It is Obvious

Chris Rick has got altogether too much to say

Archive for November, 2010

Spare us the price of a cuppa guv.

Posted by chrisrick13 on November 30, 2010

It is obvious: the workings of government are mysterious.

After the tsunami in Indonesia my wife hopped on a plane and did relief work for a short time.  She obviously got a taste for it as, a year later, she announced she was spending 3 months abroad doing ‘good works’.  She would not  be paid while she did this.  After I got out of intensive care I nearly got my revenge.  The agency organising her trip rang up and said that as she was a teacher did she want to teach or did she want to do something completely different.  I answered the phone so assured them that she wanted to dig ditches and clear sewers.  Alas, they rang back to confirm and she answered, so she went teaching.

At least she taught during the first period when she was in the North.  When she went South she was touring the likely school where she would work and saw a teacher beating a child.  She stormed into the classroom took the stick off him and broke it.  The school said she could still work there if she apologised to the teacher.  She replied that she would do so provided the teacher apologised to the child.   Consequently she spent the time down south riding around on the back of a moped giving injections at clinics and health advice to young mothers.

The UK foreign aid budget is protected from cuts.  It stands at ₤8.4bn.  Of that, ₤1bn goes to a country with an economic growth rate of over 8%, nuclear weapons, and a space programme.  It is the same country that my wife worked in: India.


It is obvious: the workings of government are mysterious and corrupt.


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15 minutes of fame

Posted by chrisrick13 on November 26, 2010

It is obvious: our attention spans are short.

How long ago was it that all we could think about was the UK cuts.  An ailing economy heading for disaster unless the deficit was cut.  That is still true, but David Cameron has got the knife out and started.

Why is the UK no longer the centre of attention?  The answer is BIG PIES.

On that same subject, have you looked at the French economy?  Makes the UK position look positively healthy.  Do they get away with it because they are in the Euro and in the right half of the Euro?

It is obvious: our attention spans are short.  Don’t worry, just like the goldfish, we’ll swim around the bowl and  be back in a minute.

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Negotiate (1)

Posted by chrisrick13 on November 26, 2010

It is obvious: negotiating is easy.

I am not a good negotiator.  I used to be a very poor one.  The difference is that I have studied it quite a lot.  I can now recognise when tricks are being run against me and know the best counter.  I even know how to start in the best position.  I know a lot of the things not to do…but still often do them.  My biggest regret about my 21 years of education is that not once did anyone teach me anything about negotiating…something we do almost all of our lives.

I have been putting my thoughts together and this is the first of, possibly, a number of entries on the subject.

The first, most important and easiest is possibly the simplest: never accept a first offer.  You will be doing both sides a favour.  If you accept, the other party will forever be kicking themselves that they did not start higher.  When the deal has happened you will always be wondering if you could have got it for less.  You will save both of you years of anguish by not accepting that first offer even if the ultimate price is that first price.

I always do principled negotiating and do not lie or pull any of the nasty tricks I will tell you about.  So when I am offered a deal I always suck in my breath and put a grave expression on my face.  At the very least I know I am doing us both a favour even if I think this the best deal ever.

You can put a counter offer in, but that then limits the negotiation.  Best is to simply say something like: “I don’t think I could go that high”.  If the other party is a good negotiator he will have mechanisms to limit the downward move, so let him employ them not you.

The big temptation if it is a good deal is to accept so that they won’t walk away.  Even if they say no to your counter offer you can always pull them back and go for the original price.  Suck that breath in.

As important as this is, it is not the first act of a negotiation.  The next article covers the starting point and the all important BATNA.

It is obvious: negotiating is easy to do poorly.

Alas:  Copyright © Chris Rick 2010

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I’m confused

Posted by chrisrick13 on November 25, 2010

It is obvious: things are not obvious.

Angela Merkel yesterday called for Irish bond holders to take a hair-cut.  This is simply the issuer of, say, a $100 bond indicating that they are going to pay it off at maturity at $50 or even not pay it off at all, or stop paying the interest (which takes its value to zero).  A lot of $100 bonds are already trading at that reduced price which factors in no interest payments or the likelihood of no redemption at maturity .  You can buy one and if it is paying 2% interest on the bond then you are getting a 4% yield on your money.  When the bond matures you will double your money.  However the reason that it is only worth $50 is that there is a good chance that the bond will not be repaid or only, say, $25 paid.  That is what investing in bonds is all about.  There are many bond holders who have bonds paying poor (or even good) returns that are trading at half their maturity value.  They are in the basket of keep-to-maturity bonds.  Suffer the 50% loss of interest for a number of years rather than the 50% loss of capital today.  Ms Merkel takes the view that with bond repayment being guaranteed by the various bailout mechansisms there are huge returns on the investments with no risk.  she wants bond investors to  be exposed to the risk that their interest  charges are indicating.

Of course the various bailout plans are aimed at reducing the cost of borrowing so that countries in trouble (Iceland, Greece, Ireland, Portugal, Spain, Italy, Belgium) can afford their debt repayments, or at least persuade traders in their debt that they can.  Ms Merkel’s words caused bond yields (interest rates) to rise and cancel out any drops caused by bailout announcements (and action).  Private bond holders have brought these hold-to-maturity bonds out the basket and sold them…there is no reason not to.

So why is she sabotaging the efforts of the ECB and the EU in general?  Half a dozen of her words were worth several hundred billion.  The missing information might be that her announcement was for German ears.  Germany will be funding a lot of the support for the sick countries of Europe.  That means German taxpayers or, equally accurately described, German voters will be paying.  There is a strong move in Germany that they are prepared to keep paying out provided others are also seen to take the pain.

This is another example of the contradictions that beset European economics and European governance.  Can the Eu and the Euro survive?  Simply – no.

It is obvious: things are not obvious but they can be certain.

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Here we go

Posted by chrisrick13 on November 24, 2010

It is obvious: I am too pessimistic.
Today I was determined to write an entry that focused on good things.  I had a theme about the speed of information flows.  Not that there was any more news today than a hundred years ago, just that the news of it got around quicker.  That means there is so much information ‘thrown’ at us (damn those quotes) that we do not have good ways of processing it all.  Hence we tend to remember noteworthy things and those are almost always, inevitably, bad things.

I have abandoned that, nearly.  Today is a day of moment.  It might be seen as the day that the world economic order changed, though that will not be recognised for some time.  Change is unsettling and produces winners and losers but it is not necessarily bad.  I have to admit that I have a degree of confidence that the people who will manage the change will find a way to make the result as bad as possible as it seems they only try to keep things as they are rather than managing a change.

Illogical actions are not the preserve of those in power.  For example there is a general strike in Portugal today.  When your economy is in a mess it makes obvious sense to further damage it with a strike.  In Ireland it looks likely that two minor political parties will bring down the government and prevent a budget…on which is predicated the EU funding.  However that might well be the right thing to do if change is wanted.  (I wonder why Gerry Adams has run south to become an Irish MP?)  History dictates that the minor parties will not profit from the action.

There is now much talk of markets attacking currencies and bonds.  This is a media term.  How does a market attack anything?  What happens is that a lot of people with money to spend, or, more importantly, money to protect, look at the facts and decide to do the thing with it that will be best for them and their interests.  They make dispassionate and logical decisions and as everyone has the same information they tend to act in the same way.  Those who are not so sure have to follow as the actions become self-fulfilling.

Where do they get the money from?  My pension fund for a start…and yours.  The cash my electricity company has lying around, that it needs, to keep the business running.  Same for my council and the local NHS trust.  It is my money being used in my own best interest to take advantage of political decisions that are not the best, guiding the actions of the country I live in that are supposedly in my own best interest.  King Canute had it right.
It is obvious: I am too pessimistic, alas, only some of the time.

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Hold your breath

Posted by chrisrick13 on November 23, 2010

It is obvious: the triggers are there.

I proposed my trigger theory some time ago.  Simply it says that all the steady state models are vulnerable to triggers.  These are simple events, often small and with no seeming relevance, that trigger chaotic change.  I am focussed on economics and politics but they probably apply everywhere.  If I am right there is no use in it as the triggers are not predictable.

I wonder if the Irish bailout is a trigger.  It differs from other triggers I can think of: it is large, it is relevant, everyone is aware of it.

The bailout is just that.  It does not address fixing the problem.  It just kicks the can down the road hoping for something to come along and provide a way out.  (Don’t forget my 5 questions.)  But there is a danger that the budget will not be passed into law.  The likely winners of the coming election have said they will not be bound by any agreement with the IMF/EU anyway.

I have now picked up in the press a reporting of a growing movement for a new order in Ireland.  On the model of France, a second republic.

Suppose that there is no bailout in Ireland and it crashes.  I use the word ‘crash’ as I cannot accurately describe what might happen if its banks fail.  Certainly ‘crash’ is an appropriate image.

What happens next?  It starts small but happens quickly.  The only people well equipped to handle it are the beggars on the streets in Mumbai as they are already where we will all be going.

I’ve woken up.  It was just a nightmare.  All those clever people in charge of things will never let it happen.  The Irish are just playing a strong negotiating hand.

It is obvious: the triggers are there and one will get pulled sooner or later.

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Posted by chrisrick13 on November 21, 2010

It is obvious: I’m a baby boomer.

During this coming year 600,000 baby boomers will retire.  They are 65.  Next year 850,000 will retire.  That is what I read.  I think they should have said that 600,000 will start receiving state pension.  No.  I don’t think that is right either.  What about all the women.  Certainly many of the baby boomers I know have already retired so they fall into that waiting for state pension group.  Anyway you look at it though, there are a lot of people not going to be working and sucking the state dry soon.  For the next many years there are large numbers of them joining in at a similar rate.  I tell you nothing new.

I’m quite happy about this.  I opted to be a leach on the state at the front end of my career and didn’t really have a job worthy of the name until I was 28.  The plan was to work until I dropped, but hopefully do less of it in my declining years.  Work is not easy to get nowadays.  I have been a hired-gun for a long time and mercenaries are not in big demand at the moment.  However if 2.5 million retire over the next 3 years and I don’t, there might be one or two slots opening up for me.

But will that help?  Rates go up to try and get the reducing numbers of people to work for who needs them most.  After not very long though, the complete job goes somewhere else.  A lot of jobs just don’t even start.  That is not too bad though, because there is a lot of money to be made from last-man-standing.  (For those in IT: anyone know COBOL?)

Very myopic of me.  What about the non-boomers who are poorly served by their education?  At least the baby-boomers who looked on their skills with contempt are no longer making the hiring decisions.  Do these people have the skills to replace the boomers?  Do they realise they are supporting us boomers in retirement?  Do they realise that they are the ones who will have to work harder to kill the deficit?  Do they realise they are the ones who will have to chip away at the debt?  Do they realise that they are being saddled with a £20,000 albatross for their education that we did not have?  Do they realise that they won’t even be able to vote for what they want because the boomers outnumber them…at least for a few years.

I wonder what they will do?

It is obvious: I’m a baby boomer, but I might just try and keep that secret…or buy a shotgun.

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Get on the snake

Posted by chrisrick13 on November 21, 2010

It is obvious: numbers don’t lie.

I have just heard that the banks don’t expect to lend much on mortgages next year.  Good.

They are making it very difficult for first time buyers to ‘get on the ladder’.  I think the phrase should be: getting on the snake.

I was a first time buyer and for many, many years struggled with a large mortgage.  I lived in a nice house…but I was so busy working that I rarely spent any time in it.  There was a better way.

Now the banks are doing what they have been told to do which is to be prudent with their lending.  Truth is I don’t think they needed telling this time around.

There are so many first time buyers desperately trying to get on the housing snake and one day soon they will be glad they did not.  But if they unluckily manage it then the banks are ensuring two things.  First, if they default, there will be enough equity in the house for the bank to recover all its money.  It is not some plot to deny first time buyers a house, merely an appropriate hedge against house prices going down.  Isn’t it a little worrying that the hedge is so large?  Secondly they are trying to make sure that the family is earning enough that their chances of defaulting are small when something adverse happens.  Why are they concerned about that?  The banks are doing this in their own interest only.

Had they done this 10 years ago then we would not be where we are now.  Not that bank lending has anything to do with government over-spending.

The banks have done a third thing that will help.  They have put huge loadings on the base rate when working out their mortgage rate.  So that now a mortgage costs 0.5% (base rate) plus maybe 4.5%.  This is iniquitous really, but at least the base rate has to go up by 5% before the mortgage repayments double.  If the bank has calculated a ratio where they think the family can still pay off the mortgage when the bank rate goes up by 5% then everyone will be happy.  Base rate will go up, but not by 5% for a couple of years yet.  A lot of people will not now lose everything, at least for a while.

The bad thing that I see is that parents are being lured into paying the deposit.  This I see purely as a way of getting people in my generation who cashed in on big increases in house prices to pay some money back.

So who is losing out?  Not the first-time buyer.  I’ll re-explain that in a minute.  The losers are you and me.  By that I mean people of my sort of age in a nice house with virtually no mortgage.  With no first time suckers (ooops buyers) our houses are worth very little.

If you borrow £100,000 to buy a house you pay £5,000 in interest each year.  You will also pay for repairs and maintenance, insurance…another £5,000 each year.  On an average house that is nearly £20,000 a year.  Rent a place instead.  It will be less than £20,000 a  year.  In a year where will the house price be?  Don’t forget that just to stay still it will have to be worth £105,000.  So what do you think its value will be?  You have a job today.  Will you have one next year?  What could you do with that £20,000 deposit you need to get an average house?  What will you do with the extra £5,000 in your pocket from renting?  You will have somewhere to live and £25,000 more in your pocket than if you bought, plus interest on your £20,000.  What you won’t have is a leveraged investment going down in value.

It is obvious: numbers don’t lie they sometimes just don’t shout loud enough.

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Local hero (3)

Posted by chrisrick13 on November 19, 2010

It is obvious: there are a lot of them out there.

I came across this today:

It is compelling reading from Morgan Kelly, a professor of economics who, according to commentators on the article, has been hitting the nail on the head over recent years.  At the end of reading, everywhere around me seemed very quiet and still.

No two countries are the same, but I cannot see how this will not apply to other countries as well.

This means we are about to lose our 5th biggest trading partner.  Someone has to stop Osbourne throwing billions at Ireland.

I could perhaps write more on my considered view but it seems pointless after reading the article.

It is obvious: there are a lot of them out there.  You just need to look.

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Where has all the money gone?

Posted by chrisrick13 on November 19, 2010

It is obvious: I know nothing about economics.

This is a recurring theme with me:  where has all the money gone?

I understand that the problem with the banks is that they can lend much more than they have on deposit.  I don’t understand that mechanism but it works.  The banks are required to hold some money so that they can pay the few people who want their money back.  They hold as little as possible to maximise profit and lend each pound out as many times as possible to maximise profit.  This is an unstable mechanism that will fail from time to time.

So a bank might need funds to unwind the loans to pay back the people who want their cash.  this is what the BoE has done in the past and charges high rates to lend this money to a bank. So the taxpayer (effectively) puts money into a bank.  The system stabilises and after time the money is returned.  There may be small losses or if the bank recovers then small profits.

Where do the losses come from?

As I understand it.  The banks have lent a lot of money secured against assets.  The borrowers have said they no longer want to be part of that arrangement and turned in the assets as they stopped servicing the loans.  The assets the banks now own are worth a fraction of the loan amount…which is why the borrower stopped paying in the first place.  There is the loss.

Could this all be accounted for by the reduction in property values in the US?  Spain, Ireland and others can be ignored as they are so small.  Even in the UK where the borrower will be chased for ever to repay the loan there is no money coming back as the borrowers have no other assets with which to pay the money owned.

If there are a million houses in the US where the banks have lost $100,000 on each that is still only $100bn.  It isn’t enough.  What else have the banks lost the money on?

But this is a zero sum game.  The bank has lost money to someone who borrowed it, bought a house and walked away when it halved in value.  Someone got the money and…put it in the bank or spent it.  If someone lost then someone gained. If these gainers have spent the money then they have helped keep the global economy growing.  If they have run out or stopped spending then it is going to be a mighty long time before the global economy starts expanding.

But the question remains: where has the money gone?

It is obvious: I know nothing about economics…you can fill in the rest.

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