Hedgehogs

Hedgehogs – why can’t they just share the hedge” Dan Antopolski, the London stand-up comedian, won the award for funniest joke at the Edinburgh Fringe Festival this year.

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Qataris rescue Canary Wharf

Jenny Davey

In July a team of bright and youthful Chinese representatives from the state-owned China Investment Corporation (CIC) descended on Canary Wharf asking for an investor presentation about the east London financial district.

Just five weeks after that presentation, the world’s largest sovereign wealth fund, run by Lou Jiwei and Gao Xiqing, emerged on Friday as part of a consortium that has engineered the most significant property deal of the year — the £800m recapitalisation of Songbird, owner of Canary Wharf.

The deal is the biggest equity raising of any UK property company this year — trumping cash calls by British Land, Land Securities and Hammerson. It also represents the first big investment in British property by the Chinese and shows the seismic power shift in the world’s money markets. But while the Chinese attracted the headlines, even more significant was the backing of Qatar’s sovereign wealth fund, an existing Songbird investor that will emerge as its biggest shareholder after the deal.

In late April John Carrafiell, adviser to Songbird, flew to Doha to meet Ahmad Al-Sayed, chief executive of Qatar Holding. The Qataris reportedly gave an on-the-spot commitment to pump more cash into the company — long before CIC got involved. They even indicated they would be willing to do the whole recapitalisation themselves.

The bailout would be breathtaking in a boom — but during a recession that has wiped almost 50% off property prices in 18 months, it is extraordinary.

On Friday night the deal was being greeted in the City as a defining moment, not just for the property market — which is finally showing signs of life again — but for London itself.

For the protagonists of the transaction, the past 72 hours have been stressful. More than 60 lawyers have been toiling through the night to sign off the paperwork for the trans- action that saved Songbird from collapsing into administration. The lawyers were supported by a high-powered roster of dealmakers, including Naguib Kheraj, the former finance director of Barclays who runs JP Morgan Cazenove, and Carrafiell, who led Songbird’s £1.7 billion takeover of Canary Wharf in 2004.

If Songbird had collapsed into administration, there were fears its demise could have led to the fall of Canary Wharf itself. Insiders feared Songbird’s stake could be taken over by hostile investors who would force the sale of its buildings and strip the group of more than £1 billion of cash on its balance sheet to make a quick return.

“For me, it’s a new year,” George Iacobescu, Canary Wharf’s chief executive, said on Friday. The relief was palpable.

The cash injection will in effect wipe out Songbird’s debts and give Canary Wharf the confidence to start building office towers again when the market improves. It will also strengthen its ability to lure big companies from the Far East and the Middle East.

CIC will join existing shareholders in Songbird — Morgan Stanley Real Estate Funds, Qatar Holding and Simon Glick — in providing more than £800m in new equity to pay back a Citigroup loan. Qatar will be the largest shareholder with a stake of almost 30%. Glick will have about 27%, CIC will have about 19% and MSREF about 10%. Qatar and CIC will also take £275m of non-voting and non- convertible preference shares.

For the Qataris and CIC it will no doubt emerge as the deal of the downturn. Canary Wharf will be more conser- vatively financed than its competitors, opening the door for it to snap up distressed assets. And it creates the prospect of the group being drafted in to help the Qataris with the rest of their property portfolio in London — including the Shard of Glass.

Only one group will be left crying over a lost opportunity — Brookfield, the Canadian group that holds a minority stake in Canary Wharf. It was rumoured that it hoped to take advantage of Songbird’s difficulties and buy up its stake. (Jenny Davey, The Sunday Times) http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article6815195.ece

G20 fears oil price may derail recovery

David Smith, Economics Editor

Finance ministers and central bankers of the G20 countries, who meet in London this week, will celebrate signs that the worst of the recession is over and that upturns have begun in some countries.

However, they will also warn of continued fragilities in the banking system and the need to remain vigilant against further crises. They will say that the rise in the oil price, currently $73 a barrel, poses a potential threat to recovery.

There will be pressure on surplus countries, notably China and Germany, to do more to boost their economies and help cure global imbalances, though both have shown stronger-than-expected growth recently, particularly China.

The G20 is likely to reinforce the message of this month’s meeting of central bankers at Jackson Hole, Wyoming, which was that interest rates will need to remain low for a considerable time to allow the recovery to take hold.

They will also say that countries will need to have credible programmes in place to restore their fiscal positions once the immediate crisis is over.

The G20 gathering, to be held at the Treasury, will bring together finance ministers and central bankers from the large advanced economies but also key emerging economies such as China, India and Brazil.

It is intended to prepare the ground for the G20 meeting in Pittsburgh on September 24-25, the third during the global crisis.

Since the last talks, in April, most economies have shown signs of stabilisation or modest recovery and stock markets have risen strongly, with the MSCI Global index up by nearly 60% from its lows in early March. Pressure for a further fiscal boost to help economies out of recession has abated.

This week’s meeting will also consider bank bonuses, financial stability and a boost to the resources of the International Monetary Fund (IMF).

France’s President Nicolas Sarkozy, having negotiated a deal with French banks to limit their bonus payments and to make more of them in the form of shares, is seeking an international “cap and tax” agreement on bonuses.

He has won the support of the German chancellor, Angela Merkel, though the plan is likely to run into opposition from America. Alistair Darling, the chancellor, has signalled that he favours a tougher stance on bonuses but believes the best way to control them is by imposing tougher capital and regulatory requirements.

The new Financial Stability Board, agreed at the April meetings and a successor to the Financial Stability Forum, is expected to propose tougher capital requirements on international banks.

In April, the G20 agreed to treble the resources of the IMF from $250 billion to $750 billion but the deal to do so has yet to be put in place. The hope is that agreement will be reached on national contributions to the extra resources, intended to give the IMF scope to engage in more rescues of crisis-hit economies, by the time of the organisation’s annual meeting in the autumn.

They will also review the progress since April on clamping down on tax havens. Since then a number of countries have signed tax accords and agreed on fuller disclosure.

Apart from the G20 gathering in London, attention this week will focus on America’s monthly employment report, due on Friday. Last month it showed a 247,000 drop in non-farm jobs, which was smaller than expected, and a surprise fall in the unemployment rate to 9.4%.

In Britain attention will focus on the purchasing managers’ surveys for the manufacturing, construction and service sectors. These have suggested that the economy is recovering more quickly than in the official figures. (David Smith, The Sunday Times) http://business.timesonline.co.uk/tol/business/economics/article6814934.ece

Soaring deficits cast a shadow over the dollar

Irwin Stelzer: American Account

$2,000,000,000,000. That’s the amount by which the Obama administration raised its 10-year estimate of the nation’s budget deficit from the $7 trillion it guessed only a few months ago, a 30% error. It seems that expenses are higher than estimated — up 24% this year, the largest increase since the height of the Korean war — and revenues are lower.

There’s worse. The new estimate assumes that Medicare and Medicaid (government healthcare) spending will be cut by $622 billion, even though Congress has made it known that it is reluctant to make any such cut. Then there is the $600 billion in revenue included for the sale of emission permits, despite the fact that The House of Representatives has given away so many permits gratis that the programme will produce at most $450 billion. Those two items alone come to almost another $1 trillion in red ink. Throw in another $1 trillion for Obamacare, recognise the irrational exuberance of Obama’s economic and revenue projections, and it is no surprise that senior economist Bill Gale, at the liberal Brookings Institution, says that the deficit will exceed $10 trillion over the next decade, a figure he finds “deeply alarming”. So do voters, who now rate the deficit as the nation’s No 1 problem.

This year, the deficit will come to 11.2% of GDP, and by 2019 the debt will be equal to 76% of the value of the nation’s output of goods and services, almost double the 41% when Obama took control of the nation’s finances. Not a problem, White House economists tell me. Not sustainable, says Warren Buffett, among others.

Which brings us to Martha’s Vineyard and Beijing. A tie-less president took time off his vacation on Martha’s Vineyard to praise and reappoint an also tie-less Ben Bernanke to another four-year term as chairman of the Federal Reserve Board. The lack of neckwear could not conceal a certain tension. The president was trying to divert attention from the grim news about his burgeoning budget deficits, and the chairman was trying to reassure the markets that his reputation as “Helicopter Ben”, a man who would fight recessions by dropping cash from the skies, might be merited when the economy is in freefall, but did not preclude him from reining in all that liquidity when the right time comes.

Given that his new term runs until the end of January 2014, Bernanke can with impunity tighten, if he thinks that is necessary, just as Obama launches his 2011 campaign for a second term. Recall that it was just such a tightening and consequent slowing of the economy by Alan Greenspan that George Bush the elder still feels handed the 1992 election to Bill Clinton. Gratitude is not a central banker’s dominant emotion when it interferes with sensible policy.

So the marriage of convenience between Democrat Obama and Republican Bernanke might not end on a pleasant note. Especially if the chairman decides sooner rather than later that the era of quantitative easing — jargon for printing money — must come to an end lest the dollar begin to take on the characteristics of the now-deceased (but remembered with fondness in Italy) lira.

New data support Bernanke’s view that the worst of the recession is probably over. Last week the Department of Commerce announced that sales of new homes rose 9.6% in July after an increase of 9.1% the previous month. Sales are still 13.4% below last year, but are up 32% from the January record low.

The news from the market for all homes, existing as well as new, was even cheerier, especially since it is based on a larger number of sales and is less subject to revision. The much-watched Case-Shiller index of house prices in 20 metropolitan areas recorded an increase of 2.9% during the second quarter. Prices remain 14.9% below the second quarter of last year, but have risen in 18 of the 20 areas covered by the index, prompting Karl Case (of Case-Shiller) to announce: “When I saw those numbers, I danced a jig. It appears that the housing market is stabilising quicker than people thought.”

The sales strength was due in part to low interest rates, in part to a rise in consumer confidence, and in part to an $8,000 tax credit for first-time home- buyers, due to expire on November 30.

The pace of manufacturing is also picking up. The index of leading economic indicators, the Philadelphia Fed survey, and the Empire manufacturing index (New York State) all reported gains, leading Goldman Sachs to conclude “that manufacturing is in the early stages of a rebound to correct undue liquidation of inventories”.

On to Beijing, on which Bernanke is keeping a wary eye. The Chinese, who hold $776 billion in American IOUs (after selling $25 billion in June), see the combination of these signs of an emerging recovery, along with huge deficits as far ahead as the eye can see, as a sign that the dollar is certain to deteri- orate in value. They want Bernanke to follow the lead of his doctoral supervisor at Princeton, Stanley Fischer, now governor of the Bank of Israel, and start to raise rates to head off inflation. Israel is, of course, a tiny player in the world economy, but, as James Lord, an economist with London-based Capital Economics puts it, the response of its central bank to the financial crisis “has been sophisticated . . . [and] Bernanke’s preferred method for reversing any inflationary impact … is essentially what the Bank of Israel has done ”Bernanke’s preferred method for reversing any inflationary impact . . . is essentially what the Bank of Israel has done”.

Bernanke hopes Beijing has enough faith that he has a viable exit strategy to continue buying huge amounts of US Treasury securities. The Fed chairman, not confident that the recovery is yet robust, wants to hold off raising interest rates.

Retail sales remain weak, commercial-property loans look increasingly toxic, about one-third of American banks have tightened credit standards in recent months, failures of regional banks are on the rise, the list of problem banks is at a 15-year high, and boardrooms are not full of members eager to approve big investment projects.

Bernanke wants to go down in history as having defeated a recession without triggering inflation. He is halfway there. (Irwin Stelzer, The Sunday Times) http://business.timesonline.co.uk/tol/business/columnists/article6815073.ece

Recovery surprises leave markets floating on air

David Smith 

Late August is a dangerous time to write about the stock market, ahead of the autumn storms. This time last year I might have remarked on the solid gains shares were showing during the holiday month, with the FTSE 100 up more than 300 points.Then banking armageddon arrived, pushing the index down nearly 2,000 points over the next couple of months. Not every autumn has a global financial meltdown and, fingers-crossed, history will not repeat itself. And we should not get too hung up about the seasons.

As Mark Twain memorably put it: “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”

Economists are not necessarily best-qualified to tell you where the stock market is going. Nouriel Roubini, the New York University professor, has made his name in the credit crisis. A nice piece on Bloomberg last week, however, noted that if investors had followed his stock-market advice in recent months they would have missed out on the “rally of the century”, with the S&P 500 up 52% in six months, and the MSCI world index up 58%, the biggest gain since it started life in 1970. The FTSE 100’s rise is nearer to 40%, impressive but continuing its relative underperformance of recent years.

Roubini’s downbeat view of the American economy and the stock market may yet be right — but timing is everything.

Some fund managers, on the other hand, have what economists would regard as highly unusual views about the economy. Neil Woodford, head of investment at Invesco and one of Britain’s top fund managers, said: “I do not see economic recovery happening in the next three to four years”, and this informs his investment strategy.

That would imply the longest period of recession /stagnation in Britain’s modern history and, together with the downturn so far, would be twice as long as Britain’s slump in the 1930s. Nothing is impossible but, given that recovery has almost certainly already begun, this is highly unlikely.

The Bank of England’s latest forecasts, published this month, imply the UK economy will be more than 9% bigger in mid-2012 than now. I would have a small wager that its forecast will be closer to the outturn than no recovery at all.

Why have stock markets risen so strongly? It has been a two-stage process. The initial spurt from the dark days of early March came with a realisation that the world was not entering a second great depression (third if you count the end of the 19th century) and that not all banks would have to be nationalised. Markets were priced for disaster and decided this had been averted.

The second leg has been driven by good figures. “Economic data generally continue to be better than expected, which suggests that we are emerging from the longest and deepest recession \,” says Bob Doll, chief equity investment officer at Black Rock.

The figures suggest growth will have turned positive in every G7 country, including Britain, this quarter. France, Germany and Japan are already there. Germany’s Ifo measure of business confidence has soared, a reflection of the fact that export demand has turned the corner. China has led a turnround for the hard-hit Asian economies, acting as the region’s locomotive. America’s housing market, where the recession story began, is showing strength in both activity and prices.

Normally, economic recovery is tinged with a fear in the markets that the authorities will take action to dampen it down, notably with higher interest rates. However, central bankers made clear at their recent annual gathering at Jackson Hole, Wyoming, that this is not on their agenda. The markets have an unusually clear run.

In Britain, while figures last week showed a nasty 10.4% fall in second-quarter business investment, the credit crunch still biting hard on spending by firms, most of the figures have surprised on the upside.

It’s over – but all is changed, utterly changed

For everyone from the man in the street to politicians, financiers and economists, the world will never be the same again

Anatole Kaletsky

Tuesday’s reappointment of Ben Bernanke as Chairman of the US Federal Reserve Board — accompanied by new highs for global stock markets and news of rising house prices and improving consumer and business confidence on both sides of the Atlantic — was a fitting symbol for the end of the financial crisis.

Whatever happens in the next few months — and some serious risks still lie ahead — it is now clear that a rerun of the 1930s Great Depression has been avoided. The Great Recession, which was predicted by many economists and pundits to be far deeper and more intractable than any previous postwar downturn, may go down in history as the Great Exaggeration.

Having said this, it would be foolish to assume that the world after the crisis will be the same as it was before.

The economic and political lessons to be drawn from the events of the past year will be enough to fill many books — and the world might do well to consider these at leisure, rather than jumping to instant conclusions in the heat of the crisis.

But as the end of recession approaches, it does seem worth highlighting some of the clearest implications for politicians, central bankers, economists, financiers and ordinary voters.

Starting with the man and woman in the street, “end of recession” stories in newspapers and economic statistics will offer little comfort to the jobless or to those struggling to make ends meet. Past experience suggests that unemployment will continue to rise for at least a year after GDP has resumed growing. Wage increases tend to lag even farther behind. Moreover, taxes and interest rates are certain to rise as the recovery gets established, not just in Britain but in all developed countries.

The only consolation is that any rise in interest rates in the years ahead should be much less steep than in previous cycles. The reason for this is that central bankers and politicians will be united in a desire to keep the economy growing as strongly as possible while government borrowing is reduced.

If taxes are to be raised and public spending slashed in the years ahead, interest rates will have to be kept very low to sustain expansion. This is why I believe that Britain, the US and Europe will not see base rates rise above 2 per cent until 2012 at the earliest — and maybe not until the second half of the next decade.

Turning to politics, it is almost certainly too late for Gordon Brown to expect any electoral boost from the improving economy. Unemployment and living standards will continue to deteriorate until the last possible date for the general election, even if growth resumes now. Many voters will, therefore, continue to believe that the economy is terrible even after the statistical recession is over — and government apologists who try to paint a rosier picture will earn only their distrust.

To make matters worse for Labour, the timing of this economic cycle should be very favourable to the Opposition. If the recovery continues on schedule, unemployment should start falling within months of the election. This will create good conditions for the Tories to increase their majority in the following election.

In other countries, by contrast, the timing of the economic cycle is good news for incumbent governments. Barack Obama, Nicolas Sarkozy and Silvio Berlusconi should all be able to present themselves as saviours when they next face the voters. The same will be true of Angel Merkel and the new leadership of Japan’s Democratic Party, assuming that they win their elections, as expected.

The ironic result of all these electoral contests is that the crisis of capitalism is likely to strengthen broadly pro-market parties all over the world and crush anti-capitalist forces. Even the swing to the left in US politics, which ought to be strengthened by the timing of the economic cycle unless President Obama badly misplays his hand, should reinforce the international capitalist consensus.

After all, the US under Obama is merely moving from the extreme right to the mainstream of economic thinking in the rest of the world.

What, finally, might happen to mainstream economic thinking as the crisis fades? One sure prediction is that economists will have to rebuild their subject from the ground up. Almost all the advances of the past 30 years in macroeconomic and financial theory have turned out to be blind alleys.

If economists want their subject to be taken seriously as an academic discipline they will have to acknowledge this empirical refutation and abandon the theories of rational expectations and efficient markets, rather than trying to fix these theories by tinkering at the edges.

If it happens, this seemingly abstruse transformation in the nature of academic economics could have important implications for everyday finance, business and even politics. For the theories of efficient markets and rational expectations have served as the ideological underpinnings for the rigorous, fundamentalist brand of capitalism that has dominated global thinking since Margaret Thatcher and Ronald Reagan swept to power.

Suppose that Thatcher-Reagan’s slogans such as “the market is always right” or “you can’t buck the market” are now replaced with an acknowledgement that markets sometimes make catastrophic mistakes, even when they are as perfect as they possibly can be from the standpoint of theoretical economics. Once this intrinsic fallibility of markets is acknowledged, serious debate can begin about all sorts of issues removed in the past 30 years from the political sphere.

These range from bankers’ bonuses and minimum wage rates to the objectives of monetary policy, the financing of healthcare or the subsidising of uneconomic alternative energy sources.

Exposing to political debate all sorts of issues that were supposedly settled by market judgments need not mean that governments will take over or that capitalism will be replaced by socialism. On that score, the worldwide swing to the right in politics is reassuring.

It does mean, however, that capitalism is likely to evolve in the coming decades into something rather different from market-fundamentalist brand of capitalism that has dominated the world for the past 30 years. (Anatole Kaletsky, The Times) http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article6811407.ece

Japanese economy hit by ‘double nightmare’

Leo Lewis, Asia Correspondent

With potentially the most momentous general election for five decades less than 48 hours away, the Japanese economy has plunged into the double nightmare of runaway deflation and soaring joblessness.

The Japanese unemployment rate hit a record 5.7 per cent in July, although many analysts believe that the official number massively understates the true extent of joblessness.

Many believe that the Government’s calculation methods, which do not count people not actually looking for work, may disguise a figure twice the official size.

Nomura analysts have warned of Japan’s huge hidden jobless problem, and of the likelihood that the extent of the crisis may emerge over coming months and years.

In one potential scenario, Takehide Kiuchi, the bank’s economist warned, Japanese unemployment could reach 12.2 per cent as companies shed their giant armies of surplus labour.

Two reports today — the July unemployment numbers were accompanied by the latest consumer prices index — paint an especially dismal picture of the world’s second-biggest economy only days after official GDP numbers showed Japan crawling out of technical recession.

Consumer prices nosedived by 2.2 per cent year-on-year in July — the most acute fall they have registered, surpassing even the falls logged during the country’s notorious five-year struggle with deflation that began in the late 1990s.

Takuji Aida, a UBS economist, said that although the price declines were largely the product of falling energy prices, the core figures reflected weak demand in the service sector and that the trend would make a hefty impact on employment trends.

Fear of yet more rounds of job cuts have crept across the entire Japanese economy. Toyota’s announcement this week that it would permanently close one of its domestic car production lines confirmed, for many, that those worries were justified.

The effect of that fear has been for households to make abrupt cuts in their spending: cheap clothing stores and discount food wholesalers have enjoyed surging sales, while the mainstream of retail has taken a heavy beating.

Although Japan broke free of its long cycle of economic contraction in the most recent quarter, few believed that it was yet time to celebrate a recovery.

Although the stock market continued a long rally, many economists warned that trading-floor euphoria was not a reflection of Japan’s true prospects and that falling prices would exact the same heavy toll they did during Japan’s last phase of deflation. (Leo Lewis, The Times) http://business.timesonline.co.uk/tol/business/markets/article6813214.ece