Saturday, 30 January 2010

Why I'm with Obama

The fact that President Obama’s recent statement of intent as regards splitting out ordinary banking activities from the more speculative ‘off piste’ forays that have brought us all so much trouble caused a shock to the US stock market should be no surprise. Banks, heavily damaged though they are, remain truly enormous and still represent a very significant chunk of the Dow Jones. However, I am sure that the correction that we saw last week will be the usual short lived demonstration of annoyance and not much more.

Much more significant in the long run will be the much better than expected US GDP figures, which showed that the US economy grew by an annualised 5.7% in the last quarter of 2009.

When contrasted with our ‘narrow squeak’ of +0.1% estimated growth for the same period, we begin to see who might have been “best placed to deal with a recession”.

I’m with Obama all the way, and I am not referring to his campaign slogan of just over a year ago. I believe that it is imperative that banking practices are made more transparent for the public and investors alike if we are to be expected once more to engage with these organisations going forward. Where I differ with many is that I feel that the more experimental and innovative trading activities are also to be welcomed, just not mixed in with the same organisations whom we expect to be clearing our pay cheques every month.

I fear that the President’s honourable aims may be thwarted by the many vested interests, which would prefer that the institutions in question remain vast, monolithic structures that are beyond comprehension and control. Indeed, the pronouncement may even have been evidence of a certain degree of cynicism on Obama’s part, designed as a bargaining tool that can later be withdrawn to ease his Healthcare Bill into reality. If so, it might still have served as valuable a purpose but I would love to see it succeed.

One senses that despite what we all might have felt about him during his election campaign, there is more intent about Obama and less playing to the galleries than is the case with our incumbents. I was somewhat puzzled quite why Lord Myners, the man who approved Sir Fred Goodwin’s pension deal at RBS, despite warnings at the time that it would be “enormous”, followed Obama’s announcement quickly with a statement that he would not be pursuing the same strategy for the UK. To date I have seen no plausible rationale for this, which leaves me to suspect that it is either merely another symptom of the pre-election paralysis that stops us attending to all the other pressing economic issues or is yet more evidence of an opportunity missed as a result of key figures not being ‘up to the job’.

There were many factors that caused our present economic malaise, too many in fact to list here. We were unfortunate that a number of these happened to coincide, turning what could have been a simple correction of cycle into a vicious collapse. That we stand broken as a result is undisputed. The crippling level of unemployment, record levels of debt and a stagnating economy will all take many years to overcome.

The saddest thing of all to my mind is that we appear to be happy to let this painful time pass into history without truly learning the lessons of how we made greater the danger of this mess befalling us in the first place.

Any man who tells you he can predict the future is misguided, but the bigger fool is the one who ignores the past.

Friday, 15 January 2010

Bank of England projections "Unbelievable"

Danny Blanchflower, former member of the Monetary Policy Committee (MPC), the body that sets the Bank of England Base Rate went on record this week as suggesting that the Banks’ projections of recovery were “unbelievable”. In an interview for the Citywire organisation Blanchflower said that the bank was forecasting that our recovery from this recession would be the “fastest we’ve ever seen” and went on to say that “it’s unbelievable, and we will see that”.

Analysts have for some time been expressing doubts about the pronouncements that have come from the Treasury, which have looked more like a sharp rebound than a process of recovery and now the BoE’s own forecasts seem to be coming under the same level of doubt.

What is not in doubt is that the most important economic decision of this century will be the point at which the financial support for the economy, the much talked about Quantitative Easing (QE), begins to be withdrawn. This will be a decision made by the Bank at such a time as they feel the economy has built sufficient momentum that it can stand on its own again.

The timing of the withdrawal of support is so critical because of the dire consequences of getting it wrong. If support is withdrawn too early (as might be the case if the over enthusiastic forecasts are believed despite what the fact might be telling us), then we risk the ‘Double Dip’ recession, that shows a glimmer of recovery only for activity to plummet further as we enter a prolonged period that might look very much like a depression. On the other hand, if support is given for too long we risk lurching sharply from recession to inflationary spike without the intervening few years of things feeling Ok that we are normally accustomed to in the general run of things. Thus, the decision around when to scale back on QE will undoubtedly be what shapes the next couple of decades of our economic prosperity.

No pressure gentlemen!

Friday, 8 January 2010

Tax Rises – beat the inevitable!

A very Happy New Year to anyone who reads my blog. I wish you all a healthy and prosperous 2010.

With the current state of the Public Purse we see constant veiled references to ‘savings, economies and efficiencies’ within Government spending that offer the opportunity to improve the situation. Whilst it is undoubtedly true that there must remain huge inefficiencies within such a huge beast as UK plc, no degree of corner-cutting is going to make enough of a difference for us. ‘Cuts’ remains the one word that nobody wants to utter, but it is only a matter of time before it re-enters the vocabulary, after which point the debate will quickly become over how much and where such cuts can be made.

Cuts alone though will not get us out of the hole that we have collectively dug. Thus, Tax has to be the one area where the greatest difference can be found. In a growing economy, tax receipts would be expected to rise as the money circulates swiftly and productively from each of us to the other. Even the most optimistic of pundits reckon on there being a fairly long slog before we return to that kind of environment and with a flat or shrinking economy, we need to wise up to the inevitability of tax rises. Some no doubt will be stealthy, some more direct, but taxes must rise as part of our rehabilitation program.

Scanning the tax system for an obvious target leads me to Capital Gains Tax, the tax that we pay on profits when we sell assets such as shares, second homes and the like. Capital Gains Tax (CGT) always used to be paid at the individual’s highest rate, until recently 40% after various allowances for inflation and so on. In April 2008 this rate was reduced to 18% across the board, regardless of income or wealth of the individual concerned. Thus, at a stroke, the likely tax bill on a £1,000 gain for a higher rate taxpayer was reduced from £400 to £180. This has since been exaggerated all the more with the introduction of the 50% Income Tax bracket.

According to HM Treasury, every 1% by which the CGT rate rises would raise a further £120 Million of revenue for them. It has to be said therefore that the current 18% flat rate for CGT looks very vulnerable indeed and I would say that it is only a matter of time before the anomaly is corrected.

Where is the Opportunity?

CGT is chargeable on the difference between the purchase price of an asset and that at which it is sold. £10,100 of the resulting gains are free if tax with the rest being chargeable at the prevailing CGT rate. As we have said, the rate is subject to change, but so too is the threshold above which the tax is paid. Historically the current £10,100 tax-free gain amount is the result of occasional incremental increases, but there is nothing to stop this process being reversed. As we know, a Chancellor desperate for revenue can and probably will look anywhere for what he needs.

If a rise to the rate of CGT is indeed going to happen, then an opportunity is created for investors to ‘crystallise’ gains now and get the proceeds sheltered into ISA or Pension funds depending upon their objectives, where CGT will no longer be an issue.

If ISA’s have already been fully used for the year then it is still possible to crystallise the gains and reset the ‘base cost’ for the investments to the current value. Changes to the law mean that investors cannot simply reinvest in the same stock as before, but there is a whole universe of funds and stocks out there from which to choose.

Above all, the message should be not to wait for the axe to fall and close off these areas of opportunity but to sit down with an appropriate Adviser and see if the current situation offers you some scope for advantage.