When listening to and reading recent comments about the proposed reforms to Housing Benefit, I am forced to reject many much stronger expletives before arriving at the word "Twaddle".
The status quo in the UK is simply unacceptable and unsustainable. The Beveridge/Morrison revolution that led to the establishment of the Welfare State has turned, as most revolutions do, into a nightmare. From the very beginning in the late 40s and early 50's the left in the UK hijacked this wonderful concept - that the weak and needy should be sheltered and supported - as an exercise in extending State control into every element of our lives. In general it has been one-nation Tories that have strengthened the welfare system by dragging it back time after to time to its worthy roots - that of a safety net.
I have little doubt that the reduction of housing benefit to saner levels, both in terms of eligibility and quantum, will have a profound effect on many. We should, however, remember that these proposals are not retrospective and the effect on current beneficiaries will be small to non-existent. For new claimants, however - welcome to the real world!! Why should my children - all working and tax-paying adults now - have to struggle to rent or buy (I will deal with buying a little later gentle reader) a home at rates that reflect the aftermath of the buy-to-let frenzy fuelled by the laxity of monetary policy under the Blair/Brown Labour government?
The soft pink fuzzy warm media industry that lumps together the poor, the underprivileged, the sick, the old, battered teddy bears, puppies with big brown eyes and soft fluffy kittens are, of course, back where they are most comfortable - in opposition and able to make cooing noises of sympathy at the same time as tutting noises of disapproval without for one moment having to give thought (they never have, never do and never will do) to how it is paid for and how we administer such things.
If current benefit reform goes through, it will have little or no effect on the needy. A dry warm home of two bedrooms in Leicester is as valuable as a three-bedroom flat in Central London if you want to keep your children warm and healthy. What about work do I hear those members of the previous government with insufficient shame to keep quiet for a few decades say? Errr.... is that the government's job - or even its business? Within a very few years of the proposed reforms real jobs will arise as the labour pool grows. Then (and I do appreciate this concept is up there with incest and paedophilia for some) those self-same claimants can start paying the government back for their help by way of Income Tax and National Insurance contributions.
Going back to the specifics of housing benefit and property levels - both rental and purchase prices - it seems self-evident (a dangerous phrase) to me that the level of much rental property is set as a matter of course by the levels that will be paid as Housing Benefit. I cannot for one moment believe that the major consequence of a reduction in both the numbers of those receiving this benefit and the amounts involved for those who do will not be a substantial reduction in rent levels that will stabilise either at the new lower benefit level or at a level dictated by "real" renters looking for a home. Inevitably this will hit the private landlord hard and will, I strongly suspect, mean the speculative stock of housing built over the last few years of the Blair/Brown lunacy being sold off and a substantial drop in house prices. Such a fall would ultimately be the salvation of the working classes (by which I mean those that do the work) as both renting and buying become affordable again. The "cult of property" in the UK means that this will be unwelcome in many quarters - but homes are ultimately places in which to live, love and grow. For everything else there are pension funds and savings.
Yet again the UK media are using this as another cudgel with which to bash the coalition government, but I admire the way in which they are making the hard decisions in the glare of public scrutiny and with the internal debate hardly hidden from public view.
It is perhaps the finest single principle of British society that we protect the weak and needy. That must remain sacrosanct. The vast majority of our huge benefit budget goes neither to the weak or the needy however - and that must be stopped and stopped now.
Dum Spiro Spero
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Sunday 31 October 2010
Saturday 16 October 2010
Coalition Politics - How seeing the other side's point of view outrages journalists.
One of the less edifying spectacles to be found in the press at the moment is the desperate hunting of journalists and "commentators" (a slippery phrase that, and one that seemingly absolves them from fairness, even-handedness or even telling the simple truth!) for yet more reasons to hate our current coalition of concensus.
Clearly it takes away the fun of thundering against the primeval error of an idea or policy if the response is "actually - you are right, we have listened to representations, thought again and made changes" How DARE they do that - or am I missing something and it is the true nature of democracy showing through for once? I suppose the thing that the journos hate most is that by listening, our political masters are no longer absolving the fourth estate of responsibility for their ramblings.
The decision made yesterday to ring-fence education spending is a clear victory for the voices of reason and in particular for the Liberal-Democrat element, and is one that redounds to the great credit of both parties.
Now can we PLEASE apply the same sanity and common-sense to our Universities?
Dum Spiro Spero
Clearly it takes away the fun of thundering against the primeval error of an idea or policy if the response is "actually - you are right, we have listened to representations, thought again and made changes" How DARE they do that - or am I missing something and it is the true nature of democracy showing through for once? I suppose the thing that the journos hate most is that by listening, our political masters are no longer absolving the fourth estate of responsibility for their ramblings.
The decision made yesterday to ring-fence education spending is a clear victory for the voices of reason and in particular for the Liberal-Democrat element, and is one that redounds to the great credit of both parties.
Now can we PLEASE apply the same sanity and common-sense to our Universities?
Dum Spiro Spero
Thursday 14 October 2010
Investment Bubbles or just Burble - Nowhere to hide?
A good friend of mine living the expatriate highlife has been pushing the bear case for western stock markets hard recently - which has proved to be a very expensive mistake for him. Even so, I still read a number of reports pushing the "October Effect" which, as far as I can make out, is far from proven. Despite my reservations, I can't deny that 1929, 1987 and 2008 all saw their roots in an October crash. Illogical to believe that this is a pattern - three times in a century? Yes, very illogical - but who ever said markets were logical?
One similarity between the present and these three events does worry me. For reasons I have often propounded before, I think that equity markets are almost the only home for much of the liquidity sloshing around in the system (and the talk of QE2 promises even more!!). In all of the crash years previously we had not dissimilar situations of momentum. The reasons were different in all three cases, but the result was the same - there was strong momentum caused only partially by good fundamentals, whilst a lot of that momentum was for the reason that it was the only place to be. Investors and Fund Managers have, overall and with some laudable exceptions, a herd mentality.
The crashes in all these cases did take place from a starting point of genuine strength, The dog was wagging the tail - but any crash of serious magnitude can cause a cascade of events - usually concerning liquidity and/or loss of business confidence that can have the tail wagging the dog in the blink of an eye.
My message? Just a counsel of caution. The current run is justified on most econometric measures - but quantitatively is 300-ish points ahead of itself on the FTSE and almost 1000 points on the Dow. Recent sharp reversals have proved great buying opportunities - but a "Black Swan" event is incubated in just these situations.
Dum Spiro Spero.
One similarity between the present and these three events does worry me. For reasons I have often propounded before, I think that equity markets are almost the only home for much of the liquidity sloshing around in the system (and the talk of QE2 promises even more!!). In all of the crash years previously we had not dissimilar situations of momentum. The reasons were different in all three cases, but the result was the same - there was strong momentum caused only partially by good fundamentals, whilst a lot of that momentum was for the reason that it was the only place to be. Investors and Fund Managers have, overall and with some laudable exceptions, a herd mentality.
The crashes in all these cases did take place from a starting point of genuine strength, The dog was wagging the tail - but any crash of serious magnitude can cause a cascade of events - usually concerning liquidity and/or loss of business confidence that can have the tail wagging the dog in the blink of an eye.
My message? Just a counsel of caution. The current run is justified on most econometric measures - but quantitatively is 300-ish points ahead of itself on the FTSE and almost 1000 points on the Dow. Recent sharp reversals have proved great buying opportunities - but a "Black Swan" event is incubated in just these situations.
Dum Spiro Spero.
Wednesday 13 October 2010
QE2 - Going the same way as the Titanic?
Obviously I am not talking about enormous ships here - rather I am referring to the second round of Quantitative Easing currently being openly discussed by, among other Central Banks, the Federal Reserve in the U.S. The QE2 name it has been given seems tragically appropriate.
To nail my colours to the mast (see - another nautical reference), I whole-heartedly supported the first round. There was no choice other than to see the financial system crumble under the twin burdens of uncertainty and ever-dwindling liquidity. Since then we have seen the vast majority of QE go directly into bolstering the balance sheets of commercial banks (a good thing), boosting capital available for Proprietary Investment Banking activities (Do I need to call this a bad thing? Have we already forgotten how we got here?) and very little go into boosting the real economy other than by creating a fantasy world where large corporates with strong balance sheets can borrow more at close to zero interest rates while medium-to-small businesses are unable to pry capital (the very capital provided by our governments) from the banks who have appropriated it.
The recovery is weak - but is in existence. QE2 is not necessary at the moment and would, in any case, be subject to the law of diminishing returns - even if (which I doubt) it were to be modified to avoid the abuses I have just described. We need to keep such a blunt weapon ready against urgent need.
The reaction of markets in the last few weeks has been particularly difficult to fathom. Good news (and there has been some) is a sound foundation on which to base market strength, but the present arguments related to further stimulus frighten the willies out of me.
In essence the argument goes that we are close to flat-lining economically, with growth around 1% in most sectors. Large corporate earnings disguise this as the whole post-QE world skews results in their favour and they make up the major indices. To bolster the majority of the economy that does not have these advantages, yet more money needs to be injected (and remember that so little of it reached the right destinations last time) to "help" them. So we are doing so badly that we need more help - and that is a good reason to be bullish - because we are doing so badly?
The words honest and Corporate America may not sit easily in the same sentence, but this is a magnificent exhibition even by the standards previously set. "Please give us more money to help the economy - we will try to make sure none gets as far as it's intended recipients, but you have to do this."
Without divorcing "Real" Banking from Corporate Banking, this will be a spiral that can only end in tears. Ultimately the money pumped in via QE can only be reclaimed by much higher interest rates or depreciation of fiat currencies.
Dum Spiro Spero.
To nail my colours to the mast (see - another nautical reference), I whole-heartedly supported the first round. There was no choice other than to see the financial system crumble under the twin burdens of uncertainty and ever-dwindling liquidity. Since then we have seen the vast majority of QE go directly into bolstering the balance sheets of commercial banks (a good thing), boosting capital available for Proprietary Investment Banking activities (Do I need to call this a bad thing? Have we already forgotten how we got here?) and very little go into boosting the real economy other than by creating a fantasy world where large corporates with strong balance sheets can borrow more at close to zero interest rates while medium-to-small businesses are unable to pry capital (the very capital provided by our governments) from the banks who have appropriated it.
The recovery is weak - but is in existence. QE2 is not necessary at the moment and would, in any case, be subject to the law of diminishing returns - even if (which I doubt) it were to be modified to avoid the abuses I have just described. We need to keep such a blunt weapon ready against urgent need.
The reaction of markets in the last few weeks has been particularly difficult to fathom. Good news (and there has been some) is a sound foundation on which to base market strength, but the present arguments related to further stimulus frighten the willies out of me.
In essence the argument goes that we are close to flat-lining economically, with growth around 1% in most sectors. Large corporate earnings disguise this as the whole post-QE world skews results in their favour and they make up the major indices. To bolster the majority of the economy that does not have these advantages, yet more money needs to be injected (and remember that so little of it reached the right destinations last time) to "help" them. So we are doing so badly that we need more help - and that is a good reason to be bullish - because we are doing so badly?
The words honest and Corporate America may not sit easily in the same sentence, but this is a magnificent exhibition even by the standards previously set. "Please give us more money to help the economy - we will try to make sure none gets as far as it's intended recipients, but you have to do this."
Without divorcing "Real" Banking from Corporate Banking, this will be a spiral that can only end in tears. Ultimately the money pumped in via QE can only be reclaimed by much higher interest rates or depreciation of fiat currencies.
Dum Spiro Spero.
Tuesday 12 October 2010
Education - a right, not a privilege. Certainly NOT a commodity.
My own educational background is not so different from many others. I attended a tiny private school from an early age and then I was obliged to attend the local state primary school for one year as my parents moved house. It was at that primary school that I became aware of the streaming process that marked out a child's future for life. In the intuitive and irrational way that children have, I became aware that the "D" set were not only abandoned by themselves (and presumably their families) but that they were also allocated significantly inferior resources. At 11+ stage the "sorting hat" - not of Harry Potter, but of the system, would set each and every one of the boys I was with on a largely inescapable path.
I then went to a superb school and onwards to Oxford - all on scholarships, but even without those, with the support of the state. I quite simply could not have afforded to do this without the best education I could get being offered to me by my country as an investment in my future and in anticipation of the millions of pounds I have paid in taxes over the years.
Later in my life I earned the right to call myself a farmer ( a conceit really - I owned the land whilst others did the work ) and learned important lessons about, among other things, preserving seed corn and nurturing a growing crop.
Perhaps the segue into my analogy is fairly obvious - but our children, our youth and even our adult population who wish to learn are our seed corn. Words were cheap to Blair, but how I wish he had meant those three - "Education, Education, Education" - as his priorities. To borrow from a political philosophy I despise much less that Blairism, I can see no greater aspiration for an educational system than "From each according to his abilities, to each according to his needs". The crop must be nurtured to the best of our abilities.
Education is, perforce, a pyramidal structure - with a broad base of nursery and primary education narrowing to a smaller University sector. Throughout this pyramid, inequalities of resources come in all forms. Wealthier parents can not be expected to eschew the opportunity to give their offspring more, but only if this does not mean detracting from the less fortunate, Cultural imperatives play their part - many asian and oriental parents support their children (and why, in this context, is the perjorative term "pushy" used so much? - I admire it) more, it seems, than the great majority of WASP parents. I have known some abysmally dim kids from wealthy families or the ethnic groups mentioned above, just as I have known some to be razor-sharp from the local sink estate. As with any crop, the first growth stages are the most important and all should be fertilised with the manure of knowledge (I do hope you don't think I kept a straight face as I typed that phrase!).
Private eduction benefits greatly from the state - not only via charitable status for tax. Most teachers were trained at the expense of the state and the framework from which private education hangs is in essence that of the national system. Even the inspection and regulation system is that of the nation. It works, so let us not dismantle it, rather let us use it or emulate it in the manner of the traditional Grammar School. At the very least let the state reclaim some of its investment in terms of much higher scholarship or free place levels.
Then the pyramid narrows - and narrows sharply. University education can range from the aethereally academic to the brutally practical, but it must be the tip of the pyramid, rather than a mere extension of presence in a system than real education. Three years of hard work at least (many degrees in Germany can take up to 6 years) are the slope a student faces and his reward is to be at least potentially a more valued and valuable member of society. The corn grows and society reaps it in turns of contribution and even taxes.
I regard the concepts of Tuition Fees and Student Loans as being so ill-conceived as to be positively dangerous. Today's students are the leaders of tomorrow. It is insane to think they might have bought that position rather than earned it.
Education to the highest level deserved and properly used should be totally free to all.
Dum Spiro Spero
I then went to a superb school and onwards to Oxford - all on scholarships, but even without those, with the support of the state. I quite simply could not have afforded to do this without the best education I could get being offered to me by my country as an investment in my future and in anticipation of the millions of pounds I have paid in taxes over the years.
Later in my life I earned the right to call myself a farmer ( a conceit really - I owned the land whilst others did the work ) and learned important lessons about, among other things, preserving seed corn and nurturing a growing crop.
Perhaps the segue into my analogy is fairly obvious - but our children, our youth and even our adult population who wish to learn are our seed corn. Words were cheap to Blair, but how I wish he had meant those three - "Education, Education, Education" - as his priorities. To borrow from a political philosophy I despise much less that Blairism, I can see no greater aspiration for an educational system than "From each according to his abilities, to each according to his needs". The crop must be nurtured to the best of our abilities.
Education is, perforce, a pyramidal structure - with a broad base of nursery and primary education narrowing to a smaller University sector. Throughout this pyramid, inequalities of resources come in all forms. Wealthier parents can not be expected to eschew the opportunity to give their offspring more, but only if this does not mean detracting from the less fortunate, Cultural imperatives play their part - many asian and oriental parents support their children (and why, in this context, is the perjorative term "pushy" used so much? - I admire it) more, it seems, than the great majority of WASP parents. I have known some abysmally dim kids from wealthy families or the ethnic groups mentioned above, just as I have known some to be razor-sharp from the local sink estate. As with any crop, the first growth stages are the most important and all should be fertilised with the manure of knowledge (I do hope you don't think I kept a straight face as I typed that phrase!).
Private eduction benefits greatly from the state - not only via charitable status for tax. Most teachers were trained at the expense of the state and the framework from which private education hangs is in essence that of the national system. Even the inspection and regulation system is that of the nation. It works, so let us not dismantle it, rather let us use it or emulate it in the manner of the traditional Grammar School. At the very least let the state reclaim some of its investment in terms of much higher scholarship or free place levels.
Then the pyramid narrows - and narrows sharply. University education can range from the aethereally academic to the brutally practical, but it must be the tip of the pyramid, rather than a mere extension of presence in a system than real education. Three years of hard work at least (many degrees in Germany can take up to 6 years) are the slope a student faces and his reward is to be at least potentially a more valued and valuable member of society. The corn grows and society reaps it in turns of contribution and even taxes.
I regard the concepts of Tuition Fees and Student Loans as being so ill-conceived as to be positively dangerous. Today's students are the leaders of tomorrow. It is insane to think they might have bought that position rather than earned it.
Education to the highest level deserved and properly used should be totally free to all.
Dum Spiro Spero
Tuesday 5 October 2010
Corporate and Government Bonds - All Risk from now on.
It is possible that a few Trobriand Islanders, some Siberian indigenous natives and even some saffron-robed monks perched high in the Himalayas may have missed the news - but the rest of us are only too painfully aware of the financial troubles of the last three years.
My first observation is the staggeringly comical ability of some "think-tanks" to produce research such as this - http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8040090/UK-tiptoeing-towards-Japan-warn-consultants.html - where the reasoning is exactly that which was eschewed during the boom years. I am reminded of the words printed on rear-view mirrors in the USA (where they are obviously not bright enough to think for themselves) that "Objects seen in the mirror may seem closer than they are". So it is apparently with financial crises. Despite the 4-sigma Black Swans being just that, it seems that all financial commentators are now permanently living in Western Australia. (For the hard of understanding, this will explain my reference - http://en.wikipedia.org/wiki/Coat_of_arms_of_Western_Australia ).
Whilst happily ignoring the "fact" that the metrics recently rediscovered for financial prudence are far from new and that moves were in place - Basel 2, 3, 432 and so forth - to use (while blissfully ignoring) such metrics, it is now so clear to these sages that we are doomed to undercapitalised financial institutions and multiple-dip recession. To quote the greatest sage of all, Frankie Howerd, "Woe Woe and thrice Woe!!"
Our political masters have dealt with the crisis by injecting into the system so much money that interest rates are functionally zero or negative in the wholesale market. I contend this was right and the only course of action. The major banks have accepted this largesse with glee and stuffed their balance sheets with this free money whilst keeping retail rates sky-high and feeding large quantities back into their investment banking activities, what Vince Cable calls "Casino Banks". Almost the only positive side-effect has been to allow larger corporate borrowers to refinance at wholesale (i.e. almost zero) cost. As a result both Government Bonds and Corporate Bonds are trading at record highs.
This situation is unsustainable. The only two end-game scenarios (and they may well be two faces of the same coin) are either to suck back the surplus liquidity once the world economy is adjudged to be "safe" or to attempt (which it seems is covertly happening already) to depreciate a currency enough that the resulting inflation acts as a counterbalance. Timing is everything here - and is it really possible to trust Central Banks or Governments, with a tradition of centuries of acting to late, to get it right. In any case - inflation here we (eventually) come.
Whether one believes that we will all be double-dipped in the brown and smelly stuff or that things are painfully inching back, the time can hardly be more that 2 years away before the punch-bowl is taken away from this party and rates start to rise rapidly. Please note. I make no issue with whatever may befall in the interim.
With the exception of the insane mentality that promotes Gold as an "investment", there are fewer safe havens than Government Bonds and I would even argue that some Corporate Bonds provide more security in that supra-nationals are a spread of risk against sovereign default. Even so, there is really little or no more juice to be sucked from the Orange of yield and my fear is that Mr. Market, with his love of discounting future events, will soon see over the horizon to the gloomily-lit downlands of higher interest rates.
Where does that leave us? Probably the 4%+ yield on major indices (avoiding the risks and rewards of stock-picking - I am talking indices alone here) in equity markets. The fear/greed ratio seems to be so high these days that sell-offs of an illogical nature (or, in the interests of even-handedness, equally silly rallies) and major short-term moves can reasonably be expected. Of course this argument will also be subject to the idea of markets discounting forward events, but historically inflation has been far less destructive of equity than bond markets.
Dum Spiro Spero
My first observation is the staggeringly comical ability of some "think-tanks" to produce research such as this - http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8040090/UK-tiptoeing-towards-Japan-warn-consultants.html - where the reasoning is exactly that which was eschewed during the boom years. I am reminded of the words printed on rear-view mirrors in the USA (where they are obviously not bright enough to think for themselves) that "Objects seen in the mirror may seem closer than they are". So it is apparently with financial crises. Despite the 4-sigma Black Swans being just that, it seems that all financial commentators are now permanently living in Western Australia. (For the hard of understanding, this will explain my reference - http://en.wikipedia.org/wiki/Coat_of_arms_of_Western_Australia ).
Whilst happily ignoring the "fact" that the metrics recently rediscovered for financial prudence are far from new and that moves were in place - Basel 2, 3, 432 and so forth - to use (while blissfully ignoring) such metrics, it is now so clear to these sages that we are doomed to undercapitalised financial institutions and multiple-dip recession. To quote the greatest sage of all, Frankie Howerd, "Woe Woe and thrice Woe!!"
Our political masters have dealt with the crisis by injecting into the system so much money that interest rates are functionally zero or negative in the wholesale market. I contend this was right and the only course of action. The major banks have accepted this largesse with glee and stuffed their balance sheets with this free money whilst keeping retail rates sky-high and feeding large quantities back into their investment banking activities, what Vince Cable calls "Casino Banks". Almost the only positive side-effect has been to allow larger corporate borrowers to refinance at wholesale (i.e. almost zero) cost. As a result both Government Bonds and Corporate Bonds are trading at record highs.
This situation is unsustainable. The only two end-game scenarios (and they may well be two faces of the same coin) are either to suck back the surplus liquidity once the world economy is adjudged to be "safe" or to attempt (which it seems is covertly happening already) to depreciate a currency enough that the resulting inflation acts as a counterbalance. Timing is everything here - and is it really possible to trust Central Banks or Governments, with a tradition of centuries of acting to late, to get it right. In any case - inflation here we (eventually) come.
Whether one believes that we will all be double-dipped in the brown and smelly stuff or that things are painfully inching back, the time can hardly be more that 2 years away before the punch-bowl is taken away from this party and rates start to rise rapidly. Please note. I make no issue with whatever may befall in the interim.
With the exception of the insane mentality that promotes Gold as an "investment", there are fewer safe havens than Government Bonds and I would even argue that some Corporate Bonds provide more security in that supra-nationals are a spread of risk against sovereign default. Even so, there is really little or no more juice to be sucked from the Orange of yield and my fear is that Mr. Market, with his love of discounting future events, will soon see over the horizon to the gloomily-lit downlands of higher interest rates.
Where does that leave us? Probably the 4%+ yield on major indices (avoiding the risks and rewards of stock-picking - I am talking indices alone here) in equity markets. The fear/greed ratio seems to be so high these days that sell-offs of an illogical nature (or, in the interests of even-handedness, equally silly rallies) and major short-term moves can reasonably be expected. Of course this argument will also be subject to the idea of markets discounting forward events, but historically inflation has been far less destructive of equity than bond markets.
Dum Spiro Spero
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