Bull & Bear
Bull & Bear: two opposing market views
Whether you're a 'glass half full' or a 'glass half empty' type of investor, freelance journalist Michael Baxter discusses the latest economic, company and investment news from both optimistic and pessimistic viewpoints.
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18/05/2012 - Bull and bear: time for a new Marshall Plan
Bull and Bear - an optimistic and pessimistic view of investment news. Today's stories: Obama calls for less euro austerity, Cameron calls for more. Spain's problem is not its banks, or its debt, it's something else entirely.Google throws a spanner in the world of Internet publishing. Companies in the news: National Grid, Marston's,Invensys.
Obama calls for less euro austerity, Cameron calls for more
Barack Obama and David Cameron agree on one thing. They both think the euro countries should be more like their own countries.
It's time for the G8 again. How time flies. And this time it seems that Germany will be in the firing line. Angela Merkel's new best friend Francois will be whispering words of less austerity in her ears. And it seems as though Mr Hollande will have an ally in a certain Barack Obama. The US President is expected to use the G8 conference to put pressure on Germany to instigate policies designed to promote growth and less austerity: a bit more government spending, and a more dove-like central bank. Mr Obama fears that unless this happens, the global economy will fall back into another recession.
Meanwhile, David Cameron has similar fears. We are in "perilous economic times,” he said yesterday. He knows that if the crisis in the euro gets much worse, the UK too will descend into recession. (Although some might want to point out that, according to the ONS, the UK is in fact already in recession.)
At one level DC and BO seem to be saying something similar. The US President fears another global recession, while Mr Cameron said yesterday: "The Eurozone is at a crossroads. It either has to make-up or it is looking at a potential break-up." (As an aside, why do politicians always feel they have to make their key points rhyme?) The poet that is Mr Cameron then lost the rhythm of his speech entirely, saying: "Either Europe has a committed, stable, successful Eurozone with an effective firewall, well capitalised and regulated banks; a system of fiscal burden sharing, and supportive monetary policy across the Eurozone, or we are in uncharted territory, which carries huge risks for everybody.” So not a single rhyme in that sentence.
But then the different between the views of the Prime Minister and the President become clear with DC's next remark. "Just as in Britain we need to deal with the deficit and restore competitiveness, so the same is true of Europe...This is a debt crisis. And the deficits that caused those debts have to be dealt with," he said.
So you see the difference in emphasis.
This begs the question is there a lesson in history? Is it not the case that history tells us cut backs in times of recessions can lead to even bigger problems? The Treaty of Versailles punished Germany for its transgressions and the result was World War II. Don't try to punish Greece or Spain for their mistakes.
Between the wars the US had the New Deal, but Keynesians say that then President Roosevelt didn't go far enough. World War II was itself a kind of massive Keynesian stimulus by accident, and in the sense that the Great Depression ended and a golden era of growth followed, it seemed to have worked. But maybe the key to the post war recovery was the Marshall Plan.
Mark Twain once said: "History does not repeat itself, but it does rhyme." And if we want the global economy to dance a more upbeat rhythm, then bear the following in mind:
Spain's problem is not its banks, or its debt, it's something else entirely.
And so once again the credit ratings agencies stick the knife in.
This time it is Spanish banks that have received the treatment. Moody's has cut the credit ratings on 16 Spanish banks including Banco Santander and the giant Spanish company's UK subsidiary.
Meanwhile, another Spanish bank - Bankia - seems to be in danger of suffering a Northern Rock style moment, as rumours fly round that no less than 1bn worth of euros have been withdrawn from the bank.
And returning to credit ratings, Moody's also downgraded the rating on four Spanish regions: Catalonia, Murcia, Andalucia and Extremadura. Meanwhile, Fitch downgraded the credit rating for Greece. Last Monday Moody’s downgraded 26 Italian banks.
The latest move by Moody's and Fitch comes in the same week that talks gather pace on reducing the power of credit ratings agencies. According to a piece in the 'FT' earlier in the week, the big three - Fitch, Standard and Poor's and Moody's - have access to privileged information, making it all but impossible for new players to enter the market.
But the real problem with the credit agencies is that they don't consider the big picture. They look at individual risk but never consider systemic risk. That is why they missed sub-prime, and that is why some say they are getting it wrong again. They reduce the ratings when a country or bank does not reduce debt fast enough, but overlook the fact that their own actions lead to kind of global pressure for more austerity, which may be in danger of making things worse - and indeed more risky.
Right now, citizens in Greece and Spain are looking at their money in their bank accounts and thinking, I need to withdraw this fast, and put it into a bank abroad, ideally in Germany. This was always going to be the danger during the period building up to exit from the euro.
But, bear the following in mind.
The Austerians say you have to look at the problems not the symptom. Debt caused the crisis, therefore it makes no sense to run up more debts to try and fix it. Their argument may or may not be right, but for Spain this argument is patently wrong.
During the boom years the Spanish government debt was modest; far lower than in Germany and France.
Also, lest we forget, Spanish banks were supposed to be the prudent ones. During the banking crisis in the UK in late 2008 and early 2009, we were told we needed to learn a lesson from Spanish banks. You may recall that while Spanish banks, just like those in the UK, offered very high lending multiples on mortgages, they also maintained higher capital ratios. For a while the Spanish banking model seemed like the perfect model: the one the UK needed to adopt.
But the truth is that the only banking model that is safe is one that involves no lending at all. And of course such a model would be catastrophic for the wider economy.
One could dig a bit deeper and say the problem in Spain was the housing boom. And that is closer to the truth, but even that only tells a part of the story. Spain's problem is that a big part of its labour force only has experience in construction. It is similar in Ireland too. And since around half of Spain's younger people are unemployed, one assumes an awful lot of other potential Spanish workers have no work experience at all
Neither Spain nor Ireland can expect another construction boom for a very long time. It matters not what the level of demand is for Spanish and Irish products. For that matter, it may not matter that much if the two countries leave the euro and enjoy a lower exchange rate. What they need, along with Greece and Portugal, is massive investment and re-training of the work force. Long term growth can only come with growth in productivity. And right now there is no sign of this happening.
Regardless of whether the euro is allowed to break apart or not, in order to stop half of Europe falling into a depression possibly lasting decades, a massive amount of money needs to be pumped into these economies.
In short nothing less than a Marshal Plan circa 2012 will do.
Google throws a spanner in the world of Internet publishing
The thing about Google is its simplicity, at least simplicity from a user's point of view (its algorithms are far from simple). So you get this big white screen with a search box in the middle, a logo above, and a fairly unobtrusive menu at the top.
Then you type your key word and you get a list of links with small extracts.
For most of us, Google is just a signpost.
Google News is a bit more. After all you can scan the headlines and get a pretty good feel for what is going on in the world.
But now the company is planning a change that really will have a dramatic effect. The idea is for Google itself to display certain information on its screen in response to searches. Google has been talking about a "knowledge graph", and it will work like this. You type in your search, and in addition to links you will get snippets - for example, a passage from Wikipedia.
Publishers are worried. Won't that mean we will start using Google as an end in itself rather than as a means to access other web sites?
This has the makings of a huge controversy. Just remember, you read it here, or at least you may have read it here, first.
Companies in the news
Bull and bear: There was a certain amount of sitting on the fence among the tipsters today. With all that wider uncertainly, you can't blame them.
Questor in the 'Telegraph' took a look at National Grid. Recent profits were better than expected, but in the case of this company, it's "all hail the regulator". Will Ofgem let it up prices, and if so by how much? Questor says "hold" pending that decision.
Over at the 'Times', Tempus took a look at Marston's, - Pitcher and Piano chain, hundreds of tenanted pubs and Hobgoblin beer - and Invensys. Tempus likes the Marston's strategy of building new pubs over buying existing ones; it likes the company's valuation too, but apparently there are some wider problems at the moment in some place called the Eurozone, and mindful of that Tempus could only bring itself to say "hold".
Bull: But at least Tempus was a touch more positive on Invensys. It reckons a bid from the likes of Siemens or GE may be on the cards and so says "buy", but only if you are happy with taking some risk.
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