Anyway, back to the good news. The Students Loan Company have decided, so very charitably, that due to the falling interest rates that they should make immediate reductions to the paid interest rates on student loans in the UK. The rate is normally linked for the year to RPI (retail price index) but due to the aggressive (and necessary) monetary policy employed over the last 3 months, they have enacted a clause which stipulates that the rate can be no higher than 1% above base rate. So the rate has come down from 3.8% to 2.5% on student loans with effect from 9th Jan so we should see some benefit sneaking in soon (check the official page here if you’re in doubt). The other good thing is that if inflation continues to slide back from the 5% high and the economy continues to look pretty sick, there’s a good bet that Base Rate will be due another cut or two this year. Using Student Loan Company’s logic that the paid rate can’t be more than 1% above Base Rate, we should see paid interest rates on student loans fall further. Stranger things have happened than Base Rate sliding down to 0.5% by the end of 2009 thus meaning a paid interest rate of 1.5% on student loans, a whopping 2.3% less than the originally set level.

On that note, who’s up for another Jaeger Bomb?

“This town, is coming like a ghost town
All the clubs have been closed down
This place, is coming like a ghost town
Bands won’t play no more
too much fighting on the dance floor”

Lyrics there from Ghost Town by the Specials, which, if you replace ghost with eco, may prove an ominous prophecy for the future of Eco Towns. Listen to the track here:

[See post to listen to audio]

For a blast from the past, click here to listen to Harry J and the Allstars, Liquidator).

What would Captain Planet make of the proposed ‘Eco Towns’ in the UK? Well, I think he’d wouldn’t be too bothered because if he were real, he would now be getting epically BD with the growing hoards of eco-conscious ladies in the UK. Captain Planet would be getting laid on the scale of George Best in the 70s, as the environment has justifiably nudged to the forefront of the minds of those well-off enough to have a choice as to what car they drive, where they source their vegetables and an ability to buy bags that are anything but free plastic bags.

I have digressed from the outset, what I actually want to consider is the following statement from Hegel in the context of the ‘New Towns’ of the UK and the proposed Eco Towns;

“What experience and history teach is this-that people and governments never have learned anything from history, or acted on principles deduced from it”

Under very different circumstances (i.e the conclusion of the second World War) the government made moves to reconstruct the UK against a backdrop of a country with a changing economic composition (certain industries growing, some dying) and a people displaced through the attrition of the War. This led to a program of developing New Towns (predominantly in the South East) with stellar line-up including Bracknell, Basildon, Stevenage and Harlow. There was then a second and third wave of ‘New Towns’ (between the 60s and 70s) including places such as Milton Keynes, Skelmersdale and Northampton.

The fortunes of these New Towns have been as varied as the response you might get from the government  when questioned on their stance on Eco Towns. At the one end of the scale you have towns such as Skelmersdale, Welwyn Garden City and Basildon that either feature or were nominated for inclusion in The Idler’s infamous “Crap Towns” book. From personal experience, Skelmersdale is really quite a grim place, with roundabout after roundabout which has developed a grim and dark undertone which you might expect considering it lives in the shadow of Liverpool, which despite it’s undoubted importance to the UK, has struggled somewhat over the last 30 years to cope with the sector shifts in the UK economy. On the topic of Basildon, apparently the locals have taken to calling a certain part of town (which I assume is akin to some sort of Essex Sin City) as ‘Bas Vegas’ . This reminds me of my home town Torbay, which the locals have taken to calling Torbaydos (the similarities are negligable although Torbay does have some of the highest incidents of bankrupcy, teenage pregnancy and lowest wages in the UK).

On the other end of the scale you have Milton Keynes (much maligned by the masses but admired by many ‘in the know’ such as town planners, architects and business leaders) and Bracknell which have massively exceeded the population targets set for them and will no doubt go from strength to strength over the next 20 years.

The point of showing the diverse fortunes of the ‘New Towns’ in the context of Eco Towns and Hegels quote is that the government should heed these examples (and one of the main maxims of property); it is location, location, location which is important here. In the context of Eco Towns, it is actually “location, location, location” squared. Firstly, the government needs to be forward-looking in deciding where these eco-towns are going to be; what is the UK demographic going to look like in 20 years and how do Eco Towns fit in? Secondly, the government needs to be forward-looking in terms of industry; where Bracknell & Milton Keynes have succeeded is the fact that they are replaced to act as a alternative or secondary location for the London-centric service industry. What industries are a ‘good-fit’ with Eco Towns and where should they be located to benefit from this?

By their very nature, Eco Towns will be a major step in environmentally conscious living and if done properly, should allow the UK to demonstrate to the rest of World what is achievable. However, the challenge is really to make them economically sustainable i.e. to be desirable for people to live in and to be desirable to industries (of a suitable nature) to want to locate near.

Note, it’s actually Rollercoaster Tycoon on the Atari. But seriously, Theme Park was epic

Well, despite the sterling work of the people at the Bowl Court squat, vocal support from some lass called Tracey Emin and the ‘Save the Light’ campaign it appears that Hackney Council have given their support to the uber-scheme planned to “regenerate” the Bishopsgate Yard area of Shoreditch. Full details of what’s planned can be found here. Having read the document and taking into consideration the other developments that are planned (300 odd flats on Bethnal Green Road, Norton Folgate mixed-development scheme and Hearn Street/Plough Yard development), it’s clear that we live in unique times currently in Shoreditch. The whole aesthetic and vibe of the area will be completely replaced with something more akin to the nearer city fringe around Broadgate, Devonshire Square and the like.

Check out this image of the proposed sky line, quite scary me thinks! Can’t help but think going into a recession building loads of speculative office and residential units isn’t the brightest idea man has ever had. I wouldn’t be surprised if this ends up getting mothballed for a couple of years (say completion 2012) although will they try and throw it together in time for the Olympics? If so, expect a bodged effort.

See full image here at BD Online

Well, if you cast your mind back to November last year, a certain site, told you that the shit would hit the fan, so to speak, in this article.

As I clearly have a Nostrodamus-esque ability to predict the future, I continue to predict that Turbowolf will be massive, I love all their tracks, enjoy Bite Me Like a Dog here:

[See post to listen to audio]

Talking of Winners, Music and Hating to Say I Told You So…here’s a blast from the past via The Vines…

Mark my words, we are heading to a very, very severe economic downturn, the likes of which most living generations won’t have experienced. The macroeconomic picture is so bleak that it’s almost like Nostrodamus’ worst ever nightmare. If you’ve got access to an economics textbook, I’d thumb to the case study on Japan’s stagflation, because stagflation is about to be the buzzword of the next 2 years in the UK and US. Negligible/no growth combined with massive inflation caused by the sterling and dollar weakening massively, thus reducing purchasing power internationally. Don’t expect producers to have the consumers back either, they will be passing on the increased cost of raw materials like pass-the-parcel at a nursery school. Also, have fun trying to getting more cash money from employers; low growth means pay cuts and redundancies, not more cash for you. Even if they did pass out more cash, it’d just be a start of a wage-cost inflation spiral.

This problem will be compounded by the “flight to quality” which now appears to include commodities, which will be self-defeating for investors; as they hoard oil, it will bring the economies they reside in down around their eyes. Asset bubbles are popping up quicker than out of a 5 year old’s bubble machine.
The only saving grace for the UK and US economy is that the infection is likely to spread to the whole World through this beautiful globally-entwined economy we have. The developing World will struggle to keep pace with production because the demand created by the rest of the World will drop off as imports will become massively overpriced vis-a-vis domestic produce due to the weakening currency.I predict that Middle Eastern and Far East sovereign funds will become big news in Q3 and Q4 as they use their petro-dollars to take advantage of weak equity markets to make astonishing purchases of Western household names.

Protip: stay away from anything in the luxury or tourist market because that shit is going to get hammered. The only people that will be unaffected will be those that are ‘recession neutral’ i.e. are too rich to give a fuck!

Europe will be by no means unaffected, I have real concerns for the housebuilding and construction driven Spanish economy and as for emerging markets, as liquidity grinds to a halt and investment yield in developed markets suddenly become on parity with developing markets, investor demand will suffer paralysis or “fly back to quality”.

For that apple-of-the-eye, the UK residential market, as I’ve said for months, we’re in for a hard, hard fall. As heavily reported (and in no uncertain terms suggested previously by I) lenders are closing up shop to high leverage mortgages and mortgages are becoming more expensive. There’s two ticking timebombs here; the buy-to-let market and those on floating rates that will expire. With new mortgages dropping significantly, repossessions, property funds having to fire sale assets and speculative new builds not selling, I predict a 30% drop in house values over the next 2 years, with the only caveat that quality will maintain it’s value (give or take 10%).

The problem is a liquidity one and a confidence one; once fear hits, as it has, then it’s the beginning of the end. I’ll leave you with this video from Cramer. Cramer is a renown US TV financial markets commentator (and an epically big deal in US financial circles) and made this comment back in August. Look at the fire in this man’s opinion, he knew what was going on, he knew exactly what was required (how many times has the discount rate been cut since? 2.5% now? O RLY?)…he basically predicted Bear Stearns going for the equivalent of Big Ben being sold for the price of a Rolex.

Now it’s Budget time! Not quite the same ring.

I think this Budget is an interesting one in that there’s quite a few new concepts flying around, mostly in the ‘green’ policy space, which I will go on to discuss imminently.

My one immediate concern is there’s lots of posturing in there i.e. ” Goverment seeking views on how long-term fixed mortgages can help first time buyers to get on the housing ladder” – well how long does it take to seek views? They’ve had since last year’s budget to speak to people in full knowledge of the fact that today the electorate would want cohesive plans for the UK economy. I could have given them a heads-up in five minutes if they’d asked me…The fact is that long-term fixed mortgages (i.e. 40/50 years) would assist first-time buyers immensely. By having debt amortising over longer periods, it reduces the repayments and by fixing the rate, it reduces the exposure of the borrower to interest rate risk. If you combined this with robust analysis of people’s income and provided sensible levels of leverage (salary multiples), we wouldn’t see such volatility and uncertainty around housing markets. I for one believe that housing is the one asset class we want as little volatility in as possible in because the human impacts of wild variations are so immediate. With all the whizzy things we can do with interest rate derivatives now, surely there’s a market for these fixed interest inflows? If these products were introduced into the market with robust controls (leverage and income levels), I could see them breathing life into the savaged asset-backed securities market in the long-term as they would be fairly ideal for securisation.

Again, on this topic of posturing over substance in the context of housing, we are informed that the government has found public sector sites for 70,000 new homes this year…so what? Where are the tangibles plans, that is surely what a budget is supposed to do? The government has known of the requirement to build new homes for nearly 5 years (here’s John Prescott’s plans for new homes, written in 2003), why can’t they deliver facts on an issue that is close to all of our hearts?

Biometric technology to be implemented at Heathrow and other airports to “speed up the time taken to get through immigration control“. I can’t help but think that the Telegraph hasn’t done justice to that one, it gives the impression that the new technology will actually help immigrants get in the country quicker – talk about pandering to the immigration nutters! I think however you spin this one, it’s simply another Orwellian control.

Thanks to About.com for this one.

I will reserve my pat on the back for Mr Darling until I see the details of the non-dom tax, but fair play to him for continuing with the plan to put some structure in place. Despite the grumblings saying that £30k per non-dom will lead to a flight to other cities such as Frankfurt, I say it has to logically be done. £30k may be a token figure but to the top non-doms of this World, it’s chicken feed and if they are rational economic actors, the upheaval of leaving London and associated time and actual costs would be higher than £30k (the challenge for the government is working out the optimal level here as I do grant that to tax beyond the upheaval cost and monetarised sentiment value of living in London will result in a flight from London leaving the City’s economy in tatters).

Another novel concept in the budget was the creation of a £12.5m ‘capital fund’ to assist woman entrepreneurs. Now I’ve seen some capital funds in my time, but £12.5m isn’t what I would call a capital fund. That is what I would call a very small ‘micro-finance’ fund. Whilst a £12.5m micro-finance fund in the developing World could have a considerable positive impact due to the lower cost of living and lower base incomes of borrowers and lack of access to conventional banking facilities, £12.5m in the current costly UK economy, between, for example, 1000 women entrepreneurs is a laughable £12,500. Show me a sustainable business plan that you can set up with £12,500 (with no other capital) that will create worthwhile returns for the entrepreneur over more than 1 year and I’ll call Mr Darling a genius. £12.5m really is an incredibly token amount, it’s almost derisory. If it’s a grant, you’d be better of getting it and whacking it on red at the roulette table than trying to work that amount of capital through a start-up.

Plastic bags, the great enemy of the environment (check out our article questioning the focus on plastic bags – which has since been supported by this Times article) are to be subject to a tax in 2009. It’ll be interesting to see where this tax is levied. I firmly believe the tax should be levied on the producers of the bags and/or the importers of the bags, not the consumer. In terms of driving a behavioural change, if the tax was levied at consumer level, i.e. it’ll cost you 2p per plastic bag, I have a feeling that rational consumers will price the inconvenience of having to carry round alternative bags higher than 2p, therefore will pay the 2p tax were required. Whilst this is all good from the government’s tax revenue perspective (let’s call it making money for old rope i.e. they will do nothing but get income), I don’t think it’ll drive the positive behavourial changes from an environmental perspective…and that’s what the aim is…right?Or is it!?

If you read the comments on any of the popular news sources, they are inundated with Joe Bloggs from Cornwall saying that it’s all one big environmental conspiracy! I read these comments with interest as in terms of economics, there’s some interesting game theory and public good discussions to be had in terms of the environment. The layman on the street says “why should I change my behaviours whilst China/US (insert perceived big polluters here) is still giving it the gusto!?”. Now this problem is akin to the ‘freerider’ problem of public goods in that the UK can undertake as many environmental initatives as it likes but the risk remains that another country can carry on regardless and thus we, the UK consumer, has ‘lost out’ vis-a-vis the consumers in said country without making a substantial difference to the overall environmental wellbeing of the World.

There is a name for people who espouse this view of “they aren’t doing it so why should we?”, they are called morons. You can decide right now whether you are a moron or not by answering the simple question; Should we continue current levels of polluting the Earth because other countries are? If you answered yes, then please attempt to navigate away from the page and kindly instruct your fist to punch your face repeatedly.

One of the things that morons are unable to do is acknowledge the events of history. We as a nation continued unfettered through the industrial age and imperialistic escapades without as much as a finger wagging with regards to our impacts on the environment. This was probably due to our inability to measure environmental impacts at the time or perhaps because everyone was too busy actually doing stuff. Now, one might argue that when you take our historic impact as a nation into consideration, we have “had our fill” of environmental damage and as an advanced, democratic nation should now be looking to act as a bastion of best practice on the topic of environmentalism. It is this point that I stand by; we as a nation are so happy to be down-trodden, we just love to see the negative in everything. We should be looking at the championing our government does in terms of the environment and embrace it. We are very much trying to occupy a place in the leading pack on environmental issues, and this holistic view should be applauded. If any of you are still in doubt as to whether a tough environmental stance (wise) vs unfettered consumerism (morons) is the place to be, check out this comment from the Times website on today’s budget:

What about Tata cars in Indra!
A car for evrryone under $1000.
I bet they are Green!!!
What about the Smog in Beiging?
it is so stupid to tax us for other country’s Failures!!
David, Dunstable, UK

I didn’t even know they had cars in Dunstable, but anyway, I digress. The ideas floating around on the environment are;

• fiddling with the pricing system for greener cars
• adjusting our carbon target
• producing a yearly “carbon budget”
• funding for the “Green Home Service” (£26m) to reduce fuel bills

On a final note, I can’t get too excited about some of the spending initiatives but will leave you with one final bit of analysis to ponder:

• £12.5m women’s entrepreneur fund
• £60m to fill “skills gap” in the economy
• £200m to be spent on improving schools
• £750m this year and £950m next year getting children out of poverty (estimated nearly 4m children living in poverty in the UK – estimates suggest £4bn extra spending required a year to eleviate the problem)
• TOTAL on these four areas: £1.972bn

vs

• £2bn on defence

I feel like screaming at the screen in a futile attempt to stop the inevitable. In said horror film it is the gruesome death of the cannon fodder cheerleader, in the real World right now it’s the even more gruesome looking recession that we’re running straight into.

image courtesy of nymag.com

As an economist, I’m quite a sadist when it comes to the economic cycle. I hate stability, it’s all about volatility – that’s when you find out who knows what(and who was just lucky and could talk a good game) and what variables influences what and to what extent. For me, trying to flatten the boom-bust cycle is the Sisyphusian challenge of politicians.

“If I can just keep this economy rolling, they may not notice that I’m really quite a stalinistic dullard”

What I find so beautiful about the free-market is the fact that it’s a moving feast that can change quicker than you can draw a supply and demand diagram. The other thing that is so intriguing about the free-market is how it can so quickly be gripped by fear (and the dynamic between the two points). To quote loosely Michael Lewis’ Liar’s Poker “if you don’t know who the loser is in a transaction, then it’s probably you”. It is this very self doubt that has had financial markets crippled for the last 6 months – as Bank’s parcelled up toxic waste American Real Estate into complex AAA-rated products they lost a certain amount of trust for each other – whilst they have all been in the game of securisation, it was now a case of who had ended up with all the shit in this multi-billion game of pass the parcel.

Fear has a crippling effect on any market and what started in the sub-prime property World spread to securitisation which has now pretty much closed down the IPO and secondary loan markets – trying to syndicate anything other than cast-iron corporates is like trying to sell Christmas trees on Boxing Day.

Now the investors have it. They are pulling out of investment funds in their droves (crippling property funds and hedge funds in equal measure) and staying up at night worrying about the bloodbath that is the stock markets, not to mention the likely value slide the roof they’re currently staring at is going to take. My indicator for how frenzied the markets are is look at Gold and Bond prices – they are the relative safe-havens that people run to when they are gripped by fear.

There’s more…in the UK, retailers are announcing some horrendous figures for Q4, a quarter which has a disproportionate impact on their yearly performance – which shows that the consumer is starting to feel the burn, and rightly so too! The consumer has had it easy for the last couple of years – spiraling house prices and cheap and easy credit. Now the consumer is showing some signs of floundering under the effect of increased interest rates (their impact is slightly delayed) and the drying up of easy and cheap credit. It’s time for downgrading and battening down the hatches, but my money is on the UK consumer being stubborn as a mule and thus leading to a record level of bankruptcies and house repossessions in 2008.

Then there’s inflation…I still think that there’s something wrong with the way we measure inflation, I just don’t think that it really captures what’s going on (maybe it’s just London that’s seems to be facing weekly price hikes on certain goods). I’m pretty sure the Tesco near me is printing new price tags every weekend. Anyone who’s an EDF customer will have just got a weasel of a letter saying that they are putting prices up. Final thing on inflation, I’ve been watching property rents via Gumtree over the last 9 months and they have gone insane. This is because buy-to-let landlords are passing on their increased costs of debt to the tenants, tenants will thus have less disposable income and so the downward cycle goes. Due to the weakening corporate, retail and financial services industry performance, increased wage demands are going to fall on deaf ears and redundancies are likely to become de rigeur. The impacts on charity in a downturn have already been touched upon in an article on this website by Chairman Meow.

I’ve just heard a little bit of news from out in the field from Kingmug (he’s catching some waves down in Devon) and he says that people are going fucking crazy down there because they are so scared about property prices. He says it’s almost like a scene out of an apocalyptic 80s movie – albeit I find it hard to believe that this panic has spread to the surfing community, it’s not really in-keeping with the vibe.

My advice, save the pennies as it’s going to be a bumpy old ride. You could do what I’m gonna do and just move to China. That’s the beauty of globalisation, if one market gets fucked up, you can just move to another.

Image courtesy of CrappyGraphs.com

One of the big stories of the week has been the decision by the US Federal Reserve, The Bank of England, The European Central Bank, The Central Bank of Switzerland and the The Central Bank of Canada to inject around £110 billion into the market to ease concerns.

Why are they doing this? The simple fact is that borrowing in the inter-bank market has become too expensive and is stalling the cogs of the financial markets. The impacts of high libor rates can be seen in various areas; the doubts over the operating models of Northern Rock, Bradford & Bingley and Alliance & Leicester (because their operating model is reliant on borrowing short-term money on the inter-bank market); the number of large bond issues, syndicated loans and IPOs that have been pulled (these are all ways in which companies raise large sums of money – i.e. there hasn’t been the liquidity or inclination to execute some of these deals) and the general decline in the value of Bank stocks (although this is also in no small measure due to worries over bad debts/asset values and worsening economic conditions).

Don’t get me wrong, liquidity needs to be pumped into the market to allow the system to work, it’s not hurting the man on the street as some misguided commentaries have stated, if anything, making liquidity available for bank’s to lend to top corporates in all walks of life actually assists all those shareholders of said corporates, their employees and ultimately those that enjoy their products/services.

The more controversial point I want to make is around liquidity and in fact the global shift in liquidity. Let’s think what’s happened over the last 5 years…China and emerging markets have performed very strongly, attracting liquidity into their central coffers as the developed world flocks to purchase their wares. Commodity-rich countries especially those swimming in oil have benefited from the heady heights of their respective commodity prices.

So emerging markets and commodity-rich countries are suddenly bulging with liquidity, and you know what? They want a return. They want a yield better than US treasury bonds and have become more adventurous in achieving this return. See examples such as The Chinese Development Bank buying a share in Barclays and the aborted bid by the Qatar Investment Fund , Delta Two for Sainsburys.

The global balance of liquidity has tipped and now I can’t help but think that putting the liquidity into the market for the developed economies banks is protecting both the banks (as the distributors of liquidity) and the corporates (as a demander of liquidity). Ultimately, if liquidity continued to freeze up (frankly caused by its own over-exuberance) then more large debt placements would go on hold, banks would continue to feel the capital squeeze (thus not be able to do as much business) and the FTSE as a whole would be materially and negatively impacted (although some cash-generative corporate players would outperform the rest because they are ‘teflon’ in liquidity problems).

So…shares going down, not necessarily because of fundamentals but just because the market mechanism has fucked up and prevented the flow of cash. Some shares will go down beyond their fair value and suddenly holding these shares brings very reasonable returns indeed. In fact, if I’m looking at an underpriced Bank that’s turning £5bn in profit each year and I’m a petro-dollar rich state-backed investment fund…fuck it, I’ll have the lot…

During this boom something weird happened, we all grew a conscience.

Walk with me down memory lane, cast your mind back to 2005 – 2006…

We’re all wearing bands on our wrists marking us as a benevolent tribe. Inviting our friends round to feast on fair trade products whilst discussing the hybrid car we are thinking about purchasing. We stop chatting about becoming carbon neutral only to watch Live 8 on the TV. We are staying awake at night worrying about Global Warming. We shake our heads at those not using a ‘bag for life’ or for the super chav/budding environmentalists those “I’m not a plastic bag” bags.

As an aside, imagine how ridiculous the World would be if everything was labelled with what it isn’t rather than what it is. For example on the front of buses “I am not the 214,271,8,242 etc ad nausem”.

Now it’s easy to be philantrophic when you’re rich, look at the huge amounts that Bill Gates and Warren Buffett can give away without batting an eyelid. 2005-2006 in the UK was a period when the population was feeling relatively wealthy (low inflation, low interest rates, increasing property values) and feeling more obliged to spread the wealth. In fact, over £10.9 billion was donated in total during this period.

You may have guessed but times they are a-changing, a few of the wheels on the economic bandwagon are coming loose and it’s not going to be about if the wheels come off, but whether they come off just as we roll into a Little Chef (and thus enjoy a stodgy and overpriced soft landing) or just as we’re on a hairpin (and in the words of the pikeys in Snatch, get proper fucked).

Now either way, with increasing commodity prices (i.e. higher household expenditure), the impact of the interest rate rises, slowing salary increases and other squeezes on household disposable income our charitable donations are likely to tame somewhat as individuals.

I predicted the biggest faller will be Fair Trade goods. Already, Fair Trade Coffee trades far in advance of the market rate (the whole point I guess) but this distorts the free market. There is surely an element of income elasticity of demand for Fair Trade Coffee (and Fair Trade products in general) to consider in a downturn, i.e. when income goes down, demand for these goods goes down as consumers switch to alternatives that are at market price. SO I guess the point that I’m getting at is that godliness comes at a price and that when the economy turns, I expect people to crawl back to their market equilibrium coffee. Check out this site on coffee pricing, it’s pretty interesting.

The interesting one is alternative-energy and self-sufficiency in a downturn. Whilst I expect activity in this market to reduce, the wise person should actually wait for the market to go down and then invest in kick-ass self-sufficiency to opt out of spirling energy costs…thinking about it.