Jordan and Peter Andre) these various separate functions were brought under one roof. For instance UBS incorporated a jobber (Akroyd) Equity Broker (Rowe & Pitman) and a Gilt Broker (Mullens). These were put into SG Warburg, a merchant bank. So now one institution can offer research, advice, trading and finance. It all sounded like a good idea to the Americans but many in the old UK system had reservations and they were right. Greed took over and the Chinese walls which were supposed to protect clients from these new super powers rigging research and prices came falling down. With the Jobbers now replaced with highly capitalised banks, trading volumes exploded and the risk positions taken were  10`s if not 100`s  times bigger than under the old system. Eventually, a relatively new breed of institution began to evolve, Hedge Funds. Up until the big bang, only jobbing firms were able to hold a physical short position in stocks and shares. The bigger and more profitable the investment banks became the bigger the impact they had on the British Economy. Big bang was responsible for the creation of tens of thousands of jobs directly but more importantly hundreds of thousands of jobs indirectly. Salaries (and share awards) in the industry ballooned to rock star proportions, not just to a few but to many. In turn this money spawned a spending spree unheralded in the modern era. The South of Britain became the domain of white van man who was a bastard child of the big bang. The period since big bang has seen millions of manufacturing jobs disappear, but that did not matter because we had easy money. Total debt (Private and Govt) in the UK trebled between 1997 and 2008. Not bad when you consider that debt up to 1997 had taken 300 years to get to acumalate. This easy money lead to a an explosion in money supply and more importantly the Velocity of money. In turn that lead to an asset explosion which drove the white van man into a frenzy of activity. To further the investment banks ability to throw even more risk into the pot, the Glass-Steagall Act of 1933 was repealed. The very safety valve that was put into place following the last big depression, how can the regulators and Central Banks not be charged with serious offences over this!

At Akroyd & Smithers we were encouraged to read (and reimbursed weekly) the FT and other important papers together with Industry journals and periodicals. When I left the City, FT reading had become for dinosaurs. You were more likely to see traders with the Sun under their arm. Knowledge of companies was almost non existent choosing to concentrate on trading patterns (via mathematics) and the Greek alphabet. As an example of this new environment I offer two examples from my past. Both of which highlight the part Hedge Funds have to play in the City culture.

First up Gartmore. The then superstar head of Gartmore Hedge Fund made a presentation to the senior equity staff at an Investment Bank. He demanded that all price sensitive research and information should be given to him 24 hours before any other clients. If this were not agreed to, it would jeopardize the several millions of pounds paid to the Bank by Gartmore`s Pension Fund. Thus, in affect using the leverage of the pensioners of this country to gain him a huge salary but also to create massive returns for his investors who were in many cases senior people within the investment industry. It was not clever, it was fraud!

Secondly, I was sitting in for a colleague, and had to take charge of a large placing in a FTSE 100 company on behalf of a corporate client. So we were acting as adviser, broker and trader in the deal. When we got the green light to place the shares I made the decision to inform, first, the pension fund clients who were likely to be long term investors. Once this was done I opened it to Hedge Funds. Why? Well, we in the industry knew that telling them first (Hedge Funds) would have driven the price of the stock lower as they short the stock during the process then buying back in the placing. I knew this was a controversial decision because like all brokerage houses, the management fawned over hedge funds. Well, I was hauled over the coals for not telling a specific hedge fund who had close links to our management. I found out from my colleague later that they had been given a prior warning of the placing and had a large short position ready to make a fortune. Our management had a big interest in this Hedge Fund making big returns, I think you can guess why. Sadly, the individual who gave me the dressing down and implicated in the process is now in charge of the London Stock Exchange. Poacher turned game keeper I guess.

The City of London is now shrinking at an alarming rate with those highly paid jobs disappearing daily. As regulators demand banks hold more capital and separate commercial and investment banking activities, volume will continue its lower trajectory and hedge funds will find it more difficult to navigate and trade. They will have to get smarter or disappear. My guess the old Buffett adage will come into play `When the tide goes out you can see who has been swimming with no trunks on`.

As the City shrinks, the velocity of the spending which the industry had ignited will collapse. This will expose the South of England economy and house prices will fall which will put another nail in the tyre of white van man.

If the city is to be serious about rebuilding trust in the financial industry, first we need to venture back to the single capacity system. It has been proved with many high profile cases lately that the regulators and governing bodies have no will or ability to stop greed and dishonesty. I am not saying that the City was pure prior to big bang, indeed I know an old friend who was banned from the London Stock Exchange and the London Financial Futures Exchange for various insider and tax related reasons. All of which he was guilty of as he had a close network of Masonic contacts who raped the system. A certain religious group have also played a big part in city infringements.

Pension funds have been responsible for the biggest fraud committed in history. When I wrote an article for my election campaign in the 2010 General Election I highlighted that £100bn of Pension Funds in the UK actually lost money in the previous 10 years. The City grew over that period making ever greater profits. Where do you think those profits were coming from???? You the pensioner. Poor quality investment management (not to forget Gordon Brown) has blighted a whole generation of current and future  pensioners. All we have to show for this glorious period in financial growth is a banking system which only survived due to the generosity of the British government, with your money!

So when they tell you employment has gone up, just raise an eyebrow and wounder what quality of employment (and nationality) we have created. If all was so good, why have our high streets become ever more populated with Pawn, Betting, Pound and Payday Loan shops. We have had 20 years of some of the worst short termism a country could ever expect. The medicine to all this is not pleasant and no amount of sugar will take away the bad taste. Batten down the hatches for it will be a long hard slog. Cameron and Clegg have said much but done little other than spend more of the two precious commodities we have little of, MONEY and TIME.

 

 

 

 

Sunday, October 21st, 2012 Consumer Debt, Debt, National Debt, Predictions, UK 1 Comment

Be Prepared for a Wedgefest!

A Storm is Brewing!

Some very long term chart scenarios are coming to a head at the same time. As these charts are forced into ever tighter trading ranges, the rebound when they finally break will be explosive. First up is Sterling vs $ or cable to traders (so called as it was the first currency traded via the undersea cable link between the UK and the USA). It has been rampant of late testing a previous high of $1.63 this mainly due to Dollar weakness brought on by QE3 but also by the misplaced confidence in the UK economy. I still believe we will test the all time low of $1.08 once the real state of the UK debt ladened economy becomes clear to all. The budget deficit has continued to grow with government spending increasing year on year throughout this parliament term. Tax receipts have been mildly affected by raised taxation but will fail to rise further. The significant cull of highly paid traders and brokers in the City will have a dramatic affect on income tax collection during the normally high January period and once again during the spring bonus time. The post Olympics correction is underway and the upward trend in unemployment will once again be resumed. Industrial order backlogs are diminishing which will focus the attention of employers who have been prepared to hold onto excess employees in the hope of an expansionary phase, wrong! The high street continues to be a demanding environment with the growth of charity, pawn and pound shops showing no abating. The growth in these outlets merely confirms my significant concern for commercial property which is grossly overvalued as a sector. Eventually, high street shops, office blocks and possibly some industrial units will be allowed to be converted into residential. This will drive housing property down to a more stable pricing multiple (to average earnings) which will reignite lending. Of course, this purge in the system will first flush out all the highly geared operations and cause a mini crash in itself. Until that is done we cannot move forward. As Warren Buffett says `When the tide goes out you can see who has been swimming with no trunks on`.

Anyway back to Cable. $1.63 is a massive resistance which if broken will lead a charge to $1.64. If this is breached, I am totally wrong and will eat my hat. I believe the bottom of wedge will go (currently $1.55) starting the long journey lower. As I have stated in several blogs on the UK, Sterling has performed much better in the last two years vs the Euro than the Dollar which harms our export potential eg  Dollar import commodity costs higher but out export markets of Europe get weakened by Sterling’s strength.

Next up, the FTSE. The rush of enthusiasm following QE3 helped propel the index close the the top of its wedge. If it closes above 5900 (not that far away) significant further gains are implied with an attempt on the 2007 high in prospect. It is clear that QE around the world is driving certain asset classes into bubble territory and this is no exception. Despite all the very real global problems in the world today, Syria, Iran, Afghanistan, Japan/China island dispute, China slowdown, Europe, Fiscal cliff, Western world budget deficits, Japans budget deficit, US drought, the markets are mesmerised by easy cheap money. Lets be clear about this, the world is changing down a gear, not to raise revs because all the debt problems have been solved and the headwinds are now tailwinds, it is because there is a massive abundance of global productive capacity which was put in place to meet the insatiable consumer demands brought about by historically unheard of credit growth. This is history and will not repeat itself no matter how many QE`s you do. The debt is real and it is huge. Inflationary tactics currently being deployed are extremely risky which no one can forecast the outcome of. I watch (how sad) the import and export numbers of most countries and two factors are striking over the past year. Firstly they are not growing in volume terms and secondly the import components are generally the weaker of the two components (how can this be?). Everyone wants to export their way out of trouble, a fine concept in normal times when the world is healthy, but when all nations are trying to do the same thing at the same time, the result will be messy.

The Yen is a topical subject with this blog of late and my favoured trading instrument. Previous blogs have highlighted its 40 year ascendance and why I believe that is coming to an end . The wedge high (Yen weakness) was tested last week and held fast. I believe it will give way  in the next two months as the central bank finally gives in to mounting political pressure to meet its goal of 1% inflation. The economic data over that period will deteriorate (adding to the central banks urgency) at an alarming rate thus confirming the counties slide into recession. The support or point of entry to this trade is between ¥ 77.50 and ¥ 78 which is not far from current levels. If I am right and the wedge high is broken, my objective is ¥ 83. My overall belief is that it will fall to ¥ 100. One of the reasons why I feel confident is highlighted in the bottom two charts see below

 

Below is the Dow Jones from 1997 to date (6000-14000) and above is the Nikkei from 1997 to date (22000-8000). From left to right the outcomes is a mirror image even if the path taken to get there is not quite so. Why is this of interest and why should it lead me to be negative of the Yen. Well, in the words of the late grate Max Bygraves OBE (and my mums favourite) `I wanna tell you a storyyy`

I mentioned in my previous blogs about the demographic time bomb which has now exploded in Japan. In brief, the rapidly ageing population and strong currency has lead to a seismic shift in employment away from manufacturing and into social/health care. The Japanese have been very clever. They have used the strong Yen to shift manufacturing away from Japan. This once second biggest economy of the world is outsourcing its manual work to the rest of the world. As they have precious little natural resources this make double sense. Once you have created significant income streams of foreign currency, a weaker domestic currency will greatly enhance the Yen value of such cash flows. Hence, Japanese company values would be greatly enhanced in Yen terms. At the passing of the next few central bank meetings, the pressure will grow, until eventually the genie will be let out of the bottle and significant monetary easing will be undertaken. This will put the Yen on a sustained downward trajectory and reverse the fortunes of the Nikkei. It is possible to play the spread between the two indices, eliminating the currency risk, via spread betting. I have always found IG Index very easy to use.

The US Federal Reserve have put great stead in inflating the equity asset bubble as a way of preventing the economy from collapsing. The US president is very grateful of all the QE help he can get. Indeed, he was quick to herald the latest unemployment figure as testament to his policies. However, when he came to power he promised to halve the annual budget deficit. Had he done so, unemployment would be akin to some of the worse performing European nations. The Dow Jones is indeed on a high testing all time records, with all that lay before it, it might be wise to `Fight the Fed` a phrase which has lead to all who have tried in the past, worse off. This time round it might pay off. Sell Dow /Buy Nikkei… currently 4660 points the difference.

 

 

 

 

 

 

 

 

 

 

 

 

Monday, October 8th, 2012 Predictions 3 Comments
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