[This is the last Posting until 18 August. Every year, we intend to take a summer break, not just because of the Season but because we believe that Bloggers can get tired and hackneyed if they fail to stand back from their commitment and consider what they are doing and why.

Our commitment was a Posting every Monday, Wednesday and Friday and we have done this since last August. Now is the chance to consider how to proceed without being overwhelmed by our sense of duty.  So, see you again in four weeks ... ]

We are now well into the second phase of the economic crisis.

In essence, we may be moving from incipient stagflation (slow growth with high inflation) to a more serious global down-turn in which a massive ‘jolt’ is given to the system as power shifts from West to East and from traditional services businesses to the new technology economy.

Nothing is certain in this analysis. The US economy actually performed better than expected in the first half of 2008 but Morgan Stanley is now speaking of a better than 50-50 chance that we will see a double-dip recession stateside.

US housing indices suggest continued falls in prices throughout the year ahead, oil and food are contributing disproportionately to US inflation and inflationary expectations are now (regardless of recent oil price falls – see below) in danger of locking price rises into the system.

The Federal Government’s actions in underpinning Freddie Mac and Fannie Mae have not entirely restored confidence because attention has turned to the dire state of smaller institutions, especially regional banks (following the collapse of IndyMac Bank in California).

Nor is Wall Street out of the woods yet: Merrill Lynch announced a massive $9.4bn write-down, a $4.6bn loss in Q2 2008 and emergency asset sales designed to raise $8bn.

Similarly the dollar remains under threat. There are reports that Sovereign Wealth Funds [SWFs], notably those of the Chinese, are trying to cut their exposure to the dollar. The Financial Times reported on this at length on 17 July.

Serious SWF money has been lost in the first wave of bank recapitalisations, suggesting that there may not be funds for a second wave, placing yet more pressure on Wall Street. The state of the US economy has also damaged global confidence in American policy-making.

Gulf money is critical to support for the dollar yet a Saudi Shura Council Committee is recommending a revaluation of the riyal by up to 30%. This must be placed in the context of a similar recent report from an Abu Dhabi economic advisory body.

No major Gulf revaluation is likely in the sort term if only because national policy makers in the Gulf are fully aware that any adjustments will have a severe effect on the dollar. They are prepared to trade inflationary pain against other global economic and political effects.

But frustration at the effects of the dollar on Gulf inflation is definitely growing. Another surge in inflation might raise a serious conflict of interest between the domestic concerns of dynasts and their perception of the defensive value of the Western alliance, aka the US nuclear umbrella.

The seriousness of the situation in the US was reflected in the oil price, which reversed its drive towards $150 and plunged on fears about global demand, settling at around $138 on 15 July.

It then fell further, to $132 (we use the headline Nymex West Texas Intermediate rather than ICE Brent as marker), settled at $134.60 at close of play on 16 July, then fell below $130 on 17 July.

These falls may seem like good news (and they are for inflation, which is reaching politically critical levels) but, given supply issues, they merely indicate falling demand.

Commentators have been clutching hard at this straw of falling prices but oil traders are wiser, saying that volatility is high and that we could see a rebound. The fact that growth appears to be slowing in China may be good for the environment but not for the world economy.

Politically, we also have the odd situation of two presidential candidates trading insults on foreign policy while Americans are more concerned about their jobs and savings. It is as if the political elite have become entirely bogged down in international affairs.

Obama and McCain either do not understand the seriousness of the domestic situation or they have nothing to say to the public on the crisis. Both candidates appear weak on economic matters just when economic policy is about to become the key issue for the electorate.

Putting all this together, we are entering a time of great uncertainty for the American economy. This is bad news insofar as any of us are engaged in a global economy that has been structured around Wall Street and American consumerism.

We would be fools to predict just how bad things might get. We still think that this is a correction rather than a meltdown but it is becoming clearer by the day that we are seeing the emergence of a serious problem for American political and economic hegemony.

Whether this is a blip that lasts just eighteen months (say) or represents a more fundamental long term shift in global power relations is not yet clear ... watch this space.

www.tppr.co.uk

NEWS: City of London & GCC Conference brings together key players in international financial markets

The Middle East Association (MEA) in partnership with the City of London Corporation will be staging the third annual City and Gulf Co-operation Council Countries (GCC) Conference at the Merchant Taylor’s Hall in London on Thursday 19 June 2008.

For the third year running, this premier event will bring together key players from within the financial communities of the City of London and the GCC countries.

Lead sponsors this year include Bahrain Economic Development Board, Qatar Financial Centre Authority and National Bank of Dubai.

This year the keynote address will be delivered by The Rt Hon The Lord Mayor of The City of London Alderman David Lewis, with other high profile government and financial sector representatives from the UK and GCC addressing the Conference.

The main areas of focus at this year’s Conference include:

• Regulation and risk-based supervision in the context of the global credit crunch: GCC and London perspectives
• Building strong foundations for GCC growth: the financing and skills challenge
• Growing global impact of Islamic finance and insurance: UK and GCC synergies
• GCC investment flows to third markets and role of sovereign wealth funds

Jason Peers, Chairman of the MEA GCC region, commented:

“The City and GCC Countries Conference has established itself as a key element in the flourishing relationship between the City of London and the markets of the GCC. Discussions at the Conference will be even more relevant this year, given the rapidly changing relationship between the major global economies and financial institutions, and the increasingly powerful and self confident economies and institutions in the Gulf.”

He added: “With Western economies experiencing a financial correction and an increasing volume of capital coming from emerging markets, global interdependence is becoming even more important. This Conference allows senior finance professionals to look to the Gulf economic markets for long-term stability and growth.”

“The Conference will bring together the dynamism of the Gulf within the maturity of the City of London,” said Michael Thomas, Director General of the Middle East Association. “It will be an excellent and high-level networking opportunity.”

ENDS

Notes to Editors :

1. The Middle East Association (MEA) is the UK’s premier organisation for promoting trade and relations with the Middle East, North Africa, Turkey and Iran. Its members cover all sectors of industry and commerce including: Banking, Financial, Law, Consultancy, Manufacturing, Retail, Education and Training, and are responsible for the vast majority of all UK investment and trade with the region.

2. Conference Lead Sponsor - Bahrain Economic Development Board:

The Bahrain Economic Development Board is a dynamic public agency with overall responsibility for formulating and overseeing the economic development strategy of Bahrain, and for creating the right climate to attract direct investment into the Kingdom. Bahrain Financial Services is a department of the Economic Development Board that is uniquely dedicated to the needs of the financial services industry. Its role is to increase the international profile of Bahrain as a leading financial and business destination and to provide a single point of contact for international financial services firms looking to build a base in the Kingdom.

3. Conference Lead Sponsor - Qatar Financial Centre (QFC) Authority:

The QFC Authority is the commercial, administrative and legislative body of the QFC which is responsible for driving its commercial strategy, developing its commercial laws and forging relationships with the global corporate community and other key institutions both within and outside of Qatar. The QFC is a financial and business centre established by the Government of Qatar and located in Doha. It has been designed to attract international financial services institutions and major multi-national corporations and to encourage participation in the growing market for financial services in Qatar and elsewhere in the region.. The QFC was created by Qatar Law No.(7) and has been open for business since 1 May 2005.

4. Confirmed speakers include:

• The Right Honourable The Lord Mayor of The City of London Alderman David Lewis
• Sir David Walker, Senior Adviser, Morgan Stanley
• Baroness Symons of Vernham Dean, Special Representative on Saudi Arabia to the Prime Minister and Vice President, Middle East Association
• Richard Thomas, Managing Director, Global Securities House & Chair, UK Advisory Sub-Committee on Islamic Finance
• Michael Ainley, Foreign Banks Regulator, UK Financial Services Authority
• Stuart Pearce, CEO & Director General, Qatar Financial Centre Authority
• Robert Ainey, Chief Executive, Bankers Society of Bahrain

[Pendry White, subsidiary of TPPR, is acting as media relations adviser to the Conference through the Middle East Association]

www.pendrywhite.com

The Bank of England made an 'almost unlimited' offer to acquire the banking sector’s mortgage-backed securities for up to three years in return for Treasury bills – apparently, a massive strike at the liquidity problem.

Or at least it was claimed to be 'almost unlimited' - the initial £50bn facility opened on Monday is widely regarded in the City as relatively small beer in the context of the crisis as a whole.

Conservative Economic Management

The purpose of the exercise for the Bank of England (although the Chancellor is sending precisely the opposite signal for political reasons) was not to encourage a revival in house prices but simply to stabilize the system.

Privately, City figures have been critical of the slow motion approach of the Bank of England which appears not to have adopted the Federal Reserve's determination to break any rule that gets in the way of keeping the system afloat.

What now seems to be emerging is a clash between the politically independent Bank and the Government over emphasis and, until this is resolved, the City is likely to be disappointed by the Bank's caution.

The Bank of England is essentially pressuring the banking system to get its own house in order and will permit the necessary correction in the housing market in order to restore confidence. It is buying time for the market to work, that is all.

Where the City is nervous is that management decision-making that proved flawed in the past cannot be guaranteed to be any better in the future - and all the num-nuts who were in place before the crisis are making decisions during it. Not good!

The Government, under enormous political pressure, is desperate to see the Bank’s funds work through the system and reduce the financial pain on hard-pressed working class and middle class families.

And so the Government talked direct to the mortgage lenders who have minimal incentive to do anything other than follow the Bank’s lead and hope for more later. They gave him little reason for optimism. 

The Great Correction

Low income and buy-to-let lending were central to the Government's project to solve the housing crisis through 'market solutions' rather than raise taxes for direct social housing investment. This project is now in tatters.

Worse, high growth in the UK was largely led by public spending (but tax will fall with writedowns, falls in corporate profits, lower sales and possible job losses), property (and now housebuilding has shuddered to a halt and there is oversupply of dinky, dodgy flats) and financial services ('nuff said).

Property and finance may be around 25% or more of national employment and over 30% of corporate profits. In other words, the 'correction' that is coming is potentially equivalent in these sectors to what 1929 was to coal, iron and steel and shipbuilding.

Within Europe, the UK is peculiarly vulnerable - a services rust-belt, a 'wastepaper basket' belt - with only London as Global City looking to the East, the lean and mean specialist industrials sector and the creative industries offering something to look forward to as they globalise.

In this context, there will be no politically necessary passing of taxpayer-underwritten credit to the banks back to the taxpayers themselves and repossessions will rise. 

The financial services sector simply needs the cash to survive. Indeed, small lender mortgage rates actually increased on the day of the announcement of the Bank of England facility.

It looks as if the bankers, whose collective managerial incompetence is second only to that of the Government and regulators, are going to get away with it at the expense of not only taxpayers but possibly shareholders and certainly those who were inveigled into credit out of financial ignorance or desperation.

Crunch Time For Politicians

Having removed those levers of power that were once available to the strong social democratic state, all the politicians can do is be a redistributive mechanism from the poor to the arrogant and incompetent 'rich'. Or so it will seem. They are left with no alternative.

In the end, Chancellor Darling and Housing Minister Flint were reduced to 'urging' lenders to review initiatives to help homeowners in difficulty (which rather shows where power actually lies).

If there is one thing that New Labour Ministers are habituated to it is 'spin' and the attempt to seize the headlines after the meeting was no exception. 

BBC Online told us in headline terms that homeowners would get mortgage help - "Homeowners will have enough support to ensure that their homes are not repossessed, the government says."

Two paragraphs down the reliable Beeb reports "But ministers did not outline how they would stop people losing their homes." In other words, they haven't a clue!

Failure to support the banks means a 'crash' and it may take a generation to put in the regulatory controls to stop a repetition - assuming, that is, that the ideologist of market solutions to social problems who dominate the political class even have the will to do so.

So, given a thirty year project to detach the State from the economy and then distort the market for social engineering purposes as compensation to the electorate, the bottom line is that we are stuffed. The Government has not got the tools to help even if it had the will.

The words 'pear-shaped' and 'swanee' spring to mind.

What We Have To Look Forward To

The scale of the problem in the transatlantic banking sector beggars belief according to our sources who are too professional to get depressed. 

Our interpretation of a private briefing at City Private Bank (historically conservative) established the following to our satisfaction:-

• There are problems in Europe but they are localized and Europe itself looks set to weather the storm
• The crisis in the US and the UK is systemic based on ideological and political conditions that led to the unsustainable credit boom
• The UK economy is in an utter mess but no-one outside the City has noticed the full scale of it yet – things will get worse and the adjustment could take from eighteen to thirty six months
• The Government finances are in meltdown and one factor not widely appreciated is that bank write downs are pulling very significant corporate tax revenue out of the system which is then having to be clawed back by such politically contentious measures as the withdrawal of the 10p tax rate
• Eventually, this implies a fire sale of assets like British Energy and, assuming no spread of the crisis to the East, the best national assets will be ready-made for SWF and other non-Western takeover as the crisis hits its peak

The possibility that, despite intense political resistance in the US (less so in the UK), major national assets in the FTSE-100 are going to get taken over by foreigners now needs to be faced.  Does this matter?

Many leftwingers and nationalists, grasping at straws, are probably going to be stupid and try to stop or slow this process. The time is long past for trying to protect 'national champions' - those who lived by globalisation are now going to have to die by globalisation.

Truly global players will rise above the melee while companies that are still on the way up and those in innovation sectors will become the new economic leaders.

It is the companies that the British most identify as theirs by right of brand, mostly in the services sector, that are going to be cherry-picked in a bout of healthy creative destruction.

An End to Gloom - The Good News

In fact, for all the job losses and asset-stripping, this creative destruction is probably a good thing, part of the wider global correction in which the UK is enabled to move forward into new sectors through the input of new capital.

The new overseas centres of capital accumulation and those who can exploit the new EU single market will acquire our services sector brands and do what we cannot - globalise them. Some, a few, British brands will be at the top alongside them - Vodafone for example.

In the end, there will be a recovery although Britain's relative importance as an economy will probably never be the same again even as prosperity returns.

The world will have changed forever and the only time British troops will yomp across faraway deserts by then will be under UN or EU orders. Since yomping around the world is one of the reasons we have failed to attend to domestic problems, the less yomping the better.

So not all is gloom. This is going to get very nasty economically and politically and the current Government really does not deserve to survive but innovation continues, London remains a world city and the City of London itself continues to progress in other areas.

A Success Story

Just to take one success story for which Gordon Brown can justly take credit - Islamic finance. A licence has been awarded to a fifth Islamic Bank, Gatehouse Bank. London’s leading role in Islamic finance in the West seems to be developing regardless of the credit crisis elsewhere.

The other four licensed banks are Islamic Bank of Britain (2004), European Islamic Investment Bank (2005), Bank of London and the Middle East (2007) and European Finance House (2008). No other EU country has yet licensed an Islamic bank and New York is now way behind.

Similarly, those London investors, always adaptable, who are nervous of the Atlantic economy are likely to be offered new opportunities to invest in stable (Bush Administration permitting) plays in the Gulf.

The Financial Times reports today [23 April] that Global Investment House, listed in Kuwait, Bahrain and Dubai, is said to be planning to raise $1bn in London.

GIH operates in sixteen countries, precisely in those Middle Eastern, African and Asian markets that underpin the more favourable attitudes in the market to global giant HSBC and niche player Standard Chartered.

What Scares Us

The scariest thing we heard in the last few days was not our Wall Street friend's fears for meltdown or the horrible details of banking ineptitude, but Hilary Clinton threatening to 'obliterate' Iran if it attacked Israel with nuclear weapons (a needless threat at this time as anyone who knows the region will tell you).

It is scary not because we believe she intends to do any such thing but that she felt it politically useful to get herself a decisive victory in the Pennsylvania primary. Private-mails from America have also showed a growing xenophobia against China - not criticism, downright xenophobia. 

All in all, the country that could not cope with the aftermath of Katrina and which is about to see a wave of repossessions and bankruptcies and has never dared to point the finger inwardly at itself (this is called 'optimism') is ripe for populist excesses externally.

In many ways, the economy is not what we should be worried about at all, but the political consequences (as in 1929). Let this correction take its course and we will come out of the end of the tunnel with a changed but rebalanced world that may serve us for another thirty years.

But what if the 'losers' get really scared and try to claw back respect and power through superior force? And what if the rising powers get greedy and try to capture resources through subversion? 

Then we are in truly serious doo-doo hoping, at best, for full employment in wartime economies and trusting in our ability to dodge missiles.

http://www.tppr.co.uk