Interregnum

Equity markets are waiting with baited breath. Some sort of correction must surely come before the end of the year. However I guess we really are in unprecedented times and no one has any idea what is likely to happen.

Pensions

In todays budget it is very difficult to see how you can square reducing tax relief for higher earners with leaving Public Sector Pensions untouched.

Peston’s Views

Robert Pestons Blog regarding the non take up of the UK Bond sale and the subsequent success of the ensuing index-linked bond sale a few days later misses the essential point that Index Linked Bonds are going to much more attractive since our quantative easing is going to ensure that we have inflation post 2010.

it is fairly clear that no one has much of a clue about what is happening!

Dealing with the credit crunch in the UK.

“I started writing this in the middle of December 2008 and now at the end of January 2009 I can see no sense coming from our political appointees. I am more convinced than ever that some form of radical solution is needed.” – Les Cantlay 6th February 2009

The background to the solution

It is my belief that we currently face the greatest threat to our way of life since the dark days of the Second World War. Many people in this country seem to be completely unaware, or are in denial of the situation that we find ourselves in. The talk in the press is of recession, however the impression is given that this will be relatively short lived and that given time it will resolve itself. I do not believe this to be the case. Our Government is also guilty of lying to us. Either that or they too are in complete denial about the magnitude of the problem.

Gordon Brown is right when he says that this crisis started in the USA, however he is completely wrong when he says that the UK is well positioned to withstand the downturn; he is also quite wrong when he gives the impression that it is nothing to do with him. It is New Labour who chose to model the UK financial system on the ideas that were driving the American economic fantasy. It was these ideas that led to the creation of a flawed regulatory system, to the independence of the Bank of England and the creation of the relatively incompetent and weak FSA. A system that was only going to worry about the Consumer Prices Index and ignore asset price inflation was an exact copy of what Greenspan and subsequently Bernanke were pursuing in the US. The end of “boom and bust” was both an incompetent concept and a dangerous one.

The heart of the problem
The subprime crisis was only a symptom of the real issue. At the heart of the problem both in the US and in the UK is the decline of domestic savings and the building of an economy which itself was a product of a cultural drive to super efficiency. This type of efficiency resulted in making the greatest possible use of capital and therefore leveraging assets as far as possible. The problem with this is that it is a bit like building a car to exceed the land speed record and running it on the smoothest surface possible. Everything is so finely tuned that there is no redundancy built in. The slightest unexpected bump can prove fatally disastrous.

Lax regulation and the availability of abundant capital at relatively low interest rates ensured that growth was a foregone conclusion. In such a climate greater and greater risks were taken. Investment decisions, including property ownership became a one way bet. The US Fund Managers became keenly aware of the “Greenspan Put” i.e. that if the market really got into trouble the Fed would step in to get growth going again. The UK followed suit, after all we had been reliably told that we had seen an end to boom and bust. Tragically in all of this we no longer saw the need to save money for a rainy day and on top of this we managed to destroy our Pension Funds.

The solution
The following is our prescription for a solution to the problem. In reaching a solution we do need to take into account that we do not have all the means to affect this as sovereign nation on our own. The great globalisation has robbed us of that luxury. The US will resolve the crisis and will come out of it stronger but the UK could end up being collateral damage. The crisis will end up in disaster for the continuing development of the European Union and I do not think that there will be any help from that direction. We need to look to ourselves for our solution; however we do need CONUS, Asia, and Europe to cooperate on any globally initiated solution. We do need to understand that the solution to the financial crisis, as far as the UK is concerned, will take place against the background of increased likelihood of further systemic shocks. Candidates for these could well be:

• The unwinding of the Credit Default Swap situation
• A draconian reduction of the Hedge Fund Industry
• Catastrophic collapse of other economies
• A Nuclear event
  

We need to recognise that we are in financial earthquake territory and the question to be asked is “have we had the main event or have we had some warning shocks” This is not the time for politics, nor is it the time for laying blame and looking backwards. Some real scenario planning goals need establishing which can be set down without fear of political consequence.

Scenario 1
If the world is heading for a depression how do we in the UK deal with that situation?
Scenario 2
If the world is in an extended recession how do we in the UK come out of it quicker than every other nation save perhaps the USA.
Scenario 3
If the outcome of the next two years is that we merely repressed a depression how do we ensure we defuse the future crisis.

On the basis that you should always plan for the worst but hope for the best then we should be creating the contingency required for a full blown depression.

So what is the real UK problem?
Forget the fact that everyone is in the same boat. The real problem for the UK economy, in the short term, is a lack of Money Supply. Put simply there is not enough money available in Corporate and individuals Bank accounts. The creation of money to sustain our current national lifestyle from overseas borrowings has dried up. Our main source of foreign earnings, Financial Services is shrinking rapidly.

What should be done now?
Like real first aid financial first aid does not have to be a elegant or indeed a long term solution. Like real first aid stemming the flow of blood is the first priority lest the patient dies before real help can be organised. In financial terms the equivalent of this is Quantative Easing or to use its pejorative term simply printing more money. Sure this will lead to inflation but we now know better how to control this and, it buys us time. We have already wasted too much on half hearted solutions which have been accompanied by what I can only say is political optimism. Absolutely if Gordon Brown admits that we need to print more money he will lose the next election – but so what he is going to lose it anyway. There is absolutely no positive legacy in bringing down the country with the Labour Party. If he dos the right thing now the Labour Party may get another chance in ten years.

So what are the long term actions?
Once you have applied first aid I would suggest that we set the best minds that we have on the problem and find the real solution. However as a non economist here are some suggestions. No doubt economists would find fault but they seem obvious common sense measures.

1. Government spending needs to be cut by 10%, however care will have to be taken to ensure that cuts are prioritised: Cut waste- Cut programs which require spending money overseas with developed nations -Cut programs which don’t deliver or result only in benefits to a narrow franchise.

2. Redirect 10% of Govt spending into real job creation – building the future infrastructure that we need to compete in a post crisis world. Increase the size of the UKs armed forces and force the achievement of technological parity from UK sourced equipment.

3. Banks need a further huge injection of capital. Simple mathematics should tell us that they just don’t have the money to lend. Nationalise them if we must but publish at the same time the criteria and mechanism for devolving them back to the private sector.

4. Kick start the property market by opening up residential property to SIPPs, after all the Government have done all the work on this before they pulled it when they lost their bottle previously. However I would add a few twists. I would allow the transfer of main residences into SIPPs and give tax relief on maintenance and improvement. Lending policy could be controlled via this mechanism. This would allow asset values to catch up and only recognises the reality what many people believed i.e. their homes were their pensions. I would create new pension gilts which properties can be exchanged for at reversion rates when SIPP holders wish to take retirement benefits. Extra incentives should be available to purchase, and hold in a SIPP, rental property, for children and grandchildren. IHT relief should be given to ensure inter generational investing.

5. Savings need to be made compulsory. This could be done by introducing Personal Accounts immediately and making employee and employer contributions compulsory. Asset classes would have to be carefully controlled to ensure money was not unduly taken out of the economy. An enterprise credit institution should be established to offer credit directly and raise capital thorough offering Bonds at different levels of risk with well managed volatility. These could form some compulsory asset classes for Personal Accounts.

6. The new UK Pension Gilt should promise a reasonable index linked return. However this is devised the requirement is to restore Public confidence in pensions as a means of long term self sufficiency.

7. The cost of unfunded Govt public sector pensions needs to be dealt with. Existing promised pensions should be denominated in the new Pension Gilts and selectively devalued to attain parity with the private sector. This of course would be highly detrimental to the governing classes, but they should recognise that this should be a reasonable trade off against massive cuts in the Government employment.

8. The plethora of state pensions needs to be abolished on favour of the issue of the same type of Pension Gilts.

9. We also need to plan the restructuring of our economy into a more balanced mode able to withstand future shocks. We must take the opportunity to simplify our tax system and to hugely incentivise innovation.

10. The target set for inflation should be 5% not 2% and this target should remain throughout the next decade in order to help diminish some of the debt.

11. Finally come up with a credible energy policy that ensures a degree of self sufficiency.
    

Future Regulation
The current form of regulation has clearly failed a global market. Best minds should be engaged to redesign this, however the G20 cannot act in isolation, the solution requires embracing all nations. To reach this solution, leaders will require going beyond statesmanship. In the UK give the regulation of the Banks to the Bank of England and let it maintain its independence. The FSA should be disbanded as the experiment with a super regulator has failed. They have not been able to deal with the big issues nor have they particularly protected the public from the smaller issues. Replacement should be by smaller more nimble regulators, made up of sector practitioners tasked with tackling real sector problems.

The future of the Global Economy
Although recent events will undoubtedly be a set back for the global economy the answer is not retrenchment to pursue national interests, even if some of my suggested solutions may be seen as having a good deal of that attached to them. However a good citizen sets his own house in order first, as best he can without harm to his neighbours. All nations must quickly re-engage with the global economy because it is the ultimate route to the eradication of all internal threats to our planet such as poverty and climate change but also the likely bastion to any, as yet encountered, external threat.

Looking forward to 2009

In the run up to Xmas in the New Year the traditional press are full of articles either looking back or looking forward. When things have been particularly bad and we have no reason to fear the future the articles are predominantly ones reviewing how awful the year has been. When on the other hand we have every reason to still fear the future the articles ignore how awful it was in the past and concentrate on how terrible life will be in the forthcoming year. This is, of course, only human nature; the same human nature that drives markets, causes us to pursue excess in boom times and gloom in bad times.

There is probably no foolproof way of protecting ourselves against economic shocks. The best we can do is follow the old adages "don't put all your eggs in one basket" and "save for a rainy day", after all they have withstood the ravages of time and the increased complexity of the world we now have the privilege to life in. The other piece if homespun advice I would offer is "don't assume". Don't assume that the worst is over; don't assume that because the Governments have stepped in to support banks that your money will always be safe.

I believe that there are two really big shocks still in the system. The first is the unwinding if the uncertain position relating to credit default swaps and the second is further catastrophic collapse of the Hedge Funds. To avoid the effects of these we need the G20 conference scheduled in the New Year to tackle these problems and through some world type regulation create the conditions for an orderly retreat in these areas. Huge sell off of assets which these two problems may create, not only ensures volatility in the Market but it destroys negative correlations between the asset classes.

To avoid further financial disaster Government spending on non essentials needs to be reduced significantly. Banks need to be nationalised as it has always been clear that the bail outs already done merely prop up their balance sheets, they are not going to get any additional capital to lend from any other source than us the British Public – be it through tax or through savings. My next prescription would be to reduce taxes spent on non essential Government activity and introduce compulsory savings. Personal Retirement Accounts should be introduced early with no ability to opt out. Pension funds should be free of all taxes and further incentives should be designed for them to invest in renewal, green and infrastructure projects

Darlings Xmas Box

By the end of this coming week we will see what financial goodies are to be delivered in the Pre Budget Statement. I would guess this will be, perhaps, the most important budget statement this century, and nothing like the original intention of a pre - budget statement. The case, as I said in a previous blog, is quite strongly in favour of a robust stimulus package. Initial indications suggest that it needs to be up to 2% of GDP which would mean some £50bn.

There is, however, one big caveat. The Chancellor will have to admit that he is only buying some breathing space and that if he does not also introduce a plan for paying for it by increased taxes and cuts in Government spending in definitive time frames he risks further damage to the beleaguered pound. The breathing space, so created, will almost certainly last until the next election and it will look very much like our votes are being bought.

The most likely course that will be taken is a combination of "carrot and stick" and "buy now while you can." For instance taxes that directly impact on consumption like VAT and Stamp Duty may well be eased during a period of advance notification that they will be increased.

Tax credits could be used to address the 10% problem, although personally I think there would be a good case politically for just accepting that this was a mistake and bringing back the 10% band.

Tax cuts have also got to stem the tide of rising unemployment and so there may be some easing of National Insurance Contributions in certain circumstances. A far sighted policy would be to make pensions saving more attractive in the hope that encouraging higher inflows will help stimulate the equity market or at least increase the demand for gilts which will need to be issued to pay for all of this.

Whatever happens the need to plan your response and long term financial situation will have just become even more imperative!

A whacky week

At the end of last month I was predicting that interest rates could be as low as 1 or 2% by the middle of next year and many thought that this was rather draconian. Last weeks massive cut of 1.5%in base rate does make this seem more likely now. On its own I do not think that this will be enough to get the economy moving but it is a step in the right direction. The next step will be how the Chancellors pre-budget statement proclaims a package of real measures to stimulate the economy. If this is to be effective the only tool in his box is tax cuts, even though these will have to be funded by borrowing. Further relief on stamp duty would be welcome together with a stimulus package for small business.

The best news of the week, of course, is that Libor is steadily moving downwards. Markets at last stabilised although there was a minor setback midweek, however the trend was still positive.

The pound in your pocket, pension and property!

This week has seen us return to a degree of stability in the markets; gains made by and large have been held. The media circus has moved on leaving room for commentators like Newsnight's Paul Mason to dissect and try and draw lessons from what happened. If we have reached the bottom and I am not calling it so, but it looks like it may be so, where does that leave us? My sense is that protecting the value of cash has become much more of an issue, after all we have got used to the idea that equities can go down as well as up. We did not however believe that investments which traditionally had little or no volatility could be at risk. However due to the poor risk management within our banking industry that is exactly what happened. Cash deposits and money market accounts have in some cases suffered unprecedented losses. The amount guaranteed under the Financial Compensation Scheme has increased to a maximum of £50,000 but many will want to take advantage of getting higher returns for investing more. You could take the view that the Government would not let a high street bank but you would still be taking, in my view, an unacceptable risk particularly as interest rates come down as they surely will. Even if you spread your cash around a number of banks you still need to avoid situations where the authorised deposit taker covers more than one Brand. Cash deposits in separate accounts with Bank of Scotland, Halifax and Birmingham Midshires would only result in one protection of £50,000. Paying for advice on how to invest cash has now become more necessary and ever.

What about those who have had their pensions and savings diminished by the crisis? Should they flee the equity markets? Probably not, but it really depends on where you are now and what they were invested in. You should consider how your asset allocation performed during the crunch, did you have all your eggs in one basket? Now is the time to get advice on what you need to do for the future.

If all of this was not enough we are now told that houses prices are falling by more than we are earning. Not much you can do if you are heavily mortgaged but if you own your home outright and are over 55 this might be a good time to consider releasing equity from your home. Valuations are still not reflecting the true downturn in the house market and interest rates are lower than ever.

If there ever was a time to consider the protection of the pound in your pocket, the pound in your pension and the pound in your property now is the time to do so.

A new era for investment

 

It has been an interesting couple of weeks in the Markets. The volatility of the FTSE Index is pretty much unprecedented. For many the biggest problem may well be a loss of value in your Pension funds. As we come out of this crisis it is important that you evaluate how your portfolio has performed. If it was a well structured portfolio it should have lost considerably less than the FTSE. If you have lost as much as the FTSE it is probably time to have a look at the amount of risk you are carrying. You also need to ensure that you continue to invest cash safely. It would be prudent, even though we may think the Government is stood behind our savings, to keep your exposure to any one bank to less than £50,000. If you are in any doubt about how this credit crunch crisis has effected your finances, please give us a call. We may be able to help.

 

 

The deal must go ahead in the USA

This weekend we await the news that they have agreed a deal on the $700 million dollar bailout. Although these events are happening in the USA the world financial system is such that it inevitably has a large impact on us. If it does not go ahead then we will not only see more Banks go to the wall here, but all other business could be starved of cash.

My advice would be not to make any rash financial decisions this week

Where do we go from here?

Markets have edged there way back to near Melt down Monday levels. This was only to be expected, however the unease in the markets seem to be driving prices down further. The dithering that is going on in the US over the rescue plan is having a big impact. If this issue is not resolved happily by Monday trading, then I think we can expect next week to show more losses.

Worried about your investments

Most people would be given the current situation. It is difficult to know what to do, house prices are falling, share prices are falling and returns from bonds are not what we would expect, Now is the time to see how your investments managed to weather the storm. Was the risk as you expected? If not then you should come and consult with us.

Trillions

$700 Billion to be exact. That is the amount of money that the US plans to spend on saving its ailing house market. We are now in brand new territory. This has never been done before and we can only hope that it works. Robert Peston has some interesting things to say on this. He is being credited with the greatest financial scoop of the century for breaking the news on this. Many say that his action may well have prevented a run on HBOS deposits. Good for Robert but I cannot help but think that the powers that be leaked this information so as the Government and particularly the Prime Minister could be seen to be involved. Well whatever the reason it had a pretty good effect!

Some market cheer

The recent events just go to show that it is not about “timing the market but time in the market” Yesterday was the all time one day rise in the market. Anyone who decided to run for cover will have been left far behind. The next few weeks will be pivotal for the market. If we continue to make small gains throughout the next fortnight then we may be able to get back on track by the end of the year.

Meltdown Monday

Just when we thought that it could not get any worse along comes "meltdown monday." The odd thing about this is that many people have known that Lehman Brothers were in a precarious state for some time - so you would think that it would already be priced into the market.

Whow what a day!

We have become used to seeing the market yo-yo about over the last 12 months but today's drop is quite something. We will have lost 15% of the FTSE since last October which is bad news if you need to sell your holdings at this point in time. But, and its a big but if you have the nerve and the appetite for risk it is possibly a good time to buy equities.

Positive Outlook from the Elephant Man

My prize for the person with the most positive outlook on life in 2007 goes to Mr Merricks. No not that celebrated elephant man but our very own chief Financial Ombudsman, Mr Walter Merricks, who must be the only person who has seen a silver lining in the Northern Rock fiasco. In his latest Ombudsman news bulletin he has gone on record stating that there was a considerable silver lining in Northern Rocks problems. He was expecting lots of complaints but was surprised that he received none.

He goes on to say "In response to the news about Northern Rock, people whose entire life savings had languished for years in low-interest current accounts – people too inexperienced, too uninformed, or perhaps just too busy or bored, to shop around for a better rate or better account – were suddenly making decisions and taking control of their finances in the most dramatic and empowered way."

It should not take a another run on the Bank to get us looking at how our finances are performing!

Inheritance Tax Planning - AIM Investment

According to Trustnet we should not be surprised if the current concession of exempting Alternative Investment Market (AIM) shares from IHT if held for more than 2 years disappears at the next budget. I doubt if this would be made retro active, and anyone thinking about this should do so before the main budget.

Personal Accounts

Well it is no surprise that it was announced by Tim Jones, the new head of the Personal Accounts Delivery Authority that the introduction of Personal Accounts (due 2012) may well be subject to delay. I would guess that the creation of a massive new Authority to administer and accommodate some 8 million new savers may well be taxing some minds in light of recent disasters with data. Even so, this is not going to go away and compulsory saving is here to stay. It is just over a year since the government issued its white paper on personal accounts and for the general public there's been very little said about it during 2007. Even if the date is delayed and that there is a three year buildup period where both employers and employees are allowed to increase contributions slowly we should start thinking about how these additional costs will impact our business model if we are employers and our budget if we are employees.

How have hedge funds faired?

At the beginning of 2007 the FSA, in their yearly publication of "Risk Outlook",highlighted the problem of traditional asset classes reacting in nontraditional ways, by remaining relatively correlated. The year has seen a huge inflow into Hedge Funds in search of non - correlated assets. Now perhaps is a good time to look back and see if these funds have done "what they said on the tin," that is, to have performed in a market where long equity funds were very volatile and under performing,and to have done so with considerably less volatility.

As there is no standard definition for a hedge fund, and they are sometimes disguised as alternative investments it is likely that there will have been a whole range of results. However in the main, I believe, that many of these funds will have done OK, depending on the underlying strategies employed. If you hold any of these funds now is the time to take a long hard look at the performance over the last 2 quarters. These funds are rarely priced on a daily basis so it may be some time before you can get the information.

If your performance in this asset class has met, or exceeded, your expectations don't get carried away. Even though they are designed to be less risky, they are difficult to place on a risk spectrum. Transparency issues and failure of any "black box" methodologies do render them susceptible to catastrophe risk so I would keep them as a relatively small part of any overall portfolio.