Archived news and commentaries
King and Sants tiff? 11/3/2011
Worrying rumours for all lovers of compliance...
With the marriage of the Bank of England and the FSA pending, there are murmurings of incompatibility.
In reality, at least at institutional level, it’s more like the end of a divorce. Like a species of Hollywood personality, the two parties are lurching together again seemingly regardless of Doctor Johnson’s warning about hope and experience.
But there is a serious problem here, which in our opinion should be quashed immediately. If the FSA doesn’t like the Bank’s opinion regarding bank supervision, well hard luck, frankly. A good job was not done, but that is history. The investing public does not sponsor burgeoning organisations for them to indulge in turf wars.
Grow up ladies and gentlemen! Let Mervyn think and Hector administer; there’s the making of a good team here if a focus is kept on purpose and effectiveness.
The Future of Finance 15/7/2010
and the theory that underpins it
Inspiring day at the IET yesterday. See the website: http://www.futureoffinance.org.uk/ and the LSE Report, a very good book, which explains where it all went wrong but available for only a short while:
http://harr123et.files.wordpress.com/2010/07/futureoffinance3.pdf. Or buy the book!
Crystal balls 5/2/2010
Fund-a-mentals - a random tour. Are they a good guide for future events? A Friday commentary
We take an alternative approach this weekend. While the world is full of worried PIGS and governments flounder, we see where various successful fund managers’ hearts and thoughts lie and muse on whether they are a good pointer for the next trends.
Villain of the piece, to many eyes, has been PIMCO using a painfully flowery metaphor describing the UK gilt market as resting on a “bed of nitro-glycerine” and pointing to the UK government’s spending largesse as a root cause. To the rescue rides M&G who, while avoiding investment in the short term, point to the remedies of a falling exchange rate together with fiscal stimulation and financial reform. The latter could prove to be a test, as Edmund Conway(1) has pointed out there is a reluctance among world governments to reform and he rightly, in our opinion, bemoans their lost opportunity.
Some interesting and surprising comparisons between national economies have arisen in the current debates; we hope they are not in the nature of pots and kettles. While the UK’s GDP to deficit proportion is 68.7%, the US is at 84.8% and Germany at 78.7%. This suggests to some minds that PIMCO’s criticism might be overdone. On the other hand, gilt yields have long been a good barometer.
Folk hero Andrew Bolton, now of China fame, sees a changed Western world with reduced growth and talks of a key watershed. Looking forward he speculates that thoughts will turn away from recovery and be more concerned with the next event. Such uncertainty is unwelcome.
It’s inevitable that individual fund managers become geographically concentrated and there are bullish prediction for emerging markets generally and some enthusiasm for India. More generalist funds take a global exposure path; perhaps by including everything one has to be right somewhere.
Volatility in equity markets will be this year’s lot according to Standard Life where safety may lie in corporate bonds. Santander, however, looks to structural growth companies.
Does this lead us to a clear picture? Perhaps not. Should we, like T S Elliot ,“see time future in time past” and thus be wary of things which are “different this time”. Well, yes, in my opinion providing we observe the fundamental laws of economics. The difficulty is that the predictable events come at the wrong time and in a different order. The hardest lesson to governments is that of Mr Micawber who did eventually balance his accounts - but went to live in Australia.
Orlando
The foregoing is not in any sense a prediction or recommendation.
(1) http://www.telegraph.co.uk/finance/comment/edmundconway/6128259/Boom-and-bust-capitalism-wont-be-fixed.html
Cause and effect 29-01-2010
How to start a credit crisis ~ an irreverent Friday commentary
We offer these views in the nature of a preface written in the attitude of Charles Dickens. Please don’t follow the method, merely, we suggest, remember the error and keep well away from its imitation.
Underwriting
If you know that a loan or credit is not likely to stay on your own balance sheet, because you’ve sold it on, you become nothing more than a distributor. The buyer may come back and complain about the quality, but it will be much later and he’s probably sold it on himself, and again, and so on. Imagine, notwithstanding the doubtful quality of your credits, you are a popular supplier. You will need more stock, so you may begin to look further, abandoning your previous standards. And what about offering better yields? You can go down-market again. Easy, isn’t it? Just make sure you don’t buy it back in secondary trading. If it’s not good enough to keep, don’t buy it.
Gearing /Leverage
Be a responsible board and look to the primary ratios, something a non-executive director was invented for.
Models
Not always the obvious place for a deep intellectual discussion on the future price of widgets but usually well disposed and armed with common sense, very unlikely to stand for nonsense; were our VaR and other projections so well-founded. Begin with a simple idea, furnish it with data and then try not to play with it. Overdevelopment does not belong in serious models and the temptation to stitch advantageous variables and rosy projections into your mathematical models will please your masters, but will bite you all when reality descends.
Regulation
There is a theory that when America has gone to war and spies a new objective, rather than advancing and killing it on the ground, so to speak, they were tempted to build a machine, thus proving it needs a very large bundle of money to kill the smallest enemy soldier. Regulators can fall into this trap. A new threat to good order arises and the temptation is to write a new rule. Not wrong because it has to be forbidden, if it’s such a bad thing; but that really isn’t the end of it and we land up with a wood and trees problem. The regulator feels comfortable, but he may have created a monster, which no management can easily perceive, leave alone administer. Transparency (at all stages) makes for efficient markets.
Valuations
Our stock of investments cost a bundle and we think we understand them, but we’ve never been quite comfortable with our ability to value them and mark-to-market is a bit sticky because some of the instruments carry something of our invention, so maybe we’ll not mess about with them too much, no point in making waves and who knows any better anyway and why threaten everyone’s bonus and the market’s up so perhaps we’ll leave well alone and trust to luck... The result is ruin and it’s up to a firm’s management both fully to understand any commitment before it’s taken on and to have the courage to insist on sensible valuations.
We’ve not mentioned the following tripwires but imagine our readers will be well aware:
Idiotic funding, trying to stretch the gap between short-term funding and longer liabilities sufficient to accommodate Methuselah.
Sensible governments who, like a proper Nanny, decide you’ll learn by your mistakes and decline to bail you out young master Lehman (who perhaps imagined he had a safety blanket, until he touched the Street).
Unlikely yields, out comes of nout as they say in Yorkshire, it’s high for a good reason, and never a good one.
I’ll leave the last word to Dickens: “Now what I want is Facts... Facts alone are wanted in life.” [Mr Gradgrind – BLEAK HOUSE.]
Orlando