Some say he is Devil incarnate, some draw inspiration from him, while others believe he is just a fictional caricature of a bygone era. To us, he is just another experienced insider, who’s been at the crossroads before. Ladies and gentlemen, we invite you to an exclusive interview with the Man himself, Mr. Gordon Gekko.

We met at Gekko’s office, around 12 BST, the eye of the storm of the daily volatility hurricanes that have been sweeping the global markets lately. After the early European vol, reacting to the Asian close & local news, and before the arrival of the American vol it was safely calm to have a brief chat. Gekko looked nothing like a man that has been chewed and spat out by the system and the regulators. He was on top form, vintage Gekko, if I may say so, albeit maintaining his rather outdated sense of fashion. Enjoy the ride:

NG: Mr. Gekko, let’s start by briefly setting the scene. You had that run-in with the SEC about 20y ago..

GG: A misunderstanding. The most valuable commodity I know of is information. There was some confusion regarding my sources, but hey..as I said, a misunderstanding. It was very quickly sorted out and I was back making waves, although more silently, ever since.

NG: You run your PE firm and there have been quite a few deals lately that you were involved in.

GG: Correct, the last 6y have been good. There were a lot of opportunities to..liberate companies. Size was not an issue. There was a lot of capital for people like me. America was working.

NG: Some say that this credit galore was what brought the system down. A house of cards that could not withstand the headwinds of an economic downturn.

GG: Nonsense. I hear the word greed mentioned all too often lately. Greedy bankers, greedy investors, greedy consumers…At the risk of repeating myself, let me tell you that greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.

NG: So you think that all these mortgages based on questionable or even fraudulent personal data were right to be handed out? You promote households and countries living on a stockpile of credit cards and loans? Loans to go on holidays, loans to buy cars, loans to pay their loans?

GG: There have been excesses, it is true. There was a point where people thought that everyone could just make money. They thought no-one was losing. Bankers would get their bonuses, average Joe would get his dream house and a car to go with it, credit rating agencies were getting their fees telling us that the world was risk-free, regulators were happy with the financial reports they were getting from Wall Street. I could raise capital to buy any corporate that I wanted. Hell, capitalism stopped being a zero-sum game. Suddenly everyone was winning..<GG laughs at this point> I was meeting many of these people at my club and I was telling them: ‘You’re walking around blind without a cane, pal. A fool and his money are lucky enough to get together in the first place’.

NG: I see you didn’t concentrate your criticism just on Banks.

GG: What do you expect? Let’s say that I am Mr. American-Bank-CEO…I don’t make my balance sheet work harder, but I remain risk-averse and what happens? The equity analysts will come and say I’m running my shop inefficiently, I am a cash-rich underperformer and I will be taken out..

NG: Indeed, and now you are the villain because you grew your balance sheet, and amassed some Level 3’s along the way, and you need a capital injection from the state or you’re history; as a company, because as an individual, you would have lost your job by now.

GG: Unless you are in the UK.

NG: …

GG: And then you have the investors. When the world was risk-free you were going to Mr. Banker asking for yield. Well, pal, there is only one way you get more yield, and that’s by getting more risk. Enter structured credit. The only way to satisfy Mr. Investor the last years was for Mr. Banker to create the CDOs and CPDOs and so on. And when they wanted more yield they would make the CDO squared and if we had time we would see the CDO cubed and so on.

NG: Of course someone was asleep at the wheel for giving these the high ratings they had. Model complications aside, when you are running such a high correlation and you fail to see the systemic risk of the structure that would eat it right up to the AAA, then..

GG: Speaking of correlation. Monoline insurers, pal. People were paying them premia to insure their structures; the same structures that were so low risk in our risk-free world. So what was the risk? Only of a systemic event when a shock, let’s say a housing bubble burst, would spread like wildfire and bring the house down. So that was what you were hedging against with the monolines. Ok, pal? if we go down that route and the monolines have insured every structure in the market, what do you think will happen to them? But there are no surprises when it comes to herd mentality…Ever wonder why fund managers can’t beat the S&P 500? ‘Cause they’re sheep, and sheep get slaughtered.

NG: Fair points..but let’s fast forward to the present. Hindsight is easy. What do you think of the current situation?

GG: A mess, pal. The system is in seizure. The lubricant of capitalism has evaporated and the clogs have seized. The politicians, agencies and regulators were too busy doing whatever they were doing, and we wasted time. The herd has panicked and is running scared. Thank god they are more on the ball now, and there are some proper responses.

NG: You are referring to TARP, the liquidity injections and the UK measures…

GG: I like the UK measures. I am not a man who would trust someone called Darling with anything of value, but I am impressed. The banks need capital, not just selling their toxic <GG scoffs at this point> assets. They lost billions from marking these down, they lost their capital, they need to replenish it.

NG: Would you say some sort of government supervision is required to ensure that all these capital and liquidity injections will eventually get transferred to the interbank market and then to the consumer and the corporate borrowers?

GG: Absolutely. I usually get sick when I hear the words ’government intervention’. But I agree these are tough times, and daddy needs to come and bail the system out. Ban shorts? I would rather die than utter the words, but if your main strategy now is to short and accelerated the drop, you’ll have to ask yourself two questions: ‘Will your broker be around to give you your gains?’ and ‘What exactly will you be doing with your paper once the system is in depression? Origami?’ Sure, for the time being central banks have been pumping billions into the system and it feels like they are thrown into a bottomless pit. They never reemerge. The Banks don’t trust each other and they won’t lend to the corporates, let alone the consumers. This is a guaranteed ’road to hell’ scenario. We are heading to recession, but if this persists it will be a depression.

NG: A vicious circle, starting with the lack of credit and causing mass layoffs, defaults, decreased consumption..Not pretty. But do you think we’ll make it?

GG: I am optimistic. I think there is finally a lot of political muscle on a global scale wrestling with the monster. G7, IMF, USA, UK, EU, China finally got serious. I need to see the measures getting acted upon, though…But, I believe we are turning the corner.

NG: Man looks in the abyss, there’s nothing staring back at him. At that moment, man finds his character. And that is what keeps him out of the abyss. That’s what you are saying?

GG: Exactly. The herd got scared these last days. They realized that things are pretty critical for big daddy to coming to the rescue like that. Banks go down, companies lay off people and are fighting for dear life themselves; Mr. Joe has a hard time remortgaging or getting a loan, countries are close to default. But that’s good. We need it.

NG: Capitulation.

GG. Yes, I think we are close to a bottom here. Big volumes on Friday, 20% drop in a week for the DOW and SPX. 30% – 60% for the financials. I like financial stock at these levels. They give big thrills in ST moves. But we haven’t bottomed out just yet. I don’t think the governments will mess it up and cause huge dilution and stock value destruction once they recapitalize, else they are missing the point. I like the GEs of this world and pharma and utilities too for some long term gains. Don’t get me wrong, I’m buying some C for my grandchildren too.

NG: Any other investments you like? Gold, oil, currency,…safes?

GG: Safes. Ok, pal..if you buy a safe what are you saying? You think the banks will go down and the ATMs will stop working. So you want to keep paper money in your house. If the doomsday scenario does happen, bon appetite eating your origami locked inside your place. They won’t be buying much, assuming you make it outside without getting shot.

NG: So no safes, anything else?

GG: Not sure with Oil. We are heading to a recession at best, so I am not bullish with that. Gold as an inflationary haven with all this billions being printed may be a good choice. FX? Well, there are a lot of blind currencies out there and I am still struggling to find the one-eyed one.

NG: That was very colourful and insightful Mr. Gekko. Thanks for your time.

GG: Remember pal. Life all comes down to a few moments. This is one of them.

* Κάθαρσις is the final act of an ancient tragic drama; its greek for “purging”.

For years now, a drama is being staged in the birthplace of theatre. Since Greece joined the European Union, in 1981, a strange symbiosis has been taking place. This blog aims to shed some light to the Greek psyche -a major factor we believe in helping assess the outcome of the current situation- rather than overanalyse the numbers. The latter have been parading throughout analyst bulletins, research pieces and news for a good few weeks now; last year’s deficit was corrected by around 3%, to 7.7% and the estimate for this year’s deficit was corrected from 6% to 12.7% of GDP (in the process, the EU discovered that the Greek statistical service was under the control of the government); Greek public debt is around 113% of GDP (Euro area average is 79.5%, still Greece comes 3rd after Italy and Britain); S&P had reacted by giving Greece a negative outlook, and one day later Fitch substantially downgraded the country from A- to BBB+ (on a day of very limited market liquidity and not waiting for the still pending outcome of Greek-EU discussions-probably an analyst just working on a deadline); this brought forward speculation on the future eligibility of GGB’s as ECB (and also GC) collateral, as well as whether investors would support future Greek issuance and the repercussions of such events; Greek spreads have sky-rocketed and the curve has flattened, GGB’s have plummeted v Bunds and the questions regarding the ability of the country to service its debt are growing louder. What is going on in Greece then?

The country, geographically isolated from the rest of the Union, is indeed burdened by a structurally and perennially weak economy; plagued by high public and personal debt levels, rife tax-evasion, a rampant black-market and an underdeveloped, non-diversified and uncompetitive industry, Greece has long been one of the weakest links in the Union. Instead of making full use of the generous EU development funds, the state and the economy has been steadily growing poorer, while (a significant part of) its population has been fattening themselves. Inevitably, it has frequently been the subject of less-than-glowing articles and analyses. Recently Goldman Sachs immortalised it as the G in PIIGS (alongside Portugal, Ireland, Italy & Spain), the unattractive acronym given by the mighty GS to the laggards of Europe.

Politically, Greece has been dominated, since the end of the military junta in the mid ’70s, by 3 families; the Papandreou clan -whose patriarch George was PM in the mid-60s- founded the Socialist party and dominated during the early EU years, from 1981 to 1990 and again from 1993 to 1996 under Andreas Papandreou and are currently steering the country under the premiership of his son George; the Karamanlis family, founders of the Conservative party, held the PM office between 1974 and 1981 with Konstantinos, and between 2004 and 2009 with his nephew of the same name; the Mitsotakis family, the significant other of the conservatives, held the PM office between 1990 and 1993 with Konstantinos and his daughter Dora, who has just (unexpectedly) lost the battle to become the new leader of the party, remains a force to be reckoned with. Put differently, the 3rd Hellenic Republic (starting after the junta) has been defined by the Papandreou and Karamanlis families for 26 out of its 35 years. Arguably, the socialists were the ones who moulded the huge, labyrinthine and largely inefficient public sector and the complex system of benefits and social policies that have been draining the public coffers for decades, albeit without promoting growth. Should we be branded as anti-Papandreou, let’s make clear that the conservative governments were themselves lacklustre, uninspiring with policies mostly undifferentiated from those of their predecessors; they eventually managed to steal the limelight by effectively presenting heavily doctored budgets to the European Commission and tarnishing the reliability and respectability of the country along the way (whether Greece is the only member state fudging budget numbers is highly unlikely, but it is the only one caught red-handed).

Socially, Greece is intriguing. Greeks are quite a solitary people. A small nation, effectively an island in the EU, separated by geography, speaking an old but also insular language (‘it’s all greek to me’), believing in a different brand of Christianity (orthodox). Ethnos Anadelfon they sometimes call themselves, a nation with no brothers (which makes their recent Eurovision successes even more impressive, given the absence of alliances to count on -apart from Cyprus, but that’s a different and long story). Domestic news dominate bulletins – up until very recently Greeks insisted that the global crisis was someone else’s problem. Modern Greeks still feel as if they live in the centre of the world, a veritable Medi-terranean nation. They do not travel much and are notoriously difficult to please when they do. There is no place like home. Partly due to Greece’s rich history and partly due to their south-European temperament Greeks also attribute to themselves a certain edge over the westerners and they are characterised by a certain wit and mischief -which can be charming at times (epic conquests of Scandinavian tourists) but damaging at others (budget fudging). And just in case the Greek wit is confused with the British variety, Greeks do not do self-deprecating.

Mix decades of timid governments and socially-friendly laws with free (European) money, a good measure of Greek temperament and a dash of a global credit crisis and you get a fiscally explosive cocktail. PM Papandreou definitely got one thing right in today’s address to the nation (and its creditors): for Greece to survive this crisis much more than spending cuts and taxes are required. The issues have become interwoven with the Greek psyche itself. Serious change is imperative for the nation to have a chance. Change in civil servants’ mentality (‘we are untouchables and since we do not evade tax like the rest of you, don’t complain if we milk our perks‘), in private business (a badly paid, stagnant environment made possible since there is extremely limited job mobility and availability), in freelancers & professionals (where tax-evasion is rife and cash-under-the-table payments are common practise among craftsmen and doctors) and finally in public administration (where the path of least resistance and compliance with vested interests has provided the shady and dump environment for all other problems to mushroom in).

It is not going to be easy. PM Papandreou, in one of the most important moments of his career, made quite a few brave announcements tonight, very uncharacteristic of modern Greek politics. His speech was probably too long, had too much detail in some areas and too little in others. The first 15 minutes though were an audacious dissection of the current Greek socio-economic stalemate and he didn’t mince his words there. For the first time in many decades did a Greek politician attempt to rouse the nation by referring to dangers to their sovereignty. Far-fetched as it may seem, it may well be the only thing that Greeks will respond to. And their buying in Mr Papandreou’s call to detox the nation is imperative for Greece. The measures will be not be pleasant and the awakening will have to be a rude one.

Our bid/offer on the eventual outcome is pretty wide. Greeks might have been complacent for just too long. While we were listening to Papandreou’s speach on one of the biggest Athenian radio stations, 15 minutes in the broadcast was interrupted for a 5 minute commercial break.

As PM Papandreou put it tonight, the Greeks will ‘change or sink‘.

cw

The transcript of PM Papandreou’s speech (as reported by Bloomberg®):

BN    18:50    *GREECE PM ENDS SPEECH IN ATHENS

BN    18:49    *GREECE PM SAYS DECISIONS TAKEN WILL BE PUT INTO EFFECT BY FEB

BN    18:48    *GREECE PM SAYS IMPERATIVE TO TAKE DECISIONS, IMMEDIATELY

BN    18:44    *GREECE PM SAYS WILL PROCEED WITH STATE ASSET SALES

BN    18:41    *GREECE PM SEEKS BEGINNING OF TALKS FOR NEW, JUST TAX SYSTEM

BN      18:37   *GREECE PM TELLS MINISTERS TO REDUCE SPENDING ANNUALLY

BN      18:34   *GREECE PM SAYS PLANS DEFICIT UNDER 3% OF GDP BY 2013

BN      18:34   *GREECE PM SAYS DEFICIT WILL BE UNDER 5% IN 2012

BN      18:33   *GREECE PM SAYS 2010 BUDGET DEFICIT CUT IS NEAR 4 PCTAGE POINTS

BN      18:32   *GREECE PM SAYS 2010 BUDGET CUT IS MORE THAN EU8 BLN

BN      18:32   *GREECE PM SAYS 2010 BUDGET WAS FIRST STEP

BN      18:30   *GREECE PM SAYS TACKLING CORRUPTION IS KEY

BN      18:28   *GREECE PM SAYS TO CUT ADMINSTRATIVE LEVELS FROM 5 TO 3

BN      18:23   *GREECE PM SAYS IMMEDIATE NEED TO REFORM HOSPITAL SYSTEM

BN      18:23   *GREECE PM SAYS LEGALISING MIGRANTS WILL BOLSTER PENSION SYSTEM

BN      18:21   *GREECE PM PLANS LAWS FOR PENSION SYSTEM BY END-JUNE 2010

BN      18:21   *GREECE PM SAYS PENSION SYSTEM TALKS AIM AT VIABILITY OF SYSTEM

BN      18:20   *GREECE PM PLEDGES TALKS TO OPEN UP CLOSED PROFESSIONS

BN      18:15   *GREECE PM SAYS MAIN GOAL IS ECONOMIC GROWTH

BN      18:13   *GREECE PM SAYS EACH MUST CARRY BURDEN ACC TO THEIR ABILITY

BN      18:13   *GREECE PM SAYS WILL PROTECT MIDDLE-INCOMES, POORER GREEKS

BN      18:13   *GREECE PM SAYS MANY CHOICES WILL BE PAINFUL

BN      18:12   *GREECE PM SEEKS SUPPORT TO BEAT CORRUPTION, TAX EVASION

BN      18:11   *GREECE PM SAYS AT POINT WHERE DECISIONS WILL DETERMINE FUTURE

BN      18:10   *GREECE PM SAYS CONVINCED EU PARTNERS OF THE ISSUES, ROADMAP

BN      18:08   *GREECE PM SAYS MARKETS WANT ACTIONS, NOT WORDS

BN      18:08   *GREECE PM SAYS BIGGEST DEFICIT LACK OF CREDIBILITY

BN      18:03   *GREECE PM SAYS GOVERNMENT WILL CLASH WITH MENTALITIES OF PAST

BN      18:00   *GREECE PM SAYS CRISIS CAN BE AN OPPORTUNITY TO CHANGE GREECE

BN      18:00   *GREECE PM SAYS CHALLENGE IS FOR EVERY GREEK TO CHANGE

BN      17:59   *GREECE PM SAYS DEBT UNDERMINES GREEK FUTURE

BN      17:57   *GREECE PM SAYS DEBT CLOSE TO EU300 BLN

BN      17:56   *GREECE PM WILL TAKE DECISIONS THAT HAVEN’T BEEN TAKEN IN DECADE

BN      17:55   *GREECE PM SAYS WILL TAKE DECISIONS WITHIN NEXT 3 MONTHS

“Come and keep your comrade warm
I’m back in the USSR
Hey, You don’t know how lucky you are, boy
Back in the USSR
Oh, let me tell you honey.” {The Beatles/Back in the USSR}

Thursday 10/12/2009

Yesterday, Alistair “Eybrows” Darling delivered a masterclass in politics on the occasion of presenting the Pre-Budget Report at the House of Commons:

‘How to avoid tackling difficult subjects: the art of scapegoat-ism and self-preservation’

There is something rotten in the United Kingdom. Borrowing is expected to be £178bn in the current fiscal year (previous Alistair estimate was £175bn) and £176bn in 2010-11 (previously £173bn), when the public debt ratio is projected to rise to 78% by 2014 and the GDP growth -or lack thereof- for 2009 has been forecast at -4.75%, (previous Alistair estimate was -3.25% to -3.75% in the Budget).  Fiscal deficit correction under the current measures and forecasts is expected to be rather slow over the next few years.

Remember Alistair’s boss and predecessor proclaiming his “vision [being] of a Britain where there is not stop go and boom bust but economic stability; a Britain which is business-friendly, and where there is enterprise, opportunity for all“? So much for that..Even in 5 years from now the planned public spending is forecast to remain oversized and the cyclically-adjusted current deficit  -one of Mr Brown’s golden rules was to keep it at 0- will still be 2% of GDP (5½% this year).

It is no wonder that the rating agencies -who become increasingly proactive on sovereign risk, which we are convinced will shape 2010 events- are making noises on the justification for and sustainability of the current AAA UK rating. “Eyebrows” must have got by now a firm grasp on the implications of such a development, as well as on ways to fight against it. There have been quite a few cases in the past 30 days- Greece, Dubai & Spain but also Ireland and its painful fiscal measures.

Unsurprisingly though, the British Chancellor has delivered a political rather than fiscal budget, avoiding to tackle public spending issues that would (even further) hurt Labour’s prospects for the upcoming (by June 2010) elections. He (initially successfully) disguised this major shortcoming from the -apparently easily impressionable- public by offering a public sacrifice of national enemy ≠1; the ‘bankers’ (a ludicrously vague title; a bit like calling everyone in a football stadium a footballer).

Instead of writing anything further on the Pre-Election Report that “Eyebrows” delivered, I will post a few excerpts from City economists (yes, bankers) commentary on the event.

But first, on more thing. The gilt market hinges a lot on the fiscal credibility of the Treasury. With a very heavy issuance profile and nothing credible from the Chancellor, the winter of 2010 may prove to be a winter of discontent for the gilt market.

Today, the show started with a juicy sell-off. Mind you, the fact that the gilt traders (yes, bankers) have been punished by the Treasury for their despicable crimes against the hard working folk of this country doesn’t help..

CITY COMMENTARY

“Sustainability postponed, credibility risked” …The PBR is unlikely to dispel concerns about the UK’s public finances. The government’s fiscal plans will see the public debt ratio continue to rise for the next five years at least. Although the government’s room for manoeuvre may have been constrained by the political cycle, its reluctance to announce more aggressive consolidation measures carries economic risks. Question marks are likely to persist regarding its willingness to impose the requisite adjustment, and the UK’s AAA sovereign credit rating and the currency are likely to remain vulnerable.” {Barcap}

“The PBR appears to be aimed at reviving Labour’s core support rather than seriously tackling the UK’s medium-term fiscal problems. The PBR extends the “tax, borrow and spend” fiscal trend of recent years, with slight upward revisions to the deficit forecast for 09/10 and 10/11, further tax hikes on top income earners and slight rises in planned public spending in 10/11. Moreover, it does not produce credible and detailed plans to return the UK to a sustainable fiscal stance in coming years. In our view the PBR seeks to create a fiscal fiction that the deficit can be resolved solely by tax hikes on a relatively small share of the population (‘the few, not the many’) and without painful public spending cuts. The revenue forecasts again look over-optimistic, and there are no public spending plans after 2010/11 – only vague forecasts. The Chancellor pledged to protect spending on health, schools and the police, but gave no sign where the axe will fall. Given the record of recent years, this lack of clarity is likely to fuel scepticism whether the Chancellor really is committed to spending restraint. Rather than produce a serious and credible fiscal consolidation plan, the Chancellor’s aim looks to be chiefly political: to reinforce Labour’s core vote and try to deprive the Conservatives of a majority in Parliament after the next election. The Conservatives need to be at least 10% ahead of Labour (roughly) to get a majority in Parliament (the required lead increases if the Lib Dems do well). Recent polls suggest that the Conservatives are indeed about 10% ahead of Labour, but polls also suggest that Labour’s core support is significantly higher than Labour’s current voting intentions (whereas the Conservatives’ voting intentions are well above their core support). Thus, Labour’s political strategy look to be aimed at making the election tribal (hence the “class war” rhetoric); to avoid hurting their own core support (hence no early fiscal tightening); and to portray the Conservatives as a party that wants to cut public spending for ideological reasons (to detach floating voters from the Conservatives). This approach seems to be working in political terms: three of the last five polls have pointed to a hung parliament. But, in market terms, it implies no preelection commitment to fiscal consolidation and a growing risk that there will be a hung parliament – which also could prevent early fiscal consolidation post-election as well.” {Citi}

“The UK press has concluded that the relatively slow pace of tightening, which doesn’t begin in earnest until 2011, reflects politics more than economics – there’s a general election next spring. It’s hard not to see the same motivation in the new retroactive levy on banks’ bonus payments. The Treasury says the measure is (a) designed to encourage more capital accumulation by banks, (b) justified because “banking profits have been facilitated by significant taxpayer support”, (c) justified too because £25,000 – the level above which the levy applies – is also the level of median earnings in the UK. It also says the levy will bring in £550m. The claim that anyone in a bank whose bonus is more than the median income – the pay of half of all UK workers and more than half of public-sector employees is above that level – has earned it only  through “excessive” risk-taking or taxpayer support is, to paraphrase, a bold one. (As it happens, real output per employee has risen by 79% in financial services over the past decade; the comparable measure of productivity in public services has fallen by 6%). The vast majority of UK-based banks did not receive any support from UK taxpayers – though the PBR is careful just to say “taxpayers” in general, leaving it open as to whether they live in the UK or elsewhere, there is no proposal to reimburse other countries for the support they may or may not have given. And, especially when a lot of careful thought is going into new, global regulatory framework for banks, this is hardly the optimal way to encourage more capital accumulation. The government says this is a “one-off” tax.  That’s what governments always say about retroactive taxation. And yet, coming after similar levies on pension funds, utilities and oil companies, this is becoming something of a habit for the UK government. If it increases the perceived likelihood of more such “one-off” measures in future, the levy has serious implications for the incentives to locate business in the UK – non-financial as well as financial – and, as a result, for the cost of capital and terms of trade. This effect is impossible to quantify and, as regards its impact on the exchange rate, probably dominated by other, cyclical effects over any forecasting horizon (we continue to think those are generally positive). But the longer-term risks are clear. The Treasury has said it expects a significant reduction in bonuses paid out this tax year. It still thinks that the levy will bring in £550m. But that’s a pretty small dent in the deficit (it pays for about 7 hours of government spending). And it’s likely to be outweighed by the loss in income tax. Suppose, for example, that total bonus payouts would’ve been £6bn without the levy (this estimate is from the CEBR), with half that total paid in cash the other half in unvested equity. The Treasury says it expects actual payouts of £1.1bn (£550m/50%), a reduction of close to £5bn. With half that amount lost in cash payouts, the Treasury is effectively foregoing £1bn (40% x £2.5bn) in income tax. Net of this amount the levy is a revenue loser.” {GS}

” One thing this Chancellor (and his predecessor before him) has is consistency – he consistently gets his sums wrong. Government borrowing has been higher than forecast every year except one since 2001. Maybe his colleague Mr Balls will give him a remedial arithmetic course for Christmas. After such a track record of consistently being too optimistic on the outlook for the public finances, expecting the public to believe the latest set of numbers is a bit like expecting the public to believe in Santa. As expected the PBR was primarily a political stunt, littered with landmines for the Conservatives. The effect of the discretionary measures amounted to almost GBP4bn of loosening in fiscal year 2010-11, switching around to a GBP11bn per year tightening in 2011-12 and 2012-13 (or 0.7% of GDP). Most of the discretionary measures that were announced had been leaked and hence did not surprise. More specifically, there was even more pain for high earners and sweeteners for the elderly. There was some green spin, support for jobs, education and training. A year ago the Chancellor announcement of a new 45% income tax rate on earnings over GBP 150k per year. By April, the new tax rate was shifted up to 50%. The latest instalment in the PBR was a 50% tax to be paid by banks on bonuses above GBP25k. This is perhaps the best demonstration of how the Chancellor is putting political points scoring ahead of the more important job of fixing the public finances. The scheme will generate just GBP550mn. Far more time was devoted to this than the GBP3bn (almost 6 times bigger) increase in the borrowing estimate for 2009-10. For all the hype, the political shenanigans and bashing of bankers, the big picture is there is a massive hole in the public finances and that was not plugged by the PBR proposals. As a percent of GDP, (adjusting for the improvement in economic growth in the next year or so – i.e. cyclically adjusted) there is a borrowing requirement of 10% of GDP. That is approximately GBP140bn to GBP150bn. On top of that, given the rise in the government’s interest burden (from around 2% of GDP to 5% of GDP) as a result of a surge in outstanding debt, there is a massive hole to plug. Put another way, over the next 4 years, the government’s (overly optimistic) forecasts for the public finances show that borrowing will rise by over 40% of GDP. That is the issue and it was neglected in favour of attacking bankers. In order to narrow the deficit sufficiently to stop debt rising as a % of GDP requires tightening of more like GBP30bn per year. The government has emphasised efficiency savings. The government can find all the efficiency savings in the world, but it is never going to find GBP140bn to GBP150bn. Substantial spending cuts and tax hikes are what is needed. What usually happens at Christmas is that several of the children’s new toys break. One thing you are guaranteed with this Chancellor is that when one of his forecasts break down, as they invariably do, he will immediately replace it with another – unfortunately, equally dodgy. Thus we saw yet another upward revision to the projected fiscal deficit this year – from GBP175bn to GBP178bn. The measure that was deliberately given the most exposure measure announced raises a mere GBP550mn. Judging by the media response this was a highly successful tactic, which has deflected attention away from the key issue. It was a missed opportunity to take steps to prevent a downgrade in the UK’s credit rating.” {BNP}

BNP’s piece is naturally our favourite.

break a leg

cw

Another mass sell-off, another wave of uncontrollable panic from Tanaka family in Tokyo to Papadopoulos family in Athens. What triggered this mass apprehension:

The Office for National Statistics in the UK said on Friday gross domestic product fell 0.5 percent in the three months to September, the biggest drop since Q4 1990 and the first contraction since Q2 1992. Analysts had forecast a fall of 0.2 percent.

I have two observations:

1. What’s new?
2. Not a massive analyst error if we want to be honest-the contraction would be here even if they were right

‘The mind is its own place, and in itself

Can make a Heav’n of Hell, a Hell of Heav’n.’

-MILTON, Paradise Lost

Confidence, or lack thereof. Consternation among investors small and large. It was refreshing putting it all behind for a few days.

I suppose everyone now knows about the recession now since politicians made it official by using the word more and more openly in public. No surprises there.

In any case, that is what economic cycles are all about. There is nothing growing indefinitely -like cold fusion it is physically impossible.

It looks like it is going to be hard-ish, long-winded and painful. It is not the end of the world though -unless you make it to be (read Milton’s wisdom above). Plenty of opportunities for wealth creation will pop up here and there:

• Property (in one (US) or more (Europe))
• The GE’s, Pfizer’s of this world (cheap as chips)
• Miners, who now suffer from luck of demand, due to a decelerating China et al.
• Precious metals in the meantime
• For the less risk-averse financial stock. I don’t think we will have another LEH. If we do -that is it is not prevented by the government(s)- it would mean that the governments exhausted all their arsenal. But one way or another (hyperinflation) it won’t happen.

Nothing unanticipated happened, to explain this huge throw-up this morning in Europe.

We have to follow closely what is happening, but our view is:

Do not panic. This looks a lot like a bottom-forming. If there is no bottom to this global collapse of finance, well, there is nothing you or I can do about it. Just hold tight for the tough ride.

But we remain optimistic and stare at the dawn of a public-owned world

Take a deep breath. Exhale. Interestingly, it’s a sunny day today in London.

180′ and counting for the close. Unless there is something drastic -like a rate cut (which won’t be wasted tonight)- this is a historic session. Many nasty records have been broken and I think a lot of medicine and/or alcohol is going to be consumed tonight.

The only greens on the screen are:

• Gold 4.5%
• Short ETF’s 17%+
• JPY

What was red was glowing red… record losses for European and US bourses, commodities in free-fall, destruction of EUR, GBP, no easing off of spreads. I am holding my breath for tomorrow, as a fresh wave of Japanese (etc.) investors will liquidate their investments while we sleep (for those who will). A big red pre-open sign is expected. So..what do we do?

This is time for a drastic signal from the government (any government). When people start withdrawing cash around the world from their accounts and jesting about canned food, etc. we all have to brace ourselves. Politicians -not that you read this article- cut the populist act and act as you are supposed to do as stewards of the well-being of the people. That sounded a bit communist, but I assure you, these are extreme times.

For those withdrawing cash from your guaranteed accounts: Do you think that if it comes to that, the paper you hold under your mattress will mean anything to anyone?

Chill out, take some rest and good luck!

•nikosgi

Things are grim, I will not mess around with you. Those who read our last 2 weekly specials know that we were bracing for this (and worse). The bailout (TARP) is pretty much dead in the water in its current form and there is pain, panic & confusion in the markets around the world. EUR/JPY and global exchanges on freefall, corporates are hurting, commodities tank, a couple of % points of growth are estimated to perish around the world.

The shift of the focus this morning is in Europe, where the reality of the contagion (never in doubt by the practicioners) hit Banks, corporates, governments and investors hard. Russia routinely suspends trading in its 2 exchanges to cushion the fall, EU leaders are running scared, trying to prop up their country financial defences creating dangerous precedents for the future of the Union. HRE, Fortis, Unicredit, HBOS, Iceland (the whole country)…there are many fronts.

War-style economic cabinets are set up and extreme measures (recapitalisation of banks, rate cuts, blanket bank deposit guarantees, loans to corporates) are mulled over. I believe many of these have to happen and will happen. This is a huge crisis and no-one, anywhere in the world is going to adhere to strict peacetime rules.

The news run fast, the vol is spiking and the markets are not exactly perfect (and will become significantly less so). Act accordingly.

Over and out (for now)

At 1:55 p.m., 226 US lawmakers had voted against the bill and 207 had voted in favor. Republican members voted 132 against and 66 in favour.

Shock…

When the screens showed the outcome the Dow plummeted by 450 points. It seems at the moment that we stabilise at -550 for the day, which in itself is scary. It feels like living in a nightmare, with the Republicans who opted for re-election succumbing to populism and dynamitising the Plan. Not that the plan would be the Panacea of all the miseries of the financial system. But just to get an idea of the shock from this decision, when the votes were counted and the Dow plunged, I at first though there was a technical glitch with my screen as everything was at nonsense prices;CNBC changed their headline ‘bailout rejected by the House’ to ‘bailout appears to be rejected by the House’. The votes were cast, the dismissal was a fact, but no-one thought it was possible.

Awe

At least there is some stabilisation. Barring Wachovia (RIP?) that is down 82%, the other major players are still holding up (just about). I am debating with myself whether the denial of the Plan is a good thing after all. This may be the first act of the Catharsis, the shedding of risky assets, the deluge that would mark the bottom of the market. The fact that for the time being the major Banks are not 20+% down is a comfort. Think about this too: The plan was being discussed ad nauseam for some time. I think it had lost a lot of its potency in the process, and if it had passed, soon we would be moaning that things were bad. The markets would resume falling but the arsenal would be empty. There is no doubt: Capital needs to be injected one way or another to the system and everyone needs to get their act together fast.

It seems we stared at the Abyss today, and we are still alive. JUST. Fingers crossed for the rest of the week! Our sympathies of all those investors who got hurt. Keeping half my long GS and C positions open going into today proved wrong.

Things to look out for tomorrow:

• EuroBanks (especially Icelandics & UK), how will they react to this bombshell?
• Oil, it lost 10% today. It can easily bounce on good news

GOOD LUCK

•nikosgi