For what it’s worth, this is an excellent summary of my views on Greece. Joseph Stiglitz in The Guardian today.

There’s nothing your average arbitrageur likes better than a big, juicy takeover bid. It offers him the chance to buy one side, sell the other and pocket the difference. Takeovers don’t come any bigger or juicier than Royal Dutch Shell’s £55bn offer for BG Group, yet he doesn’t seem to want to play.

The Shell price dropped on the news, and has carried on falling since. The BG price jumped, but for almost four months, the gap between the value of the offer and the BG price has remained almost constant at around 10 per cent. In other words, there’s £5.5bn of value to be picked up between now and the deal’s closure.

It’s not that simple, of course. Regulatory hurdles abound. China, a big importer of LNG, BG’s speciality, is a complete unknown. Completion is many months away, and Shell’s yield is nearly 5 per cent more than BG’s. A quarter of the bid is in cash, which is either a handy slice of insurance or a dilution of value, depending on your view of the oil price.

The analysts at Deutsche Bank are baffled by the missing arbs, but reckon the £17bn that has been wiped off Shell’s market value since the bid is overdone, and that as the LNG projects come on stream, a “cash wall” is coming, to support a 6.4 per cent dividend yield. Their preferred route in is via BG, the risks notwithstanding. So come on, you arbs…

Plenty of nagging doubts

Oh, goody,  another book on the banking crisis. Ivan Fallon’s Black Horse Ride would be better entitled Black Horse Down, as it chronicles how Lloyds TSB stumbled to its knees and is only now trying to get up again.

The drama of the near-collapse of HBoS, following the Bank of England’s refusal to underwrite a Lloyds rescue of Northern Rock, has been pretty well picked over, although the narrative can still shock. If the Financial Conduct Authority’s warts-and-all report is ever published, we may learn a little more, but it’s unlikely to help those Lloyds shareholders still dreaming of compensation.

This book certainly doesn’t. It reasserts how Lloyds was obliged to do the prime minister’s bidding, with chairman Sir Victor Blank and his chief executive Eric Daniels faced with Hobson’s choice. Mr Fallon is more interesting when it comes to documenting the febrile, almost manic atmosphere before the collapse. Almost every bank chief executive wanted to merge, provided he could be in charge afterwards. Lloyds, for all its undeniable prudence in the face of provocation from the deal-makers, was in there with the rest of them.

It’s dispiriting stuff. Customers, merely fodder for the empire-builders in the mine’s-bigger-than-yours contest, get barely a mention. As we have learnt subsequently, hardly a thought was given to whether it was possible to run such vast, international empires.

Banks are always under siege from those who live by dealmaking, because their size means that a tiny slice of the price translates into millions for the promoters. Some deals can help customers and shareholders, but it’s almost accidental if they do. Lloyds has ended up with a UK market share beyond anything it could have dreamed possible before the crisis, but it may have cost Sir Victor the chance to become Lord Blank (of Cheque) however sympathetically he’s portrayed here. It’s a jolly good ride, though.

A Chinese burn from the treasury

The Private Finance Initiative has not been one of the outstanding political inventions of the century. Conceived as a way of making the public sector more efficient by applying private sector methods to projects, it has turned into a magnificent moneyspinner for the financial engineers. PFI financing totals £57bn, and the vehicles are sliced, diced, bought and sold almost daily.

Prices are seldom disclosed, perhaps to avoid revealing just how lucrative the deals have been. In 2012 the treasury found that many were “tarnished by waste, inflexibility and lack of transparency”, but of course it’s all different now. Indeed, PFI has been judged such a triumph that the chancellor is sending a delegation to show the Chinese how it’s done. That should hold their economy back a bit.

This is my FT column from Saturday



Dear readers (both of you)

I’m sorry about the underlined format on this post. I don’t know how it happened, and I can’t remove it (yes, I’ve tried toggling the “underline” icon). The process had also wiped out all the links in the copy..


Funny stuff, liquidity. Traders make it and  investors mostly don’t need it. For all the talk of deep two-way markets, liquidity essentially means that there’s someone there to buy when you want to sell, and across a wide range of markets, it’s drying up.

Even the most liquid securities market in the world, that in US Treasuries, isn’t as deep as it used to be. As for the next tier down, the US regulator is worried enough about corporate debt to call a meeting of the banks and asset managers to see what can be done about it.

One proposal is to allow big sales to stay hidden, to allow a trader who takes on the risk more time to work the order. The London stock market, meanwhile, is going the other way, insisting on more transparency rather than less. At present, the broker’s commission covers eveything, but from 2017, the Markets in Financial Instruments directive (Mifid 2) insists that research costs are  unbundled and shown separately.

The big investors who drive the market’s volume may decide that they’d rather not pay for the research, thanks. For the brokers, sell-side research is like advertising – you know half of it is wasted, but you don’t know which half. As with advertising, much of the output is duplicated or commoditised, while original investment ideas are quickly copied. Real added value from an individual analyst is hard to measure.

Transparency is a fine ideal for efficient markets, but there’s a real danger here that brokers’ research will disappear from all but the most heavily-traded stocks. Today’s sell-side research outside the FTSE 100 is already patchy, and beyond the FTSE 250 is almost unknown. The company-funded work from the likes of Edison may draw attention to the company, but is backward-looking and a poor substitute for independent analysis.

Sell-side analysts are there to drum up business, but their insight gives their work value well beyond an instant buy, sell or hold recommendation. Without it, liquidity will go on shrinking. So far, this doesn’t seem to have bothered the authors of the bulldozer that is Mifid2. Its current draft threatens significant damage to London’s markets, and it’s getting very late in the day to stop it.

 Interference on the line

Sir Charles Dunstone is not a happy bunny. He’s noticed the tsunami of mergers and rumours of mergers in telecoms, none of which appear to involve Carphone Warehouse or TalkTalk, the two businesses he built. However, that’s not why he’s concerned. He fears that tf the number of mobile networks shrinks to three (it was five not long ago) one of which is owned by BT, then the dismal state of competition in telecoms will get worse.

Well, he would say that, wouldn’t he, given the clinical way a major competitor, Phones4U, was cut off by the networks. One day they might decide to dispense entirely with the middlemen, which doubtless encouraged him into his own merger to form Dixons Carphone. The proposed consolidations in both fixed line and mobile brings that day closer, as competition dwindles.

All is not yet lost. Margrethe Vestager, the EU competition commissioner, is making combative noises about markets shrinking from four players to three as she decides whether Hutchison Whampoa’s 3 network can do just that in Britain by buying O2. The UK authorities are reviewing BT’s bid to buy EE. BT is responding with talk of creating a UK “digital champion” in telecoms. Ah, those were the days, when good old British Telecom was our national champion…

Time to make a splash

Is Yanis Varoufakis approaching his singing in the bath moment? In 1992, the chancellor whose name escapes me was so happy at Britain’s exit from the Exchange Rate Mechanism that he burst into ablutionary song. After five years of misery and economic squeeze trying to live with the wrong exchange rate, humiliation and devaluation heralded 25 years of continuous growth. Greece has endured more than its five years, misery is widespread and there’s hardly a stuffed olive left to squeeze. Humiliation and devaluation is imminent, so come on Yanis: “Oh we do like to be beside the (Greek) seaside….

This is my FT column from Saturday

The Committee of the Commissioners for the Reduction of the National Debt is meeting next month. It’s the first since a dinner in 1986 to mark the 200th anniversary of their establishment under William Pitt. It must have seemed like a good idea in 1786, since the debt had ballooned to £250m and his administration wanted to be seen to be doing something about it.

The commissioners’ mission, it has to be said, has not been an unqualified success. That sum would finance the UK government for about three hours at the current rate of spending, and for all our chancellor’s fine projections of a government surplus to reduce the debt, there is no realistic possibility of achieving one in the next five years.

Still, the meeting shouldn’t be without interest. It’s not only the sums that have inflated since 1986; there are now three deputy governors of the Bank of England, so they could outvote any alliance between George Osborne and his least favourite Speaker, John Bercow, on the committee.

There’s unlikely to be anything as vulgar as a vote. Instead, the participants might try and decide what it is they are trying to reduce. In April the National Debt clocked at £1,487.7bn,  or about £25,000 for every man, woman and child in the UK. However, £375bn of this debt is owned by the BoE itself, following its Quantatitive Easing programme. The BoE is owned by the government, so there’s a perfectly respectable argument that the National Debt is a mere £1,112.7bn. Doesn’t that make you feel better?

Royal Mint strikes gold

Admit it, you’ve always wanted a 2 1/2 euro coin. A two euro tip can look mean, while a five euro note is excessive. Just don’t try and use the new coin in France, or you might meet your Waterloo,  just like the commemoration on the coin. It’s legal tender in Belgium, to mark the 200th anniversary of the battle, but since the Belgian mint is charging E6 a pop, few will appear in change even in Brussels.

Apart from the satisfaction of irritating the French, the issue follows a trend from mints everywhere, to diversify from the prosaic business of stamping billions of everyday coins. Our own Royal Mint lists 87 “products” and 107 coins issued so far this year, including the Royal Birth silver proof fiver (75 per cent sold!).

These coins are hardly more currency than is a gold necklace – the Churchill £20 silver coin for £20 is a rare exception – but because they’re called currency, they escape VAT. The Mint has long exploited this anomaly, and now it’s going into bullion trading for small investors – very small, with a £20 minimum purchase in units of 0.001 oz.

You’d need powerful glasses even to see 0.001 oz of gold, so don’t expect to take delivery. The Mint will guard it even better than if it were in a Covent Garden safe deposit box, while allowing small investors to speculate with confidence and a reasonable spread between buying and selling prices.

If you view gold as an insurance policy rather than an investment, this is not much help, since you won’t be able to get at it if the sky falls. As an investment, gold today is way out of fashion, which probably means it’s worth thinking about as another asset class. The Mint’s minibars are certainly better value than the 2 1/2 euro piece.

Put it on the Bill

An addition to the Bill Mackey memorial list of early warning signs of financial trouble: the official corporate history. The gem of this genre remains BZW, the First 10 Years, which was also its last 10, so we might note the 768-page thumper (even longer than the latest annual report) that is the first 150 years of HSBC.

It’s been a disappointing week for the world’s local bank, since the Mansion House speech failed to say anything about rolling back the bank levy, despite the leaks beforehand. It’s all very well the Chancellor extolling the wonders of London as a world financial centre, but if UK banks are taxed here on their worldwide deposits, they’ll make their head office elsewhere.

This is my FT column from Saturday


The market is having one of its periodic anxiety attacks about Big Oil. In the last five years, the FTSE100 index has risen by about 30 per cent. Perpetually mired in Macondo, BP shares are lower now than they were then, while Royal Dutch Shell’s are barely higher. In that time, worries over peak oil production have given way to concern at peak oil demand. As the saying goes: the stone age didn’t end because we ran out of stones.

In response to last year’s oil price slump, the companies are slashing exploration; while pressure groups are encouraging the more, ahem, sensitive institutions to sell their oil shares, just as they pressed for the sale of tobacco shares a generation ago. In the US, the global warming enthusiasts have switched from lobbying congress to targetting individual coal-fired power plants. The strategy of persuading local authorities and the courts to shut them down has been very effective.

Big Oil CEOs fear that oil-fired power is next in line, which is why six of them wrote to the FT this week arguing the case for gas. One of them, Ben van Beurden, has just bet his career on high-cost oil and gas, launching Shell’s takeover of BG.

This was justified as an opportunity to pick up a good business cheaply, but in the two months since the announcement, Shell shares have slumped 14 per cent, to £19, at which point they yield almost 6.5 per cent, more than they did in the grim days of 2008. The management has already pledged to at least maintain the payout for the next two years.

However, the market is signalling that the BG deal disguises a hole in Shell’s financial projections, and that the dividend is not sustainable. Yet BP’s ability to pay tens of billions of dollars in compensation shows there’s a deal of ruin in a major oil company, and these businesses have proved hugely resilient over the decades. Shell is not only traditionally dull, it has a Dutch CEO.. The chance to buy the shares on this sort of yield may not come again.

Here’s the new Bill

Bill Mackey was the accountant who pulled the plug on Laker Airways in 1982, stranding 6000 passengers. Despite his gruesome task, his wit and charm in front of the cameras won over the public, and he produced a checklist of distinctly non-accounting indicators of impending financial disaster.

These included a retired politician chairman whose Roller had personalised number plates; a whiz-kid as CEO; a recently changed banker and an unchanged auditor; a move to new offices and “a huge order for Afganistan”. These signs, he averred, were far better forward indicators than the numbers he was trained to analyse.

Now, aged 90, he has gone to the great receiver in the sky. Whatever he finds there, not much has changed down below. The rules have forced at least a reappraisal of long-serving auditors, while personalised numberplates have mostly gone in the sacred name of security.The financial numbers remain a lagging indicator, since bad figures always take longer to add up than good ones.

Today’s early-warning checklist might include the number and length of stock exchange announcements (RNS diarrhoea), the departure of a long-serving, high-profile CEO (Terry Leahy from Tesco, John  Browne from BP), serving on too many boards (Dennis Stevenson at HBoS), an enthusiasm for round-robin letters or presidency of the CBI (Mike Rake).

Mackey might have accepted the idea of “stakeholders”  but he would surely have been as suspicious of the fashionable enthusiasm for boardroom diversity as he was of the Queen’s Award for Industry, a much missed and very fine forward indicator of trouble.

So can they outperform the boys?

Female fund managers number just 7 per cent of the total in the UK,  according to Tilney Bestinvest. Fund management would seem eminently suited to female strengths; since judging those running businesses where a fund might invest is so important. We’re forever being harangued about women in the workplace, and fund management is one of the few businesses where it should be possible to measure whether diversity really helps. Sadly, with the proportion stuck at 7 per cent, they are still too few for a statistically valid sample.

This is my FT column from Saturday

Mike Ellis is an Authorised Person. We know this because the Financial Conduct Authority did the authorising. Mr Ellis.was finance director of of HBoS from 2001 to 2004, and again from 2007 until 2009. Now he’s chairman of the Skipton Building Society, an altogether less demanding role, but still atop a financial institution with £16bn of assets.

The FCA has a report into the near-death experience of HBoS. Under the cosh from the Treasury committee it promised to publish, but seems in no hurry, hiding behind the “Maxwellisation” rule. As with the “duty of care” this principle has been stretched like a piece of knicker elastic to cover far more than originally envisaged. Maxwellisation now obliges reporting bodies to inform any individual that they face criticism.

Obviously, the person must then take legal advice, consider carefully what’s proposed, perhaps ask questions, take further advice, consider carefully, and before you know it, the events have slipped into ancient history. As Ray Perman pointed out in a letter to the FT this week, the resultant delay is as rough on the innocent as on the guilty.

An objective observer might think that the finance director of a major financial institution when it almost failed would face criticism in any report into the rescue. In Mr Ellis’ case, we’ll only know when it’s published. In July the public gets its annual chance to ask the FCA about a date. Do not expect an illuminating answer.

In addition to naming the guilty, the report should provide ammunition for the die-hards who believe that Lloyds Bank and its top brass knew they were buying a lemon. That HBoS was a lemon is not in dispute, since the purchase price was cut after it had been agreed, and the damage to Lloyds’ balance sheet was extensive.

The question the Lloyds Bank Shareholder Action Group wants testing is whether the directors knew it was a lemon, but went ahead anyway, strongarmed by the Treasury. The group reckons this cost shareholders £6bn, and its lawyers are scrapping in court with Lloyds and the former directors.

That money is gone, and continuing to pursue those in charge then seems pretty pointless. We want to know exactly what happened, and since the FCA report was originally commissioned (by the FCA’s predecessor body) as an internal report, it should tell us – provided the ghost of Robert Maxwell lets it see the light of day.

Please don’t ask for credit

They’ve heard all the licence to print money jokes at De La Rue, but the latest one is even less funny than: Why can’t you just run off a few extra notes for your fees?

This week Britain’s banknote printer revealed grim figures and a cut dividend. A clipped payout is usually accompanied by some cheerful rider about a base from which to progress. De La Rue said only that it will “seek to maintain” the lower level. The shares sank to their lowest for over a decade.

Inflation is the banknote printer’s friend. It remains a long way off, while plastic notes (if we take to them) last longer than paper ones. But the existential threat is to folding money itself. Last year the value of cashless transactions in the UK passed that of cash sales, and the decline of cash is accelerating. Technology is making even the smallest transactions – for a tube journey, say – cheap enough to beat cash. Cashless sales also make fraud and theft harder, and avoid the cost of money counting.

De La Rue’s new management has a strategic plan, but if banknotes are going to become like the canals – nice to have, but hardly essential in a modern economy – the outlook is pretty grim.

Pop up or pay, pal

Sick of those pop-up ads on your PC? A German court this week ruled that adblockers are legal, even though allowing the likes of Google to pay to allow ads through the block looks suspiciously like extortion. We’ve come to believe that email should always be free, but like in-credit banking, it costs money. Those irritating ads still look a less painful way to pay for it.

This is my FT column from Saturday

There wasn’t much of a cheer this week when Britain posted its first annual fall in prices since the one-month wonder in March 1960. We’ve got used to the idea of things getting cheaper and besides, it’s only the Consumer Price Index that’s in negative territory, and by the smallest measurable amount.

The Retail Prices Index, maligned by the purists, includes a better measure of house prices, which the Office for National Statistics reckons have jumped 9.6 per cent in a year. The RPI is not perfect, but it’s a much better measure of the changing cost of living, and it’s still rising, by 0.9 per cent in the last 12 months.

Even measured by the CPI, the fall in prices will be short and shallow. The slump in the cost of crude or the wars in the supermarkets are hardly comparable to, say, the impact of the development of the railways on the price of domestic coal. That was a genuine gain in efficiency, while oil is already rising again and grocers will eventually rebuild their margins.

In anticipation that deflation will be as fleeting as it was 55 years ago, fixed interest stocks are themselves deflating. Since the start of the year the 30-year gilt has fallen by over 11 per cent, half of that in the last month. These bonds are used to determine the “risk-free” rate of return, although in reality it’s anything but risk free, as the recent buyers discovered. They have lost the equivalent of three years’ dividends in five months..

Like inflation, the cycles of rising and falling bond prices are measured in decades. In the 1970s, inflation appeared resistant to all efforts at control. Then along came Mr Hu He with his billion brothers and sisters, and the price of all sorts of goods wilted in the glare of globalisation. Today, the efforts of the world’s central banks are concentrated on preventing deflation. If the recent sharp rises in bond yields are any guide, the danger ahead is that they become too successful.

Contemporary, or just temporary

It’s not only government stocks where the investment risk is highest when it seems lowest. The anonymous buyer who paid $179m for Picasso’s Les femmes d’Alger at least has the comfort that the painter is no longer composing, so to speak, and that the supply of Picassos, while considerable, is at least fixed.

The purchaser of Christopher Wool’s confusingly-titled Untitled (RIOT) has no such assurance. Like a mini central bank, the 61-year-old Mr Wool can produce as much scrip as he likes, or as much as the market will bear. If he can get $30m a pop, as he did earlier this month, there’s quite an incentive to keep up production.

The cannier artists are even more like central bankers, since they produce a series of essentially the same work, sometimes with little more variation than is found in the serial numbers of bank notes. The buyers of contemporary art are adding the risk of further supply to that of fickle fashion. Nonsense, says Larry Fink, the CEO of fund manager Blackrock (salary $22.9m last year), contemporary art is one of the world’s two great stores of wealth, along with apartments in London and New York.

The image-conscious squillionaire may believe this, or view his purchases as a way to keep the score and show off to his peer group, but none of them likes losing money. Perhaps Mr Wool’s next work could be a series featuring a giant picture of a black tulip.

Change the recipe

As another chief executive departs from Thorntons, prompting one wag to remark that the key qualification for his successor will be the ability to have a pretty box full of creative but plausible excuses for failure at the ready. This little company has a miserable history of promise deferred, strategies abandoned and a share price below where it stood in the last century. But maybe the problem is not with the management, strategy or distribution. It’s just that Thorntons’ chocs are not very, well, chocy. They might be made of vegelate. Could the recipe have been wrong all along?

This is my FT column from Saturday (before they cut the jokes)




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