I don't really like commenting on day-to-day news as I subscribe to the view that most of it is noise that distracts from what is really going on. Why bother wasting your time and effort when it doesn't really matter?
For example, who cares if the FTSE goes up 1% one day due to 'reason x' only to fall 2% the next due to 'reason y'. All that matters is what happens in the long term. So why bother trying to understand 'reason x' when it is just the opinion of some random journalist?
But the story of Barclay's profits is an interesting example of the current economic situation. Robert Peston did a piece on it in his blog yesterday. The numbers are totally barmy!
It is clear as mud what is going on with Barclays. They haven't taken any bailout money (yet!) but have probably secured some of the assets with the BoE, but that's not really clear either at present.
They announced £6.1bn of profits yesterday at a time when most of the competition are suffering either heavy losses or total collapse. Impressive - you'd have to make 3,050,000,000 ironing boards to generate that much profit. The equivalent of 50 ironing boards for every person in the UK!
But the profits suggest Barclays should be valued at 5-10 times their current share price (the price earnings ratio is something like 1.3 compared with an average around 10). But they're not, suggesting the market has doubts about how 'real' their earnings really are. So something doesn't stack up. 'No smoke without fire' springs to mind...
But what really confuses me are the assets held by Barclays. They've gone up from £1,227bn to £2,053bn in the last year. So they hold the equivalent of 205 billion ironing boards of stock - that's a BIG warehouse! Or the equivalent of 3,400 ironing boards per UK person. That's a big number...
But this is at a time when assets have generally lost value - but the profits suggest their value has gone up. What are these magical assets? I realise they have been boosted by the aquisition of some of (collapsed) Lehman Brothers, but it still does not make sense. There just is no transparency...
It's mad. But we'll have to wait for the history books to be written to know how this story finishes...
Tuesday 10 February 2009
Ironing Boards
The numbers associated with the current financial crisis are getting mind-boggling.
Bonuses in the millions (for failing)
Losses in the billions
Bailouts in the trillions
Liabilities in the quadrillions
and so on and so on...
It's both surreal and unreal. So it's time to think of a way to get back to reality. But what could we use?
Currencies are hard to measure at present as we are all hell-bent on debasing the damned things. What is the alternative?
Ah, yes! The faithful ironing board!
In a past professional life I used to make ironing boards for a living (I also used to make tea for a living, but that's another story...). Not glamorous, but on reflection, I'm actually very proud of it. Millions of people now use something 'real' that I had a big influence in developing.
It's 'real' - unlike most of the nonsense going on in the economy at present.
For simplicity sake, going forwards I'll refer to an ironing board as being:
1 IB sells for £10 (for now)
1 IB generates about £2 of profit
So if you make 1000 ironing boards, it should generate £10,000 of sales and £2,000 of profit. On an average day a factory of about 50+ people would make 1500-2000 ironing boards. Quite a bit of effort to generate only £3-4k of profit.
Why bother when Governments and banks can just print billions?? That's the problem that our country faces currently.
So when bankers say they 'deserve' millions in bonuses and billions in bailouts, think how many ironing boards that equates to...
Bonuses in the millions (for failing)
Losses in the billions
Bailouts in the trillions
Liabilities in the quadrillions
and so on and so on...
It's both surreal and unreal. So it's time to think of a way to get back to reality. But what could we use?
Currencies are hard to measure at present as we are all hell-bent on debasing the damned things. What is the alternative?
Ah, yes! The faithful ironing board!
In a past professional life I used to make ironing boards for a living (I also used to make tea for a living, but that's another story...). Not glamorous, but on reflection, I'm actually very proud of it. Millions of people now use something 'real' that I had a big influence in developing.
It's 'real' - unlike most of the nonsense going on in the economy at present.
For simplicity sake, going forwards I'll refer to an ironing board as being:
1 IB sells for £10 (for now)
1 IB generates about £2 of profit
So if you make 1000 ironing boards, it should generate £10,000 of sales and £2,000 of profit. On an average day a factory of about 50+ people would make 1500-2000 ironing boards. Quite a bit of effort to generate only £3-4k of profit.
Why bother when Governments and banks can just print billions?? That's the problem that our country faces currently.
So when bankers say they 'deserve' millions in bonuses and billions in bailouts, think how many ironing boards that equates to...
Thursday 5 February 2009
Paul Volcker - The Solution?
Who and where will the solutions to the current economic problems come from?
A starting assumption: The UK might as well be the 51st state of the USA. A brief analysis of the last 40-odd years of interest rate and inflation patterns show a strong correlation between the two (much stronger than most of Europe).
If we accept that the above holds to a reasonable degree, then we need to take a close look at the US for leads of where we are going and where solutions may lie.
There aren't many policymakers in either the UK or US that inspire me with confidence at present. One notable exception is a bloke called Paul Volcker.
Paul who??
Paul Volcker was chairman of the Federal Reserve (US central bank) between 1979 and 1987. His relevance today can be summed up by saying that he is a 'friend of sound money', which is something that many of today's 'free money' generation will find weird. After all, what's wrong with abolishing taxation and just printing the money to fund a bottomless pit bailout programme and stimulus package?
The reason I think it matters is that long-term 'sound money' is the most likely solution to our current problems. As a society, we don't realise it yet - it's too early in the downturn - but history tells us that at some point funny money must be replaced by sound money to heal the economy. We can't carry on funding society with printed money - sorry to disappoint fans of all the stimuli packages!
This is someone who has been there and done it in an economic crisis; taking tough decisions that his predecesors were too afraid to. Google the guy - he talks sense in straightforward language, unlike the constant riddles from his successor at the Fed, the 'sage' Sir Alan Greenspan. Here's an example from today:
Quote:
Some banks are not only "too big to fail," Mr. Volcker said. Some are "too big to exist."
Dead right; and the further we get into this mess the more he will be proved correct...
Volcker has been pulled in by Obama to head up a new economic advisory panel - which is an encouraging sign. But his 'sound money' views don't fit with many in Washington at present, so there seems to a lot of delaying going on. Let's hope he is consulted sooner rather than later.
When things get really messy (maybe a few years away yet) at some point we'll get desperate and then you can expect that Paul Volcker (or someone similar) will get wheeled out to come up with the solution.
In the meantime, the Daily Mash is probably closer to the truth than most mainstream economists at present!
A starting assumption: The UK might as well be the 51st state of the USA. A brief analysis of the last 40-odd years of interest rate and inflation patterns show a strong correlation between the two (much stronger than most of Europe).
If we accept that the above holds to a reasonable degree, then we need to take a close look at the US for leads of where we are going and where solutions may lie.
There aren't many policymakers in either the UK or US that inspire me with confidence at present. One notable exception is a bloke called Paul Volcker.
Paul who??
Paul Volcker was chairman of the Federal Reserve (US central bank) between 1979 and 1987. His relevance today can be summed up by saying that he is a 'friend of sound money', which is something that many of today's 'free money' generation will find weird. After all, what's wrong with abolishing taxation and just printing the money to fund a bottomless pit bailout programme and stimulus package?
The reason I think it matters is that long-term 'sound money' is the most likely solution to our current problems. As a society, we don't realise it yet - it's too early in the downturn - but history tells us that at some point funny money must be replaced by sound money to heal the economy. We can't carry on funding society with printed money - sorry to disappoint fans of all the stimuli packages!
This is someone who has been there and done it in an economic crisis; taking tough decisions that his predecesors were too afraid to. Google the guy - he talks sense in straightforward language, unlike the constant riddles from his successor at the Fed, the 'sage' Sir Alan Greenspan. Here's an example from today:
Quote:
Some banks are not only "too big to fail," Mr. Volcker said. Some are "too big to exist."
Dead right; and the further we get into this mess the more he will be proved correct...
Volcker has been pulled in by Obama to head up a new economic advisory panel - which is an encouraging sign. But his 'sound money' views don't fit with many in Washington at present, so there seems to a lot of delaying going on. Let's hope he is consulted sooner rather than later.
When things get really messy (maybe a few years away yet) at some point we'll get desperate and then you can expect that Paul Volcker (or someone similar) will get wheeled out to come up with the solution.
In the meantime, the Daily Mash is probably closer to the truth than most mainstream economists at present!
Gordon Brown does the Hoovering
A few months ago, I dug out Edward Chancellor's (very good) book on speculative bubbles and read the chapter on the Great Depression of the 1930's. The aim was to see what mistakes our current leaders were likely to copy from that period.
The one thing that leapt out was the similarity between Gordon Brown and US president Herbert Hoover. Both were finance ministers during the boom and were seen as the steady hand during those times. But they both took over around the time of the bust starting and it was all downhill from there.
Brown constantly blames "global problems" rather than his own government for helping contribute to the conditions for the crash. Again, this rhymes perfectly with Hoover. Whilst it worked initially, it eventually backfired badly on Hoover.
Over time, Hoover became associated more and more with the problem, as measures became increasingly desperate, rather than the solution. Although still early in the current cycle, Brown is showing all the signs of going down the same route. People already laugh at the suggestion of him being still an iron leader with prudence as his middle name. A couple of years ago, you'd have been branded a bitter loonie for suggesting that. How times change.
My feeling is that until all the people involved (Brown included) recognise that there was a fundamental problem with the financial system (and people's role in it) prior to the credit crunch then we can't move into the healing stage for the economy. The UK is still a million miles from taking the bitter medicine needed (balancing/reversing our various deficits) and until we recognise it makes no sense to 'return to 2007' then our problems will continue to get worse. But that would require real leadership.
Hoover got booted out in the elections of 1933 and was replaced by 'New Deal' Roosevelt.
Much as Brown likes to think of himself as the new Roosevelt, the signs suggest he'll go down in history as the new Hoover. Definitely not a Dyson...
The one thing that leapt out was the similarity between Gordon Brown and US president Herbert Hoover. Both were finance ministers during the boom and were seen as the steady hand during those times. But they both took over around the time of the bust starting and it was all downhill from there.
Brown constantly blames "global problems" rather than his own government for helping contribute to the conditions for the crash. Again, this rhymes perfectly with Hoover. Whilst it worked initially, it eventually backfired badly on Hoover.
Over time, Hoover became associated more and more with the problem, as measures became increasingly desperate, rather than the solution. Although still early in the current cycle, Brown is showing all the signs of going down the same route. People already laugh at the suggestion of him being still an iron leader with prudence as his middle name. A couple of years ago, you'd have been branded a bitter loonie for suggesting that. How times change.
My feeling is that until all the people involved (Brown included) recognise that there was a fundamental problem with the financial system (and people's role in it) prior to the credit crunch then we can't move into the healing stage for the economy. The UK is still a million miles from taking the bitter medicine needed (balancing/reversing our various deficits) and until we recognise it makes no sense to 'return to 2007' then our problems will continue to get worse. But that would require real leadership.
Hoover got booted out in the elections of 1933 and was replaced by 'New Deal' Roosevelt.
Much as Brown likes to think of himself as the new Roosevelt, the signs suggest he'll go down in history as the new Hoover. Definitely not a Dyson...
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