What to do about the BBC

June 14, 2012


The curious thing about the UK’s Leveson Inquiry is the absence of mention of the BBC and its role in our media. While the State owns it, we the taxpayers, have neither control nor influence over its policies or activities. Certainly there are focus groups, complaint processes and all sorts of representation built in to its governance model, but the reality is, at its own admission, a left-biased organisation self reinforced by highly selective recruitment processes. The appointment of its “regulators” chairman has virtually assured a new DG of a leftish leaning. It is by far the most influential media group in the country, the one that no politician dare cross, irrespective of party. Its market share in television, in radio, in local radio, in on-line content and in various print media individually and collectively rivals and exceeds the influence of, for example, the Murdoch’s. So why is it free to do and influence as it likes? One answer is lack of accountability, but there is an answer in the much loved John Lewis model. What if the BBC had meetings at which licence holders could vote? Clearly given the penalty for not having a licence, the licence holders, as a cohort, are the most representative and diverse any public body could wish for. They have also paid for everything and legitimately may wish to influence everything. So why not implement stakeholder’s annual meetings? Along the lines of company law such meetings could review executive remuneration and hold executives to account. One licence holder, one vote. Who could possibly argue that such a process would not be democratic, inclusive, equal and desirable?


Last Thought of the Year

December 31, 2011

I keep hearing and reading that there is only one way forward for the UK-the European Union, and ever-closer-union. But, the pros never provide useful information allowing me to build a compelling scenario. I still don’t know why the EU will be successful. Its banks are largely bust; many of its nations are insolvent and its leaders don’t lead. Its demographics, read a decade ago and more, have suggested low growth and high costs of capital. It seems destined to exist behind trade barriers (and in due course exchange controls). Why would we wish to remain committed to a social and democratic model that doesn’t appeal to many, perhaps most, Brits? How does continued membership (on the basis of the present social model) enhance and promote Britain in a world that is leaving Europe behind? I’m not suggesting that we suddenly gain global success and increased influence; rather we might stand still where we are, while Europe slowly submerges under the weight of its own lack of foresight, leadership and influence.

Nothing like a crisis: Now we’ve a Crisis

August 6, 2011

Over the last week politicians on both sides of the Atlantic have stoked the Crisis- the US being rewarded with the first credit rating downgrade in its history and the Europeans proven incapable of coherent policy formation let alone policy implementation. Such is the nature of professional politicians with few, if any, experience-based leadership qualities.

Stock markets have fallen etc etc. The stage is set for that all important summit meeting.

Nothing Like a Crisis: Nicely Stoked-up and ready to go!

July 20, 2011

Back in early December 2010 I wrote a paper on how, just perhaps how, the crisis might, once created, be mitigated. For various reasons I didn’t post it here then but now some seven months later and ahead of tomorrow’s EU summit publication seems timely.

ECB buying bonds not the solution

I disagree that simply buying bonds solves Europe’s insolvency problems. The problem of liabilities not met by assets is unlikely to be solved by unwilling taxpayers handing over ever increasing proportions of their income to bailout a failing system. So, something has got to change. Rather than that change being the end of the single currency, I believe that Merkel will try to save the currency, and by implication the Union, by creating the conditions by which the EU will move closer to fiscal union on the one hand and the recognition that debt restructuring must start, on the other. These would be important steps in securing the long-term viability of the euro. Clearly fiscal union is too bigger step for many, so some brinkmanship will be needed to use crisis, instead of democracy, to bind the Union forever closer.

The facts would seem to suggest that the extent of EU liabilities greatly exceed viable assets available to meet them and once this truth can no longer be ignored (‘the emperor has no clothes’) either the system needs reform or the system will quite simply fail. Without ECB funding the whole system would have failed already and the ECB cannot continue to provide support on this scale without the support of Merkel. Nor can the ECB simply buy up periphery, and worse financial, bonds bloating money supply in an enormous QE exercise with untold inflationary consequences.

I think one should not underestimate the power of political vision. History is littered with impossibilities and immovable impediments that simply melted when necessity demanded; indeed just about every community law concerning the common currency has been simply ignored already. It would be wrong to assume that financial markets can break the euro and by definition the Union. But failure can only be avoided by urgent reform. That reform needs three components: fiscal jurisdiction, debt restructuring and competitiveness adjustment.

Once the EU has the potential to raise taxes (it doesn’t actually have to do so) so an element of stability is reintroduced into the fabric of the euro. Never has the opportunity to introduce direct EU tax income (completing the bodged currency union) been so achievable, and Mrs Merkel I’m sure senses that. The EU could then have the ability to assume the debts of member states with no particular country facing a politically unacceptable share of the burden.
So this looks like the political approach of choice but what should the policy response be?

A three component strategy

The fact remains that the sheer scale of the insolvency is unmanageable as it stands and therefore two additional key remedial mechanisms need to be created. Firstly, one that recognises the mispricing of risk- the stark reality that both some public and private debts cannot realistically be repaid in full; and secondly, a mechanism that addresses competitiveness between member states.

Restructuring debt can either be achieved by the ECB simply buying it up (which I reject due to the inflationary and/or diminished growth implications) or it can be more effectively left on existing balance sheets but via a swap for “serial depreciation bonds”. These substituted bonds would reduce in value by a set (say) 10% per annum to a given residual value, allowing holders to progressively realise the losses rather than the shock of taking the hit in one fell swoop. Obviously regulators would need to turn a blind eye in terms of mark-to-market to these legacy securities, but they have done so in the past (e.g. Brady Bonds) and could do so again.

Turning to converging competitiveness what I have in mind is a two track euro but not the solution put forward by others. Rather I would set the weaker economies apart from Germany and its close satellites, giving each its own Junior Euro. I’ve not fully though through all the moving parts, but the obvious impediments such as currency notes and day-to-day transactions in cash are actually relatively simple and cheap to overcome. The juniors would have to be priced realistically to reflect differing equilibriums in terms of interest rates and initial exchange rates relative to the mother Euro.

However I do not propose countries leave the Eurozone. Rather I propose a “currency board” structure. This has been used on many occasions (by the British) as a means of launching new national currencies and could be used again by the EU to cement countries to the Union; allow for progressive convergence over time, and eventual re-union at a future date. The key political imperatives are the countries didn’t leave the EU nor did they entirely leave the Euro.

The exchange rate for junior euros against the mother euro would be managed within trading bands set by the ECB in consultation with the underlying country. The junior euros would be backed by the existing reserves denominated in the mother Euro allocated, and supplemented, as required, again by the ECB.

Accordingly the markets are presented with countries with currencies that are cheap by design; have appropriate interest rates; are likely to experience improved growth rates but possess constrained inflation potential and domestic debts with (increased) capacity for repayment in (potentially) a strengthening currency.

The residual (mother) Euro members do not suffer a substantial strengthening of their currency (they have the potential to run current account deficits with the junior countries for example) and to the extent they do, then the junior’s reserve backing improves directly and in proportion.

So should buying bonds be abandoned, and a more sustainable approach be introduced, I suggest the solution needs three components that could look like this:

• Giving the Union contingent fiscal powers provides a back-stop should all else fail;

• Allowing credit to be re-priced progressively allows adjustment to be planned and avoids further shocks to the financial system allowing a timely and effective recovery;

• Using a “currency board” approach to managing currencies provides:

• Common and achievable goals within the Union and assurance that the political goal of currency union has not been lost;

• A mechanism to allows convergence to be undertaken at a sustainable rate;

• By a backing the Junior Euros with Euros within the Currency Board structure considerable control can be applied to the open market rate for Junior Euros and the managed trading range permitted for each.

The above measures, together, offer the prospect of recovery within the desired political framework on the one hand, and with the benefit of external financial market support on the other. While I freely admit these ideas constitute pie-in-the-sky thinking they do suggest the potential for outcomes other than simply buying and warehousing bonds in the hope that things will work out.

7th December 2010

Nothing like a crisis: Game On!

November 25, 2010

Angela Merkel has been speaking today in the Bundestag on a plan to impose majority voting in the terms and conditions of certain Eurozone bond issues. She said “This is about the primacy of politics; this is about the limits of the markets.”

In any market segment the majority of issuance is usually held domestically (for obvious reasons) and the banks are often the biggest holders. This is particularly so when the “bank recapitalisation carry trade” is advantageous.

Should it be necessary for an issuer to seek an extension in maturity; a cut in coupon; or a reduction in maturity proceeds (generally known as a restructuring on, or prior to, default) majority voting would tend to eliminate private bond holders (such as individuals, overseas pension funds and mutual funds) from the voting process creating de facto senior and junior holders.

Now if those banks were the underlying problem who do you think they are going to vote for? Would it be the individuals, overseas pension funds and mutual funds; or the troubled Government best positioned to reciprocate the favour?

The first rule of fixed income investing is “Get Your Money Back”. Yesterday I suggested that a crisis can have its uses. Today Merkel seems to have started playing the anticipated game.
Game on!

Nothing like a crisis, or two

November 24, 2010

There must be those in the EU that actually quite like a crisis or two. Firstly, crises tend to push currencies down which can be good for stronger, exporting, countries. Secondly, for those stronger countries the chances are capital leaving the weak will stabilise or perhaps even reduce their interest rates. So if you are called, for example, Germany an occasional crisis in the Eurozone might not be all that bad. If you were uncomfortable with a set-up where fiscal policy was divorced from monetary policy you might even see a reason to endure a further crisis or two as a means of pushing the ever closer union.

I am, of course, glossing over the obvious inconveniences and dangers inherent in the current crisis in the Eurozone but my point is this could be a moving-ahead moment, not the big step backwards anticipated by some in the marketplace.

What should policy makers be worrying about? The perennial question mark that hangs over Spain and its miracle banks. This elephant in the room is of such size that it could be the catalyst that, rather than seeing the EU experiment disintegrate, actually takes it forward.

From a policy prospective it must to attractive to have urgent circumstances that precipitate the fiscal and regulatory components missing in the single currency equation. Bailing out Greece and Ireland places these issues on the agenda; however  should Spain need bailing out, then that would require, for the first time a fiscal transfer, and in doing so take Europe closer to its desired ever closer union. The mechanism already exists in the form of the European Financial Stability Facility which allows multilateral debt guarantees or, to put another way, a mechanism to transfer economic ownership of debt financing obligations from one country to another.

Now creating a pan-European tax base would, of course,  be contrary to public opinion within the EU: a very inconvenient impediment to thinking at the heart of the European project. But in times of crisis deals are done without democracy getting in the way and I am very sure that such an opportunity will not be missed.

Going Pear-Shaped

August 10, 2010

On markets I’m sounding a bit like an old gramophone and haven’t really changed views in recent months as most developments have been just the arrival of forecast events rather than the arrival of new information. I do think that there are so many moving parts in play at the moment that clarity is indeed difficult to achieve. However we must have a view, so where is sustained recovery coming from?

Starting with Japan it is indeed difficult to see Japan as the engine of global growth with its demographic and deflationary issues lurking in the background. Most of Asia is still too small to make a difference on a global scale, and too fragmented to assume a global role in the near future. China is quite rightly focusing on its domestic market but that process will take a decade or more. Africa- no; Latin America- no; Russia oh no, so that leaves us with the developed economies the most significant of which are beginning a de-leveraging process that realistically may take a decade to conclude. This puts both the consumer and the corporate sector under some pressure: it’s not easy to see where profit growth is coming from (domestic demand falling and cost of capital rising) or what sustains consumer demand (wage pressures, lack of credit availability, rising tax burdens). Having said this, the Consensus Forecast is for profit growth! Japan around 8% pa going forward; the UK around 8.5%; but lower, and then declining, expectations in both the US and core-Europe. Perhaps this tells us something about various attitudes to printing money and profits in real terms. The good news is, of course, currency depreciation may help boost export markets which, in aggregate, could be the developed world’s saviour as the change in terms of trade would suggest growing and broader based demand from EMs.

So is Europe the engine of growth? With prospective growth of 1.4% in 2011, a recent currency crisis and the wrong demographics, probably not. Having said that Europe now has a cheap currency and the ability –if it wants to take it- of recreating some highly competitive satellites capable of, on the margin, boosting aggregate growth within Europe while the cheap euro precipitates an export-lead German recovery. Sounds good but the banking system won’t be (despite Stress Testing) in a position to help, so no it’s not Europe.

So that brings us to the US and the posed question. My answer is one should be optimistic but mindful of the very real downside risks. For example,  there are more future mortgage resets to come in the US. These numbers show a situation that is very similar to the situation in mid-2007 and poses the threat of a further contraction in consumer demand. Resets will continue to rise peaking in 2013/4.

The US does have a history of reinventing its economy through renewal. Although the problems of bank intermediation and leverage misuse were arguably first felt here, equally the US will probably emerge well ahead of the others (again a theme expressed by Michel over the last year or so). There is plenty to go wrong- strong currency; unemployment; the banks. But on the other side of the coin there remains a de facto dollar bloc covering much of the world; a propensity to work (rather than languish on benefits) and very low interest rates across the term structure. The US’s main export markets are all doing well. The US is probably well positioned due to its (potentially) overvalued currency and substantial non-paper reserves (gold) to go ahead with a further round of QE to tide them over the waves of forced debt restructuring predicated by the recapitalization of the banking system. So, on balance a pretty awful situation, but with get-outs. Not sure that the get-outs extend to Europe or the UK. I’d put money on the US and hope.

Avoiding the equity trap

April 10, 2010

Americans are optimists. One I had coffee with last week felt sure equities were about to take off. I didn’t agree, arguing I didn’t know where the earnings were coming from given the prospective environment which would be starved of growth and with deleveraging reaching further down the feeding chain. Overall a dis-inflationary environment I would argue.

However, not wishing to appear rude I then turned and supported his view – because one thing is for sure: if the US (and the UK for that matter) can inflate away its massive debt overhang- it will. And that means owning real assets like houses or proxies like, yes, equities.

But hold on! That sounds like buying into a bubble -multiples not supported by earnings- and that’s at the root of our current mess.

So what may make sense?

Michel thinks owning Australian index-linked treasuries while buying an out-of-the-money option on the S&P 500 might be a sensible position to take.

From afar the UK a sad sight

April 8, 2010

Here in New York our experience is the same as in Georgetown. The streets are bustling, the carrier bags full and somehow there is a real confidence exuded as we pass along the streets. America is out of recession, the US is pulling off its renewal trick and the Government is looking to book an initial ten billion profit on bailing out the banks.
In comparison what a sad sight the UK looks especially from this side of the pond. Immigration, government jobs and and the many millions simply living on hand-outs create the absurd situation where an utterly incompetent, corrupt, surveillance-crazy, back-ward looking government led by a man who has never been elected by anyone – could actually get another five years in power.

We are the most watched county in Europe- possibly reduced in just thirteen Blair/Brown years to something rivalling the old East Germany. Blair/Brown have pushed through Parliament almost one law PER DAY over those thirteen years! At the same time Parliament has been bought-off leaving little if any scrutiny of legislation.

This is the election that really will change lives. Can our traditional values ever be restored? The Tories are the only hope. But can anyone turn back Labour’s election rigging?

On the way to Washington DC

April 3, 2010

The Cromwell clan is en route between NYC and DC. We left our Harvard friends in mid-conversation but caught the noon train with ease. Fast, comfortable, excellent wi-fi. Such a contrast with the dirty, crowded rip-off in the UK. The Cromwell’s are introducing the kids to the most political of cities. The Easter weather is wonderful (72) and the cherries are in full blossom. Great!