Monday, 30 March 2009

150,000 words!

Lucky commuters received a spoof copy of the Financial Times on Friday. It was quite a piece of work.

"Journalists frame public debate, and the City frames public policy,” said Raoul Djukanovic [made up name], who edited today’s fake FT. “If they reframed their thinking, they could help build a different world instead of conning us with lifestyle porn and bubbles."

The journalists behind it are - it is thought - disaffected financial hacks. Alphaville says it was written by Michael Fowkes, who wrote this, which provides some evidence for his authorship.

As a financial journalist, I can't say I felt particularly challenged by it. In fact, after a page I grew bored. No jokes. No facts. Just a series of long-winded assertions by someone with a political axe to grind.

Hardly something the internet is lacking.

A quick check

Private Eye sells many papers based on exposing journalists' hypocrisy, and it is rather easy to do.

Take Dan Atkinson, for instance, loudly declaring in this column, and in this book, that evil power-hungry bankers and politicians knowingly ignored the dangers of excess credit.

Well, how about Dan Atkinson's own output, in his role as senior journalist at the Mail. Surely, during those crazy boom years of 2005 and 2006 he was shouting from the rooftops that we were headed for a crash. Surely?

Er, no.

"No one now doubts that the UK consumer has over-borrowed in recent years. As long as employment prospects are good and interest rates remain low, it will not be a problem," said Atkinson in a jointly bylined piece at the beginning of 2006.

In all, of the 63 financial articles he wrote in 2005 and 2006 for the Mail, only 3 concerned debt, and one of these was about the Bank of England warning about excessive debt. Another one argued that regulations were unfairly hampering people from borrowing.

So at the time of the boom, Atkinson's opinion were pretty much in line with leading politicians and bankers. Yep, those same ones that he wrote his angry book denouncing.

And, no, it doesn't really matter. Journalists get it wrong all the time. However, this time around these accusations are being taken up people baying for bankers' blood. At such a time, the truth is precious.

Sunday, 29 March 2009

The worm that turned

I have never been a fan of the equity market.

A share is not a particularly strong investment to take - you get paid out last if there's a big problem at a company, and you don't really have any control of any company - and during the credit boom, share prices just looked wrong.

I sold out of my last share holdings in November 2007 when I grasped the full scale of the credit crunch. It took a while for the equity markets to catch up and collapse, but eventually they did.

Now, however, I am interested in shares again. For many of the reasons listed here, which suggests that there opportunities in the gloom, and there are likely to be some big movements in share prices, even during the economic slowdown.

However, I do not agree that investing in an index tracker - one that follows the entire market - is a good idea. Because there are still many reasons why some companies' share prices will fall, a lot, over the next year. The stock market, as a whole, is very unlikely to rise - it is as likely to fall.

But some shares will do well. I am looking for companies with strong balance sheets, strong cash positions, in good sectors and management, with limited amounts of debt. And the final thing, is that the rest of the market has not found them yet, and the share prices are low.

A counter example: Sainsbury's. I like Sainsbury's. It is a good company that I know well, but not only do I know this, but so does the rest of the market. When it released strong figures a week or so ago, it's shares went down. It is not a good high growth stock ... but it is one to have and to hold for a while.

So the shares I am looking for are good companies in unfashionable sectors, like hedge funds, retailers and banks.

Friday, 27 March 2009

We are like you

Now that so much money has vapourised, does this mean that City money is not real? It is a claim I hear frequently, and seems to underpin some of the arguments for manufacturing. Much better to make real things rather than rely on fantasy money, the argument seems to run.

It reminds me of a seminar during my masters degree close to a decade ago. My soft-left professor was arguing that the City skewed UK industrial policy, and that it operated largely in its own bubble without reference to anyone else.

The issue of the day was Gordon Brown arguing with Europe about withholding tax and Eurobonds.

So to illustrate his point, my professor asked who cares about Eurobonds, who actually knew anyone who worked in that market?

Amused, I raised my hand. I worked in the Eurobond market, and it was clear to me (at the time) that the European move to impose a withholding tax was an attack on London as a financial centre (I’m not sure I still agree, I probably do).

The point being, you don’t know anyone whose livelihood depends on the City until you ask. And if you do ask, you might be surprised at the answer.

Wednesday, 25 March 2009

Same mistakes all over again

Mid-way through the financial crisis, it's a relief there's no-one out there banging the drum for banks to lend irresponsibly again.

Oh, my mistake.

Will you succeed? You will indeed. (98 3/4% guaranteed.)

Through the looking glass, the world looks the same but different.

To get there, read Nassim Nicholas Taleb’s book Fooled by Randomness, and it becomes quite impossible to see the financial industry in the same way again.

So it is always interesting to meet someone that gets it, that has drunk the kool aid, taken the red pill and gone to other side of the looking glass, particularly if they control half a billion pounds of money.

Such a person is Hugh Hendry, head of
Eclectica Asset Management. He came to speak at Reuters yesterday, and it was clear from the outset that there was something different about him compared with other industry figures.

The reading matter laid out before him was enough to suggest something unusual was likely: Dr Seuss’ Oh The Places You Will Go, and Will Self’s The Quantity Theory of Insanity.

And Hendry did not disappoint. Parts of the hedge fund industry were evil, he claimed, while his investments in agriculture were just to show people that he wasn't completely pessimistic. Meanwhile, difficult questions about the future were palmed off by references to his astrologer.

The intellectual substance to his perspective is not just Taleb, but the economist Irving Fisher.

(The Economist ran a
useful briefing on Fisher last month if you haven’t heard of him.

"As parallels to the 1930s multiply, Fisher is relevant again. As it was then, the United States is now awash in debt. No matter that it is mostly “inside” or “internal” debt—owed by Americans to other Americans. As the underlying collateral declines in value and incomes shrink, the real burden of debt rises. Debts go bad, weakening banks, forcing asset sales and driving prices down further. Fisher showed how such a spiral could turn mere busts into depressions.")

Hendry is often on the TV nowadays, possibly because there is little else for him to do at the moment – almost all of his investments are in safe-as-can-be government bonds, and he claims he will not start buying for another 18 months or so. Here’s one TV performance to keep you going, while here’s another.

Personally, I think his comparisons between Japan in the 1990s and the US in the 1930s are interesting but possibly overplayed. History rhymes rather than repeats.

American consumers are more optimistic and less rational than those in Japan, while the financial markets today form a profound and powerful industry reaching throughout society, in a way they did not in the 1930s. A few broken windows aside, the interests of finance are more likely to again be embraced by Anglo-Saxon politicians and publics rather than entirely rejected, as Hendry’s analysis implies.

But I am very likely to be wrong, and he right, or maybe both of us are wrong. As such, almost all of my assets are in risk free investments, while I have a small investment in bank shares.

Be that as it may, it was a refreshing change to hear someone speak who is not constrained by industry expectations, who thinks for himself and who gets that the financial industry demands (needs!) more rationality than could ever be known by any set of human institutions.

Monday, 23 March 2009

Day trading

After my earlier success with Lloyds, first thing this morning I bought some HSBC shares. My basic strategy at the minute is to take advantage of volatility in banking stocks. I think the overall direction is positive, as investors creep back in, but there will be days of big drops. The skill will be to buy on the drops and sell on the leaps.

HSBC dropped a lot on Friday, largely because of investors taking up rights issue sales. This pushed the price down and now they are moving back up, ahead of the US Fed announcement this afternoon. Again my target is 10%: I bought at 370p, so looking for a sale at 410p.

Edited to add: again, a rising tide floats all boats ... shares hit 415p in the mid-afternoon, so I sold on. Interesting this day trading lark.

Friday, 20 March 2009

Lloyds sold

That was quick! I sold the Lloyds shares I bought earlier in the week. My aim was for a 10% return annualised. Instead, I got my 10% return in a week. So why wait any longer?

Criminalising mistakes

Had a good chat with a mate yesterday about big mistakes and morals.

On one side of the conversation, I was putting forward the line that people are generally quite wrong, so mistakes - even very, very large ones - are hardly surprising, while on the other side of the debate, the point was made that these mistakes were sometimes knowingly made, and made for short-term gain at the price of others.

So I was thinking about this last night. At what point do mistakes become crimes? If short-termism was a crime, then we should all go to jail. And if stupidity is condemned then the police will certainly have a big job on their hands.

But then, but then, we do legislate to protect society, and the behaviour of banks has led to unprecedented taxpayer bailouts. We have had to pay for them, and that won't do.

Obama, last night:

Shouldn't someone go to jail, Leno asked, for what had happened to the economy? "Here's the dirty little secret," Obama replied. "Most of the stuff that got us into trouble was perfectly legal. And that is a sign of how much we've got to change our laws." More "common-sense" regulation of financial products was urgently needed. Still, he went on, people "should have complete confidence in the banks … They shouldn't be putting [money] in their mattresses."

Thursday, 19 March 2009

Bonus surtaxes

Here is one way that the British government could solve a number of problems all at once.

Why not introduce a supertax on extremely high earners? And craft it so that it specifically affects the amount 'earned' by Sir Fred Goodwin?

Taxing Goodwin's millions to the hilt would be a neat way of punishing his mistakes, keeping within the law, as well as clawing back tax, giving high earning bankers a nasty dilemma, and throwing the electorate a meaty bone to satisfy their anti-banker lust. What's not to like?

I thought of this a while back and am reminded of it by Felix Salmon, who recommends it as a way to resolve the AIG bonus situation.

Fools or frauds?

Much of recent comment implicitly (at least) suggests that all bankers of recent times are fraudsters. But here's one stat that suggests they were merely fools:

"The net value of purchases for all bank directors in the six month’s since Lehman’s collapse was £95,700, a 91pc slump from the £1.1 million that they bought in the previous six months."

That 1.1 million is probably now worth a fraction of that amount. People are angry, and want to throw around accusations, but it would be great if we could get angry at the right things: stupidity, ignorance and arrogance.

Many of the critics of bankers unfortunately demonstrate many of the same traits.

Tuesday, 17 March 2009

Discredited banks

The British have a love/hate relationship with the City. It is a complex issue, complicated by a history of class antagonism, the North/South divide and lingering confusion about what the City actually does (ie, is money made in the City 'real'?).

(I set up a information service for the European finance industry a while back, so can certainly attest to the reality of City money and its role in exports.)

I woke up this morning to hear Robert Peston arguing that the public's anger at bankers puts at risk one of the few industries in which our country has comparative advantage. In this he repeats arguments I have been making recently about the dangers of throwing the baby out with the bath water, and buying into myths about manufacturing.

There is a very large 'but'. That is, there is more than a whiff of truth in the criticisms of banks and bankers, and the government (to its credit) is pushing hard for deals where banks clean up their act in return for taxpayer support. Note the comments underneath Peston's article (on the Peston link above).

This makes today's stories about Barclays particularly pertinent. The often persuasive Alphaville crew believe the bank is seriously challenged by today's revelations. Certainly, such large-scale 'strategic tax planning' is not the 'humble' and socially-aware form of banking that the government (and public) wish to support.

Instead, the activities of Barclays' SCM look like the kind of discredited complex and aggressive behaviour that characterised the banking world during the credit boom.

Monday, 16 March 2009

I don't like charts, but ...

... I did like this one. HT Alphaville.

Edited to add: the Alphaville comparison does not work, because the mechanism of the bubble - the meme flowing from the 'smart money' through to the public - is not applicable.

First buy

In a fit of spring madness today, I bought some shares. In Lloyds.

I originally planned to do this in summer 2008, when they cost around £2.50. Today they cost me just under 50p. Unlike then, there will be no dividend for, I guess, 18 months. However, the bank dumped most of the bad stuff from its books, and I reckon the equity market is 'anti-bank', depressing equity prices excessively.

I don't think market antagonism will change for six months or so, but suspect as the banking sector has been the first to restructure it will be the first to recover.

My guess is the investment will begin to pay off in 18-24 months time. Hoping for 10% per annum return, so selling for around 70-75 pence in late 2010.

Not likely here

Other parts of the UK press have picked up on the Stewart/Cramer debate discussed below. The Guardian wonder whether it should happen to financial journalists in the UK.

Of course it should, but the UK journalists that should be scrutinised are those that pumped up the housing markets for year after year, without caring or thinking about the consequences.

However, there still remains too much of a cosy and self-interested consensus - with journalists' employers receiving significant sums of advertising money from the housing industry, and too many householders still believing (hoping?) that their house prices are real.

This allows evidence-free articles like this to still be published, written by journalists still desperately trying to pump up the market.

Edited to add (after Matt's comment): I am not accusing anyone of dishonesty, just ignorance and bias (same as Jim Cramer).

Friday, 13 March 2009

Emotional closure

The Jon Stewart vs Jim Cramer argument has gone to an interesting place, in my humble opinion.

After days of increasing - and articulate - anger from Jon Stewart, one of CNBC's leading commentators, Jim Cramer, went onto his show.

And - amazingly - the debate is really interesting. Stewart tones down his hyperbole, while Cramer also seems sober.

Couple of things - Stewart thinks that people were so engaged with the debate because of the gaps between CNBC's claims about itself and the reality. I don't agree, I think the engagement is because the public needs to talk, think, shout, engage and get some, er, closure on what is happening out there.

That's the first section. The second section is a little less interesting but we see Cramer accept things must change.

The third section sees Stewart act as the public, plaintively crying "why didn't you tell us this stuff?". It is eloquent, angry and intelligent. Must watch stuff.

Here's some blog opinion on the debate.

Thursday, 12 March 2009

Square eyes

On a day that Reuters got a lot of news coverage for its interview with Hector "be afraid" Sants, it is interesting to take a quick look at financial TV.

CNBC - favourite of the day traders - has come in for a lot of attention recently, and not for reasons it would like. Watch Jon Stewart's attack, or - more realistically for those of you at work - read Salon's fun article on the subject.

Who watches financial television seriously? I do not know but Reuters has just launched its new streaming video service, and with serious intent.

There is talk that the future of TV is 'narrowcasting' ... so I guess this fits with that.

Wednesday, 11 March 2009

Second-wave feminism

Gratifying to see it is not just me that finds cliched assumptions about gender offensive. It seems some rather high-powered women do too.

"...we are deeply troubled by claims that women are inherently more risk-averse or cautious or prudent than men, and that this essential nature somehow makes women more suited to leading in a downturn. Such assertions have little or no empirical support in a business context. These speculations also come with dangerous implications. Are men therefore better suited to managing growth or leading businesses through healthier economic times?"

Tuesday, 10 March 2009

Ever the contrarian

I have been a running a low-level campaign for unfashionable industries, such as finance and the media.

Once seen as the mainstays of the new economy, in the light of the crunch these weightless sectors have come in for criticism from all quarters.

So I enjoyed reading Dave Hill’s plea for London to not be shy about selling its strengths.

"Is there something shallow and insubstantial about all this, even something just a little un-British? On the first point, I can't help fretting that the answer might be yes. On the second, I am certain it is no. Even more than in the 1980s we have little choice but to rise from the ashes on a zephyr of conspicuous consumption and self-promotional frippery. Churchill's reticent, stand-alone land will be saved by greasepaint, insurgent aliens and the party buckets of Colonel Sanders. We need to buy and have world buy into us. We need to sell ourselves, history and all."

And if you have any doubts about the level of unpopularity of finance, read the comments following Tetsuya Ishikawa’s call to help firms used and abused by private equity companies.

Edited to add: it's well worth a read of this article suggesting the decline of manufacturing in the UK is a myth.

And, while we're at it, it's worth reading Simon Jenkins on Thatcher. Gets across the complexities and paradoxes of politics.

Monday, 9 March 2009

Kay (again)

FT columnist John Kay has a new book out, "The Long and Short of It", which is notable for having one of the worst covers ever known on a book and being a wise but rather difficult read.

This is surprising given that that book is intended for the general reader. Indeed, it is more impenetrable than his previous book, which explained (quite brilliantly) how all of the world's economies work.

So for the even more general, general reader, it is worth a read of this article by Kay n the Sunday Times, which summarises most of his main points.

- most professional fund managers are not able to outperform the market
- all they do is follow conventional wisdom (this is their learning and advice)
- so there is no need to pay them fees
- it is not *that* difficult to learn the basics yourself
- and it will probably be the best paid work you ever do

Friday, 6 March 2009

Simple lessons from history

I always like finance explained simply and quickly, and here’s a good one, possibly the best I have ever seen.

Two problems – first, the focus on sub-prime is a little out of date, the problems for the last year have been much broader – corporates, sovereigns, LEHMAN! AIG etc.

Second, it’s great being wise, but is it so great to be wise after the event? We might learn some lessons from history, but I do suspect the lesson here – that CDOs and subprime do not really work together – have already been learned.


(And can we stop blaming investors solely for subprime - there was politics in here too.)

Thursday, 5 March 2009

The credit angle

The big news of recent times is that the share markets appear finally to have succumbed to the crunch.

It took some time but it was inevitable – credit and equity are not divorced (though they are in many newsrooms).

As such, orthodox articles like this, which explain the equity drop in terms of results and expectations, miss a couple of key points.

First, that the bid premium has gone. Private equity buyers have vanished, as have trade buyers. Neither can raise any debt, and paying in shares aint often gonna win friends. Cash is king, and there's not much around.

Second, the rise of distress fundamentally alters the value of shares. If dividends stop, the value of shares droop, as there’s no income. And if creditors look likely to take over, then the value of shares fall off a cliff.

So, maybe it's time to buy a new bed.

Wednesday, 4 March 2009

The future of finance (for the next 10-15 years)

- Mathematical models should not be relied on without a proper understanding of the economic conditions and behaviour that fed them.
- It is foolish to put blind faith in credit rating agencies. Do not invest in what you cannot understand.
- Shun arbitrage strategies that assume permanent access to liquidity.
- Avoid investment vehicles that inflict swingeing charges in exchange for what in most cases will amount to market performance or worse.
- Treat leverage with due care. Recognise that the conventional wisdom of the consulting fraternity is not conducive to contrarian behaviour, one of the keys to successful investing.
- Above all, beware what Charles Mackay, the 19th-century historian, called the madness of crowds.

From here. HT Alea.

Never the same again

I found myself interviewing a very senior corporate lawyer yesterday and he had exactly the same views as those I heard on Monday at a Guardian debate.

"This is not a small shock which will rock the economy for a short while and then life will go on as normal," he said. "Things will not be the same after this."

How things will look after the shock is a matter for debate. The Guardian debate's subtitle was "Can Capitalism Be Fixed?" though the panel were not clear as to what capitalism really is, was or will be.

Gray was clear that things will never be the same again, and they will be worse. But his position is the standard ludicrous political mix shared by much of the whinging left:

- expecting a gold-standard welfare state provision, far better than anyone, anywhere has ever known
- ignoring the nationalism and social solidarity that built up the welfare state
- closing down the country's most productive economic sectors
- building up our manufacturing base to compete with low-cost Asian countries
- calling for massive transfers of wealth overseas

We are in desperate need of something better. We await a new generation of thinkers, writers and politicians to lead. Until then, the corrosive nature of modern discourse drags us down ever further.

Tuesday, 3 March 2009

Ultra-capitalism at the Guardian

I had my first peek at The Guardian's new building last night, when I went along to one of the paper's "Capitalism in Crisis" debates.

It was difficult not to gasp at the riches of the building - providing a level of grandeur beyond any investment bank - and not wonder at the ironies on offer ... but I tried my best to get over myself.

On the panel, John Gray offered up his best grumpy old man impression. Why had we not listened to the mavericks he wondered, an idiotic statement if I had ever heard one. Admittedly, I am no fan of Gray. He wrote a book a few years back that I truly loathe and I have never read a word of his since. Here's why.

Then came Jayati Ghosh, a professor of economics in India. She trotted out the line that exploitation of the developing world has not ended, and that it would difficult for the capitalism to recover.

She claimed that jobs had not gone to India and China, in defiance of our own experiences, and the evidence. When challenged, she uttered the phrase: "There are many countries in India and China," meaning - I presume - that the jobs have gone to the wrong bits of these countries, and which sounded to me like she was cherry-picking evidence to suit her thesis.

Elsewhere, the two generally pro-capitalist speakers, financier Terry Smith and David Goodhart, editor of Prospect, were more interesting.

Smith makes for a fine after-dinner speaker, having a good sense of wit and an impressive collection of stories. He was also the most succinct. When defining what had gone wrong, he said that people simply borrowed too much because debt was too cheap. It is an argument hard to disagree with.

Goodhart was sometimes contrarian and often interesting, but by the end he tired as the audience's (rather predictable) anti-capitalist leanings seemed to get to him. And it is desperately hard to talk positively about private enterprise at a time when the government has had to bail out some of the country's largest companies.

This is almost as hard as swallowing an anti-capitalist line from a newspaper that during the boom years did all the things that its comment pages frequently castigate. Like Michel's Iron Law of Oligarchy repeated, even those most resistant to capitalism bought into its excesses. (And yes, the editor of the Guardian earns more than double that of the Prime Minister.)

So now that the bankers are apologising, and the politicians are U-turning, wouldn't it be delightfully ironic if the Guardian becomes the last institution to continue boom era hyper capitalist behaviour?

Monday, 2 March 2009

Financial advice

Every week or so someone asks me for financial advice. It is both a good question to ask, and one that worries me.

Max Hastings' article in the Guardian today shows why. Love him or hate him, he's a smart guy, yet his investment return over 25 years is probably below zero.

He uses this information to wonder whether the approach we take to personal investment in this country works.

He asks: "When it comes to money, many of us are unfit to be let out without a nanny. But who can be trusted to push the pram?"

It is another good question. Put simply, people both wilfully ignore good financial advice and are regularly fleeced by people they should be able to trust.

The Mail, as ever, provides some real people.

Whatever the answer is, I suspect it will not satisfy these frustrated Alphaville readers. It feels like the end of days, and even a change in government appears unlikely to shift the gloom. Charlie Brooker expects a riot. I think the odds are shortening.

Restructuring Cartoon!


It is likely you know David Simonds' work, but you might not know that.

He does many of the cartoons for The Economist, as well as for the New Statesman, as well as occasional pieces elsewhere.

He is my favourite cartoonist (as well as being a really nice person), able to both convey detail and humour, which is some skill.

Here's a couple more.