Slight Flaw in the Budget

Phillip Hammond delivered a reassuringly dull budget this week. The furore over the self-employed will pass or be diluted. Just what investors like to see. In fact, Hammond holds many of the traits fund managers like to see in CEO’s; ‘reassuringly dull,’ covers it nicely. Mr Hammond said that according to the OBR borrowing will be less than predicted that borrowing will be £51.7bn in 16-17, down from the predicted £68.2bn. The Chancellor has promised in fact to drop the deficit below 2% by 2021 and eliminate it completely shortly thereafter.

That would take nothing short of a miracle.

Britain’s national income has exceeded expenses expressed as a percentage of GDP for just two brief moments in the last 30 years. The first followed the stock market’s mid-80’s surge and the second was in the final stages of the Tech boom in the late 90’s. The market peaked shortly thereafter turning the surplus into a big deficit. The financial condition of the UK has been deteriorating for decades now. A 1.5% budget surplus in 2000 reversed before it reached its ’87 peak of 2% in 1988. The budget gap wasn’t closed at all in 2007 prior to the financial crisis despite booming stock and property markets. The subsequent 2008-9 deficit beat all previous records. In terms of debt to GDP, UK debt in 2010 was the third highest in the world being beaten only by Greece and Italy.

This is probably as good as it gets. The living-in-fairyland inhabitants of Westminster moan without pause about austerity. They are in for a shock. Mr Hammond’s positive read on government finances is not a ramp for take-off; it is a warning that the edge is near.


Back after a parents trip to Auschwitz-Birkenau. It does make you think about many things…. Europe amongst them.

A visit to any of the camps is always going to be emotionally challenging. It does though, give pause for moments of reflection on many things, the current state of Europe and “could it happen again?” amongst them. Of course genocide has indeed continued to be inflicted on people across the world since 1945 and there seems to be no end, or sense, to the steady stream of racial, religious and ethnic murder and cruelty in the world. Growing divisions in Europe will not take us back to the 1930’s but the shadow of the Second World War is never far away and traditional cross border suspicions are again bubbling under the surface and are not helping; not one little bit.

Angela Merkel took office ten years ago in 2005 when Europe was enjoying the pinnacle of its success. German integration was complete, the Russians were picking themselves up off the floor, Europe was united with a queue of new entrants to the EU project and the global economy was blazing. The world though has very much changed. Europe is in crisis with many members blaming Germany for their problems. Few countries now want to join the EU and the EU doesn’t want any new members. Ukraine is plunging deeper into the abyss and fear of Russia is growing. US politicians are discussing arming the Ukrainians and storing arms for US troops in the Baltic States.

The combination of economic and political stress has led to an increase in nationalism. Those flames are being fanned by the actions of extremist Islamic terrorists. Germany then, finds itself in the unwanted and uncomfortable position of being forced to take a leading economic and political role. The good thing about that is there is no other country more unlikely to change a political problem into a military one. The bad thing is that institutionally, Germany is not experienced or adept in the handling of cross border crisis.

Reluctantly, probably the most important politician in the world today but with no easy options.

Playing in the Russians backyard and encouraging demonstrations was never going to have an elegant end. As is often the way with liberal minded democracies when shots were fired the Germans backed off and instead of supporting the Ukrainians they joined in with sanctions. Germany will not ever get involved in military action in the East but is now being forced because of its earlier political engagement to seek compromise and to cool the situation down, much to the chagrin of a number of US politicians.

Merkel’s US visit was designed to persuade the US to soften its approach to Ukraine but a deep rooted suspicion of the Russians and their intentions does not easily change in Washington and Putin meanwhile, has his own constituency to serve which will not easily accept Russia backing down without significant concessions.

Equally, the Greek situation is creating unease in Berlin. The Germans have massively benefited from free and open markets with more than 50% of GDP going to export. Growing nationalism and protection may come to threaten Germany’s dominant export position, especially if the Euro is threatened by a Greek default and expulsion with others following. Germany has been forced to adopt a tough public stance with Greece yet the new Greek government was elected specifically with a mandate to challenge Germany.

From a German perspective, they’ve been doing all the right things, including lowering their leverage ration from 80% to 76% of GDP in the last four years. The rest of Europe though has its foot on the floor and is accelerating toward the fiscal cliff edge. Of Greece’s $350bn debt, a mighty $210bn is owed to the Eurozone bailout mechanism. Germany’s share of that is some $57bn. The problem is not the burden which may be placed on German taxpayers, it’s the share which other countries have signed up to and their ability to pay. Italy for example has a debt to GDP ratio of 132.6% and so is borrowing to pay interest. But Italy’s share of the Greek liability is $37bn while France is on the hook for $42bn. France is well down the road of becoming a financial basket case with the state taking 60% of GDP and with a debt to GDP ratio of 92%, (Maastrict supposedly limited debt to GDP at 60%). The problem with these stats is that a Greek exit will be met with a storm of protests from voters when they figure out what the bill means for them and there is little doubt the political map of Europe will undergo further rapid change.

None of this is good for markets. Increasing numbers of strategists are going underweight US equities and overweight European equities. These people don’t learn quickly. In fact, they probably don’t learn at all or are so glued to their valuation models they just don’t see the storm clouds rolling in. True and transparent price discovery of debt instruments in Europe is currently non-existent. That will happen when a central bank quadruples its balance sheet over ten years as the ECB has done. This of course was a necessary requirement to save European banks which had become insanely leveraged into the 2010-12 peripheral debt crisis, (DBK @ 56x for example with $1.9tr of assets and only $36bn of tangible equity).

As I wrote at the time, the unwillingness to force speculative investors to take losses and to underwrite them would simply store problems for the future. The future has arrived but paying the piper is now going to have a political cost and not just an economic one. Of the two alternatives, allowing Greece to go and watching the whole experiment unwind at great cost to the German taxpayer, or appeasing Greece, and subsequently other countries, at great cost to the German taxpayer neither is particularly palatable. The problem with both is that Germany probably ends up stronger and that is as unwelcome in Berlin as it is outside. Germany will probably allow Greece to go, if only because the domestic political cost will be lower than allowing them to stay.

It will however, set in train a sequence of events that none of us can know the outcome of. According to a new McKinsey study, global debt has grown by $57tr since the crisis. Government debt has grown by $25tr and only in the UK, US, Ireland and Spain has domestic, (but not government), debt deleveraged. China meanwhile went postal and increased leverage by 4x and now has a debt to GDP ratio at a stomach churning 282%. Zero interest rates will not hold the wall forever and disruption from FX markets resulting from political breaks are one likely route to what we refer to as real “price discovery.”  You could though, just call it an almighty crash, harsh bear market and economic depression and it’s that last word, depression, that haunts historians and anyone else who has had a reflective thought at any one of the camps.

You Couldn't Make It Up..


Two Pigs died and met their maker this morning. I refer not to insolvent states in the Olive Oil zone, but to Mac & Mabel who were dispatched quietly by the mobile slaughter man, (his other job is as an undertaker and no, I’m not making it up), this morning and are, as I write, in the back of the car being driven to the butchers by Mrs Flashbang to be turned into cuts, sausages and bacon as part of her latest thrust toward total food security at Crumble Towers. As it happens, my soft and fluffy wife also dispatched three chickens this week because they weren’t laying in sufficient abundance to justify the odd bit of corn they eat, which seemed a bit brutal to me but that chaps, is what I live with.

It’s unfortunate that European leaders and bankers are not possessed of similar backbone. Perhaps I should send the wife to Brussels; that would show ‘em and be a welcome relief to the surviving domestic livestock.

Unfortunately, Europe continues to edge toward the danger zone and the horrible inevitability of financial meltdown at the sovereign, municipal and corporate level in Europe threatens to drag is all down. I'm not going to write about it at length here given I do enough of that in the day job but I would draw your attention to one dramatic step the Greeks are making to protect themselves from fallout.....


From the Hellenic Defence & Technology Magazine we learn that U.S. authorities have approved to grant 400 M1A1 Abrams tanks to the Greek Army, which will include options between simple refurbishment – worth tens of millions dollars for all the tanks- and upgrading to a higher level of operational capability, with a higher corresponding cost. That’ll go nicely then with the hundreds of Leopard tanks they already have of various vintages.

Shame they can’t afford to fuel the buggers, unless of course; they’re the new vehicle fleet for government ministers or to defend Athens when the Germans come asking for their money back. Then again, if they keep cutting Greek army pensions the barrels might be pointing more in than out…..

The truth of course, us that Greece is acting exactly the same way as a bloke from a Liverpool estate who’s maxed his credit cards out, has a bailiffs notice and has gone straight out and bought a new car.

You couldn’t make it up.



Follow the bloody Germans..

You may or may not have been following the debt crisis in Greece. No matter, the broad brush summary is that the Greeks have been living way beyond their means and the clock is ticking against imminent debt repayments. To make those payments the Greeks must borrow money through bond sales which they can only do at a higher cost than other European governments may borrow money at. That premium prices in the additional risk of lending to the Greeks in case they default.

Intense discussions have been underway and at the end of last week the EU agreed to offer the Greeks assistance but only when the Greek government reach a point where the international markets are effectively closed to them.

The looming debt crisis has created a great deal of stress within the EU and the hard line attitude of the Germans has shocked not only the profligate Club Med countries but also the core EU states like France. The German government however has simply been reflecting a hard line German taxpayer view that they should not be put in a position whereby their hard work and productivity is exploited by idle tax evading beach bums. In fact an important result of last weeks negotiations is that the German government has sent a strong message not only to the rest of the EU but to their own people which implies that not one single German euro will be spent until all other avenues have been explored.

This hard core message of fiscal discipline has strong resonance for the average German voter.

Contrast this to the British voter, whoever he or she is and in fact it wouldn't be unreasonable to ask if they exist at all. If they do, they suffer from a collective virus of bovine lethargy given after all that the current shower of corrupt and incompetent muppets have done, there is barely a whisper raised in protest. The Cabinet must sit down not quite believing their luck - they've almost bankrupted us, financially and morally and they've got away with it - only a few points behind in the polls and growing in confidence as the election approaches. They're beginning to think they might actually pull it off; you can smell it.

So why is there such a dramatic contrast between the German people and ourselves and why does their government listen and ours don't? I genuinely don't know. I can only guess that people have simply given up, that they've decided that whatever their view is it won't make a blind bit of difference. That whatever actions citizens take They will still be there and They will keep on coming, no matter what, there is no way to finish them off. 


Even more sad, at times.......... I feel the same way.

What of the opposition? Just like many, many others I simply despair. No backbone, no courage, no idea. I sat next to a lady last evening who had every reason to vote Tory in May. I listened to her reasoned critique of Labour and then asked her about the Tories. "No way am I voting for them," she said, "I have no idea what they're policies are." Nor do I.

In fact, David Cameron rather reminds me of the captain of this ship.........(yes, I know we've all seen it before but it makes the point and me laugh at the same time so it's in..).



Greek Crisis; "Our Guys Did What?"

Some readers may only have a passing interest in financial news and perhaps none at all when it comes to esoteric instruments like CDS's  on Greek Goverment bonds, (In simple terms, this is like buying an insurance policy on Greek bonds, or any bonds for that matter, in case they default.) No matter, stick with me on this one.

You'll be aware that the Greek economy has recently been exhibiting all the characteristics of an ill fated passenger liner that set sail from Southampton in 1912. European Union ministers meet this week to try and hammer out a support package otherwise the Greeks may go to the IMF. No need to get bogged down with the quite complex geopolitics at play here but in the run up to this meeting the Greek government has been virulent in it's attacks on "speculators," who they blame for creating the crisis.

Prime Minister George Papandreou is among the global leaders that have been pushing for increased financial market supervision of CDS and a crackdown on market manipulation. In fact, he threatened to spit in the face of anyone who bought them and the silliness extended to the Spanish and Greek secret services saying they would spy on CDS traders in New York and London.

“We are in a state of war, in a battle against special interests, both at home and outside Greece. It is a battle against speculators and for transparency, so that markets are at the service of the people, not the other way around.”

No George my fine furry friend, idle tax dodging Greeks are the cause of the crisis, not the people who are highlighting the symptoms like only four citizens paid tax on earnings of over 1m euros last year.

Still with me because this is the good bit? Greek daily Kathimerini has uncovered that the biggest speculator, holding 15%, or $1.2bn of the total $8bn in Greek notional CDS is a firm which is about 600 yards from the Greek parliament in Athens............ the state owned Hellenic Post Bank (TT).

"With a position totalling 950 million euros, or 1.2 billion dollars, TT had the ability to shape momentum in the speculative derivatives market which the Greek government wants to be controlled."

Good to know we're not the only ones with an incompetent Prime Minister................... ho hum!