Monday, 21 April 2008

Is this the right medicine for the City?

Today the Bank of England (BoE) has unveiled its plans of a £50 billion lending boost. While I suspect that most bankers and traders alike will welcome this move, I’m mindful to point out that such governmental financial manoeuvrings is not without disquietude.

In broad strokes, the plan is that banks will be able to swap potentially risky mortgage debts for £50 billion of secured government bonds, thus allowing them to operate with some semblance of liquidity in the banking system.

Early indications are that the banks broadly welcome this move by the BoE; hitherto both the BoE and HM Exchequer seemed either unwilling or incompetent in the face of the current credit crunch. On a point of information, I’m intentionally refraining from referring to this as the “US” credit crunch, as I believe this to be an unhelpful misnomer.

The insatiable appetite of British banks for consuming exotic derivatives and more importantly, not correctly understating these financial instruments, is as much a causative factor in producing the current credit crisis as our American cousins.

My worry about this current action is the sense of timing. Are we now collectively paying the price of failure in the Exchequers deficiency in providing leadership at “first light” of the credit problems?

Just about every Central Banker in the world realized sometime ago the exigency of the moment, while the Bank of England lacking leadership from the Prime Minister and the Exchequer, seemed more intent on riding their moral high horse (moral hazard). The refusal of the Mervyn King to pump much needed liquidity into the markets as early as last August was an incongruous decision.

While it is true that financial ignobility should not be rewarded with the taxpayer cash, the balance of the public interest and private interest in this instance are deeply coupled. What the BoE should not do, is allow these banks to persist in this reckless mortgage lending.

Let’s be clear here, most of these banks pocketed large amounts of cash profits from partaking in subprime related financial instruments. As a fully signed up capitalist, I defend their right to make such money; however it must be made abundantly clear that the losses are theirs too, not the taxpayer!

If it is one thing that this current crisis should teach us, it has to be this – unrestrained cheap credit is “expensive!” Our collective predilection for credit has been a contributory factor for the current turmoil.

I know Liberal Democrats and hard left Labour members would like too woo us with their unabashed liberal narrative of the credit crunch as some capitalist conspiracy, but this can be safely ignored.

New Labour has a well document penchant of legislation, and I fear this will act as a cue for satisfying this urge. We should not rush into legislation for legislations sake. Calmness combined with vigilance is the more sensible route.

On reflection I would have to conclude while the action is late, I broadly welcome the move. I hasten to point out that the fallout from this credit crisis is far from over. For one thing Fannie Mae ( and Freddie Mac ( ) combine to make up the trillion dollar ticking time bomb. For my money, as long as these two institutions remain in credit limbo, the crisis is well and truly unfinished business. Let’s just say the “patient” is still critical.

Friday, 18 April 2008

Gordon Brown Schadenfreude

OK, so I should explain – Schadenfreude is the German word for “pleasure from misfortune”. I can’t deny that the Prime Minster current spot of trouble, is giving me pleasure.

Since October of last year the PM has gone from hero to zero, finding himself in a climate inimical to his political health. Who would have thought that after riding high in the polls last summer and his “Midas” like touch, Gordon Brown would now find himself bearing the fruits of his contretemps.

Cue the 10p tax battle! It now turns out that the Labour backbenchers have collectively woken up from their deep sleep with regards to the abolition of the 10p tax band. The reason why I suggest they were collectively sleeping is that this policy was made known a year ago by this Prime Minster, at that time masquerading as Chancellor of the Exchequer.

It now turns out there are 70 or so backbench Labour MPs whom have decided to sign a motion criticising the 10p tax band abolition which will cause further sleepless night for the Prime Minster.

Just when you thought it could not get any worst, the economy seems to be heading further South, with only the Prime Minister and Chancellor of the Exchequer holding the belief that we will weather the oncoming storm. Let’s hope for all our sakes this is not the case, continue to watch this space!

Tuesday, 15 April 2008

The biofuel mendacity

For sometime now, the green movement and their ilk have been pushing their agenda of coercing governments to force us the consumers to use biofuels. As is typical with the greens and their inability to see past their own towering moral vanity; such policies for the uninitiated are bound to have a catastrophic impact on the vary people that they say they “care” about.

Eliding as do on the consequences of green polices, while substituting as fact, their “remedy in search of a problem”; the greens have attempted, and with some semblance of success, of painting a picture that conjures up images of renewable abundance, minus the downside of being an encumbrance on the planet.

For anyone whom took just a cursory glance past page one of Environmental Greens & Co press releases, it would have been abundantly clear that all this razmataz was intentionally obscuring some glaringly obvious shortcomings.

People, land, resources and food are inextricably linked with social, political and economic forces. Unbridled “green bias” skews and distorts such relationships, which by its very nature is inimical to us all.

I know the greens hold anything that has but the slightest hue of capitalism in contempt, but they could learn a few things, should they set aside their dogma for a moment. There is no such thing as a free lunch!

Biofuels, in principal are a good thing. Panacea it isn’t. I support biofuels in principal if but for the purpose of reducing our dependence on energy from volatile regions of the world.

As an energy / commodity trader, I can see that that old adage of “no free lunch” is alive and well. For one thing biofuel precursors, have sky-rocketed on the global commodity exchanges. This has had the effect of pushing up prices on pretty much all staple ingredients to which we are dependent on.

My advice to the greens and their allies is to spend less time in their air tight ivory towers and a little more time in reality. Inflicting pain on the people in an attempt to prove a point which can never be proven is an exercise in futility, but more important downright dangerous.

Tuesday, 8 April 2008

Thank G-d for Lord Lawson!

Last night I had the pleasure of watching Lord Lawson on “Newsnight” ( dare to question the premise of global warming / climate change advanced by the Environmental / Green Lobby. I have never needed any convincing on this as I have always been unashamedly incredulous of this whole environmental scaremongering.

For far too long we have collectively allowed that “cosy liberal consensus” to monopolize this debate with innuendo and supposition, substituting where empirical evidence should be offered. Lord Lawson was right to expose the holes as he did last night on the environment lobbies most egregious claims, and boy are they are plenty!

Make no mistake about it; the green lobby is nothing more than socialism repackaged. They are quite adept at “throwing mud” on any of us if we dare question their premise. Well I for one believe it’s time we were able to have a grown up and frank debate on this topic. We can not afford to leave an issue as important as this in the hands of the liberal elite.

Ahhh! But we have science on our side, I can hear them all shout. The fact is, they have never had science on their side. “Voodoo” science does not count. This trick of limited data points extrapolated with contempt, is about as empirical as taking a humpback whale out of the sea; placing it in a fish tank and then concluding, that what is observed in such a limited scope is what we can conclude happens in nature.

Just to be clear here, my understanding of empirical is: provable or verifiable by experiment. For all the talk about the earth being “two minuets to midnight”, we have seen nothing but extrapolation and computational modelling. Great tools they are, but I have to tell you as a former financial engineer, computational modelling as well as interpolation / extrapolation are only part of the necessary tools meant to argument the scientific toolbox, not replace it. In other words, context is always necessary, and results are NOT prophecy scribed in stone.

And on that topic of the “science” of the environmental debate, to my knowledge based on the information I have read the earth is not warming, its’ actually cooling. Taking 2002 as my reference point the earth’s temperature has pretty much reached a juncture of little or no growth, ergo the argument advanced by the environmental lobby that CO2 emissions is driving temperature flies in the face of facts. The fact is, CO2 is increasing yet temperatures are plateauing, and no, you don’t have to take my word for it, the International Panel on Climate Change (IPCC) has acknowledge this very observation!

There seems to be a whole industry created solely for the purpose of inculcating us the consumer, that we should carry the baggage of global guilt as a consequence of humankind’s progress. This is a recipe for disaster, and would affect the majority world countries worst, the very same people the green lobby, cries is their Raison d'ĂȘtre.

Repetitive yes, but in closing I must state as a matter of fact the following – In light of decades spent churning out computer models, there remains no empirical evidence that anthropogenic CO2 production is causing global warming. The caveat here is, if you except that the earth is warming in the first place. If you do go on to except that premise that yes in fact the earth is warming, calculating the contributions from a thawing earth as a result of the last ice age, itself the consequence of changes in solar heat following changes in the earth's elliptic orbit and in its tilt, can never be answered with certainty.

This nonsense of the “precautionary principal” if followed to it “illogical” but logical ends has no boundaries. After all the next time you get in the bathtub, walk down the stairs, leave your home, you risk death. Yet if we adhere to the environmental lobby’s premise, we should as a matter of caution cease these activities – crazy? My point and sentiments in a nutshell!

Wednesday, 2 April 2008

The North Atlantic Treaty Organization “cri de coeur”

The North Atlantic Treaty Organization (NATO) has since August 2003 taken on the responsibilities of command and co-ordination of the International Security Assistance Force (ISAF) in Afghanistan.

At this particular juncture, NATO forces are coming under increasing attacks, more ferocious in nature as the Taliban adopts more effective tactics such as the use of improvised explosive devices (IEDs), kidnapping and summary executions to name but a few.

I suspect that most people now accept the legitimacy of this NATO operation in light of the events of September 11, 2001. Unlike the war in Iraq, were my “suspicions” tell me the plurality of opinion was / is against the Iraq war, to which I hold contrarian views on; we can at least agree that principals that underpin the whole Afghanistan exercise is different but equal, and are laudable.

As it now stands, the aim of the alliance in Afghanistan is as follows:

To assist the Government of Afghanistan and the International Community in maintaining security within its area of operation. ISAF supports the Government of Afghanistan in expanding its authority to the rest of the country, and in providing a safe and secure environment conducive to free and fair elections, the spread of the rule of law, and the reconstruction of the country.

As the Taliban consolidates its ability to conduct what I could only conclude is a war of attrition; certain members of the NATO alliance find it more appropriate to adopt a posture akin to that of an ostrich, whereby, they would sooner bury their collective heads in the sand, exposing to all of us their “true” working parts.

By any measure, the United States, Great Britain, Canada and The Netherlands are unfairly shouldering the bulk of the heaviest fighting, as they are currently being forced to take on the most dangerous combat roles.

Conspicuous by their absence in the South or the East of Afghanistan(where the heavy fighting is), some our European partners namely - Germany, France, Italy and Spain make a mockery of the collective doctrine of the NATO alliance. These offending members not content to do anything that remotely resembles “heavy lifting” have inoculated themselves by hiding behind the use of caveats.

The use of caveats by some members of the alliance have prevented and will continue to prevent irrespective of additional troop numbers, because they conditionally prevent these members from actively engaging with the enemy. You may recollect the riots in Kabul of May 2006. Perhaps what is less well know is that as a result of such liberal use of caveats, some of these countries do not permit their troop to handle tear gas, one of the most effect tools in dealing with riots.

Irrespective of what the liberal elite of Europe would have us believe, it is NATO, not the European Union that has served us well in Europe since it’s inception on April 4, 1949. Any attempts to undermine this institutions role does a disservice to us all, and we should resist with rigor the attempts by the European “chattering classes” to undermined this institution and replace it with one created by Brussels and run by France and Germany. France has long established its credentials on NATO that much is not up for debate.

The summit currently taking place in Bucharest, Romania must have a successful outcome. What is at risk here is far greater than the political egos of Merkel, Sarkozy, Zapatero & Co. This is a war that that will be long in duration and high in cost. Make no mistake about it, the cost in not finishing, or following through to its end is far higher.

The Taliban is currently having little problems in moving through the tribal areas of Pakistan and Afghanistan. They are currently, if not already, are establishing secure supply lines, increasing the production of heroin, as well as other illegal activities which as a result increases their coffers with money.

Couple the above with weak and ineffective leadership by our European allies is merely a delayed recipe for disaster. Far worst is the result of an embolden Taliban with the money and means to do us all harm. We can not allow poor leadership and surreptitious political agendas to viciate that great institution - NATO

Wednesday, 26 March 2008

New Labour & the FSA Experiment - Res ipsa loquitur

The cacophony of background noise is a trademark of the political theatre a.k.a. - Prime Minister’s Questions (PMQ’s). But occasionally, one can make what I could only describe as rather telling observations.

David Cameron decided to use his “bag of six” – questions that is, to bludgeon the Prime Minster on the Financial Services Authority (FSA) inept handing of the Northern Rock crisis. Unfortunately for him, his observations on ineptitude were partially reciprocated, as he returned the favour; making a poor case for a valid argument.

The fact is we really need not look very far to see an excellent example of effective regulation in action – cue The Federal Reserve Board. Just take a look at how deftly the Fed dealt with the near collapse of Bear Stearns, and contrast this with the slipshod action or “inaction”, of the FSA in conjunction with BoE in dealing with a similar situation – the collapse of Northern Rock. Even as the dust is still settling, it is clear that the American approach of quasi-public regulation is far more superior. More importantly, the Fed as a unitary authority is an approach that while not perfect, has the benefit of pooling resources, and presenting itself to the banking industry as a sole place of reference.

While I am not quite ready to hitch my cart to the Tory economic engine, I most certainly support the Tories premise to hammer home the point that all this talk about New Labours economic prowess is just that – talk! Furthermore; the decision to split responsibilities of banking supervision and regulation between that of the Bank of England and the FSA have proven to be categorically short-sighted and economically sophomoric.

Yes, we all know the ability of Gordon Brown to verbally vomit statistics at will is amazing, if not of a mild autistic savant. However; The Tory party can rightfully argue that the decision to separate the powers of regulatory supervision between the FSA and the BoE was one of poor judgment.

I further opine that in light of FSA admitting in their own style that they are simply not up to the job, that the regulation of addressing:

      • Banking panics;
      • Striking a balance between private interests of banks and the centralized responsibility of the government;
      • supervising and regulating banking institutions;
      • maintain the stability of the financial system and containing systemic risk in financial markets;
      • to be responsive to local liquidity needs

Be solely the domain of a quasi-public Bank of England. As a trader myself I have a keen interest in a stable and efficient market place. If the regulator of first instance can’t be trusted, relied upon or worst – proves incompetent, it affects us all. For all the talk from new Labour on prudence and stability, it’s only when things fail, that we get the accurate picture.

Res ipsa loquitur – it speaks for itself! The idea that the status quo of relying on the FSA to effectively deal with systemic risk and regulation in the banking sector, is clearly no longer a sustainable proposition. I fear however, that New Labours response to today’s report from the FSA will be genetically in the style of New Labour – more regulation! It really is the case that "less is more!"

More regulation in the area of banking would be the wrong response. What is needed here is calm insightful fortitude in dealing with issues in banking, against the current backdrop of “tight” credit markets. I know it would be the breaking of a lifetime habit for New Labour to instead look to the private sector for the experience necessary in dealing with and examining the types of risk that banks take.

The ability of the regulator to understand such operational banking risk, goes some way to pre-empting such catastrophic failures such as Northern Rock. The Bank of England is in the best position to understand this, it would be folly indeed to not re-examine this remit, and learn a few lesson from our cousins on the other side of the Atlantic – The Fed!

Wednesday, 12 March 2008

The Freshman’s Budget

A politician's words reveal less about what he thinks about his subject than what he thinks about his audience. George Will

The Chancellor today presented his budget to Parliament, and I have to tell you after watching and listing with keen interest, I was left recollecting about an interesting traffic sign I once saw – “slippery when wet”. This was a “budget”, and I use the term loosely, that was vexatious in the selective statistics used and intellectually pretentious.

Chancellor Brown, pardon – Darling, took my breath away, when he said: “Britain is more resilient and more prepared to deal with global shocks.” Inebriating incredulity on the Chancellors part comes to mind. The fact is, for all the right decision that the government took in 1997, such as giving the Bank of England its independence; we are now at a state where government finance is in bad shape. Why? Simple, this government failed to set aside or ensure preparedness for the “rainy season”, a staple of all economic cycles.

The government has stated, and nauseatingly so, their adherence to the “golden rule” - Huff and puff all you want Chancellor that rule is the only thing blown over. Mr Cameron was correct when he said, the trade deficit was set to rise to a record £72bn while the rate of investment was "slumping" by two thirds and debt as a share of GDP, if Northern Rock was included, was 43.8%. Clearly this would "bust" the chancellor's fiscal rules.

In October's pre-budget report, Mr Darling forecast growth at 2.0-2.5 percent in 2008 and 2.5-3.0 percent in 2009. This contrasted sharply with a poll conducted by Reuters of 60 economists, whom put economic growth at 1.8 percent in 2008, picking up only slightly to 1.9 percent in 2009.

The persistent conviction of the Chancellor that the economic weather can safely be described as a slight overcast seems to be grossly at odds with most economists who see the high risk of an oncoming storm.

One could not ignore the incessant use of the word “stability”, as if somehow repeated Ad nauseam would produce the result. I would have thought that if stability were desired, a posture of tax cutting to stimulate the economy would have been a more sane prescription.

I am incredulous of stories about “green taxes”. It is patently clear to me that this governments wish to relegate plastic bags, excessively tax alcohol and the automobile, is nothing more than government by authoritative decree. And anyway, we are not stupid; we know a tax jack when we see and feel one. This is really a case of – “I just need the money!