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Saturday, 25 October 2014

The reality of dream-on-omics beyond Saint Mario

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Last week I certainly made no bones about how impressed I had been with St. Mario’s performance in explaining the ECB position of offering a back-stop bid to markets and helping those who help themselves – and I did not mean by trying to help themselves to easy and unconditional money. The discussions are already humming and asking whether, had the ECB done two years ago what it did last week, whether we would have avoided the Eurozone crisis.

Anthony Peters, SwissInvest Strategist

The answer is the same as the one which wonders whether one operates on an athlete when the first signs of an injury appear or not until it is too painful for him to continue his sport. Hindsight has always got the right answer.

When will they get into their thick heads that the government doesn’t have any money of its own?

Anyhow, after the hubris of last week, reality returns in the form of the Greek coalition which has fallen out over the plans for austerity and, more to the point, how not to implement the promises made to the putative donor countries. Overall, the Greek position will not affect the ECB plans but it will renew the querying with respect to but the commitment and the ability of weaker Eurozone members to meet the objectives they have set themselves.

So, while we ponder the fiscal state of the usual suspects, enter, stage left, our old (or new, to be truthful) friend, President Francois Hollande, with another dose of good old French Socialist dream-on-omics. Tax and spend, tax and spend. Fifty years of it have not helped, so I can’t see how or why he believes that a further two will suddenly change the paradigm.

I appreciate that according to fiscal multiplier and accelerator models, in theory at least, €1 of central government spending should turn into something €3 of GDP growth. However, as with so much of our orthodox economic theory, these were created before open economies, globalisation and overbearingly costly public administration costs were part of the scenery.

But the French are not alone in their residence on another planet. I heard this morning on the wireless an economist from the UK’s Trade Unions Congress, I think it must have been Nicola Smith, the Head of the Economic and Social Affairs, who was banging on again that “austerity hasn’t worked”. What “austerity hasn’t worked” actually means is slightly beyond me but if she believes that there is some amazing way of creating growth while cutting 10% of cost out of 45% of the economy, perhaps she should turn her mind to planning how she is going to spend the Nobel Prize for Economics which must inevitably be hers.

Oh yes – the government must invest in this and the government must spend on that…. When will they get into their thick heads that the government doesn’t have any money of its own? It can only spend our money; it is primarily in the game of redistribution of what it takes from us in taxes and anything other than that is in the form of borrowing from future generations.

I’m not sure how much Hollande thinks he’s going to generate from taxing earnings of over €1 million at a super-tax rate but however much it is, it won’t go very far towards turning the French economy around in the two years he has promised. His popularity levels don’t have me convinced that the French people are overly impressed with him and his assertions and for them not to believe that their “Grand Nation” will be capable of doing a triple saltomortale without a net is new. The Bund/OAT spread hit a tight of around 60bp in mid-August and I flagged that as a screaming sell. It is now at 69bp and I would still be giving it all day long until it is above 100bp where I’d be prepared to reassess.

Meanwhile, we await the Karlsruhe ruling on the ESM. I can’t see the constitutional challenge succeeding so I’d forget the politics - do I catch myself referring to a ruling by the German supreme court as politics? - and focus on the fundamentals. Despite all the bluster in the wake of last week’s ECB meeting, they remain doubtful.

Glencore/Xstrata

On a more practical note, the posturing between Glencore and Xstrata goes on. I declare an interest as a shareholder of Xstrata but as my stock is held in a nominee account, I have no voting interest. Anyhow, I’m not sure that my vote would have a particular impact. What looked like a stitch up of shareholders for the benefit of the senior management of both companies has been blown wide open and the outcome remains uncertain. I suspect that the brainless index investors who will vote for anything that boosts short term performance in a difficult year will be backing the revised offer and amended management structure, irrespective whereas more thoughtful and long term holders of Xstrata will feel that not quite so bad is still a long way from good. Which of the two sides wins is to be seen.

In the meantime, Tony “show me the money” Blair, who is rumoured to draw £2m a year as consultant to Xstrata’s bankers JP Morgan appeared at a meeting between the two companies to bat for the Glencore side – apparently for a juicy one-off fee. I suppose there’s no pound sign in “conflict of interest”. Wanna bet he’ll suddenly declare a large donation to charity? Sorry, I have to stop here; I’m feeling a bit sick….

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