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Wednesday, 13 December 2017

On Capello, Kaletsky, the mouse and the elephant...

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Anthony Peters, SwissInvest Strategist

The British Secretary of State for Business, Vince Cable, had better get his skates on if he wants to limit senior executive pay and reward for failure before the next England football manager takes charge; it must have escaped me that Fabio Capello was being paid £6,000,000 a year …

and none of it in deferred stock. Having been in the job for four years now, he has garnered some £24m. I’m pretty sure that Stephen Hester would have walked too, had he had that kind of reserve to fall back on. Globally, Hester is responsible for the livelihood of nearly 150,000 employees and their families, but the England manager only has a squad of 22 to care for and they are largely being paid by someone else. He can hire and fire without risk of being sued too. For that, he gets £16,500 a day. Come on Vince, show your teeth!

Meanwhile, I was listening to the radio on the way in this morning and found Anatole Kaletsky being interviewed. I have always held him in high regard although I have felt that he has become rather too convinced of his own infallibility in recent years and some of the GaveKal output is, in my humble opinion, a bit ahead of itself. This morning he outdid himself.

Green shoots of recovery

There is much delight and excitement in the United States and around the world about the green shoots of recovery which are finally beginning to poke their heads through the ruins of the Greenspan Credit Boom. Last week’s surprisingly good Labor Report supports the view that we truly might have finally found a bottom.

Washington has relentlessly pursued a policy of Keynesian stimulus with aggressive deficit spending which has taken the debt/GDP ratio beyond 100% and it is still rising.

Kaletsky, for reasons which escape me, decided to compare the United States with Great Britain, the two nations divided by a common language, as though they were equals. His thesis was simple: both countries went into the downturn with bloated financial services sectors and excessive household debt. Both countries countered this with near-zero interest rates, quantitative easing and expansionary deficit spending. Then, he argues, Britain went into austerity lock-down while the US went on spending, thus inferring that the austerity policies of Cameron and Osborne has vitiated the situation here while O’Bama’s liberal sowing of Federal cash hither and thither was being used to pave a road to a place called Panacea.

What a naive statement for a man of Kaletsky’s format. How and why has he chosen to overlook the minor fact that the US is still the world’s largest economy and that it provides the world’s reserve currency. Nobody is obliged to hold Sterling and the US’s ability to run these deficits while its bonds are yielding 2% is only possible because of its privileged status.

On Anatole Kaletsky: comparing the US and UK on a like for like basis, especially given the paltry dependence of the former on the economic well-being of the eurozone is, in my view, dangerous and misleading

A month or so ago, the British Shadow Chancellor and Labour attack dog Ed Balls took a swipe at Osborne by declaring that the ultra low interest rates in this country were evident proof that Tory economic policies were failing. Osborne struck back with what might have been his very best ever parliamentary retort by suggesting that obviously the 7% interest rates in Italy and 6% in Spain must therefore be proof to Balls of their success. Where would Gilt rates be, were Westminster to go back into stimulus mode, let alone the currency?

The mouse and the elephant

I was reminded of the old mouse and elephant jokes we used to tell as kids. The mouse and the elephant go to the beach. The elephant is in the water when the mouse calls to him and asks him to come back to dry land. He is on his way in when the mouse calls to him that it’s OK he can go back in.

The elephant, somewhat perplexed, asks what was wrong? The mouse replies: “I can’t find my bathers and was just wondering whether you might have put on mine by accident.”

I’m sorry, Anatole, but trying to compare the US, which has still not seriously addressed the fiscal deficit with the UK, which has, is fatuous. More to the point, we know how easy it is to declare austerity measures but how difficult it is and how long it takes to make them stick. The UK does not have the freedom or the flexibility to experiment with fiscal stimulus.

Monetary stimulus is within its gift, for it can execute that on a domestic-only front, but expansion of the fiscal deficit requires “approval” by its overseas lenders too and they have the option to walk away if they don’t like what they see. Do the government and the Treasury have the courage or the nerve to test that water?

All that aside, comparing the US and UK on a like-for-like basis, especially given the paltry dependence of the former on the economic well-being of the eurozone is, in my view, dangerous and misleading. Student Kaletsky: can do better.

Finally, Wednesday was another day of extraordinary issuance in the bond markets with demand seemingly continuing to outstrip supply at will. Nevertheless, the Kingdom of Spain opted to reopen its new 10-year benchmark bond through the syndicate process and not through the more common auction system.

It has become the norm to introduce new bonds through traditional underwriting groups and syndicated distribution, but thereafter to leave increases to the monthly auctions. The decision to go by the former indicates that the Spanish Treasury is less certain that all is well in the garden than are the markets. Makes you wonder, doesn’t it?                    

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