Sunday, 21 December 2008

The New Capitalism -by the BBC

Over the last year or so, there is one man that has become a source of pain for some in the financial services sector. Some journalists don’t like him either. It is Robert Peston, BBC Business Editor. [blog]

His idiosyncratic style and general slow delivery (plus mumbling and fumbling and humming) irritates many. Others are irritated by his “attacks” on the financial services sector and the markets. The right-wing blogosphere attack him for being a "leftie" and the mouthpiece of the Labour government. Or so they claim. Stockbrokers and investment managers despise him because he “brings the market down”. I thought the markets were "efficient"?
The FT journos call him Pestowire, or Peston RNS, a reference to the Regulatory News Service used for the public dissemination of financial markets announcements.

It is difficult to convey to anyone living outside the UK how pervasive Mr Peston’s presence in the BBC has become. Since his reports on the debacle of Northern Rock, and the collapse of the banking system and consequent recession, his presence is the main feature of the 6pm and 10pm news bulletins every single day. I remember one day he even broadcast from the garden in his house.

Recently, he has published a short essay with the title “The New Capitalism”. [PDF]
They are summarised in these two videos. [link]

Personally, I don’t have any issues with his reporting. And when someone’s argument is over style, or personality, you know that people are on a loser. So I haven’t got much sympathy for those who blame Peston for anything. The world, or the stock markets, would not be any different, had Robert Peston not reported on the stories we all know about now. Shooting the messenger is not the answer to this problem, and it shows how inward-looking and shamelessly self-preserving the financial services sector (I refuse to use the word ‘industry’) has become: denial has become the modus operandi in the face of an unpleasant reality.

I do have a bit of an issue with this essay though. Not much with the content than with it having the logo of the BBC as an endorsement. So is this the BBC’s vision of capitalism post-credit crunch or Peston’s? It may be trivial and I might be over-analysing, but the presentation of this essay is not clear, and as a license fee payer I object the way in which has been delivered.

I have no issue with Peston’s book “Who rules Britain”. It may read more like a series of articles and it lacks a cohesive argument, a central thesis that it is presented to the reader. But overall, it provides a few examples of how the City and big businesses work, and how tax avoidance, sorry tax efficiency, has been encouraged by the Labour government.

But reading his essay on the new capitalism taking shape, I could not help but wondering about some of the statements and claims made:

“Arguably the global economic crisis will turn out to be more significant for us
and other developed economies than the collapse of communism.”
Well, I disagree completely. The collapse of communism left millions of people in the world, including Europe, ideologically orphan. Suddenly, there was no alternative to capitalism in its various forms. Communism, the egalitarian, collectivist alternative had failed. We went from two competing systems to one. Now we are going from an imperfect system to another one.

I agree 100% on the debt binge ('credit expansion' to be technical about it) as the key cause of the present crisis.

Some of the language is quite emotive:
“To put it in crude terms, for much of the past decade, millions of Chinese
slaved away on near subsistence wages and still managed to save, both as a
nation (China swanks £1,400bn in foreign exchange reserves) and as individuals.
And to a large extent they were working to improve our living standards, because
they made more and more of the stuff we wanted at cheaper and cheaper prices.”

It is naive to say the Chinese slaved away on near subsistence wages. Living standards in industrialized areas of China have risen in a way that was unthinkable a few years ago. If they were “slave” wages, then they could not save as much as they do. Agreed, the wages are low compared to Western standards, but wage differentials should not be measured in absolute terms, otherwise workers everywhere except western Europe are too slaving away. I could even concede that most factory workers in China are on relatively low wages, a byproduct of the excess supply of labour, but average Chinese wages are by no means “slave”. Also, and more importantly, the Chinese were not working to improve our standards or toiling for our prosperity: they were working to improve theirs, like any sensible nation does.
It would be more appropriate to say that we were outsourcing work to China so that we could buy goods at cheaper prices and keep inflation down.

I agree that the savings imbalances and the current account deficits in the UK and US (and also Spain) are unsustainable and that our low inflation in the last few years is the result of excess savings from emerging economies being recycled into UK, US and Euro-area debt.

And I also agree with the culpability. All of us to a certain extent for being addicted to compsumption, but mainly our financial institutions for having failed to protect the interests of their shareholders, creditors and customers, and our governments and regulators for having failed to take the appropriate regulatory (disclosure, capital requirements) and political (current account deficits, allowing outsourcing to countries with unacceptable working conditions, supporting asset inflation) decisions to prevent this crisis from happening.

But Mr Peston forgets to mention the issue of taxation and the use of low-tax jurisdictions by companies and business leaders, and how this Labour government has done nothing to stop it.
He also forgets to mention the use of off-balance sheet vehicles by banks. The Labour government and the FSA did nothing to prevent it. And he does not mention that this goverment has overseen tax changes that favour the megarich and private equity at the expense of middle class earners.

But Peston also forgets to mention the concessions China, India and others will extract from keeping buying our public debt. Just now China, if they wanted to, could bring Western economies to its knees simply by refusing to buy our low-interest, low yield government debt. But the Chinese will not do that. They will keep buying US and UK debt and will extract political concessions from the West.

What these concessions will be is difficult to predict. But I am going to venture a couple of possible scenarios:

Institutional reform: the Chinese and India will demand that international institutions are reformed and the US veto is abolished at the IMF and the World Bank.

Taiwan: Slowly, Tibet has become off-limits for the West. And next it will be Taiwan. If I were Taiwanese I would be crapping myself. Over the next few years we will see how China, slowly but surely, will gain gradual sovereignty over Taiwan as a condition for keeping Western capitalism ticking over. And this way, Mao’s dream of a unified China under one leader and one party will be accomplished.

But will the US accept that they no longer have the monopoly of power in world finance? Will they (we) accept to be humiliated once again over Tibet and Taiwan? Maybe not, since Western governments will be unable to control the press and public opinion as efficiently as the Chinese. So we are heading for a political and economic stalemate of unpredictable consequences.

There is one way out of this problem without the Chinese becoming the new superpower and gaining power over Taiwan: inflation. If the West is unwilling to make so many concessions, China, India, Gulf states and others will demand that US and UK government debt pays a higher rate of interest than it does now. That is something our governemtns can do very well, and technically is called "an increase of the money supply", or as my dad says, "printing more money". This however will fuel inflation in the US and UK and Euro-area which could have a devastating effect on employment and business investment -unless proteccionist measures are adopted to protect "national" industries. But then, protectionism itself keeps inflation high; there is no easy solution.

So over the next few years our political leaders will have to make very “tough” (don’t they love to use the word?) choices.

Do they accept that a new world order is emerging and that there are political prices to pay? Or will they postpone or delay this restructuring of world finance and political power by implementing inflationary policies that will reduce the nominal amounts of national debt but fuel domestic inflation?

In crude terms, the question is: will our (Western) politicians give up the world power mechanisms they have built up over the last few decades?

I know what my answer is. What is yours?

Monday, 15 December 2008

Slightly above Turkey

Someone asked me the other day how Spanish democracy compares to other European states given its troubled history. I have a reply ready for these situations: “slightly above Turkey”.

We had another couple of examples this week.

First, there is one person who is going to be judged on a political charge: refusing to participate in the Spanish electoral process.

Marc Belzunces refused to participate in the administrative process of crossing people off a voters’ roll and spend a full working day in an electoral polling station. He objected on the grounds of conscience: he does not believe he is obliged to participate in a Spanish electoral process performing administrative functions. He refused to attend on election day.
Fair enough, you might think, can they find somebody else?
Not so simple. He is now being prosecuted by the Spanish Prosecution Service (Fiscalía).
They are pressing charges against him. A political crime in the European Union.
Oh, it just happens that the person in question is a pro-independence Catalan. Does this change anything? Yes, it does. Every election, dozens of people across Spain refuse to participate for whatever reason in the administrative process of setting up the ballot papers, counting the votes, updating the voters’ list, etc. I have not heard of any high-profile prosecution. Yet, we can expect the Spanish judiciary to ensure this (Catalan) man is fined and punished accordingly. And a wee reminder to others who may be thinking about doing the same. [Avui, VilaWeb, El Periódico, La Vanguardia, Racó Català]

Another example of the Spanish state dogmatic approach to its own brand of nationalism is in the banning of a TV advert. Yes, you are reading this correctly: a TV advert in favour of official recognition of the Catalan football teams has been banned by a Spanish court. [Avui, VilaWeb, La Vanguardia, TVC]

Why? I heard you ask.
Because of the following slogan: “Una nació, una selecció” (One nation, one team).
Oh yes, the judge also said that children were used, but I have not seen any of the political adverts from either the PSOE or PP being banned because they featured children. Since when it is banned to use children for TV adverts?

I link the video below so everybody can watch what the Spanish judiciary have banned. I don’t see anything in this TV advert that warrants a banning order, but then I am not a Spanish judge:

This is just another example of how Spanish nationalism pursues its objectives by using the law, Spanish law, to ban, prohibit, punish anything and anybody that might question their proto-Francoist idea of national sovereignity and integrity. Sure, nobody gets killed these days, beatings in prision cells are rare, but the same policy objective is implemented under the façade of democracy. Spanish democracy, just above Turkey and its infamous Article 301.

Sunday, 14 December 2008

The Best of the Rest: The Black Swan

If you are a regular of this blog, you will have noticed that nowadays I don’t write about Catalan/Spanish politics very often. It is too depressing and there is plenty to write about with the worst financial crisis since The Great Crash happening before us. Anyway, there are plenty of good sources out there (check out the links section) out there that explain what the problems are and how to move forward. I find the Diàleg section of the Avui newspaper a breadth of fresh air and practically the only mainstream media which offers a platform to the pro-independence movement. For example, this article on Sunday’s Avui. If you require a translation to English or another language, use this online translation tool.

Anyhow, back to the topic. I have been reading a few books recently. Even if you are not interested in financial markets and economics, I suggest you read these three books. It is probably one of the best investment decisions you will make in 2008.

First, I read the latest book from George Soros. [Wiki]

This is the second book I have read from Soros, I first read The Alchemy of Finance in 2003 and that was the first time I heard of his concept of “reflexivity”. I had only been in financial market for over a year, doing a crappy back office job, but this book made a lot of sense to me. This was a successful market participant, reviled by the British press for his involvement in Black Wednesday, that was telling us that the system is not as good as everyone think it is.

In his latest book, he delves further in the concept of reflexivity and how it induces vicious and virtuous cycles. One thing that strikes me about this man is how despite all his wealth and success, he still has massive hang-ups about not being accepted by the academic community and not being taken seriously as a philosopher. At a different level, it reminds me of the hang-ups I have about my own education and not having attended a proper university in Barcelona when I should have done all those years ago. If even one of the most successful people in the world has a hang-up about academic achievement, then how am I supposed not to have one about my own mediocre academic background?

So reading Soros again was good. The book is easy, there are no technicalities, and his own admission of fallibility makes him quite endearing. A book that anybody can read and understand.

Then, after years of delay and making up excuses, I found the courage and time to read ‘Fooled by Randomness’, by Nassim Nicholas Taleb. [Wiki]

And just now I am reading ‘The Black Swan’, his latest book.
Sometimes I wish I had read these two books many years ago, before working in financial markets. Now it is rather late to seek a new career…

These two books contain a bit more of mathematics and certainly more philosophy than Soros’ digestible book.

Before you go and read the reader reviews in Amazon, I would advise you not to do that until you have read the books yourself. When the main criticism of a book is that its style is “irritating” and that the author is “full of himself”, you know there is something going on. I don’t know of any published author that is not full of himself!

The books can be summarised as follows:
+ Trying to apply the Gaussian curve to social sciences (say economics) as if it were a natural science (say physics) is a huge mistake. The use of the Gaussian curve in economics and financial markets is an intellectual fraud.

+ The use of statistical methods in economics is killing off any arguments about logic.

+ Economists, fund managers and consultants that appear in Bloomberg TV, etc, forecasting or giving their “expert” advice are not more than entertainers.

+ The narrative fallacy, how we retrofit explanations to events we never predicted.

+ Because of the above, globalisation of finance, and many other small things, the complexity of our world is ignored in favour of simplification and this leaves us more exposed to risk than we realise. We should learn to live with uncertainty, and accept that not everything can be optimised, rationalised and modelled. Sometimes, it is just down to luck.

Taleb knows his stuff and he is probably the most well read person ever to walk in a trading floor. You don’t need to be an expert on the mathematics of finance or even philosophical movements to read this book, but it helps if you are interested in the basics. Ignore his personal anecdotes, the punctuation, his style, and just focus on the concepts.

These books are demanding but not impossible. As someone who has ended up in this industry (financial markets) by accident, I find his views appealing. Having heard and watched so many charlatans, having read so many “research reports” on economics and markets, having seen how the industry is driven by nothing but self-interest and unimaginable greed, I am hugely sceptical about how the financial markets operate. I have been for a long time but could explain how or why. From a personal point of view, these books have been a great injection of intellectual self-esteem. I knew the dogmas of finance are bogus (equilibrium, rational expectations, Gaussian curve, Value at Risk, historical volatility, retrofit explanations by 'experts', etc), but I did not know how to back up my own views with some intellectual rigour. I always knew it was not right but could not explain it properly or confidently. Now I can. If you read these books, so will you.

Sometimes, I wish I had read his books many years ago, before entering the industry. I should now be something else: a teacher, a bus driver, a tiler, or even a sound engineer. It is hard to read these books and still go to the office everyday knowing full well, as I always did but now with the theoretical back up of Taleb and others, that it is all a big con.

If you are thinking about starting a career in financial markets you should read his books as soon as possible.

Wednesday, 10 December 2008

The Best of the Rest: financial crisis

During the last few weeks, I also thought about writing a series of articles about the (financial) mess we are in, and how banks and financial markets participants are irrational, irresponsible and self-serving institutions that need to be closely monitored and regulated by competent agencies, independent of governmental interference.
(Trust me, I work in the industry and I don’t take any pleasure in writing this).

But then I read a few articles and I thought there was no point in writing about something when more qualified and intelligent people have explained the issues much better than I could ever hope to do:

(By the way, I don’t mean the latest Pestowire, more on that one another day…)

In reverse chronological order:
Nouriel Roubini: on what’s coming: Bloomberg video (let’s not ignore the Bloomberg journalist quest for a “number”… and how even a man of the intelligence of Roubini falls for it like a schoolboy), and FT article. And another essay published earlier in the year.
John Kay: Or how governments “passive” ownership of banks is just storing trouble. [Link]

A conversation between Martin Wolf and John Kay on the regulation of global finance.

But most of all, I do miss the regular macro analysis of Stephen Roach at Morgan Stanley GEF.
He may have been early in his calls (tech boom, asset bubbles, current account deficit, subprime), but he was right: macro imbalances sooner or later give way to correction and because of leverage and behavioural issues, corrections in our time are more violent and unsettling than in the past.

The problem is that when your firm earns revenue by trading volatility and hyping up the market, it is very difficult to keep writing about things as you see them. What I mean is that it is an impossible situation when you have the chief economist writing articles explaining we are getting into a big mess, and your sales desks churning structured products like there is no tomorrow.

Very few people know if he was pushed or if he jumped but having Stephen Roach in China as Chairman is like having Messi playing in the reserves for FC Barcelona. I always thought that his realist bear commentary irritated his bosses and colleagues as much as his skilful if somewhat verbose writings.

The real tragedy of banking and financial markets is how talented, educated people with intellectual curiosity have been replaced with money chasing mathematicians, PhDs in astrophysics and the like whose world vision is narrower than a snake’s arsehole.

Do you want to find out how we got into this mess? Then read a few articles by Mr Roach back in the day.

Policy errors – How politicians are no help, May 2007. Shortly after this article, he was dispatched to Asia. Whether you are in an autocratic regime, in a communist dictatorship or in a free market two-party democracy, it is not wise to wind up politicians and embarrass your bosses.
Asset bubbles must burst – January 2007. For some reason, I cannot find this one in the GEF site with the original date of early January. I wonder why some articles are removed and others remain…
Original Sin – April 2005
The Asset Economy – all time favourite, sadly removed from the Morgan Stanley GEF website, June 2004. When I read this article for the first time, I finally got it.

This article by Roach (The Asset Economy) is the one that explains the origin of this crisis. Politicians and their central bankers saw fit to support asset prices as a means to increase disposable income. One asset bubble led to another until there are hardly any assets left to bubble up.
Now it’s payback time.

Monday, 8 December 2008

The Best of the Rest: Obama

For months, I had been planning to write an article about Barrack Obama. Its title was meant to be “Obama and the promise of change”.

But there is no need. I read this article in the Sunday Herald and I think it explains the issue much better than I could ever do.

Notwithstanding that Obama’s bubble will burst sooner than later, it is more with relief rather than joy that I watched the news unfold. The USA now have a mixed race president, something many people said it would never happen, ever. Wrong. The USA is a more open-minded and tolerant country than the ridiculously twisted portrayal we see in the European media. OK, they are a few rednecks still riding, but there are many rednecks in Europe too.

It is puzzling how, collectively, people still believe in a politicians’ word when we have witnessed time and time again that any promises of “real change” sooner or later give way to “pragmatism” (i.e: more of the same) and “realism”, or worse, “incremental change”.

The only consolation is that at least now there is a man in charge who is intelligent, a man who is not going to embarrass the American people with his illiteracy and lack of intellect.

And the sad thing is that’s the best we can hope for.

PS: if nothing else, we can also laugh at the rednecks and proto-racists that are foaming in the mouth at Obama's victory. Read this for a laugh, it's very funny.

PS2: one thing is clear: he's been watched, taped and spied by the usual suspects... Welcome to the White House! [BBC News]

The natural course of democracy

It is rather worrying when the big news is that the democratic process is allowed to happen naturally, normally and without the threat of violence, financial boycotts, or political obliteration.

In Greenland, people have voted to decide their constitutional future.
Without any interference, imposition, threat, from Denmark.
It is just what happens when democracy is allowed to take place.