Matt Lynn

Location, Location, Location

2012-02-02T10:43:00.000-08:00

In the estate agency business, they always say location, location, and location are the three most important factors when choosing a house. I’m starting to think the same thing may apply to writing a thriller as well.

I’ve just published the second in Black Ops series of e-novellas – Black Ops: El Dorado, the follow-up to Black Ops: Libya. Thriller locations, and indeed plots, have a tendency to be all the same. The Middle East. Russian gangsters. Al-Queda terrorists. Plots to blow up the White House. To be honest, we’ve read most of them already.

But a few months ago, I read a story in the New York Times about how the drugs cartels in Columbia had switched from cultivating cocaine to illegal gold mining – because the gold price was now so high it was more profitable for them.

Gold? Drugs cartels? Illegal mining?

What more could a thriller writer ask for?

All of a sudden I had a really original location for a short action-adventure story.

And one that hadn’t been done to death already.

The Real Cold War

2012-01-21T10:04:00.000-08:00

I did a blog for The Spectator last week about setting Ice Force in the Arctic, but for anyone who missed it, here it is again.

The Cold War produced some of the great classics of British spy fiction. From the gadgets and babes with exotic Eastern European accents of the James Bond books, to the non-stop action of Alistair MacLean or the dark treachery of John Le Carre and the intricate office politics of Len Deighton, it served as the perfect vehicle for just about every type of story a writer could imagine. More scenes were set in the few yards around Checkpoint Charlie than anyone could keep track of.
But now there is a new type of cold war – one that is more literal than metaphorical. The Arctic is perhaps the most compelling region in the world to set a thriller in 2012 – which is why I chose to set my new novel ‘Ice Force’ in the frozen wastelands around the North Pole.
What makes a great location for a thriller? Well, there needs to be intrigue, of course. And conflict as well. The Arctic has plenty of both. The world’s last great untapped reserves of oil lie under the Arctic Ocean – about 25% of the world’s remaining fossil fuels, according to the latest estimates. But who owns it? For the last few hundred years, no one cared very much. There was nothing out there, apart from a few polar bears. Now everyone wants a share. The Russians claim that much of the Arctic is their territory, and have been provocatively planting flags wherever they can. The Americans – via Alaska – claim a chunk. So do the Canadians. And so do the Danes (via Greenland).
And oil, of course, is power in today’s world. Russia is already the largest oil producer in the world, pumping 10.5 million barrels a day. Add together its existing domestic production with all the oil potentially in the Arctic, and the Kremlin would effectively control the world’s energy supply. Nor would it be afraid to use it. Vladimir Putin has already shown he regards oil as just another weapon in big power politics. It is no great surprise then that the race for the Arctic oil has been described as ‘the new great game’.
Next, some hardship helps. The more rugged the terrain the greater the test you are setting for your characters – and the more peril you can put them in. Nowhere in the world is rougher than the Arctic. The temperatures drop to fifty or sixty below zero. Ice forms inside your sleeping bag as you sleep. Water freezes inside its bottles, and engines have to be re-heated bolt by bolt with blow torches before they will start. The ice breaks up, creating ravines where you can fall into the freezing water. It is the most brutal, inhospitable place on earth.
Finally, your setting needs to be different. What readers really want is to be transported somewhere different. To go somewhere they’ve never been before, and may indeed never get to. To be taken to a different world. Easyjet can fly us most places for a few pounds. Not to the North Pole. It really is a completely different place, and one of the pleasures of reading a thriller set there is that you get to learn about the terrain, and how to survive it.
It ticked all the right boxes. The research was fascinating, and an education in itself. The weather is more likely to kill you than your enemy. Nothing works. You need a specially adapted gun, for example. Wearing thick gloves your finger won’t fit into the trigger, but if you touch metal with your bare fingers they will drop off. So you need the right sort of gun (the Swedish Army specialises in them, in case you were wondering). Or else you need to saw off the underside of the trigger. Even then, you need an array of special oils to keep your weapons working. You need to wear night-vision goggles through the long Arctic winter. For half the year, there is practically no light. And you need to watch out for the animals. Polar bears have a great sense of smell, and they are always hungry. They will creep up on you – and their hides are so well insulated, only a few traces of their breath will be visible on your night-vision equipment. If you do get into a scrap with one, though, thump them from the right – polar bears are left-handed, so that is their weaker side.
There North Pole might never become as familiar to thriller readers as Checkpoint Charlie was. But in the next few years it might well become a small genre of its own – and rather like Robert Peary, it is nice to have got there first.

What People Actually Read

2011-12-04T08:50:00.000-08:00

If you look at the Kindle chart and the traditional charts, you’ll notice something quite interesting. They aren’t at all similar. The UK Kindle chart today is topped by Phil Rickman, who is hardly a household name, followed by Damon Galgut and Kerry Wilkinson. The physical chart is led by the latest Wimpy Kid, followed by Jamie Oliver, Lee Evans and Michael Connolly.

Why is that, I wonder? After all, these are all books. Of course you can probably discount Wimpy Kid and Jamie Oliver. Most kids don’t have e-readers yet and cookbooks aren’t a natural for the Kindle. Even so, if you look at the Kindle charts, the ‘big authors’ don’t do so well. PD James and Kathryn Stockett are in the Top 10 and Patricia Cornwell in the Top 20. But heavily hyped writers like James Paterson don’t really do that well. In my own corner of the market, military adventure, I don’t sell as well as Chris Ryan and Andy McNab in the bookshops, but on Kindle I am regularly out-selling them.

One reason might be that the Kindle audience is slightly different from the mainstream audience. It is probably slightly more male – hence the number of thrillers in the chart – and a bit more techie. It may also be more adventurous in its taste.

But the real reason, I suspect, is because it is a much more level playing field. Some books get more push than others online of course. But going into the Kindle store is nothing like going into a bookshop, and nothing at all like the books section of a supermarket. The choice is vast, there are no in-your-face promotions, and word-of-mouth (in the form of reader reviews) is everywhere.

So what we see on the Kindle chart may well be a far better guide to what people actually want to read. I’m not sure the publishers have quite realised that yet though.

How Many Kindles Are Out There?

2011-11-28T08:17:00.000-08:00

At the moment, I’m spending a lot of time setting up my new digital publishing venture, Endeavour Press. One of the things that interests me is, how many Kindles are out there. Amazon reported today that over the holiday weekend in the US it had sold four times as many Kindles as it did last year. But, rather irritatingly, it doesn’t actually say how many.

Figures are surprisingly hard to come by. For 2010, the estimates from the analysts are that five to eight million Kindles were sold. Let’s take a median figure, and called it 6.5 million. If Amazon has quadrupled those sales this time around – and based on anecdotal evidence, that sounds realistic – then it should sell around 26 million this year.

Add in the 2010 sales, and, after Xmas there could be 32 million Kindles out there globally. That’s about half the population of the UK. More significantly, I bet nearly all of those people are keener than average readers. After all, there isn’t much point in getting one if you only read on James Patterson book a year. You need to be a 5-10 books a year minimum reader to make the investment worthwhile.

So what proportion of heavy book readers will have a Kindle by 2012? I’d estimate about 40%. That’s what makes this market so fascinating.

The Return of Pulp Fiction

2011-11-19T03:41:00.000-08:00

The most interesting thing happening in writing right now is the way the Kindle is breaking down old barriers. It is creating a lot of new space for writers, and, rather surprising, it is also bringing back some old forms.

One is the long essay, which is really just a recreation of the polemical pamphlet. The other is the e-novella, which is really the heir to pulp fiction.

Pulp fiction flourished as the ‘penny dreadfuls’, lurid, sensationalist tales that filled Victorian and Edwardian railway bookshops in Britain, and in the ‘pulp fiction’ story magazines that were hugely successful in the US right up until the 1960s.

Both specialised in genre fiction, usually written fast by highly professional writers. The stories ere disposable, shocking, and attention-grabbing. And they were sold cheaply.

Look at the Kindle charts and you’ll see a lot of stuff is very similar. Lots of fairly sensationalist cheap fiction.

In effect, new technology has bought pulp fiction back to life.

The interesting point I think is that some great writing emerged from that tradition. The Victorian penny dreadfuls contained plenty of rubbish and so did the American pulp magazines.

But those magazines also provided the foundation for some great writers. Raymond Chandler, Zane Grey, Rider Haggard, and many others. Upton Sinclair was at one point knocking out 8,000 words a day for the pulps.

They allowed writers to write a lot, to develop characters, and push genres. At the moment, Kindle is allowing writers to do something very similar. There is a lot of rubbish, of course, but I suspect when we look back in fifty or a hundred years time we will decide that a lot of the most interesting work is being done for Kindle, just as it was in for the pulps in the past.

E-Books Are Blurring The Lines Between What Is ‘Published’ And What Isn’t:

2011-11-06T09:19:00.000-08:00

About the most interesting thing happening in the book trade right now is that the lines between traditional publishing and self-publishing are getting blurred. My Death Force series is published by Hodder Headline, but my Black Ops series of novellas I am bringing out myself.

More and more writers, so far as I can tell, are going down that road.

One indicator of that this week was the decision by the International Thriller Writer’s Association to allow its members to post the details of their self-published work up on their website. Until now, they had only allowed work bought out major publishers.

A hybrid model is emerging I suspect where writers do some work for major publishers, and some work for themselves, probably forming their own judgements on what mix will maximise their sales, income and creative satisfaction.

Personally I like the combination. I value the prestige of the mainstream publisher, and seeing my books in the shops. But I like the energy and immediacy of doing my own thing as well. And, I suspect I’ll soon be making more money as well.

But how exactly this is all going to work, however, no one really knows.

Will The Kindle Get Men to Read More?

2011-10-29T05:51:00.001-07:00

If you haven’t bough one of the new Kindles yet, I really recommend it. It’s lighter than the old one, which makes it completely portable, but it is just as slickly designed, easy to read, and simple to use.

But I’ve noticed one thing about it. It fits perfectly into inside breast pocket of a man’s jacket. I’m a fairly averaged sized bloke – 42 jacket size if you must know – so I guess that is true for most men.

This is a more important point than most people realise. Men don’t normally have anywhere they can carry a book around. We don’t have handbags. Jacket and coat pockets are two small for printed books (unless you are going for the intellectual look, in which case you might have a copy of Camus stuffed into a big, grey coat). Unlike women, we don’t have anywhere we can slip a book away that we can read on the bus, or waiting for a meeting, or whatever.

On the whole women read more than men – that’s why women’s fiction sells more than men’s fiction. I’m not suggesting the Kindle is a male device – I’ve seen loads of women reading them on the train.

But it might well encourage men to read as much as women – which can only be a good thing.

Authors as Entrepreneurs

2011-10-22T05:43:00.001-07:00

We tend to think of authors as fairly reclusive characters. The word ‘bookish’ summons up images of fairly self-absorbed, introverted characters, with a slight detachment from the real world. And from the authors I have met, I would say that is, in the most, a fairly accurate characterisation. Some were larger than life – Dickens, perhaps, and certainly Hemmingway – but they also led largely artistic careers.

Now, however, something is changing.

Authors are becoming entrepreneurs.

The books industry has changed. Even when you are published by one of the big houses – Headline in my case – you still need to do a lot of marketing of yourself to make sure your book finds an audience. You need to build a website, get on Twitter, and give talks. There is no point in expecting the publisher to do it all for you.

And, more and more authors are turning to Kindle as well. They are bringing out their own books, and promoting then themselves, either entirely on their own, or in conjunction with traditionally published books. They are in effect setting up small businesses.

One consequence, however, is that the books we all read will be increasingly produced by people who are as much entrepreneurs as writers. That may well not be a bad thing. A lot of fiction in the last half-century has been very inward-looking. It doesn’t have much of the energy and involvement in the world of Victorian fiction.

But it certainly means that the types of books that get written are going to be very different.

Making It Worthwhile

2011-10-06T07:18:00.001-07:00

There’s always plenty for writers to moan about. Not having our books prominently displayed in the bookshop for example. A miserable sales ranking on Amazon. And that’s before we even get started on the publishers and agents.
But every so often something comes along to make it feel worthwhile.
A couple of weeks ago I got an e-mail from a women who’s son was very unwell. He wouldn’t be having much of a birthday, she said, and his situation made it hard for him to get out and meet people. But he was a big fan of my first two books, Death Force and Shadow Force. And he would really like it if I sent him a birthday card.
In fact, I sent him a signed copy of Shadow Force.
It’s nice to know your work has got through to someone enough that they would be pleased to hear from you, even though they don’t know you. I guess that is what all writers aspire to.
I hope he has a good day.

A Stupid Tax on E-Books

2011-10-01T08:23:00.000-07:00

E-Books are the best thing that have happened to writers since…well, probably the invention of instant coffee. Sure, there is a lot of nervousness among publishers and bookshop owners and that is understandable. But for writers, they can only be good news. At the flick of a switch, you have a global market. Far more of the money generated goes to the writer. And it opens up markers for all sorts of new kinds of work.

There is one glaring injustice, however. E-books carry VAT, whereas printed books are tax-free.

That is just short-sighted greed on the part of the Treasury. A petition has been started up on the government’s website calling for its abolition. As it rightly points out, e-books are far more environmentally-friendly than the old, paper sort. No trees get cut down. No vans drive them around the country. A book is a book, regardless of the form of delivery. It is crazy to discriminate in favour of one kind through the tax system.

I’d add another point. I bet e-books can be a huge industry for the UK. We have great writers, English is the world’s language, and we have the editors and entrepreneurs who can seize the market. And yet the Government is taxing e-books unfairly – which almost certainly means the industry won’t develop as fast as it otherwise would. Bonkers.

I’ve already signed the petition, but there are only 2,500 so far. So click on the link and add your name today.

Swearing in Books

2011-09-20T08:58:00.000-07:00

I had an e-mail this morning from a reader who said he was a big fan of my books, which was nice of course. But he also pointed out that the characters in the Death Force series used the word ‘sodding’ all the time, and it got a bit repetitive.

He’s right, of course. They do, and it is.

There is a reason, however. They are soldiers. In real life it would be fu%£kig this and f!c£king that. And for some reason, I don’t think swearing works very well in books. I don’t have anything against it in real life, and it can work fine in films, but I print it somehow falls flat.

So I use sodding instead.

But maybe that doesn’t quite work either?

Real-Time Story-Telling

2011-09-01T03:42:00.000-07:00

The Kindle is a huge opportunity for writers. It is not just a new way of distributing our work. It is also an opportunity to tell stories in a new way. I’m just launching a new series of e-book only novellas called Black Ops. The first one is called Black Ops: Libya, so it is fairly obvious where it is set. The idea, however, is to tell stories ripped straight from the headlines, and put them out instantaneously.

The e-book allows us to do that. Traditional publishing takes a year at least to get a book to the market. So the instant thriller, which is what the Black Ops series aims to be, takes advantage of the technology to tell a story that has the advantage of immediacy. It is real-time story-telling.

In the first one, an ex-SAS guy called Alex Marden and a former Navy Seal called Jack Rogan are dropped into Libya by NATO to retrieve a document in the hands of the old regime that would be hugely embarrassing to the British and American governments if it fell into the wrong hands.

But they soon get themselves caught up in the fighting and chaos as Tripoli falls to the rebels.

It is a cracking adventure story. And the first time anyone has taken advantage of the e-book to try something like this.

The Possibilities on Kindle

2011-08-15T11:58:00.000-07:00

The Kindle is one of the most interesting things happening in publishing right now. Not all of it is good, of course. The publishing industry may end getting destroyed the way the music industry was. But it also creates possibilities.

There is a fascinating story in the New York Times about the thriller writer Richard North Patterson. He has a book out featuring Osama Bin Laden. But by the time it came out, the man had already been killed, which rather ruined his book. So he went onto the Kindle edition and changed it - just like that.

One of the things the Kindle can do for us is create that kind of journalistic immediacy. In fact, it is a possibility I am working on right now. But more on that later....

Summer Reading

2011-07-20T02:59:00.000-07:00

I'm off to Cornwall at the weekend with the kids, so I need to choose a few books for what I hope will be a relaxing week. I've already got a copy of Hunted by fellow Curzon-ite Emlyn Rees, The Big Short by Michael Lewis, who I know a bit from our work on Bloomberg, and American Pastoral by Philip Roth, who I have got back into since attending the Man Booker Prize dinner a few weeks ago in his honour. That seems like a pretty good range - some light fun, some art, and some serious stuff.

Hopefully a fair number of people will be taking 'Shadow Force' with them on holiday. I think of my own books as summer reading. But what makes a great story for the beach?

I think it needs a number of qualities. It needs a rattling good story that grips you from start to finish. It needs some jokes - no one wants to be too downbeat on holiday. It needs some escapism - a holiday is all about getting away from things, and we want a book that does that as well. But it also needs to tell you something serious, and educate you in some way, because a holiday is one of the few chances we have to fill gaps in our knowledge.

I try and touch all those bases in my own work. And I always keep in mind that that is the recipe for a great holiday read.

The History of the Greek Crisis

2011-07-18T08:37:00.000-07:00

I've done a piece of History Today about the Greek debt crisis. You can read it here.

Invest in Stable Democracies....

2011-07-18T08:29:00.000-07:00

In my MarketWatch column this week, I've been arguing you should invest in stable democracies - there are more of them all the time. You can read it here.

The IMF Isn't Worth Any More Money

2011-07-18T08:27:00.000-07:00

On RealClearMarkets this week I've argued that the IMF shouldn't be given any more money. You can read the piece here.

Sterling Will Fall Again....

2011-07-18T08:23:00.000-07:00

I've made my debut as a Huffington Post blogger this week with a post on sterling. You can read it here....

France Will Be the Next Eurozone Victim

2011-07-18T08:19:00.000-07:00

In my Money Week column this week, I argue that France may be the next country to fall to the euro crisis. Here is a taster.

The euro debt crisis increasingly resembles a teen horror movie. As soon as you think it is all over, the monster springs back to life. There is an unlimited number of sequels. And it usually ends up with a bloodbath.
This week it was the turn of Italy to be in the spotlight. The country’s bond yields started to spike upwards, a serious issue for a nation that has vast debts to pay the interest on. After flying under the radar for much of the crisis, the Italian debt market looks close to unravelling. Spain is coming under increasing scrutiny as well. It might well be next.
But in fact the markets are looking in the wrong place. True, there is plenty to worry about in both Italy and Spain. But the real testing ground for the euro is going to be their northern neighbour, France. It too is struggling to stay in the euro – and it, far more than Italy or Spain, has the potential to trigger a financial meltdown. France matters to the global financial markets far more than any of the other euro countries in trouble.
Monetary union was, of course, largely a French idea. The country’s industrial and financial establishment had long been unhappy with floating exchange rates. As one of the major exporters within the European Union, they could see that constantly shifting currencies made life very difficult for their companies. While Germany primarily exports to the rest of the world, France is a euro-zone manufacturing hub. A fixed currency system was very much in its interests. Indeed, one interpretation of the creation of the euro was that it was a deal between the French and the Germans: the Germans accepted merging their currency with France’s in exchange for French support for the re-unification of Germany after the fall of the Berlin Wall. It is ironic, therefore, that it isn’t working out the way France planned.
Could France seriously have a problem staying in the euro? After all, it is a big, successful economy. It is not a peripheral nation like Greece or Portugal, neither of which ever really industrialised, or a chronically financially chaotic country like Italy. Then again, Ireland was a successful, wealthy economy, and that didn’t stop the country going bust as a result of monetary union.
In reality, France is steadily losing competitiveness within the euro. That was confirmed last week with the latest trade data, which showed a widening deficit. The April trade gap rose to 7.42 billion euros. The UK, by contrast ran a deficit of £2.8 billion or 3.1 billion euros in April. The French deficit now amounts to 3% of GDP, and has been hitting fresh records month-by-month. France’s trade deficit with Germany, its main trading partner, is now one billion euros a month. “Within euroland, France is losing competitiveness to Germany, and it has no option for devaluation to help itself out,” noted Hi-Frequency Economics in an analysis of the figures. “A potential rift between France and Germany on trade would be a far more serious challenge to EMU’s political fabric than a disagreement over how to restructure loans to euroland’s second-smallest economy [Greece].”
Indeed so. There is no great mystery about what is happening. French wages have been rising at a faster rate than German wages, and their productivity is not as good. The country is steadily becoming a less attractive place to make things.
The important point is that persistent and rising trade deficits are clear evidence that France is struggling within the single currency in precisely the same way as the Greeks – it’s the same explosion, just with a much longer fuse. As it runs bigger and bigger deficits, the money will have to be re-cycled through the banking system. Eventually that will lead to a financial crisis.
It may happen sooner than anyone thinks. While a country such as Italy has a greater stock of out-standing debt, France is racking up new debts at a far faster rate. Last year it ran a deficit of 7% of GDP. French debt will total 90% of GDP this year and 95% in 2012 according to estimates by Capital Economics. That isn’t exactly running out of control – but it is getting very close.
There are other problems on the horizon. A Presidential election is due next year. That may turn into a competition for who can make the most extravagant promises. And the far-right National Front leader Marine Le Pen is pledged to bring back the franc. If she continues to do well in the polls, then pulling out of the euro will be on the agenda. That is not true of any other euro area country, not even Greece.
At any point, the bond markets may well take fright. They will start pricing in the possibility of France pulling out of the euro, or defaulting on some of its debt. Yields on French debt will start to spike upwards. And that will be the point at which the crisis turns scary.
While Greece, Portugal and Ireland don’t matter very much to the global capital markets, France does. In fact, it matters much more than Italy and Spain. It has $1.7 trillion of outstanding public debt, making it the fourth largest debtor in the world, according to data from the Bank for International Settlements. (The US, Japan and Italy are ahead of it). That debt is widely traded – 37% of French debt is held internationally, which is a lot more than Italy (24%), the US (19%) or Japan (1%), again on BIS figures. In truth, French bonds are held by institutions right around the world and have always been regarded as rock solid.
On current trends, that will have to change. France can no more survive in the euro-zone than Italy or Spain can. At some point, the bond markets are going to wake up to the problems in France. They are going to get very nervous about French debt, the same way they did about Greek and Portuguese and Spanish debt. They will start marking down the bonds, and factoring in potential default. But if that happens the losses to the financial system will be very nasty indeed. The euro was created in France. It may well be in France that it starts to finally unravel as well.

Launching Onto Kindle....

2011-07-05T08:34:00.000-07:00

The Kindle is a fantastic device for readers, but it potentially is even more interesting for writers. It isn’t so much the ability to reach readers directly, as the opportunity it offers to try out new forms. The publishers and the bookshops are all focused on the 100,000 word book. But there are lots of other ways of writing things.

I’ve just launched by first short story on Kindle. It’s called ‘Lethal Force’. It would be free, but Amazon won’t let me give it away, so instead it is 71p. It will be free in iTunes just as soon as I can get Smashwords to give it an ISBN number and get it up. Take a look, you might enjoy it.

But it isn’t just short stories that can find a home on Kindle. There are other forms of writing as well.

I already have one idea, which I’m working on right now. Watch this space…..

The British Monetary Union Isn't Working Either....

2011-07-02T02:26:00.000-07:00

In my Money Week column this week, I've been looking at the the UK as a monetary union, like the euro....and concluding that doesn't work either. Here's a taster.

What does the euro need to make it work better? The most common answer is that it needs to be turned into a fiscal union, with large-scale transfers from the richer regions to the poorer. It is the conventional wisdom of every editorial, and City pundit. Until it becomes a ‘transfer union’ it doesn’t stand a chance of succeeding.
A caveat or two is usually thrown in. The political obstacles are formidable. The Germans might never agree to their taxes being sent to bail-out Greece or Portugal. The treaties might need to be re-written, and that would require the agreement of all the European Union’s members. Still, if only those obstacles could be overcome, a fiscal union would smooth out most of the problems.
The trouble is, no one seems to have stepped back and questioned the fundamental assumption. The evidence suggests it may well be wrong. Europe has another monetary union between countries at very different stages of economic development. It is called the UK, and the currency is sterling. Reverse the polarities – the UK has a rich south, and a poor north, rather than a rich north and a struggling south – and the sterling area has many similarities to the euro area. It is made up of group of countries with very different levels of prosperity. And it has huge transfers between the richer regions and the poorer.
And the result? It doesn’t do any good at all. True, it holds the currency area together. But it only does so at the cost of creating regions that are ever more dependent on state aid. The truth is, a transfer union won’t save the euro even if it was politically feasible. Nothing will. The project is doomed.
That doesn’t stop people from trying, The most common critique of the single currency is that is an economic union without a political union. George Soros has argued for a year that without a single government the currency won’t survive. The President of the European Central Bank Jean-Claude Trichet has called for a European finance ministry.
The UK’s experience, however, suggests that even if it happened, it wouldn’t work. Britain used to be a fairly homogenous economy, with wealth relatively evenly spread out across its major industrial centres, much as it is in modern Germany. Not any more. Post-industrial Britain has a very, very prosperous capital, surrounded by equally wealthy suburbs. The Midlands and East are doing fine. The rest of the country has been falling behind at an increasingly rapid rate. The result is that there are huge disparities between output per head in the South and Wales, Scotland and Northern Ireland. It isn’t quite as dramatic as the gulf between Germany and Greece – but it isn’t that far off.
That gets fixed by fiscal transfers. The UK, which has of course a single government, and single finance ministry, shuttles large sums of money from the richer regions to the poorer. Oxford Economics, the consultancy firm, has calculated the amount the British government spends per person employed – per taxpayer, in other words - for the different parts of the country. In the prosperous South-East, the government spent £14,100 per working person. In Northern Ireland, it spent £21,200. Wales, Scotland and the North-East were all way above average. The East, East Midlands, and London were all below average – although London, which has pockets of real poverty amidst its wealth, not by as much as you might think. It also looked at expenditure relative to gross value added, that is the actual output of the region. Taking the average for the UK as 100, Northern Ireland scored 155 and the South-East just 84. In other words, a lot of the wealth from the South-East gets sent to the ‘periphery’.
The UK is, therefore, a monetary union with very significant transfers between its richer and poorer regions. The trouble for the euro’s would-be fiscal unifiers is that there is very little evidence that it fixes the problem. Northern Ireland for example has had a consistently lower growth rate than the UK as a whole – this year, it will grow by 1.1% compared with 1.7% for the UK according to estimates by Northern Bank. Much the same is true of Wales and the North-East. The regions with the biggest fiscal transfers have grown consistently more slowly than the rest of the UK, with the result that the ratio of state spending relative to their local economies has grown steadily over time. Between 1999 and 2010 state spending rose from 50% of the Welsh economy to 69%, according to calculations by the Centre for Economics and Business Research.
Fiscal transfers can hold a monetary union together. There is no sign of the sterling area breaking up, although the Scots might eventually decide to go their own way. But they won’t close the gap between the richer regions and their poorer neighbours. They are a permanent subsidy – and one that will probably grow over time.
If anything, the fiscal transfers probably make the problem worse. They crowd out private investment – after all, why would anyone in Northern Ireland set up a business when they are relatively few industries where it has much strength, and when they could just get on a plane to London, or else get a secure job in the public sector? It creates whole regions where the fiscal transfers are the only thing that keeps the economy afloat.
That just about works in the UK. It has been a unified state for several hundred years, and has close ties of language, culture and family between its regions – although it remains to be seen whether the Tory voters of the south-east will accept the deal forever. But it is very hard to see it working for the euro zone. Voters in Munich and Eindhoven already seem outraged by paying for the Greeks and Portuguese. When they get told that the transfers are permanent, and will rise steadily over time, they will surely refuse to pay. The scary truth is that even the one plausibly fix for the euro crisis doesn’t work.

How The Euro Will End....

2011-07-02T02:20:00.000-07:00

How will the euro actually come apart. I've been exploring that in my Market Watch column this week. You can read it here.

Greece Isn't Lehman Brothers. It is Worse Than That...

2011-07-02T02:18:00.000-07:00

In my Money Week column this week, I've been writing about why Greece is even worse for the markets than Lehman Brothers. Here's a taster....

If the Greeks had a euro for every City analyst and financial reporter who has solemnly warned that the country’s debt crisis risks being ‘another Lehman moment’ for the financial markets, their economy would probably be in far better shape than it is. It has become the most over-used cliché of the last few weeks – and like every tired cliché, simply shows that the people using it have stopped thinking clearly for themselves.
In truth, the Greek crisis is nothing like the Lehman collapse. It is far worse than that. Lehman was a short, sharp shock for the global markets, and although it caused massive damage to the global economy, it was over relatively quickly.
The sovereign debt crisis, by contrast, is going to be a long, drawn-out and messy affair, with no clean resolution. It will depress investment, economic output and equity market for years to come.
Over the course of the last week, the Greek crisis has prompted a global sell- off in every kind of asset – and rightly so. The government of the beleaguered Greek premier George Papandreou looks on its last legs. The Germans have been wrangling with the European Central Bank over the terms of a fresh bail-out. Protestors have been marching across Greece, fighting yet more austerity. There were certainly reasons to fear that Greece might be forced into a sudden default – and that would pose huge risks for the European banking system. Greek debt is hidden on balance sheets right across the financial system. No one really knows where the losses will come out.
Even so, it is nothing like Lehman Brothers. When the Wall Street investment bank collapsed in 2008, the US Treasury and the Federal Reserve had no real idea it would pose a systemic risk to the financial system. If they had, they wouldn’t have let it go down. They would have stepped in to rescue it instead. The crisis it provoked was largely unexpected.
That isn’t true of Greece. Germany’s Chancellor Angela Merkel and France’s President Nicolas Sarkozy are well aware of the threat a Greek collapse poses to the financial system. They aren’t going to let it happen until their experts have reassured them their banks can survive. After all, they aren’t stupid. They are not going to let their financial system blow up. If they have to find a few more tens of billions of euros to prop up their wayward southern neighbour for another year they will. It’s better than the alternative.
There isn’t going to be a sudden collapse. The risks are all flagged up, and everyone will work hard to avoid them.
The trouble is, Greece is just the tip of a much larger iceberg. The sovereign debt crisis is going to depress economies, deter investment, and keep a lid on assets prices for a long time yet.
Greece has been running massive budget deficits for years. So have most of the other peripheral countries, such as Portugal, Ireland, Spain and Ireland. France shows very little sign of getting its deficit under control. Neither does the US. The UK is making some progress, but lower than expected growth means we are unlikely to meet our targets. The sovereign debt crisis is not just a Greek issue. It is hitting most of the developed world.
That is going to impact the markets in three ways.
First, it is going to depress economic growth. There is only one real way to bring deficits under control, and that is to make deep and painful cuts in government spending. Nothing else works. But as governments everywhere scale back on their expenditure, growth is going to be hit. Over the medium-term, a smaller state allows the private sector to grow faster. It is a mistake to fall for the simplistic Keynesian mistake of thinking state borrowing and spending promotes growth. It doesn’t. Cuts allow the economy to grow faster – eventually. But it takes time for that to happen. And in the medium-term, the economy will be more sluggish than it otherwise would be.
Next, the debt crisis is going to deter investment. Who would want to build a new factory or sales office in any of the peripheral euro-zone countries right now? You have no idea what the economies will look like, or even what currencies they might be using in three or four years time. You are likely to face years of grinding austerity programmes as governments struggle to stay in the euro. And yet investment is the lifeblood of economic growth. If companies don’t invest, then economies are not going to be able to grow.
Finally, it is going to depress asset prices. For all the reasons outlined above, the debt crisis is going to slow global growth. That is bad for just about every class of asset, from equities, to bonds, to commodities (although probably not for gold, which is usually the one clear beneficiary of a monetary crisis). Clearly enough, that is going to depress the markets as well. But it is also means investors are going to be very cautious. The constant threat of defaults, the worries that it will lead to a fresh banking crisis, and the nervousness over which country is likely to be targeted next, will all make any kind of bull market very hard to sustain. And the lower asset prices are, the lower growth will be as well.
In many ways, we’d be better off with a Lehman moment. A quick, sharp crisis that ended with Greece defaulting on its debt, re-establishing its own currency, and one or two over-exposed banks being bailed out, would be better than a saga that drags on for years with no clear resolution. But it isn’t going to happen. The global economy suffered from the Lehman collapse – but was able to start recovering the following year. Unfortunately, this crisis will take far longer to resolve.

Why Aren't There More Sports Thrillers?

2011-06-22T01:53:00.001-07:00

Over on the Curzon blog, our newest member Emlyn Rees has written an interesting post about his plans for a Wimbledon thriller. That set me to thinking about an interesting question. Why aren't there more sports thrillers?

Dick Francis, of course, made a great career of writing about horse racing. But there are very few thrillers about football, tennis, boxing, formula one, and so on. It is odd. Sport is full of drama and conflict and double-dealing, all the stuff of stories, and has a huge following.

Maybe no one has really tried. One of the projects in my drawer is a football thriller that Random House made a very low offer on at the same time as I started the Death Force series for Headline. So maybe it is just a matter of waiting for the right author to come along. But maybe its because it is impossible to write about sport in a way that doesn't seem flat compared to the real thing? The spectacle itself is so dramatic, it is hard for a writer to match the intensity of the contest. If so, there never will be a really great sports thriller.

The Greek Default

2011-06-16T01:34:00.000-07:00

In my MarketWatch column this week, I've been looking at what will happen to the markets if Greece defaults. You can read it here.

What Would Happen To The Markets If Mobiles Did Give You Cancer?

2011-06-13T09:45:00.000-07:00

In my Money Week column this week I've been looking at what it would mean for the markets if mobiles did give you cancer. Here's a taster....

There is no shortage of stuff out there to make investors feel nervous. The euro could get blown apart if a long hot summer of protest in Greece and Spain boils over into civil unrest. The Chinese economy might suddenly turn down, removing just about the only source of global growth. Inflation might suddenly rip out of control, provoking central banks to sharply raise interest rates.
But there is one risk that most people probably haven’t thought about at all.
What if mobiles really do give you can cancer?
Speculation of a link between cellular technology and brain diseases has been running for a decade or more. But last week the World Health Organisation said its latest studies suggested there was a possible link between talking on your mobile and cancer.
Leave aside the medical implications for a second – although there are serious enough. This is a huge issue for the markets as well. Just think about the hundreds of billions of investment now tied up in keeping everyone texting and talking on their phones all day. From the operators, to the equipment suppliers to the handset manufacturers, to the computer and software industries, many of the largest companies in the world could be devastated if a meaningful link was ever proved.
Mobile technology has the potential to be another tobacco – a huge and powerful industry that was just about destroyed by the unfortunate fact that it killed people.
Of course, there is still no proven link between mobiles and brain disease. The WHO is not claiming that there is. It’s International Agency for Research on Cancer gathered together 31 experts to meeting in Lyon last week to review the available evidence. It concluded that there was ‘a possible’ link between mobiles and a type of cancer called glioma. The WHO has five rankings of cancer risk, ranging from ‘carcinogenic’ to ‘probably not carcinogenic’. The ‘possible’ ranking is right in the middle of the range. So it is not saying it is definite. And it isn’t ruling it our either.
For anyone tracking the industry, that isn’t particularly helpful. Lots of studies have been done of potential links to cancer, and none of them have been very conclusive so far. Mobiles appear to have some health impact. Against that, there has been no big increase in the rates of brain cancer in the twenty years or so since mobiles became a ubiquitous part of everyday life. And it is difficult for anyone to assess the data accurately because brain caner is a relatively rare condition, so there are not very many people to study.
But just because cancer rates haven’t taken off yet, it doesn’t mean they won’t. People were smoking heavily for a long time before the damage that tobacco does to your health became apparent. Asbestos was widely used in building for decades until the risks with that material were discovered. Right now, all that anyone can say is that there is some form of risk, which the medical experts will need to keep an eye on.
What we do know for certain is that if a link were ever proved, or were simply to move up from possible to probable, then the economic implications would be huge.
This is a massive industry. According to the International Telecommunication Union, there are now 5.3 billion mobile subscriptions. That is 77% of the world’s population. More than a billion handsets are being sold every year. Vast quantities of capital have been poured into building those networks. The rise of smartphones means that even more is being spent each year, and people are doing more, and spending more money on their phones. Tablet computers will only send those figures even higher.
On just about every major bourse, the big mobile players are among the leading companies. Vodafone – with a market value of £83 billion – is a giant of the FTSE. France Telecom, which owns Orange, is one of the largest businesses on the CAC-40. The world’s largest mobile operator, China Mobile, is one of the world’s biggest companies. Nokia may be struggling to re-invent itself, but it is still the world’s major handset manufacturer, and worth $25 billion. Much of the South Korean stock market depends on the mobile divisions of Samsung and LG. New players such as Taiwan’s HTC have soaring share prices (indeed, it recently overtook Nokia in value). And, of course, Apple, which is now critically dependent on its iPhone, is now the third biggest company in the world.
It doesn’t even stop there. Microsoft and Google have invested fortunes in creating mobile software divisions. Chips and other components manufacturers help sustain the commodities boom. Many retailers depend on the sales of phones. So do the new generation of app writers.
In short, mobiles have fuelled much of the growth of the world economy in the past decade. A cancer link would be an economic catastrophe as well as a medical one.
There is not a great deal investors can do about it. But they should be monitoring the medical data, and keeping up with the latest developments. And they should be preparing an exit strategy. If a link is ever decisively proved you don’t want to be holding the shares or bonds of any of the main players in the industry. You might no want to be holding equities full stop – the knock-on effects for the rest of the markets would be severe.
Meanwhile, don’t give up on some fairly old-fashioned technologies. Fixed-line operators such as British Telecom could be set for one of the greatest bounce backs of all time – and with the shares yielding 4%, it might be worth tucking a few of those away. If we all decide to get rid of our mobiles and start calling one another on the landline again, they will soar in value.

Writing On Trains...

2011-06-08T09:42:00.000-07:00

I seem to have been on a lot of trains recently, which may help explain why I haven't had much time to blog recently. I went to Scotland to promote the Death Force books, and my book on the euro crisis is coming out in Germany soon, so I went there to help promote that. I don't really like flying very much, so in both cases I got the train.

It's a pleasant way to travel, although rather unexpectedly the German train broke down somewhere between Brussels and the border, which meant I had to get a bus the rest of the way to Cologne. Still, it's not as if planes don't get delayed all the time...and when a plane breaks down, it has a tendency to drop out of the sky.

But the best thing about trains is that they give you a chance to write.

I can write pretty well most places. I know some writers like to be in the same place all the time, but I'm quite happy to write in a cafe, or at home, or on a hotel balcony.

Overall, however, I think trains are my favourite.

There is something about the steady motion that aids the creative process. Looking out of the window creates a sense of the world going by, of events unfolding, which makes it very easy to create a similar sense of movement on the page. You can can pause, look out of the window for a while, then crack on with the next sentence. It is just the right amount of distraction. Not too little, but not too much either.

I suspect if I bought a euro-rail ticket and spent six months writing my next book on trains the effect would wear off.

But I got a lot of work done on those two trips.

Is Now The Time To Sell Gold?

2011-06-06T02:09:00.000-07:00

I've kicked off a new column on the Wall Street Journal's Marketwatch site today with a piece about gold. Seems to be getting plenty of hits and feedback from readers. you can read it here.

The Decline of the IPO....

2011-06-06T01:57:00.000-07:00

In my Money Week column this week I've been looking at the decline of the IPO. Here's a taster...

The City, just like every other tight-knit profession, observes its own omerta: an unwritten code that whatever arguments may break out within the community, you don’t make them public. So when major institutions start falling out with each other in a very public way, it is time to take notice.
Last week, the fund manager BlackRock launched a biting attack on the way IPO’s were handled. The fees, they complained, were outrageous. The bankers were actively deterring new companies from coming to the market.
The point was a good one – and long overdue.
The number of new companies listing has been declining for years. But raising money for new companies is the fundamental purpose of a stock market - if it doesn't do that, it is really just a casino. What the IPO market needs is new banks that get it right - because the existing players have clearly forgotten what a stockmarket is actually for.
In a letter sent last week, Luke Chappell and James Macpherson, two of BlackRock’s most senior UK executives, laid into the banks arranging new listings with both barrels of a metaphorical shotgun. “It is in all of our interests for London to remain at the centre of a thriving capital market,” they wrote. “We are always keen to invest in companies that need equity to develop their businesses, particularly in opportunities that we are currently unable to access. However, recent developments in the IPO market have, at times, been frustrating.”
Specifically, they accused the banks of being too aggressive on price, demanding fees that were way to high, and not allowing fund managers enough time to get to know a business before they invest in it.
Given that BlackRock, with assets under management of more than £2 billion, is the single largest investor in the UK stock market, its complaints will have carried plenty of weight.
And the record of recent IPOs suggests they are onto something. Glencore, a mega-IPO that because of its size was always going to vault straight into the upper reaches of the FTSE-100 index, managed to get its IPO away, but the shares immediately sank below the issue price. Betfair, the online betting company that staged one of the biggest IPOs of last year, jumped to a premium on its first few days of trading, but is now well below its issue price. Other new issues have had to be pulled because the demand for the shares just wasn’t there.
That matters. When fund managers buy into an IPO they want to see the share price going up steadily for at least a couple of years. Everyone understands that the prospects for a company can change. But if the idea becomes fixed in investors minds that IPO prices are unreasonably hyped-up, and whoever gets suckered into buying into them is going to end up losing money, then it won’t be any great surprise if they increasingly steer clear of new issues.
The figures suggest that is already happening. The numbers of new companies joining the stock market is, as a percentage of the economy, declining all the time. According to the World Federation of Exchanges, the number of quoted companies has been roughly static – at around 45,000 businesses globally – since 2005. In the Americas, it is going down, whilst in Europe it is only going up fractionally (0.1% over five years). Since the world economy has been expanding at around 4% a year, apart from the recession of 2009, you would expect the number of quoted companies to be growing at 4% to 5% annually. But it’s not. Some high-profile names aren’t even bothering with the hassle of a quotation. Facebook, for example, chose to sell shares privately, rather than go to the bother of an IPO.
So, overall, the number of listed companies is going down, or standing still. And yet the number of trades has roughly doubled in this period. So investors are, in effect, trading less and less ever more frantically.
That is hardly a happy situation for the long-term health of a market.
First, new companies are the lifeblood of any bourse. Young companies are where the real growth is going to come from. If they can’t be bothered to join the stock market, or they find the process too expensive, then the main indices are just going to become a collection of older and older businesses. They won’t be able to grow as fast as the economy – and eventually investors will have to find some other way to buy into corporate growth.
Next, raising capital for companies is what a stock market exists for. It is why they were created in the first place – to allow new business to raise money on a scale they could never hope to get hold of whilst remaining private. If they don’t do that, then they really are, as their critics maintain, just casino tables without the bight lights and cocktails. Without any real purpose, nobody should be surprised if they get regulated out of existence.
The core problem is that the investment banks have forgotten how to build and maintain long-term relationships, both with the companies they bring to the market, and the investors that buy shares in them.
Two changes need to be made. First, the sponsoring bank should take a lot more time getting to know the businesses they are bringing to the market, understanding the medium-term prospects of each one, and figuring out how to price it accordingly. Ideally, the shares would deliver a steady 10-15% a year for at least three years after the IPO. Investors would then feel reasonably confident the IPO was worth supporting.
Perhaps the main investment banks don’t want to do that. They may have become so immersed in a short-term, quick profits culture that they no longer find it possible to build relationships over five years. If so, new players should emerge to take their place – because if they don’t, eventually equity markets are going to fade away.

The Decline of Home Ownership

2011-05-30T04:52:00.000-07:00

In my Money Week column this week, I've been looking at the decline of home ownership, and what it means. Here's a taster....

There aren’t many things that everyone in the country can agree on. We’re not likely to win the Euro 2012 championship with Fabio Capello still in charge of the team perhaps. Possibly that Pippa Middleton has a stunning, er, figure. And, of course, that owning your own house is what everyone aspires to – and the bigger the house, and the smaller the mortgage, the better.
Except that now even that last one might have to be scratched from the list. After nearly half a century during which the British increasingly owned their own homes, and when home ownership has been held up as the summit of social aspiration, fewer of us now own the place we live in every year.
Home ownership is now falling sharply in the UK, as it is in the US as well. That trend is well-established, and likely to accelerate over the coming decade. For the financial services industry that has huge implications it has barely even begun to take on board yet. The banking and savings industry is largely built around helping people to own their own home, and allowing them to borrow money against it once they do. If that is no longer a mainstream aspiration, it will have to re-organise itself completely.
The decline in home ownership is already well-established. The peak in owner-occupation was reached all the way back in 2003, when it hit 70.9% of English households. Since then, it has been going down at a steady rate of about 0.5% a year, which has bought it down to 67.5% for 2010, the latest date for which numbers are available. Owner occupation is now back to the same levels it was in 1991, so in effect there has been no growth for 20 years.
Don’t expect that to change soon – if anything the trend is likely to accelerate.
For starters, government subsidies have been steadily withdrawn. You used to get tax relief on mortgage interest payments, so that in effect the government paid part of your mortgage for you. That was steadily withdrawn, and finally abolished about ten years ago. These days, steadily rising council taxes and stamp duties mean that far from subsidising home ownership, the government now actively penalises it.
Next, houses are still very expensive. The long-term figures suggest the average house should be worth 3.5 times the average salary. They are still way above that. One reason why people aren’t buying homes any more is that they are too expensive – and until that starts to change, owner occupation rates aren’t going to rise.
Thirdly, and most importantly, the days of easy debt are well and truly over. The housing boom was largely fuelled by borrowed money, but that too is now much harder to come by. In the UK, the average deposit on a first home is £26,000, a big sum when there are student debts to pay, and real wages are falling. Pushing owner-occupation levels up to 70%-plus was only really possible when there were 125% self-cert mortgages available – in other words by lending money to people who couldn’t really afford it. The banks are not going to be doing that again for a long time – and that means that ownership will be restricted to a narrower range of people.
Take all those three factors together, and it is hardly surprising that owning your own house is less popular than it used to be. Where the numbers will settle exactly, we don’t know yet. But it is not going to be anything like the levels we were used to.
So what does that mean for financial services? There are three big points.
First, mortgage lending is not going to be the dominant force it once was. Mortgages have been a huge industry in the UK, employing tens of thousands of brokers, advisers and solicitors. It has been the major revenue source for the High Street banks and the building societies. But lower home ownership means fewer new mortgages. It’s already happening. Back in 2001, 41% of households had a mortgage. It is already down to 35%, and on current trends it is going to keep on falling. There will be less business for everyone in the industry. A lot of those jobs are going to disappear, and the profits with them
Second, lending is going to be a lot harder. Banks won’t be able to dish out money against people’s houses the way they used to. Fewer people will own their house, and those that do will probably be higher up the income scale, and so won’t need credit the way younger, cash-strapped people do. A lot of the personal lending industry is going to vanish. That which remains will have to find new and smarter ways of judging whether people are a good credit risk or not – because they won’t simply be able to take a charge over people’s houses and threaten to take them it if they don’t pay.
Lastly, and perhaps most importantly, renting will be a huge growth industry. Just because home ownerships is in decline it doesn’t mean people are going to start sleeping rough. They’ll still be living in apartments and houses, it is just that other people will own them, and they’ll be paying rent instead of mortgages. There are already more people in private rented property than local authority or social housing. The buy-to-let sector, which took such a knock during the credit crunch, is going to bounce back strongly. New private rental corporations, owning huge numbers of properties, are going to start emerging. The banks will need to start lending to them. And many of the brokers will need to turn themselves into letting agents instead.
There will be opportunities as well as threats, just as there are with any big social change. The traditional building societies will be hit hardest: their entire business was about helping ordinary people onto the property ladder. But the whole financial services industry is going to be knocked – unless it finds a way to re-invent itself fast.

How To Make Money From Writing,,,,,

2011-05-01T06:52:00.000-07:00

It might not always feel like it, but there is money in the thriller writing business….eventually. The TV channel Alibi has put together a list of the highest-earning crime and thriller writers, on both sides of the Atlantic. Ian Fleming is top of the British list, with earnings of a £100 million-plus, followed by Agatha Christie, and then by Jeffrey Archer (although I don’t think of him as a thriller writer).

Over in the US, it is headed by John Grisham on an extraordinary $600 million, followed by Dan Brown on $400 million – although I reckon if work it out per book, Brown has done better.

Are there any lessons in this for the rest of us writers? Two, I think. The first is that it takes a long time. All the writers on both lists have been writing for a long time – even Dan Brown published his first book in 1998 and it was a while before he had any success.

The second is that you have to write a lot. All the writers on the list are prolific, knocking out book after book. There are no one-hit wonders.

Anyway, I guess the moral is to keep plugging away. Riches await….although hopefully not after I’m dead.

To Be A Better Trader, Try Being Happier.

2011-04-25T08:56:00.000-07:00

In my Money Week column this week, I'm looking at how you can become a better trader - just by being happier. Here's a taster.

What makes a successful trader or fund manager? An all-encompassing view of how the global economy is developing? An instinct for a bargain? A fleetness of foot, and the confidence to take bold positions? A willingness to ignore the herd, and buy the stuff everyone else is selling? Or the patience and perseverance of a tortoise?
They are all perfectly reasonable suggestions, and there are many great traders and investors who have made fortunes through one or other of qualities.
But actually the answer may be a lot simpler.
Just try being a bit happier.
According to research released this month by the French business school Insead, the happier people are, the better they are at predicting the future – and the more depressed they are, the worse they are.
The implication is clear, both for banks and fund managers. Just make sure your traders and stock-pickers are cheerful and positive, and their performance will improve. The trouble is, however, they are caught in a classic Catch-22. Everything about the way most people in the financial markets work is guaranteed to make them miserable – and therefore to make them worse at their jobs.
The Insead research provided a fascinating insight into what makes people good at predicting future events – and what makes them bad at it as well. It has long been noted that more cheerful people tend to have a more optimistic view of the future, whilst the more miserable, not very surprisingly, are usually more pessimistic. In the markets, the optimists are usually bulls, while the pessimists are bears.
The Insead study went a lot deeper than that. It took 1,100 people, and asked them to predict the results of games during the 2010 World Cup. They weren’t particularly being optimistic or pessimistic – they weren’t making predictions for their own nations - they were just forecasting what was likely to happen. As an incentive to try and get it right, there was a cash prize for getting it right.
Interestingly, the more depressed the people were, the less likely they were to make accurate predictions. Indeed, many of the most down in the dumps did worse than they would have done just by picking winners from a hat. And they were significantly more likely to make ridiculous predictions, such as forecasting that North Korea would win the whole tournament.
The Insead team is now taking the same methods, and applying then directly to the emotional states of stock and commodity traders. But the implications are already clear enough. If being happy or depressed has a bearing on your ability to forecast the outcome of events, then it follows that happier fund managers or traders will be better at their jobs than their more morose colleagues.
The snag is, how do you influence the happiness of your staff?
Well, in truth, it isn’t that hard.
We have a fairly good understanding of what makes people feel good about life, and what make them depressed. Most of the key points were summarised by the ‘Action for Happiness’ campaign launched earlier this month by Professor Richard Layard, the guru of happiness economics, among others.
Happiness, it turns out, comes down to a few fairly simple things. Do things for other people. Take care of your body. Notice the world around you. Keep learning new things. Be part of something bigger. Have goals to look forward to. They may sound fairly like being in favour of motherhood and apple pie, yet, despite sounding platitudinous, they are certainly likely to make people more balanced and positive, and significantly less likely to suffer bouts of depression.
Here’s the catch, however.
They are not the kind of values promoted within the average bank or fund management firm.
If anything, the financial markets do precisely the opposite of what is likely to make people happy.
They concentrate on paying out huge cash bonuses, usually tied to demanding performance criteria, even though there is very little evidence to suggest that beyond a certain minimum level having more money actually makes people any happier.
They promote a ruthless competition between staff, and between companies, constantly benchmarking their performance against their peers. In fund management, for example, you have failed if you haven’t managed to beat the guy doing the same job at the next fund, even though you may have made plenty of money for your investors. And yet that is only likely to make their staff feel anxious and insecure.
And they promote a relentless short-termism, continually shortening the time to come up with results, even though it is usually far better to concentrate on medium-term performance, and more satisfying for the staff as well.
In short, if they were deliberately setting out to make their traders and stock-pickers depressed, it is hard to see how they could be doing a better job.
But, of course, the more depressed their staff are, the worse they will be at their jobs. In fact, it is a classic Catch-22. To trade well, you have to be happy, but everything about the work is likely to make you depressed, so you’ll end up being a very bad trader – the kind of person who thinks North Korea will win the World Cup, or that oil will be trading back at $20 a barrel by the end of next year.
Is there a way out of that? Perhaps.
Maybe investors should stop looking at all those charts that banks and fund managers love to produce showing how they out-performed their peers over the last there months. And maybe they should stop listening to all those boastful adverts about how the pay of staff is linked to performance.
Instead, just ask if the traders and stock-pickers are cheerful, feeling good about themselves, and are well looked after. Who knows, over the medium-term it might even produce better results.

Great Review Of Shadow Force...from Aus.

2011-04-18T11:38:00.000-07:00

There is a great review of Shadow Force from ABC Brisbane in Australia. "It's loud, it's fast and it's extremely aggressive.....Action, adventure and lots of guns combined with an excellent political sub-plot. For teenage boys or simply for those men who don't want to grow up, Shadow Force is a cracking read. Intellectually stimulating it ain't; fantastic fun it most certainly is."

You can read the whole thing here.

How Much Research Is Enough?

2011-04-18T04:53:00.000-07:00

Over at the International Thriller Writers site, I'm taking part in a round table on how much research is enough. Here's what I had to say - but take a look at the rest of the discussion.

I think research is one of those things where it helps to have experience. As CE Lawrence quite rightly points out, it is easy for the research to show too much on the page. A writer needs to know their subject, and to have a real feel for it. They need to know their characters as well, and have a real feel for the kinds of things they would think and feel and say as well. But they don’t have to have a text-book knowledge of everything they are writing about.

I suspect that attitudes to research have changed over the years as well. When I was writing ‘Fire Force’, which is a book set amongst mercenaries in Africa, I went back and re-read some of the classics of the genre. For example, I re-read ‘The Dogs of War’ by Frederick Forsyth. I can remember reading it when it came out, when I would have been about ten, and loving it. But today it seems like a really dull book, mainly because there is just too much research in it. The hero spends ages and ages setting up the mission. He regularly travels to Brussels to set up false bank accounts – by train and ferry, for Heaven’s sake, which takes up many pages. He doesn’t even get a plane. In the end, it just makes for what today seems a really dull read.

By contrast, ‘The Da Vinci Code’ is a poorly researched book. There are plenty or mistakes. Indeed, Westminster Abbey in London even had to issue a guidebook for tourists correcting some of the factual errors because so many tourists came in asking about them. But who cares? It’s a really good book – and it certainly sold well.

Thirty years ago, I think people expected thrillers to be very research-driven. But not right now. Today the key is to create your characters, and your story, and then do the research that is necessary to get things right. But this is fiction – its the plot and the people that really count.

Bust is Shortlisted for Best Business Book....

2011-04-17T01:54:00.000-07:00

I'm getting a lot of awards right now. 'Bust' has just been short-listed for the Spear's Book Awards Business Book of the Year award. The results are announced in June. Fingers crossed.

SABEW Award

2011-04-17T01:49:00.000-07:00

My Bloomberg column has been awarded a prize for best opinion writer by the Society of American Business Writers and Editors.

The Vickers Whitewash....

2011-04-17T01:47:00.000-07:00

In this week's Money Week column, I've been looking at the Vickers Report, and how it let the banks off the hook. Here's a taster....

This year, the UK had a Goldilocks moment to get to grips with its over-mighty finance industry. Two years ago, the banks were still too weak. You can’t put a patient in for major heart surgery when they are still recovering from a car crash. In the immediate wake of the credit crunch, the banks could not have survived radical restructuring. And in another two years, the banks will all be making big profits again, paying lots of corporation tax, and paying big donations to political parties. The memory of the credit crunch will have faded, and the political will to break then up will have evaporated.
But right now, the banks are strong enough to take some punishment. And the desire to make sure the events of 2008 are never repeated is still there. As Goldilocks would put it, it is neither too hot nor too cold – but just right.
Despite that, Sir John Vickers and his colleagues on the Independent Banking Commission blew it. Last Monday’s report on the future of the British financial services industry was the dampest possible squib. Its response was so feeble, and so irrelevant, that it now looks the British banks have in effect escaped from the worst series of collapses in a century or more without any meaningful reform to the way they operate.
No one can be in much doubt that Britain’s banking industry is in need of a major structural overhaul. Put simply, this country’s banks have become too big, and too risky, for the size of the economy that ultimately underpins them.
The point was well illustrated in a research note published by UBS last month. Barclays now has a balance sheet worth 100% of GDP. For a comparison, JP Morgan has a balance sheet worth 24% of US GDP. In effect, Britain is host to three very large banks – Barclays, HSBC and Royal Bank of Scotland – each of which has the potential to quite literally bankrupt the country.
We have already seen how Iceland and Ireland were ruined by the recklessness of their financiers. The same could easily happen to this country. It is a threat, and one the Commission had a duty to take seriously.
And yet, probably under the influence of lobbying from the banking industry, it has largely ignored it. The report singles out Lloyds for its main attention – when, in fact, it is the bank that poses the least threat to the stability of the financial system.
Lloyds will be forced to sell off more branches, over and above the 600 the EU is already making it get rid of. It is certainly true that Gordon Brown’s decision to bounced Lloyds into merging with HBOS was one of the former Prime Minister’s many catastrophic mistakes. It ruined a fairly sound bank, and dramatically reduced the competition in the mortgage and savings market. If reducing its size creates some space for new players in the financial services industry that will certainly be a good thing.
Yet, it is crazy to imagine that will make the financial system more stable. There is simply no evidence to suggest that too little competition between the banks is what led up to the credit crunch. Indeed, through 2006 and 2007 there were arguably too many lenders crowding into the British market. They were throwing around self-cert buy-to-let mortgages like confetti. More competition in a market is always a good thing. It creates more choice, and better service, with better prices. But anyone who thinks it is going to make the system safer is simply kidding themselves.
If the Commission was too harsh on Lloyds, it was too soft on RBS, Barclays and HSBC. It proposes stricter capital requirements, and dividing lines between the retail and investment banking units, so that the investment bank can safely be allowed to go bust, whilst the retail arm will be protected.
The trouble is, neither is going to fix the real issues.
The banks didn’t go bust because they had too little capital. A bigger buffer against financial shocks will help, but a reckless bonus system, too many complex products, and mindless expansion into markets they didn’t understand were the underlying causes of the crisis. Would RBS have survived with a couple of percent more capital? Almost certainly not. Neither would any of the other banks.
Nor is ‘ring-fencing’ the banks retails arms going to make a great deal of difference. It is very hard to believe that any kind of structure can be created that will make it certain that a collapse of the investment banking arm won’t bring down the retail bank as well. Bankers are very good at shifting money around a balance sheet. If there is a way of making the retail unit subsidise the rest of the bank, someone will find it and exploit it. For the system to work, you have to believe that the regulators are smarter and more knowledgeable than the people working in the banks – and the chances of that are just about zero.
Vickers had a one-off chance to do something really radical. He should have proposed a complete split between retail and investment banking. The retail banks would be safe, fairly dull institutions, and they could be fully protected by the government from failure. . The investment banks could take all the risks they liked, in much the same way that the hedge funds do, and if they went bust it wouldn’t matter very much to anyone apart from their staff.
Barclays might opt to move to New York. HSBC might decide to go back to Hong Kong, or to Shanghai. But so what? It matters much less than most people suppose whether a bank is domiciled in this country. The Commission had a duty to think seriously about whether it was responsible to host massive banks in the UK. It failed completely. The moment to protect the country from another massive banking collapse has passed – it won’t come again.

London's Great Economic Escape....

2011-04-17T01:44:00.000-07:00

In my Money Week column last week, I looked at how London escaped the recession, and what lessons we should learn from that. Here's a taster.

The classic 1960s war film ‘The Great Escape’ was based on the break-out of a group of Allied prisoners from a camp in the town of Zagen, in what was then Germany but is now Poland. But if you wanted to re-make it, with a financial rather than military escape, you’d probably set it in London.
At the height of the credit crunch, everyone was forecasting that London’s economy was doomed. The City, and the ancillary industries that fed off it, would come crashing down to earth. The rich would flee, and the bankers would soon be applying for jobs at MacDonald’s.
It hasn’t happened. The financial services sector has recovered sharply. London has emerged from the recession in better shape than the rest of Britain. Employment is stronger, growth is better, and house prices have bounced back. If anything the gulf between London and rest of the UK has grown wider.
There are important lessons in that. If the rest of the British economy was anything like as strong as London and the South-East, the whole country would be roaring ahead. Instead of talking about re-balancing the UK economy, we should be learning the lessons of London’s success, and trying to get the rest of the country to perform as well as it does.
The figures make it quite clear that, of all the regions in the UK, London and the South-East, have emerged best from the downturn. A CBI report released on Monday showed that financial services firms expanded strongly in the latest quarter. The big banks such as HSBC and Barclays are making huge profits again, and the City is doing well. A study by the London School of Economics, led by Henry Overman, the director of its Spatial Economics Research Centre, concluded that London had comes back stronger from the recession than any other region, and it suffered less in the downturn as well.
For example, London’s income per capita fell by 2.5% between 2008 and 2009, while it fell by 2.9% in England as a whole – and of course London was already a lot richer before the recession began. There were fewer job losses as well. The UK saw peak-to-trough falls in employment of 3.9%, whereas London saw only a 2.6% fall. And house prices bounced back quicker than anywhere else in the country. Indeed, Savills reports that prime London properties grew in value by 5% this year, whilst prices were still stagnant or falling in the rest of the country.
True, London benefited a little from government policy. The Olympics is a massive building project. The bail-out of the banks primarily helped the London economy rather than anywhere else. Against that, the massive run up in government spending did nothing for London. The South-East has far lower government spending as a percentage of the economy than other regions: in Wales for example, state spending accounts for more than 70% of the economy, whereas in the South-East it is around half that, at an estimated 36%. And of course London is harder hit by the tax rises than other parts of Britain – the new 50% rate will hit a lot of Londoners but not many people elsewhere.
In fact, the evidence of the recession is that London and the South-East have a hyper-resilient, hugely competitive economy. What we need to do is try and make the rest of Britain more like London.
There are four important lessons from the capital’s success.
First, and most obviously, London is plugged into the global economy far more than any other part of the UK economy. What happens to the rest of Britain or indeed Europe doesn’t matter that much. London’s bankers, lawyers, consultants and accountants are servicing the BRIC economies more than anything else. Russian and Far Eastern companies are flocking to raise capital on London’s markets, and that means paying lots of expensive fees. London had connected itself into booming markets – not locked itself into declining ones.
Next, London has specialised in professional services, and made itself a world-leader in selling those to the rest of the world. There is a lot of talk about reviving specialist manufacturing or creating other new industries for the UK. But the truth is, we don’t have many sectors where we can compete with Germany on quality, nor where we can compete with Eastern Europe on manufacturing costs. Maybe the best policy would be to recognize where our strengths lie – and get the rest of the country to try and do more of the things that London does so well.
Thirdly, London has a highly-skilled and hyper-flexible labour market. According to the Labour Force Survey, for England as a whole, professional and service occupations were hit less badly by the recession than administrative, trade and basic occupations. That was good for London, since professional occupations account for a larger proportion of its labour force – nearly 50%, compared with under 40% in the Midlands and the North. There was more flexibility on wages as well, partly because bonuses (which go down as well as up) are a bigger part of pay. That helped London’s workers keep their jobs through the downturn.
Finally, the state accounts for a far lower share of the London and South-East economy than it does for the rest of the country. Working for the government may be relatively secure during a recession, and that provides some protection for the regions. But the state sector also has low productivity, low growth, and it doesn’t export anything. It consumes rather than generates wealth – and it is only in London and South-East that it is small enough to allow the rest of the economy to flourish.
Forget everything you read a couple of years ago about how this would be a middle-class recession that hit London harder than anywhere else. It just hasn’t happened. Instead, London is pulling further ahead – and as the government spending cuts start to bite, that will become more and more obvious. But there is nothing that special about London. It is part of the same country as Manchester and Cardiff and Birmingham. If those regions could learn where the capital was doing so well, the UK would be doing a lot better than it is.

Shadow Force In The Northern Echo

2011-04-08T09:36:00.001-07:00

There's a great review of Shadow Force in The Northern Echo by Nigel Burton. A few choice quotes.

"IF you're a fan of modern military thrillers you're going to have fun with anything Matt Lynn writes..."

"I'm not ashamed to say that I read Shadow Force in one sitting - starting at 6pm I couldn't put it down until the last page shortly after midnight.

Great stuff.

Goudhurst Prison Blues

2011-04-02T03:10:00.000-07:00

One of my favourite records of all time is the Johnny Cash ‘Live At San Quentin’ album: a set that captures the rugged, outlaw sound of the man to perfection. So I couldn’t help thinking about that as I did my first prison gig a couple of weeks ago.
I wasn’t actually in San Quentin. I was at Goudhurst Prison, which is my local jail down here in Kent. It’s actually set among idyllic English countryside, and is in a pleasant enough old building, but the fact it has barbed wire all around it, and you have to hand in your mobile and show your passport at the door to get in, reminds you that this is indeed a jail.
I resisted the temptation to bounce onto stage saying, “Hello, my name is Matt Lynn’ before kicking into the opening chords of ‘Wanted Man’.
Instead, I just gave a version of my standard library talk, where I chat for a while about where the ideas for the ‘Death Force’ series of books came about, how they get written, how publishing works, and all the usual things that people like authors to talk about.
It was a different audience, however. They were younger, and, of course, all men. Quite a few of them had read the books, and enjoyed them which was gratifying, and the library service had bought some books to give away as a competition prize, which made a nice end to the event. They were more interested in money and contracts than most audiences, and maybe that says something about the kind of people they are.
I was struck by how intelligent most of the men were, and how articulate. Obviously something had gone wrong with their lives to end up in prison, but they were men with a lot of potential.
I came away, as one does from these kind of experiences, thinking about how narrow the line is between the safe, comfortable, easy lives that most of us lead, and the far darker, more troubled routes that some people take.

How People Power Can Curb Bonuses

2011-04-02T03:06:00.000-07:00

In my Money Week column this week, I'm looking at how people power may be able to curb bonuses. Here's a taster....

Banking bonuses are like cockroaches. Nobody much likes them. They can do a lot of damage. And short of an all-out nuclear war, they appear to be just about indestructible.
The financial collapse of 2008 didn’t do anything to curb the way the financial sector rewards itself. Nor have the attempts at greater regulation made much progress. Even higher taxes don’t work.
But how about people power?
In Holland, ING was forced to abandon a bonus scheme after a Twitter-led campaign against the bank that threaten to turn into a mass boycott. In France, last year, the former footballer Eric Cantona led a campaign for mass withdrawals from the banks. In this country, the UK Uncut campaign, has achieved a lot of impact with its protests against financial institutions.
In the end, banking pay, like just about anything, needs permission from society. Banks can’t operate unless millions of ordinary people are willing to put money into them, and use them to shift funds around. It may be that only direct action from ordinary people can finally bring the banking industry back under control.
There is little question that financial sector pay has got out of hand. The sector routinely pays its staff rewards that are far and above what other people earn, and which bear little realistic relation either to the success of the banks they work for, or to the contribution they make to the economy.
Just take a look at the latest revelations about pay at The Royal Bank of Scotland. Last month, the bank revealed that it paid out around £1 billion in bonuses. More than a hundred of its staff were paid more than £1 million. And this is despite the fact that RBS went spectacularly bust, is still majority-owned by the tax-payer, and is still losing money. It is far from alone. HSBC revealed that it paid 253 of its staff more than £1 million last year, 89 of them in London. Right across the board, bonuses have bounced straight back to 2007 and 2008 levels.
There is nothing wrong, of course, with people earning lots of money. If they are working hard and creating wealth they deserve it. But all the evidence suggests that the banking industry has become a cartel that operates against the public interest. The banks are too big, they take on too much risk, they require too much in the way of hidden subsidies from the taxpayer, and they pay themselves too generously. According to research by Harry Huizinga, an economics professor at the University of Tilburg in the Netherlands, twelve banks have liabilities of more than $1 trillion, and thirty banks have a ratio of liabilities to GDP in excess of 0.5, meaning in effect that if they go bust they may well bring down the country with them. Furthermore, the same banks pay consistently lower returns to shareholders than banks that are smaller, and less systematically important. In short, the mega banks aren’t very useful to anyone, except for their lavishly paid staff. We’d be better off without them.
But how do we bring them under control? There have been plenty of regulatory initiatives but none of them seem to get anywhere. Governments don’t appear very effective – they are too easily brow-beaten by the argument that the banks are vital for the economy.
But maybe people power can make a difference.
In Holland, ING last week agreed to scrap a bonus scheme that would have paid its chief executive Jan Hommen 1.25 million euros. ING was bailed-out by the Dutch government in 2008, and although it has since re-paid five billion euros of the money it received, there is still another five billion euros to pay back. The sober-minded Dutch objected to the sight of bankers who still owed the government billions paying themselves vast rewards. A Twitter-led campaign mobilised public opinion against the bank. People were threatening mass withdrawals from their accounts, creating the potential for a run on the bank. Although by last week only a few hundred people had taken their money out, it was enough to rattle ING. By the end of last week, it had decided to withdraw its bonus scheme, replacing it with something far more modest.
The footballer Eric Cantona tried something similar in France. At the end of last year, he launched the ‘Bankrun 2010’ campaign. The campaign threatened a mass withdrawal of money from the banks. Tens of thousands of people signed up for the Facebook campaign, in France, Britain, the US and elsewhere. The French banking unions warned of an economic catastrophe if it happened. In the end, the event was a bit of a damp squib. Some accounts were closed. But no banks went out of business. And probably those accounts that were closed were opened up somewhere else a few days later.
Still, there are signs that things are stirring.
There is no question that ordinary people feel deeply uneasy about the way that the financial sector rewards itself. They don’t buy into the argument that the banks are engaged in a fierce war for talent that means they have to pay everyone huge salaries. And they suspect, almost certainly correctly, that the way the banks reward themselves makes the system more risky, not less – and that they may have to end up paying for it.
Most of all, they feel powerless to do very much about it. But that, of course, isn’t really true. A bank such as RBS depends on its millions of retail depositors. Without them, it would be sunk. A pure investment bank depends less on ordinary customers, but there are not many of those left – and, in truth, the retail banks are the original source of the money the investment bankers play with.
The Cantona campaign didn’t work. But the ING protest was far more successful. And if the idea of depositors mobilising against banks take off, it could pose the most potent threat yet to the system. After all, for any bank there is nothing scarier than a run. Regulation won’t curb bonuses. It is unlikely that politicians or central bankers will manage to either. But people power might just do the trick.

Great Review of Bust

2011-03-28T02:16:00.000-07:00

There is a great review of Bust in Canada's Financial Post. "Public finance seldom makes for a juicy read. But Matthew Lynn, a financial journalist who, as a sideline, writes military thrillers, turns central banking into a seesaw of ghastly revelations and roaring hilarity," it says. "Bust is solid macroeconomics, practical trade theory, and fiscal policy that anybody can understand. It’s valuable reading for anyone investing in euro-denominated assets and a morality tale too."

Amazon Reviews....

2011-03-08T08:36:00.000-08:00

There’s a lovely piece in The Guardian today by Christina Martin about Amazon reviews. Apparently, there has been more controversy about authors writing their own reviews (how could they – the cads!) and whether the reviews are really reliable.

She makes the valuable point that they may or may not be real. It doesn’t really matter. You can fairly easily tell which ones are genuine and which ones are fakes by the way they are written, and whether the person has reviewed similar books. And they open up the debate about books to lots of new voices. After all, before we had to rely on the reviews on the back of book jackets – and they were often fairly fictitious as well.

Most authors have an ambivalent attitude to Amazon and other online reviews. Personally I like them. I’ve had good ones and stinkers, and although none of us like being criticised, I can take that in good spirit. The internet is full of nasty stuff, and there is no reason why authors should be exempt. Online reviews are one of the few ways we have of getting feedback on our work, and of judging how much impact it is making on the world.

The more of them the better – even if they aren’t real.

Why Investors Should Prefer Democracies...

2011-03-08T08:34:00.000-08:00

In my Money Week column this week, I've been looking at why investors should prefer democracies to autocracies. Here's a taster....

For anyone investing in the Middle Eastern markets, the last few weeks have been a heck of a ride. The Dubai market, one of the more developed in the region, plunged all the way back to 2004 levels during the past month. The Saudi market was shakier than a palm tree in a hurricane. The Egyptian stock market closed as the country ousted its long-serving President Hosni Mubarak, and won’t re-open for another week.
Right across the world, investors have pulled back from emerging and frontier markets. The darlings of the global investment community until a few weeks ago, they are now about as popular as Colonel Qaddafi in Benghazi.
There is a lesson to be learned from that. It is far better to invest in democracies than autocracies. In the last few years, the markets have fallen for the idea that autocratic governments are more stable and more efficient. There may be some truth in that in the short-run. In the medium-term, however, a revolution will destroy your investment. In practical terms, that means avoiding China and much of the Middle East, staying suspicious of Russia, and focussing instead on India, Eastern Europe and South Africa as well.
Before the tidal wave of change swept across the Middle East investors could be forgiven for believing that the nature of the regime didn’t make much difference to the case for putting money into a country. True, the people in charge of a country might be a shady bunch of gangsters and thugs, but so long as oil was being pumped, minerals dug out of the ground, and new factories getting built, it didn’t matter very much.
Emerging and frontier markets have been booming for the last ten years, pretty much regardless of whether the government in question was stable or not. According to calculations by IJ Partners, the Pakistani market rose by 449% in the last decade, measured in dollar terms. The Egyptian market rose by 430% over the same period. That was a better performance than gold or oil, and way better than traditional stock markets. The FTSE-100 was only up by only 12% over the same period and the S&P 500 by just 2%. And yet Pakistan is widely regarded as a failed state. And the Egyptian government has just collapsed.
The premium that investors used to demand to invest in emerging markets all but disappeared over the 2000s. We all know the reasons for that. Growth has largely ground to a halt in the developed economies. It was only by taking on more and more debt that the illusion of prosperity was maintained. The frontier markets offered far better prospects. They were growing fast, they had healthy demographics, and usually high savings ratios and low deficits as well. They looked a far more attractive home for your money.
But investors forgot the one thing that in the past kept them out of emerging markets – political risk. After all the 400%-plus gains you might make in a market such as Egypt don’t count for much if the bourse then gets shut down, and a new revolutionary government seizes foreign assets. You can only invest where there are secure property rights – and that ultimately depends on a stable government.
That lesson is being re-learnt very quickly. Globally, investors poured $95 billion into emerging markets funds during 2010. In the first week of February alone, as the Middle East crisis broke, they pulled more than $7 billion of that back, the biggest withdrawal in more than three years. Where once investors were piling indiscriminately into new territories, now they are abandoning them just as rapidly.
Neither is the right response.
What investors need to do is discriminate between stable and unstable emerging markets – and remember that in the medium-term it is only democracies that offer security.
There is a temptation to look at an autocracy and think it is rock solid. After all, a leader such as Mubarak hung around in power for three decades. Dictators are usually pro-business and anti-union. There is none of the messy business of populist politicians demanding tax rises, or threatening to take control of foreign investments.
But it is an illusion. Under the surface, terrible tensions are always building up. When they break to the surface, there is violence and chaos. A very radical, anti-capitalist regime can easily emerge.
It is far better to focus on the democracies – and avoid the remaining autocracies. True, the democracies might appear messier. But so long as there is a commitment to free speech, fair elections, and property is protected, over the medium-term they are far more stable. It is very rare for a democracy to be thrown out by a revolution – and it is very rare for an autocracy not to be.
So, be wary of China. True, it has great growth prospects. But it is still ruled by an authoritarian Communist Party that shows little sign of relaxing its grip on power. There are tensions between regions that are growing at very different rates. The whole of the Middle East looks off-limits as well. States such as Saudi Arabia and Dubai will face their own revolutions in time, no matter how wealthy they might appear to be. And stay suspicious of Russia. It is slowing slipping from democracy back towards autocracy, and that will make it less stable in the medium-term.
Against that, India has been a remarkably successful democracy for a very long time, particularly considering its size and relative backwardness. Brazil is a reasonably free country and so are South Africa and Turkey. Nearly all of Eastern Europe, although its markets have not shone in the past couple of years, is far more democratic than anywhere in the Middle or Far East.
There will be bumps along the way, and elections that hit the markets. But over the medium-term, it is only countries that have already created functioning democracies that offer any chance of decent returns.

A Letter to Mervyn King....

2011-02-28T05:43:00.000-08:00

In my Money Week column this week, I've drafted the letter that George Osborne should send to Mervyn King next time the Bank misses its inflation target. Here's a taster....

British economic life has acquired a new ritual. Every three months the Governor of the Bank of England writes a letter to the Chancellor of the Exchequer explaining why he has had missed the inflation target. And, on the same day, the Chancellor responds with an anodyne, sympathetic reply, accepting the Governor’s excuses without so much as a word of criticism.
We saw it played out this month. No doubt we’ll see it a couple more times before the year is out. The Bank has given up on hitting its 2% inflation target. With prices rises at 4% a year on the official figures, and significantly more on the kinds of things that people actually notice they are spending money on, there is little chance of getting back within range soon.
But, in any normal business, if you gave up on hitting the target your employer set for you, you’d expect a monstering. Next time around, George Osborne should rip up the rule-book. He should write Mervyn King a proper letter. Here’s what it should say.
“Dear Mervyn,
Thank you for your letter.
I am disappointed that inflation has yet again significantly exceeded the target set for the Bank of England by the government. I should remind you that meeting this target is a legal requirement. I accept that a target won’t be met every month. That is why some flexibility is allowed. But I am worried that you are not really trying.
I am frankly puzzled by some of the arguments put forward in your letter
I believe there must be something wrong with the forecasting model the Bank of England is using. In the letters sent both to me, and to my predecessor Mr. Darling, you have been consistently predicting that inflation will fall. For example, in your letter of May 17th last year, you argued that the rise in VAT and the drop in the value of sterling were the main reasons why you’d missed the target. “The effects on inflation can be expected to wane over time,” you stated. “As this happens, the MPC expects that inflation will fall back.”
It didn’t happen, did it? In fact, inflation has accelerated since then. If a model keeps producing the wrong forecasts, then it is time to get a new model. I would like you to ask the Bank’s economists to start working on that – and stop sending me wrong predictions.
As for your ‘explanations’, they sound more like excuses. Stop going on about the ‘output gap’. This is intellectual nonsense, and it is time you realised it. The idea that the Bank knows precisely what the ‘right’ level of output for the British economy is, and how much we are currently below it, is the kind of thing that even the Gosplan economists in Moscow in 1970 might have considered a little arrogant. In reality, we have no precise idea what the UK can produce, or how far below that we might be right now – and certainly not to within a couple of percentage points. This so-called ‘output gap’ doesn’t exist. It clearly isn’t bearing down on inflation in any meaningful way. So stop talking about it.
Next, stop blaming imported inflation. True, commodity prices are going up around that world – mainly because your friend Ben Bernanke over in Washington is running the Fed in the same incompetent way you are running the Bank. Of course global inflation impacts us here in Britain. But it is mediated through the exchange rate. If sterling was stronger, then the rising price of oil wouldn’t make any difference to the amount ordinary people have to pay at the pumps. Nor would the price of food or clothing be going up the way it is.
The Bank can certainly influence the exchange rate. Higher interest rates would strengthen sterling, and so change the inflation outlook. If you pledged that there would be no more QE, that too would help the pound. Both together would make sure we weren’t importing inflation anymore.
Finally, I would like you to read more widely. You used to be an academic economist (indeed you were one of the 364 economists who famously attacked another new Conservative Chancellor in 1981). You must be aware that there is plenty of economic theory to suggest that running negative real interests of 3.5% and printing money by the barrow load is a sure way to create inflation. Please re-acquaint yourself with the literature. In your next letter I’d like you to explain why the Bank’s policies of ultra-low interest rates and quantitative easing are not responsible for the inflation we are seeing now.
Most of all, I am worried by the air of defeatism that seems to have overcome you. Never believe that inflation is outside your control, or that it is an acceptable way of working our way out of our debts. In the inflationary 1970s, and early 1980s, when prices around the world were soaring ahead, and the price of oil more than quadrupled, one country never experienced any significant inflation. Germany. Even through the worst of the 1970s, the Bundesbank managed to keep the average German inflation rate at just 4.9% a year. In the 1980s, the average rate was just 2.1%. Please explain why the Bundesbank was able to achieve that in far more difficult global circumstance and the Bank of England can’t.
I am prepared to give you one more chance. But the Governor of the Bank of England can’t expect to be the only person in the country who is not judged by their results. Inflation makes life hard for ordinary people. Real wages are already falling. Families are struggling to make ends meet. The Bank is close to the point of losing credibility. Once that happens, there is a real risk of interest rates having to rise very sharply to bring prices under control again.
Your next letter should be your last. If you can’t find a way of getting the inflation rate back within the target, then I’m sure you will accept that it is time we found someone who can.
With best wishes,
George.”

We Don't Need More Women on Boards....

2011-02-25T04:01:00.000-08:00

I've done a piece for The Spectator about why we don't need more women on boards. You can read it here.

We Still Love Thrillers

2011-02-22T09:31:00.000-08:00

The Curzon Group was, of course, set up to revive the great tradition of British thriller writing. Judging by the latest public lending rights figures, which measure the most borrowed books from libraries, we’re doing a great job. Of the 100 most borrowed books, about two-thirds are crime and thrillers.
Okay, I’m getting ahead of myself. We can’t claim any of the credit for that. James Patterson and Dan Brown would have topped the list anyway. But it is gratifying to know that we are all working in the nation’s most popular genre.
The PLR figures give you an interesting take on what the country actually reads. Of course, the demographics aren’t really representative. Older and younger people use the libraries a lot more than most of the population. But it does give you an idea of what people enjoy away from the hype of the publishers and the deals done with the big supermarkets chains. So, for example, Stieg Larsson, despite all the publicity only managed to get one book in the library chart, and that was at number 76.
The message, surely, is that people like gritty, fast-paced crime and adventure stories more than anything else. Which is lucky, because that is precisely the kind of stuff we write.

The End Of Swis Banking

2011-02-20T05:38:00.000-08:00

In my Money Week column this week I've been looking at the possible demise of Switzerland's formidable banking industry. Here's a taster.

There are a few things we think we know for sure about Switzerland. It makes nice chocolate and reliable watches. It’s sort of pricy, and a little on the dull side. And it has the most formidable banking industry in the world.
For a hundred years or more, Switzerland and banking have been just about synonymous. Countless thrillers feature a scene where a shady deal gets done at some discreet Zurich or Geneva office where the secrecy of the transaction can be considered absolute. If London has a serious rival within Europe as a banking and finance centre, it is Switzerland rather than Frankfurt or Paris.
But now the country’s finance sector is looking challenged in a way that it hasn’t been for a generation or more. The country’s two giant banks, Credit Suisse and UBS, are struggling to recover from the credit crunch. Smaller banks such as Julius Baer are fighting to maintain client confidentiality as data gets passed onto WikiLeaks. Those may just be blips. Every industry goes through ups and down. But they may also be signals of long-term decline.
In reality, the success of the Swiss finance sector was based on secrecy and access to lots of cheap capital. Both appear to be gone forever. And that may well mean that Switzerland’s competitive advantage is at an end.
Whilst most of the global banking industry is roaring back from the credit crunch in fine fettle, and paying itself bigger bonuses than ever, the big Swiss banks seem to be stuck in the doldrums.
Credit Suisse came through the credit crunch better than most investment banks. It didn’t need a rescue. But it doesn’t appear to have recovered much of its old panache as the global economy grows stronger. It results earlier this month disappointed the market. It cut its 2010 dividend 35% last week and lowered its target for return on equity in the next three to five years to around 15% from more than 18%. It seems to have accepted that it will be permanently less profitable.
UBS doesn’t look any happier. The bank only just scraped its way through the credit crunch. Its fourth-quarter pre-tax profit from investment banking slumped
75% t to 75 million Swiss francs. The bonus pool was cut by 10% to reflect disappointing figures. Its chief executive officer Oswald Gruebel admitted that the results were “clearly not yet satisfactory.”
Meanwhile Julius Baer, one of the oldest names in Swiss banking, has been hit by an embarrassing scandal. A disaffected former staffer has threatened to publish the names of thousands of its clients on WikiLeaks. The whistle-blower has been arrested for breaking Switzerland’s bank secrecy laws, and it remains to be seen whether the data is ever released. Even so, it is not the kind of thing that will make the well-heeled clients of Swiss banks feel very confident.
Of course, every industry goes through bad spell. The problem for the Swiss banking sector is that it faces two huge challenges that may make it less competitive on a permanent basis.
The first is that secrecy is dead.
The European Union has been chipping away at Switzerland’s tradition of confidential, numbered bank accounts for years. Neighbouring countries suspected they were losing billions in taxes on money salted away in Swiss accounts, and they were probably right. German businessmen used to drive over the border at weekends with the boot of their BMW full of deutschemarks to deposit in the country. The Swiss have been forced to end all of that.
Now the internet is finishing the job. In an era of hyper-transparency it is impossible for the Swiss banks to maintain the old traditions of client confidentiality. They may succeed in locking up the latest whistle-blower. But it is simply too easily for a disgruntled employee to post thousands of account details on a website like WikiLeaks. If the US government can’t stop sensitive military data being published on the web, a few Swiss banks can’t hope to.
The trouble is, secrecy is often what people were buying. The banks might blather on about how they offered excellent service, and in-depth, personalised investment advice. But usually what the customers wanted was to keep their money hidden from the taxman, their wives, or their business partners. Secrecy was the main reason people went to Switzerland, and if its banks can’t keep their accounts under wraps you might as well go somewhere else.
Secondly, the giant Swiss banks, like the British ones, have grown too big for their home country. The Swiss central bank knows that both UBS and Credit Suisse have assets worth many times the country’s GDP. If both banks ran into trouble the way that Royal Bank of Scotland did in this country, it would quite literally bankrupt the country. In response, they have introduced the toughest capital rules in the world. The Swiss banks will have to maintain capital ratios at double the levels agreed under the Basel rules. In effect, that means the money the banks use as their raw material will be twice as expensive as it will be for British, American or German banks. In a competitive market, that is a huge handicap.
Swiss banking was a great model. Lots of people deposited tons of money in the country. They didn’t much care about how much interest was paid on it, or what the investment advice was like because what they really minded about was discretion. The banks could use all that cash as essentially free capital, which would bulk up their balance sheets, and allow them to go out and finance deals around the world. It was a fantastic way to make a lot of money.
Now it seems the model is broken. The accounts aren’t secret, and the capital isn’t cheap. Unlikely though it seems, in twenty or thirty years we might not associate Switzerland with the banking industry anymore. Still, there’s always the chocolate and the watch industry.

What Makes a Great Bookshop

2011-02-15T03:33:00.000-08:00

Congratulations to The Book Hive in Norwich, which has just been voted the best independent bookseller in Britain by The Daily Telegraph.

More then 18,000 people voted in the competition, which suggest that a lot of people are still very enthusiastic about their local bookshops, and are happy to support them. With the chains in worse and worse shape, the independents are likely to have an even more important role in selling books.

But what makes a great bookshop, I wonder.

I think selection and organisation are the key to it.

The big difference between a bookshop and buying books online or just grabbing something from the limited selection in the supermarket is that you come across things by accident. You are looking at one kind of book, and then see another that grabs your interest.

Not many shops are good at it. For example, my books are often classed with crime and thrillers, and although they are sort of thrillers, they really have nothing to do with the crime genre, and are not going to appeal to the people browsing in that section of the shop. It would actually make more sense to place them alongside the real-life military stories. Or possibly next to the history section.

Not many bookshops make those kind of creative decisions.

But the few that do will certainly survive and flourish.

The Business of Piracy....

2011-02-12T09:51:00.000-08:00

Shadow Force is set amodst the battle against Somali pirates. I've done a piece for the FT amout the business of piracy. You can read it online here.

Getting Voices Right...

2011-02-08T04:50:00.001-08:00

As I might have mentioned last week, I am making revisions to ‘Ice Force’ right now. For me, that mainly means working on the language, and in particular the dialogue.

One of the hardest things writers have to do is give all the people in the their book a distinctive voice, and that is something I find I have to continually check. It is especially hard for me, because there are ten characters in the military unit in my stories, and although some of them are more important than others, they are all pretty crucial to the series.

So I need to make sure they all speak in a way that is convincing throughout the book, and which also separates one man from another.

I don’t do it through accents. That is partly, if I am being honest, because I am rubbish at writing them. I have no ear for putting a Welsh accent into easily written form. But its mainly because I think it is distracting. You don’t want the book to turn into an exercise in showing off how good I am at accents.

Instead you have to do it by the kinds of things the men say. It is there in the way they react to situations, how they respond to jokes, and in the kind of ideas and thoughts they have.

But you need to have thought through your character completely to know what they would say all the time.

And you need to make sure they never say anything out of character. That would shatter the illusion for the reader in an instant.

When you get it right, it is very satisfying. The right dialogue really makes a book come alive.

But you have to keep checking you haven’t got any of it wrong.

The Demise of the Euro....

2011-02-08T03:27:00.001-08:00

In Management Today this month I've done a piece on the demise of the euro. You can read it here.

How to Make Money from Bank Bonuses.....

2011-02-08T03:25:00.000-08:00

In my Money Week column this week, I've been looking at how you can make money from other people's bank bonuses. Here's a taster.

Warren Buffett once famously remarked that the airline industry, whilst making it far easier for people to get around the world, had burned just about all the capital investors had ever put into it. “As of 1992, in fact—though the picture would have improved since then—the money that had been made since the dawn of aviation by all of this country's airline companies was zero. Absolutely zero,” he wrote in one of his letters to his shareholders in the 1990s.
Buffett probably doesn’t feel quite the same way about investment banking – he did, after all, help out Goldman Sachs when it was short of cash during the credit crunch and made a lot of money on the deal. But his observation about airlines is just as true of the traders and dealmakers of London, New York and Zurich. The industry has made a fortune for the people working in it. The executives and traders have walked away with fortunes. But, as a general rule, the outside shareholders have been stuffed.
Now, however, that might be about to change. Under political pressure, banks such as Barclays Capital and Credit Suisse are abandoning big cash bonuses in favour of paying their staff in deferred shares, or in bonds linked to the share prices. Whether that makes the banks any safer remains to be seen. But it should be a great opportunity for investors. The one thing we know bankers are really good at is manipulating the price of financial assets. All you need to do is invest in the same piece of paper that bankers bonuses are being paid in, and you can be sure it will soar in price.
Barclays has been making the most noise about changing its bonus scheme. Chief executive Bob Diamond is said to be about to unveil a scheme that would pay his most senior staff in convertible bonds, known as cocos, rather than just giving them wheelbarrows full of cash. The bonds would be freely traded, but would automatically convert into equity if the bank’s capital ratios fell below a required level. The idea is a simple one. If the bank gets into trouble, and runs out of equity the way many banks did during the credit crunch, all those bonuses would be converted into shares.
Credit Suisse has also been forcing its bankers to have more of a stake in the bank. The bank has started paying a far higher proportion of its bonuses in shares, and staff will have to keep them locked up for four years before they can sell them. Other banks are reported to be considering similar schemes, paying bonuses either in shares or else in convertible bonds.
It’s not hard to see the sense in the idea. Whether big bonuses played the part in the financial crisis of 2008 that is popularly supposed is open to question. It’s possible that lax monetary policy and global trade imbalances played just as big a role. What is certainly true is that bonuses have made investment banking a rotten industry for outside investors. The banks may at times make obscene amounts of money for doing very little – but, rather like football clubs, it was the players who walked away with all the cash rather than the shareholders.
The long-term performance of most of the big banks has been terrible. UBS shares are no higher now than they were back in 1993. Morgan Stanley shares are no higher than they were in 1998. The star of the industry Goldman Sachs has been a money machine for its staff, but not nearly so lucrative for its owners. The shares are still down on the 2006 price, and the yield is less than 1%. As a general rule, the people who actually own the businesses have missed out on all the money the industry makes.
No great surprise about that. There was no real need to share the spoils with the shareholders. For much of the last decade, investment banks didn’t need to raise much fresh capital.
The new bonus schemes will change all that. One useful rule in economics is that if you provide people with a big incentive to hit a target, they will do so regardless of whether it makes much sense. A classic example was in Soviet Russia. The Kremlin leadership decided too many people were dying in Moscow’s hospitals. The doctors were told to cut deaths by 50%. So they chucked all the old people out into the streets. Naturally, they quickly died of cold, but deaths in hospitals fell by the required amount. The target was met.
Banks aren’t going to chuck out old people – apart from anything else, they don’t employ any. But they will, just like those Moscow doctors, do whatever they need to do to meet their target. The one thing that we know for sure bankers are very good at is manipulating the price of financial assets. If actually getting their hands on their bonus requires that the share price or its convertible bonds hit at a certain price in two, three, or four years times, then you can be certain that the entire energies of the bank will be dedicated to making sure it happens.
Whether that will actually make the bank stronger or more stable in the medium-term is open to question. The long-term performance of Barclays doesn’t really depend on its capital ratios. The Credit Suisse share prices may or may not be a good indicator of its underlying performance. But none of that will matter. If it is what needs to be done, it will be done.
It is a great opportunity for investors. Just wait until the bonus scheme is unveiled. When it is, look at what piece of paper needs to soar in price for the bankers to collect their bonus. Then fill your boots. The bank may well go bust a few years later – but you can be sure that your investment will pay off handsomely before that happens.

Revisions, Revisions....

2011-02-01T01:18:00.000-08:00

I finished the first draft of ‘Ice Force’ last week, so now all I have to do is revise the manuscript before I hand it in to Headline. I enjoy revisions. As I’ve pointed out before on this blog, I plan my plots in a lot of detail before I start writing the book, so the difference between the first and second draft is not going to include any very radical re-working of the storyline.

Instead, it is all about the prose. I write a book straight through. I don’t go back and re-read anything until the whole book is done. So when I am revising, there is a fair amount of tinkering around to be done. But it is mainly about tuning up sentences, and punching up dialogue. That is all fun. It’s probably the bit of the job I enjoy the most.

But I was struck by a post on Roy Greenslade’s blog this week about how Rudyard Kipling revised his work.

"Take well-ground Indian ink as much as suffices and a camel hairbrush proportionate to the intersperse of your lines,” Kipling advised.

In an auspicious hour, read your final draft and consider faithfully every paragraph, sentence and word, blacking out where requisite.

Let it lie by to drain as long as possible. At the end of that time, re-read and you should find that it will bear a second shortening. Finally, read it aloud alone and at leisure.

May be a shade more brushwork will then indicate or impose itself. If not, praise Allah, and let it go and when thou hast done, repent not."

Kipling, as Greenslade points out, was talking about his newspaper pieces in India. But much the same advice applies to a book as well. Obviously we can skip the bit about the Indian ink. Apart from that, it is good stuff. Always read it carefully, put it aside for a while, then read it again. And once it is done, stop worrying about it.

The one thing I don’t do is read it aloud. But I think it might be a good idea. Words and sentences have a different flow when read out loud, and they might well be improved. I might try that this time around.

Ed Balls Will Be A Disaster

2011-02-01T01:16:00.000-08:00

In my Money Week column thios week, I've been writing about why Ed Balls will be a disaster as Shadow Chancellor. Here's a taster....

Almost alone among an anodyne generation of British politicians, Ed Balls has the ability to divide opinion. When the Labour Leader Ed Milliband appointed him as Shadow Chancellor last week plenty of people saw him as too addicted to back-stabbing and briefing to ever make an effective team player. But most praised his economic expertise, and concluded his combative approach would make life a lot harder for the Conservative-Liberal Democrat coalition.
In fact, that consensus is upside-down. Balls’s aggression, and his ability to make the life hard for his rivals, are his strengths. His weakness is his shaky grasp of economics. He’s got just about every major call on the economy wrong. And he has made himself the leading exponent of a crass version of Keynesianism that is going to end making him look absurd.
By constantly making the wrong predictions, and attacking the government for quite sensibly policies, Balls will ruin his party’s credibility. He will make the re-election of the coalition in 2015 far easier.
As it happens, Balls’s record provides plenty of ammunition for his opponents. He was the key economic adviser to Gordon Brown during his ten years as Chancellor. He boastfully claims authorship for many of his former boss’s policies, even though most of them later turned out to be catastrophic. It isn’t going to be hard to pin his past on him.
The new system of financial regulation put in place after 1997 led to the worst string of bank collapses for more than a century. The decision to run-up a vast budget deficit even while the economy was booming looks to have been a costly mistake. The housing market was allowed to run riot, mortgage lending spiralled out of control, and the trade deficit reach new heights. It wasn’t much of an economic record.
Balls points to the independence of the Bank of England and keeping Britain out of the euro as achievements. But, at the very least, these are questionable. The Bank has not done a great job of managing the UK economy. First it gave us the housing boom, now it is giving us rampant inflation. What’s so great about that? As for the euro, the Labour government could never have signed up to it without a referendum, which would have been decisively lost, so that was hardly a personal victory for Balls. It’s like claiming credit for stopping an invasion by Martians. Since it was never going to happen, it’s not much of a deal.
But electorates aren’t much interested in history.
Right now, and for the next five years, Balls is relentlessly pushing the line that the cuts are too fast, and will push the economy back into recession. Much of the media has fallen for this line as well. If you listen to the news, you’ll constantly hear that reducing the deficit may derail the recovery.
It is, however, complete nonsense.
The latest economic research suggests that, contrary to what we kept being told, deficit reduction leads to faster economic growth. And the governments that cut spending tended to be rewarded with re-election.
Take a look at the work of Harvard’s Alberto Alesina, for example. “The conventional wisdom about the political economy of fiscal adjustments goes more or less as follows,” he wrote in a paper for Ecofin last year. “Deficit reduction policies cause recessions which create political problems for incumbent governments. The latter therefore see fiscal adjustments as the kiss of death.” That’s very much how Balls sees it. The cuts will cause a recession, and a backlash against the coalition. “Fortunately the accumulated evidence paints a different picture,” continues Alesina. “First of all, not all fiscal adjustments cause recessions. Many even sharp reductions of budget deficits have been accompanied and immediately followed by sustained growth rather than recessions even in the very short run….Second and this is most likely a consequence of the first point, it is far from automatic that governments which have reduced deficits have been routinely not reappointed.”
Indeed so. In fact, cutting the deficit doesn’t lead to a recession. It more often leads to a period of rapid growth. That was true in this country in the early to mid-1990s, when big cuts in spending led to sustained recovery. It was true of Sweden and Canada in the 1990s as well. Alesina’s study looks at 107 examples of fiscal consolidation, defined as cutting the deficit by 1.5% of GDP or more, within OECD countries since 1980 and found that in nearly all cases it was followed by higher growth rather than lower.
There’s no great mystery about why that is. Of course, cutting spending takes demand out of one part of the economy. But it puts it back in somewhere else, either because the government taxes less or borrows less. There’s no reason why the overall level of demand in the economy should change.
Cutting the deficit, however, helps the economy in other ways. It improves confidence, as consumers and businesses worry less about future tax rises. Real interest rates may fall as the markets grow more confident about government finances, and that stimulates investment. The stock market usually rises, increasing demand as people’s wealth rises. And, of course, since a smaller state and lower taxes are usually good for the economy, anything that makes government smaller rather than larger will help promote growth. Indeed, another key finding of the research is that not only does deficit reduction help growth. The more spending cuts are used to cut debt rather than tax rises, the higher the rate of growth that follows it will be.
The evidence is clear. Cutting the deficit makes an economy grow faster not slower. That is true of just about every other country in the last thirty years. There is no reason why it shouldn’t be true of the UK over the next four years as well.
But Balls doesn’t get it. He insists the opposite is true. A Shadow Chancellor who spends five years issuing blood-curdling warnings about the economy, none of which come true, is not going to impress the electorate very much. He’s just going make himself and his party look stupid.

How To Plan A Book

2011-01-17T08:38:00.000-08:00

Over on the International Thriller Writer's site I've been leading a discussion on whether to plan a novel in advance. Here's my contribution, but you can read the rest of the debtate there.

Before starting the ‘Death Force’ series a couple of years ago, I spent about five years as a ghost-writer for Random House. I churned out seven action-adventure thrillers, books that were supposedly written by spies and special forces guys.

In many ways it was a frustrating experience. You get quite well-paid, but you don’t get any credit for your work.

But it did teach me one really useful thing – the importance of planning your plot.

When you are ghost-writing, you need to get the ‘author’ and publisher on board. The last thing I wanted to do was spend months on a book, and then get told it wasn’t what they wanted. So I started writing incredibly detailed outlines. I’d do a 15,000 word outline for a 100,000 word book. Every chapter and incident would be detailed, bits of dialogue, and character development. Then I’d make sure everyone was signed up to it.

And you know what. I found it was a tremendous discipline. It forced me to really think ruthlessly about where the plot was going. It forced me to think hard about turning point, and twists, and to fitting the characters into the story. And it made me much better at chucking things out – I could edit much more fiercely on an outline than I ever could on a finished manuscript.

So now that I am writing my own books I still do these incredibly detailed outlines.

And that has two big advantages.

First, the plots are much better. They start in the right place, they are tighter and leaner, and more exciting.

Second, when I’m writing the actually book, I don’t have to worry about plot and structure because that is already done. I can focus on jokes, dialogue, one-liners, terrific action descriptions, and all the other stuff that goes into a first-class thriller.

So if there is one piece of advice I would always give an aspiring writer it is – plan, plan, plan.

Why Japan and the US Are Still in the Game....

2011-01-17T08:35:00.000-08:00

In my Moneyweek column this week, I've been looking at how demographics changes our perception of the big economic trends. Here's a taster....

Unless you happen to be a hedge-fund manager specialising in high-velocity yak hide futures, most investors operate on long time horizons. Whether the Nikkei or the Footsie will be up or down a bit by the time spring comes around, or whether the dollar will finish the year up or down against the euro, no one really has any idea.
The best you can do is figure out what the long-term trends are, and you’re your investment decisions accordingly.
Over a twenty or thirty year view, most of us probably think we have a pretty good idea of where the world economy is going. China will rise into a position of global dominance, closely followed by the other BRIC economies of India, Brazil and Russia. Japan will continue its long slide into irrelevance. Europe is just about finished, although the mighty German export machine will keep powering ahead. The United States is in irretrievable long-term decline, sunk by debts, deficits, and imperial over-reach.
And yet the latest demographic research suggests that script is just about completely wrong. In fact, Japan is doing much better than most people think. China isn’t doing nearly as well. German strength is deceptive. The US is far better placed than you’d imagine. And, in Europe, Britain and France will be the highest-growth economies.
In the long-run, economics is basically demographics, with a few supply and demand charts thrown into the mix. A country’s GDP is determined by the number of working people, multiplied by their output. Output per worker varies depending on productivity growth, fairly obviously. But the number of workers varies as well. Partly that depends on the participation rate – that is, the numbers of people who go out and get jobs. Welfare systems make a difference to that: they can easily deter low-paid workers from looking for jobs. So do social trends: the number of women working has made a big difference to employment rates in all the developed countries.
But the number of workers depends most crucially on birth rates. Once your population goes into decline, it is very hard for your overall economy to grow. And if the population is growing, it’s hard for the economy not to.
How does that change the big global economic trends? Like this.
Forget all that stuff about Japan’s lost decade. It’s nonsense, pushed by Keynesian economics to justify printing lots of money. As Daniel Gros, the director of the Centre for European Policy Studies, has pointed out, Japan ‘never lost a decade’. When you divide GDP by the number of working age people (defined as everyone between 20 and 60) Japan did better in the last decade than the US, and better than most European counties as well. That certainly seems to chime with the evidence we can see all around us. If Japan is doing so badly, how come the roads are full of Toyotas and our houses full of Nintendo Wii’s and Sony TVs? If Japanese demand is so weak, why is unemployment only 5%, half the rate in the US and the eurozone?
In fact, Japan did as well as a wealthy, mature economy could be expected to. It would probably have done better if the Bank of Japan had listened less to academic Keynesians, and printed less money. Even so, the message is clear. Japan remains one of the most innovative, successful capitalist economies in the world – it’s just not going to show up in the GDP numbers because its population is falling.
Next, re-think China’s rise to global dominance. True, the country is rapidly industrialising. It’s a big place, and it is going to be a big player in the global economy. But how big? Right now, China is in a demographic ‘sweet spot’. The one-child policy means there aren’t many children. And past population growth means there aren’t many old people either. So in this decade China has an exceptionally high percentage of its population of working age. That is terrific for growth right now, but bad for the long-term. By 2030, China will have a greater percentage of pensioners to look after than the US. That is going to act a big drag on economic growth. And there won’t be much anyone can do about it.
The US, by contrast, will be in much better shape. True, America had been running big budget and trade deficits, and its banking system is in a terrible mess. But those are all short-term problems. The over-60s currently account for just 18% of the US population. That will only rise to 25% by 2050. The US has one of the highest birth rates in the developed world (14 births per 1,000 people annually, compared with 12 in the UK, or 8 in Germany). And, of course, it remains open to immigrants, at least compared to other rich countries. There will still be lots of bright, hard-working Americans joining the labour force every year for the foreseeable future, and they won’t be paying a fortune in taxes to support an army of pensioners. It’s hard to see how that can be bad for growth.
Lastly, re-think what you know about Europe. Germany has catastrophic demographics, and the country is increasingly suspicious of immigrants. A kink in the birth rates means the working age population has been stable since 2005, and will stay that way until 2015. Then it falls of a cliff. You can’t keep an export machine going when there aren’t any workers. France and the UK, by contrast, are set to dominate Europe – they are the only two major countries with stable or growing populations.
What should investors make of that? Simple. Don’t be too pessimistic about Japan. It’s in much better shape than you’ve been told. The China story is over-sold. The US is in much better shape than most people have acknowledged. France and Britain look pretty good too. Turn all of that into portfolio consisting of index-tracking funds following the Nikkei and the S&P 500, with a side position in the FTSE-100, and France’s CAC-40. Then come back and check how your investments are doing in 2030 – and you’ll almost certainly find they have done pretty well.

A Great Review of Shadow Force...

2011-01-13T03:20:00.000-08:00

There's a great review of Shadow Force in City AM today.

IT doesn’t take a rocket scientist to figure out that a book called Shadow Force – the first in a series that tracks a pack of mercenaries around the world – is not going to have much of a feminine touch. Well, journalist Matt Lynn has gone the full distance and got women out of the picture entirely. His cast of the characters at the beginning reads like a who’s who of an angry teenage boy’s warfare fantasy. There’s Steve, formerly of the SAS; Ollie, once of the Household Cavalry; David, of the Irish Guards; Nick from the Territorial Army, and so on. There’s a weapons glossary at the end, too. Well, fair enough. The kinds of men who will be reading this book won’t be sinking their teeth into it for its nuance – or for the now-popular genre of the female warrior (thank you, Lisbeth Salander). This is 100 per cent men doing, what Lynn seems to insist, is “man’s work”.

And perhaps it is. There’s an an undercover operation; a top secret unit, and possibly a death sentence for all concerned. Why? Well, Somali-based pirates are attacking ships off the coast of Africa, demanding millions in ransoms and pushing up the cost of shipping along this crucial route. The elite “fighting men” from Death Inc – the British government’s top-secret force – are called upon to destroy the pirates. Only once there, they realise they’re the target of a deadly conspiracy and their lives are the only thing that are expendable about the mission. Lynn is being tipped as the next Andy McNab and there’s no doubt he can spin a good, violent yarn with the right amount of real-life political darkness thrown in. Certainly a good read.

Why Stories Matter...

2011-01-10T09:10:00.000-08:00

Over at The International Thriller Writers Website, I've been leading a discussion on why stories matter. You can read the other contributions there, but here's what I had to say.

Why do stories matter? It’s a good question for a writer to ask themselves. If you made cars, or taught kindergarten, or worked as a farmer, it would be much easier. Your work matters because people need it. It fulfils some function. But do people need stories? What function do they have?

You could argue – not much. After all, they are just a made up series of events.

I think they do have a function. After all, we’ve been telling stories ever since cavemen sat around the first camp fires. Probably a fair numbers of those stories were thrillers (featuring hair-raising bison chases, and the inevitable double-dealing Neanderthal). A fair number would have been romances as well. It must be the case that stories perform some kind of useful function, otherwise they wouldn’t have been a feature of very human society we’ve ever known. Their function might not be obvious, like a spade, but that doesn’t mean it isn’t there.

So what is it? In my view, the function of a story is to make sense of the world. Its takes the chaos and randomness of life and gives it some sort of shape and purpose. In fiction, there are no co-incidences, and no loose ends. That isn’t always terribly realistic. But it is a lot more satisfying for the reader because it helps to make the world seem a more structured, ordered place than it probably really is. It helps make us feel our lives move towards a destination, rather than just wander around. Along the way they may also be entertaining, diverting, amusing and sometimes even educational. But that is their core function – and realising that helps you to become a better writer.

The FT's Reviews Bust...

2011-01-10T09:07:00.001-08:00

The FT is running a review of Bust. You can read it here.

Overall, I'm quite pleased with it. Lynn’s book is fast-paced, entertaining and perceptive about the causes of the crisis," writes Tony Barber.

Of course, they don't agree with the conclusion. But the FT is a slavish pro-EU paper. so I wouldn't expect them to.

Predictions for 2011...

2011-01-10T09:03:00.000-08:00

In my Money Week column I've been making some predictions for 2011. Here's a taster....

Predictions are ten a penny at this time of year. Just about every City economist and strategists has outlined their big themes of the coming twelve months. Tensions in the euro zone, rising inflation, a double dip recession and currency battles between China and the US have been exhaustively forecast.
But what makes a year interesting is not the trends that continue much as before, or the decisions that were relatively predictable. It is the stuff no one was expecting. Who would have guessed for example that BP would come close to being destroyed by an oil spill in the Gulf of Mexico during 2010, that Cadbury would be taken over or that both Greece and Ireland would go bust and put the euro in mortal danger?
So what might catch us out in 2011? Here are five surprises to watch out for?
One: The British economy comes storming back.
The UK is turning the corner faster than anyone could reasonably have expected. Growth keeps surprising everyone on the upside and unemployment hasn’t taken off in the way many feared. The coalition has proved remarkably durable, and has made a good start on getting the budget deficit under control – and, a few rioting students aside, the public have accepted austerity.
It may not last – but then again it might. In fact, there are encouraging signs of a recovery. The 30% devaluation of sterling in the wake of the credit crunch is reviving our withered manufacturing industry, and cutting into the massive trade deficit. The crisis in the euro zone has stopped the bond markets getting too worried about our own fiscal problems. Real wages are being cut – average earnings are rising by just 2.2% a year whilst inflation is running at 3.2% (and that’s the official figure – the real rate is far higher). That isn’t much fun for anyone, but there are few quicker ways to restore your competitiveness of your economy than cutting wages and devaluing your currency. It is too soon to be talking about an English Tiger, but there are signs the UK will do surprisingly well this year.
Two: Rupert Murdoch sells his British newspapers.
There is no evidence that the pay-wall for The Times and The Sunday Times has been the success that Murdoch must have been hoping for when he embarked on the experiment. News International claims 100,000 users, but it isn’t clear how many are paying full-price, or will stay with it. I haven’t met anyone who has subscribed, and I suspect you haven’t either.
Meanwhile the circulation of The Times continues to plummet. It is down to 466,000, down 17% on the year. The Sunday Times is stagnant whilst The Sun and The News of the World are also in decline. But the real problem for Murdoch is that he wants to take full control of BSkyB. It’s going to be hard for him to do that whilst he is also the country’s most powerful newspaper publisher. Too many competition issues are raised.
Is he really going to sacrifice the chance to get full control of a fantastic, growing business just so he can hang onto one that looks to be in irretrievable decline? It sounds unlikely. This is the year to get some money for the papers whilst they are still worth something.
Three: Jean-Claude Trichet’s term is extended at the European Central Bank.
The capable Frenchman is due to stand down in October from the world’s second most powerful central bank. The two leading candidates to succeed him are Mario Draghi, the governor of the Bank of Italy, and Axel Weber, the President of Germany’s Bundesbank.
Neither man is remotely suitable. Installing an Italian at the ECB’s Frankfurt headquarters would provoke riots in Hamburg and Munich. It might well be the decision that finally pushes Germany into quitting the euro – with Austria and the Netherlands close behind. But Weber wouldn’t be much better. He would be the hard money, austerity candidate, signalling years of German domination. Greece and Portugal might well decide there was no future for them in the euro.
What’s the EU to do? It could appoint and obscure central banker from Finland or Luxembourg. But that wouldn’t have much credibility. It would be far easier to extend Trichet’s term by two years until the euro is through the current crisis.
Four: The IPO market returns.
In 2011, there will be an upsurge in new listings. The private equity houses took over hundreds of companies at the height of the boom. With the credit markets unfreezing, and the equity markets doing well again, they will be looking to unload a lot of those businesses. They won’t be able to sell them to each other they way they used to, so they will have to list them instead. On top of that, governments will be looking to unload some of the banking shares they took control of during the credit crunch.
The net result will be an IPO bonanza. The investment banks will have so much stock to sell, they’ll need to tempt private investors into buying shares in new issues they way they used to. They’ll only be able to do that by offering them at a discount. Stagging – buying shares in IPOs and selling them within days – will be back.
Five: An African investment stampede.
On Christmas Eve, China invited South Africa to join the BRIC group of nations, making it the BRICS (Brazil, Russia, India, China and South Africa). That was an indication of how the continent is starting to join Asia and South America in rapidly modernising its economy. We tend to focus on the African disaster stories, but China in particular is pouring massive investment into the region’s wealthier countries, and growth is starting to pick-up. This will be the year when investors get bored with the other emerging markets and start looking to Africa instead.
Indeed, by the end of the year, South Africa, some of its neighbours and the UK may be among the best-performing economies – and that really will be a surprise.

The Middle of a Book.

2010-12-22T09:22:00.000-08:00

I did an interview the other day with Write Words. One of the questions was what is the worst thing about writing? I found that a hard one, because on the whole I really enjoy writing, which is I guess why I do it for a living.

But in the end I answered: the middle. The beginning of a book is exciting, because it is a fresh start. And you always think you are about to write the most amazing book ever.

And the end is exciting, because it’s nearly finished, and you can see how the whole thing looks.

But there is a chunk in the middle, between about 40,000 and 60,000 words, where it is all a bit of a slog. It’s then you need to dig deep to find the will to get it finished, and not to get distracted.

I’m there right now with ‘Ice Force’. Getting up to about 60,000 words though, so hopefully after Christmas I’ll be into the home straight.

The Era of Cheap Money is Ending

2010-12-22T09:20:00.000-08:00

In my Money Week column I've been looking at how the era of cheap money is ending. Here's a taster.

Interest rates are at a three-century low, and have been stuck at those levels for more than a year. Your bank deposit account pays so little interest you probably don’t even bother to look at the statements any more. The interest on your mortgage is so miniscule you might well wonder why the building society goes to the hassle of collecting it.
Rates are so pitiful that it may well appear bonkers to start speculating about the end of the era of cheap money. But a fascinating new study by the McKinsey Global Institute has looked at the trends at work in the global capital markets over the last three decades, and looked forward a decade or so as well. It concludes that we may well be close to a turning point.
The global savings rate is about to fall sharply, whilst investment will soar. A lot more people will be chasing a lot less money. If that happens, long-term interest rates will rise sharply.
For investors, that is explosive stuff. Bond prices will fall sharply. Equities may well suffer as well. The private equity and hedge fund industries will collapse. But the traditional bank deposit account will suddenly look quite attractive again.
What are the reasons for thinking the cheap money era is over?
The standard explanation for why money has grown so much cheaper over the last two decades has been that there has been a glut of savings, mainly from big economies such as China and Japan.
Whilst true, that hasn’t been the whole story. There has also been a steady decline in investment. Investment as a share of global GDP fell from a peak of 26% back in the early 1970s, to a recent low of just 20% of GDP in 2002. It has bounced around that relatively low figure for most of the last decade, according to McKinsey’s calculations.
Now it might be about to take off again. The world goes through occasional mega-investment booms. The industrial revolution, for example, or the post-war reconstruction of Europe and Japan. It may be on the brink of another one. New countries are industrialising fast, and creating new cities at the same time. Across Asia, Africa, Latin America and Eastern Europe, there is a soaring demand for new infrastructure. Roads, railways, water systems, homes and factories are all being built at a rapid pace. That requires vast quantities of capital. Indeed the rate of global investment was already starting to rise quite quickly. From 2002 onwards, it started to climb sharply, before being choked off by the global recession. As the economy recovers it will start growing again, probably back to the peaks seen in the early 1970s.
On the other side of the equation, global saving may well start to fall. China is probably not going to save as much in the next decade as it did in the past. Typically, as economies grow more mature, they save less and consume more. There is no reason for thinking that China will be any different. The same forces will be at work in other big emerging economies such as India and Brazil.
At the same time, populations are rapidly aging – not just in the developed world, but in places such as China as well. Typically, older people don’t save. Indeed, they live on the past savings.
In short, there will be a much higher demand for capital, and a lower supply of it. You don’t need to know much about economies to figure out that means prices will go up. How much? No one can say for certain. McKinsey estimates that 1.5% could be added to long-term interest rates. But it could be much more.
For investors, however, that is going to make a hug difference.
First, the bond markets will go into long-term retreat.
Although the equity markets get far more attention, the bond markets have been in a two-decade bull market – and you’d have been better off for most of that time invested in bonds than shares. With the cost of capital hitting record lows, fixed income investments just grew steadily more attractive. But rising long-term interest rates will reverse all of that. Bonds will enter a bear market.
Second, equities will be far more mixed. On the one hand, the cost of capital for companies will rise. Shares won’t benefit from investors switching out of low-yielding bonds. That 5% dividend that looked so attractive when a 10-year bond yielded 3% won’t look so great any more. Against that, costs such as pension funds will be easier to finance. Equities will be okay, but will hardly shine.
Thirdly, it will have a huge impact on the capital markets. The hedge fund and private equity industries have boomed as investors have looked for alternative strategies in a world where real interest rates kept falling. But with rates rising, plain old deposit accounts at the bank will look a lot more appealing. There’s not much point in paying a hedge fund manager 20% for some exotic, high-risk strategy when you could be making a perfectly decent return just by parking the cash in your local building society. The alternative investment industry faces wipe out.
Finally, it will impact the rest of the economy profoundly. The credit boom of the last two decades was fundamentally about money being very, very cheap. They were giving the stuff away – just about literally in the case of some credit card companies. Consumers and governments steadily ran up bigger and bigger debts, often without much of an idea how they would ever pay them back. Those days are over. Governments will have to balance their books, and so will consumers.
In a world in which capital is in short supply, people will have to go back to living within their means, and saving up for things that they want to buy or invest in. Now that really will be a big change.

Death Force On Kindle

2010-12-22T09:17:00.000-08:00

Death Force is now available on Kindle. Buy it here.

On Motley Fool

2010-12-22T07:56:00.000-08:00

You can hear me talking about Bust, my book on the Greek crisis, on The Motley Fool website.

Let It Snow

2010-12-08T03:47:00.000-08:00

It’s cold at the moment, as you’ve probably noticed. Everyone else has, understandably enough, been moaning about the weather. But when you are half way through writing a book called ‘Ice Force’ it does have certain advantages. When I need to get in the mood for another description of snow storms swirling through the Arctic glaciers, all I have to do is step out into the garden.

One of the things you have to do as writer is create a believable atmosphere. Books vary, of course. Some are set in very, ordinary everyday locations -- the suburbs, for example. I like to set my books in fairly exotic places. I think that is part of the appeal of the adventure-action thriller genre. There is a big element of escapism in these books. Nobody wants to escape to Swindon. They want the book to take them somewhere exciting, and preferably dangerous as well.

That does, of course, mean the writer has to create believable detail. You need to make it real, without overdoing the travelogues. The best way is to focus on little things. When I was writing about Helmand in Afghanistan for Death Force, for example, I mentioned the smell of the wild irises that grow in the mountains along the Afghan-Pakistan border. In Ice Force, I’ve mentioned the grinding noise that the plates of ice moving beneath you make as you trudge towards the North Pole.

The atmosphere has to be woven into every sentence you write.

And, of course, it helps if it is snowing outside while you are doing it.

The Return of Stagflation

2010-12-08T03:45:00.000-08:00

In my Money Week column this week, I've been looking at the return of 1970s-style staglation. Here's a taster....

Historical comparisons are vital for any serious investor, not because the past always repeats itself, but because it gives you a sense of what forces are at work, and how they are likely to shape events. The tricky bit, however, is deciding which historical parallel is the right one.
So where are we right now? Back in the 1930s, recovering fitfully after an almighty global crash? Standing on the brink of a long bull market such as the early 1980s?
In fact, we are probably somewhere around 1969 – coming out of a decade of relatively strong growth and prosperity, but heading into one that will prove a much harder slog. The ‘stagflation’ of the 1970s – a malignant combination of rapid and rising inflation, zero growth, and rising unemployment which wiped out the wealth of the middle classes – could well be what lies in store.
In the debate between whether we are looking at a decade of deflation or inflation, too much attention is paid to where we are right now. At the start of the 1970s, there wasn’t much sign that rising prices were going to be a problem any time soon. Nor was there much sign that mass unemployment lay ahead.
But, as a fascinating recent analysis by Morgan Stanley made clear, there were forces at work in the early late 196s and 1970s that were to pave the way for stagflation -- and which all have very clear parallels today.
There was an international monetary system, which meant that the expansionary policies of the Federal Reserve were exported around the world. In 1970, it was the Bretton Woods system that had been set up after World War Two. Today, it is quantitative easing. But the net result is much the same. The Fed is trying to inflate its own economy, for its own reasons, but much of the expansion of the monetary system ends up elsewhere.
There was a glut of dollars flooding onto the global economy. In the early 1970s, the US was printing money to finance the Vietnam War. Now it is to keep its banking system afloat, but again the net impact is very similar.
There is a twin-track global economy. In the early 1970s, the peripheral economies – in those days mainly Japan, and the emerging Asian economies such as Hong Kong, Taiwan and Korea – were growing very fast, while the main traditional economies were starting to stagnate. The same is true today, with the emerging markets racing ahead, whilst the established giants of the global economy have all slowed down sharply.
Finally, there were structural challenges to the old heavy-weight economies that meant they found it very hard to grow. In the early 1970s, they were faced with the loss of old basic manufacturing industries, and the creation of new service-based economies. In 1970, for example, 35% of British jobs were still in manufacturing, compared with only 13% now. It was impossible to grow very fast until that process was completed. Now, of course, it is debt de-leveraging: gradually restoring both personal and government balance sheets after the crazy borrowing spree of the last decade, which means that growth is likely to be very subdued for a long time to come.
The net result was rapid inflation and zero or minimal growth – the worst of all possible worlds.
Of course, there are differences as well. No historical comparison is ever perfect. There is none of the wage indexing that was common in the 1970s. When wages went up with inflation automatically, that ratcheted prices endlessly upwards. Today, wages are falling in the UK in real terms – they are rising at about 1% less than inflation – and in most of the developed world as well. The OPEC oil cartel is nothing like the force it was forty years ago – it isn’t going to be able to force up the oil price in the way it did in the 1970s.
Still, the parallels are clear enough. On balance, several years of stagflation looks the most likely outcome.
How should investors respond to that?
First, don’t worry about inflation just yet.
Although the main ingredients of stagflation were all in place by the beginning of 1970, inflation didn’t take off right away. It wasn’t until the oil crisis of 1973 that prices really started to run riot, and it was the second half of the decade that saw rampant inflation across much of the developed world. You need to reckon on the big upturn in prices around 2013 or 2014 – not this year or next. So for the time being you are fine remaining invested in assets such as bonds that don’t protect you from rising prices. They will carry on doing well for at least another two years.
Next, switch into real assets.
With zero growth, and rapidly rising prices you need to be out of cash. The outlook for property prices might look bleak on the surface, with squeezed incomes and little growth in lending, but for British investors there have been few better long-term hedges against inflation than houses and land. That was true of every other inflationary cycle and it will be of this one as well. Gold will do well. So will commodity prices. Even better, try and spot the next OPEC-style cartel that can take advantage of loose monetary policy to squeeze up prices to extraordinary levels – iron ore would be one possibility.
Finally, get ready for the clampdown.
Central banks remain remarkably relaxed about inflation – for now. They may well have decided that with so much debt on personal and national balance sheets, modest inflation is the best way of getting the economy back into shape. But stagflation is a nasty condition: minimal growth and rising prices squeeze living standards very quickly, creating real pain. Eventually, inflation will have to be squeezed out of the system. That will create a lot of losers.
At the end of the cycle, we should end up back in the early 1980s – and ready for another two decade bull market in equities. But that part of the story is still a long way off.

Don't Attack The Customers

2010-11-30T09:39:00.000-08:00

I’m not one of those writers who worries about digital books, the decline of the local bookshop, or the closure of libraries. We are story-tellers, and there has always been a demand for stories, and an enthusiastic audience for them. How they are delivered – round a campfire, on a printed page, or on an electronic screen – doesn’t make much difference.

What does worry me is that the publishing industry might repeat some of the mistakes of the music business.

In The Bookseller today, Richard Mollet, the chief executive of the Publishers Association, is demanding that the Internet Service Providers should be clamping down on piracy.

This is the wrong route.

With my other hat as a business journalist on I’ve written a lot about the decline of the big music labels. What they got wrong was trying to sue their main customers – the music fans who download music. But a business can’t constantly be treating its customers like criminals. It doesn’t make any sense.

Interestingly, the music business is in pretty good shape. Total spending on music, when you add up CD sales, licensing fees, downloads and live performance earnings, has been going up over the last few years. It’s just the old music labels that have been struggling – largely because they couldn’t figure out to deal with a changed market.

I hope the publishers don’t end up going down the same road.

The story-telling business is in good shape, even if the delivery changes. But attacking our customers is not the right way to respond.

Cyprus Well Profile

2010-11-30T09:37:00.000-08:00

There is an interview with me today on the Cyprus Well website. You can read it here.

Britain & The Euro Break-Up

2010-11-30T09:35:00.000-08:00

In my Money Week column this week I've been exploring how Britain should handle the potential break-up of the euro. Here's a taster.

It would be easy for the UK to stay smugly on the sidelines as the euro collapses. After all, Britain had to struggle not to join the single currency when it was launched. And it had to put up with years of European politicians warning that the City, and the vast earnings it brings into London, would be finished as result of its government’s stubborn scepticism. You hardly need to be German to think the word schadenfreude might be an apporiate way of desribing many people’s response on this side of the English channel.
That would be temptimg, but wrong. Britain has a huge amount at stake in the euro’s crisis. We are contributing billions to the bail-out of the Irish. The Spanish banks, which could well be the next domino to fall, have a massive presence in this country. The euro-zone is our largest trading partner.
If the euro-zone does break-up – and it looks increasingly likely that it will – then the way that it does so, and the currency system that replaces it, will matter hugely to the UK economy over the next decade. Britain should be leading that debate, And it should be arguing for an orderly break-up, returning to national currencies, but with the euro preserved as a business and financial currency.
The troubles of the euro are getting too severe for even its most enthusiatic proponents to ignore. The Greeks going bust was one thing. The Greeks fiddled their way into the system, and made no attempt to play by the rules. They should never have been allowed in, and, once inside, should have been told to reform fast, or get out again.
But Ireland is something different. It was one of the most suscessful economies in the world before it joined the euro. It did everything that was expected of it, cutting wages, and public spending with a ferocity that no other country has matched. Yet it still ran out of money. With two out of 16 euro countries needing bailing out, it is hard to see how the single currency cannot be blamed. Nor is it going to stop here. Portugal will be next, then Spain, and probably Belgium as well. After that, it is merely a qustion of whether the bond markets take France or Italy down first.
For the UK, that matters hugely. We are on the hook for a large chunk of the Irish bail-out. This county will contribute around eight billion euros to the bail-out package for the Irish government. Royal Bank of Scotland and Lloyds, the two partially state-owned British banks, have billlions in exposure to the Irish economy. If Ireland goes down, it will cost the UK huge sums.
It doesn’t just end there. The Spanish banks – most notably Santander – have a massive presence in the UK. If the Spain is the next euro domino to fall, we may end up regretting allowing a bank from that country to end up owning such a large chunk of the British financial system. Likewise, if Portuguese, or Belgium, or French banks get caught up in the crisis, that will have terrible consequences for our own banks, and for the City more widely.
And, of course, the euro-zone is Britain’s main trading partner. It is no use thinking we can simply be a spectator at this drama. The UK needs to get involved in trying to shape the way it plays out.
Of course, as an outsider the UK may struggle to be listened to. Against that, our foresight in staying out may give us a voice. After all, the architects of the euro, who assured us the single currency would protect Europe from chaos in the markets, are looking fairly foolish right now. And, in addition, Britain is one of the largest economies in Europe. All of that gives us a role to play.
So what should the UK be arguing for?
The first and most important point is that the UK should be pushing for an orderly break-up of the euro. The subject is still taboo in Brussels and Frankfurt. That is crazy. There is a real risk the euro may collapse amid chaos and turmoil. If confidence in Spain goes, it might happen very suddenly, taking France and Italy with it. After all, the exchange rate mechanism, the precursor to the euro, fell apart over the space of a few days in 1992. The euro could do the same. It would be far better if there was a calm and measured debate now about how to unravel it. Sensible decisions are rarely made during a few hours of fevered debate with the global markets in freefall.
There is plenty of talk about creating a northern and southern euro – a neuro and sudo (or the medi, as one Morgan Stanley analysis called it). That would fix some of the problems. The peripheral countries could devalue as a bloc against the stronger economies of core Europe. The two currency zones would be more compatible than the one that exists at the moment.
But will there really be any appetite for another monetary experiment after the failure of the euro? Probably not. Nor is it clear that the two zones would work much better than the one we have right now. France has been losing competitiveness steadily against Germany. It might struggle to stay in the neuro. The sudo would be led by its largest economy, Italy. How much confidence would the markets have in a currency zone led by the Italians? Yup, you guessed right – not very much. Even the Italians probably wouldn’t want to join.
The best solution would be to return to the national currencies. But it would be worth keeping the euro as a parallel currency – which is in fact what the British proposed when the euro was launched. The ECB could be jointly owned by the states of the EU, and the currency would be legal tender in every country. Over time, some of the smaller states might abandon their own currencies and just have the euro. But it would happen naturally, and from the ground up – not from the top down.
That would serve Britain’s interests best. But it isn’t going to happen unless we start arguing for it.

A Moment to Celebrate Ourselves

2010-11-24T10:03:00.000-08:00

It was National Freelancer’s Day yesterday, although not very surprisingly I missed it. Indeed, I suspect that all the freelancers out there missed it: partly because they are always very, very busy with other stuff; and partly because, by definition, we all work by ourselves, so we aren’t around other freelancers, who might remind us to celebrate.

Still, the Telegraph had an interesting survey to mark the occasion. It found that freelancers were on the whole happier than people who had jobs. Not very surprising, really. If you consider that most jobs consist of some idiot shouting at you all morning, then getting a terrible, over-priced sandwich that tastes like mouldy cardboard, with some bloke you’re only friends with because he happens to sit next to you, and then spending the afternoon in a crushingly dull meeting, it is surprising that us freelancers aren’t even further in the lead.

Its ten years now since I had a job in an office, so I’ve spent a decade now sitting around at home writing stuff. It takes a lot of discipline, of course. You have to get up in the morning and crack on with your work. You need to set yourself targets and deadlines.

And it has it ups and downs. But when you hit a down it is worth remembering that you are a lot happier than you would be in an officer.

In fact next year I might even celebrate National Freelancers Day – possibly with a plate of foie gras and a glass of Bordeaux at my desk.

Advice To Budding Thriller Writers.

2010-11-17T06:16:00.000-08:00

I’m still really enjoying the round-table discussions hosted over at the International Thriller Writers website. This week, they are discussing the one piece of advice you would give budding thriller writers.

So what would my advice be?

First, learn about structure. Thrillers are very mechanical. They need great engineering. They are a bit like cars in that respect. They can look beautiful, but if they don’t work properly, then what’s the point (unless it’s a Jag, of course, in which case we’ll overlook the fact it doesn’t work).

So the most important thing you need to do is learn about structure and pace and plot. For my money, the best way to do that is to take an early Frederick Forsyth novel, and go through it again and again until you have learned absolutely what he is doing. Then do it for yourself. It’s a bit like taking a BMW apart, then re-assembling. If you do that enough times, you will figure out how to make a car. Same with a thriller.

Next, get with the times. Thrillers are stories of events. They reflect the world around them. So don’t write an old-fashioned Cold War spy thriller. Think about private military corporations (my subject). Or financial conspiracies. Or Iran. Or piracy. But make it something now and fresh we haven’t read about before.

Okay, that’s two pieces of advice – but both valuable.

The Tech Bubble....

2010-11-17T06:14:00.001-08:00

In my Money Week column this week, I've been looking at the bubble in tech stocks. Here's a taster.

Right now, everyone in the markets is worrying about bubbles. It might be commodity prices, it might be bonds, it could be gold, or it could be the emerging markets. They are all up strongly in the past year. They all look as if they might have over-reached themselves.
But one distinguishing characteristic of a bubble is that no one really notices it. If everyone is complaining about the price of a particular type of asset, it is probably in perfectly good shape. It is the bubbles you haven’t seen that are likely to catch you out.
What are they? In a replay of 1998 and 1999, it might well be technology. Amazon is trading on a price earnings ratio of almost 70. Apple is now the third biggest company in the world. Google just keeps going up in price. And Facebook, if it ever comes to the market will be valued at billions.
And yet despite the explosive growth of the internet economy, all the old problems remain. Business models are flimsy, the barriers to entry are wafer-thin, and the technology moves so fast, it is hard for investors to make any money.
When the post-credit crunch bull market comes to a screeching halt, as it inevitably will at some point, it well be a technology crash that bring it down.
No one would deny that internet is now a huge business. That was underlined by a report by the Boston Consulting Group published last month. It found that in the UK alone, the online economy was now worth £100 billion a year, and accounted for 7.2% of GDP. If it was a separate economic sector, it would be bigger than construction, transport or the utilities.
Britain is not particularly advanced in its take-up of technology. What is true in this country will be true in every other advanced economy as well. This is a huge and growing chunk of the global economy.
It is absolutely right, therefore, that the companies that dominate the space should be sought after by investors. Anyone looking for long-term growth is going to want to own a slice of the leaders of the technology boom. Otherwise they risk getting left behind.
But hold on. Just because a company has good long-term growth prospects does not mean it is worth absolutely anything.
Take Amazon, for example. It was one of the pioneers of online retailing, and remains the best brand in that industry. I’d be surprised if there was a single reader of this magazine who wasn’t also an Amazon customer. Its latest figures were terrific: sales were ahead by 16% and profits were ahead by 39%. No doubt it will have a great Christmas. Even so, its share price has gone crazy. They have jumped from $25 a share in 2005 to $170 now. It is trading on multiple of 69 historic earnings, and 49 times the forecast earnings for next year.
Or take Apple. Sure, the iPhone is a big hit, and the iPad has been making a lot of noise. In the last five years it has got just about everything right, and there is probably no other business around that has so many devoted customers. Even so, there must be a limit to what it is worth. The shares are up by more than 50% this year alone. With a market cap of $290 billion, it is the second most valuable American business. It is the third most valuable company in the world, after Exxon Mobil and PetroChina. This, remember, is a company which, while it dominates the market for MP3 players, currently has just 4.1% of the mobile phone market, and slightly over 5% of the global market for personal computers. Those are hardly dominant market positions – but you would hardly guess that from its share price.
Much the same could be said of Google, or Facebook, or many smaller technology companies. They are good businesses, in a fast-growing sector of the economy. But they are also hitting crazy prices.
The trouble is, all the old problems with technology and internet companies remain.
For starters, there are still far too few barriers to entry. The days when a few bright Harvard students could start a website that would blow apart the industry, in the way that Mark Zuckerberg did when he started Facebook in 2004, may be over. Then again, they may not be. This is still an industry in its infancy. It is very easy for a few bright people to turn the web upside down with very little money to play with. That is great for them, and it is what makes high-tech so exciting. But is it very worrying for shareholders in the established companies. It is just too easy for a young entrepreneur to come along and blow you away.
Next, there are still relatively few sustainable business models. The online retailers make money, but often only by squeezing their suppliers to the bone. The internet is the most ruthless price comparison device ever invented, and one consequence of that is that margins will always be wafer thin. Businesses like Google may have a great advertising franchise right now – but there is no limit to ad space on the web in the way there is in the physical world. In truth, all online business models remain very flimsy.
Lastly, the technology moves so fast it is very hard for shareholders to make money. The founders and the venture capitalists who back them usually do pretty well. But by the time a company gets to the quoted market, its best days may already be behind it. It may never get to the stage of paying out steady dividends. Even Microsoft only paid its first dividend in 2003. Neither Google or Amazon have ever paid a dividend, nor are they planning to do so. By the time they do, they will probably look as far past their sell-by date as Microsoft does.
In reality, the tech rally looks overdone. It is bound to come shuddering down to earth again some time soon. And when it happens, it may well prove a trigger for a wider market correction.

Why we shouldn't bail-out the banks....

2010-11-12T02:20:00.000-08:00

In the Spectator this week, I've been looking at Iceland. The lesson of its experience, I think, is that we probably never needed to bail-out the banks. The piece is here.

Why I Write Thrillers...

2010-11-09T08:04:00.000-08:00

The International Thriller Writers website has started a series of online round-table discussions about thriller writing – sort of like a conference panel, bit without all the travelling.
I’ll be taking part in a couple of the upcoming discussions. But I think the first in the series looks really good: ‘Why Do You Read/Write Thrillers’.
It’s a fascinating issue for any writer. I mean, obviously I love thrillers. But I don’t only love thrillers. There are loads of different kinds of books I really enjoy, and I would be just as happy to write.
In the discussion, I think Todd Ritter gives the best answer when he says: “Reading a thriller that makes my pulse race takes me briefly into a world of danger and fear and excitement that I won’t experience in real life. It’s an escape and, well, a thrill”.
Still, that is more of an answer to the question of why you read thrillers rather than why you write them.
For me, I think the answer is that the thriller is such a great canvass. They are widescreen stories. They have action, characters, jokes and drama, but they can also take in politics, economics, war, technology, and international relations. They are very outwards looking books, which weave stories out of current events, but which also, at their best, are timeless. Other genres tend to be much smaller scale, rooted in one place or time.
But I guess every thriller writer will have a different answer to the question.

Writing ....Fast or Slow

2010-11-02T07:37:00.000-07:00

In case you hadn’t noticed, this is National Novel Writing Month. An American initiative, it aims to get people writing a whole novel during November. It doesn’t make much difference in my house, of course. Just about every month is novel writing month for me. But the Independent has an interesting take on it, listing some of the great books that have been written in a few weeks. I’m not sure why they included Sebastian Faulk’s James Bond pastiche ‘Devil May Cry’, because it is a laughably poor book. But it has to be admitted there are some great books there. ‘On The Road’ for example took only three weeks. So did ‘A Study in Scarlet’, and ‘A Christmas Carol’. Even Dostoyevsky managed to knock out ‘The Gambler’ in only 26 days – although he doesn’t strike you as a fast sort of a writer, in the way that Dickens does.

So is it better for writers to rattle out a book fairly quickly? I certainly think there is something to be said for it, particularly when you are writing thrillers. They are by definition pacey books. A sense of speed is one of the things that readers like about them. Like roller-coasters, they need to be designed to go very fast, and have lots of twists and turns. It is easier to create that kind of breathlessness when you are working at high speed yourself.

That said, you don’t want that to turn into sloppiness. The other key element of a thriller is structure. And that takes time to build. There is nothing worse than reading a book that is all over the place, because the writer hasn’t taken enough time to construct the plot, or do the research.

My own solution is to spend ages on the outline – the structure – but then to write pretty quickly. But I’m sure every writer has their own approach.

How To Fix The British Economy...

2010-11-01T10:55:00.000-07:00

In my Money Week column this week, I've been looking at how to get the British economy growing again. Here's a taster....

After the cuts, the growth story. Addressing the Confederation of British Industry in Birmingham at the start of the week the Prime Minister David Cameron tried to sound a more optimistic note on the economy. It wasn’t just going to be about slashing benefits, closing down theatres and arts centres, and making everyone work until they are ninety-five. The economy would soon be expanding again.
That is surely right. The U.K. can’t simply cut its way out of a budget deficit of 11% of GDP, the highest in out peace-time history. It needs to start growing again, and at a faster rate than it did in the last decade.
Unless tax revenues rise, and jobs are created to replace those lost in the public sector, the books are never going to be balanced again. Rising unemployment and collapsing firms will mean that tax revenues keep on going down. Very quickly you get into a vicious circle of cutting spending, leading to lower tax receipts, which means even more cuts. Only growth is the way to break out of that.
But how? In fact, there are plenty of good places to start. Cut corporation tax to encourage investment: reform welfare aggressively to increase the labour force: deregulate those industries that are still too protected: and create tax-free zones in those areas of the country where the state has crowded out the private sector.
There is no reason why the economy shouldn’t expand at the same time as the budget deficit is bought under control. Despite the simplistic Keynesianism that seems to have gripped much of the media, it is perfectly possible for economies to expand at the same time that the government is reducing its spending. There are two reasons for that. The government doesn’t create any money itself, it merely takes it from other people, either by taxing them, or by borrowing it from them. So its spending decreases demand as much as it increases it. Next, as government gets smaller, there are more resources for the private sector to exploit. As a general rule, the smaller the state is, the faster an economy can grow,
Indeed, the last time the UK embarked on significant spending cuts – under John Major’s government in the early to mid-1990s – the UK grew at an impressive rate, and plenty of new jobs were created. Two million jobs were created under the Major government of 1992-1997, which more than made up for the 700,000 jobs that were cut out of the public sector. Under Mrs Thatcher’s Tory government of the 1980s, the experience was similar: after the peak of the recession or the early 1980s, 2.97 million new jobs were created by 1990, which more than made up for the two million lost in manufacturing. There is no reason to suppose the UK can’t repeat that experience in the coming decade.
But it isn’t going to happen by magic.
You can expect to hear a lot of waffle from the government about boosting infrastructure spending, encouraging more lending to small business, promoting investment in green technologies, and cracking down on short-termism in the City. Most of it is nonsense. The Government has no idea which ‘green technologies’ will work in the future, and whether this country has any real competitive advantage in any of them. People have been fretting about the short-termism of the financial markets since Victorian times without ever finding a realistic way of doing anything about it. Nor does the government have any idea whether the banks should be lending more to small businesses, and if so, which ones.
In fact, the steps the government should take to get growth going again are far simpler. Here are four good places to start.
One, cut corporation tax. In Ireland, a 12.5% corporate tax rate made the country a magnet for investment from all around the world. It could do the same for the UK. Over the coming few years, dozens of ambitious new companies are going to be emerging out of the fast-growing economies of Brazil, China, India and Russia. Just as the Japanese did a generation ago, they will be looking for a base to expand into Europe. Britain should be the natural destination for them, as it was for the Japanese. But it won’t happen unless there is plenty of incentive for them to come here – and a low tax rates trumps just about everything else.
Two, reform welfare aggressively. The huge numbers of Polish immigrants who came to this country and found work in the last decade tells us the UK can easily create jobs for people that want them. There is no easier way of boosting growth than increasing the employment rate; GDP, remember, is just output per worker, multiplied by the numbers of workers. If you can move some of the roughly five million people now living in benefits into jobs, you not only save on their welfare cheques, you also boost the economy. That is what reforming welfare can achieve.
Three, deregulate protected parts of the economy. The Thatcher government of the 1980s freed up the economy to generate growth – mostly notably through privatisations.. This government should do the same. The most obvious candidate is land and building. It's virtually impossible to build anything, particularly in the South-East, which is one reason we have, for example, a relatively small tourist industry Make it easier to get permission for new buildings, and the jobs will follow.
Finally, create tax-free zones. Big parts of the UK - Wales, the North-East,
Northern Ireland - have reached Soviet levels of state dependency. The public
sector has crowded out any kind of private economy. Nothing can grow when the
state accounts for 60% or more of GDP. But just slashing state spending won't
work by itself. Instead, create virtually tax-free zones to encourage the
private sector to move into those areas as spending is cut.
Growth is not about picking winners, or choosing which sectors of the economy to promote. No one really has any idea, and least of all the government. But if it frees up space for entrepreneurs, the economy will respond – it has in the past, and it will do so again.

An Interview with the Northern Echo.

2010-10-28T09:57:00.001-07:00

There's a great interview with me about the Death Force series in the Northern Echo. You can read it here.

Don't Diss Jane Austen....

2010-10-26T06:56:00.001-07:00

Jane Austen has been getting some flak in the press, although I guess she can survive it. An academic has been studying her letters, noted how confused they are, and how different they are from her books, and concluded that her editor must have done a lot of re-writes on her books.

That story got lots of play in newspapers, and on the web. For some reason, people like the notion that authors don’t really write their own stuff, and there is some team of the people in the publishing house who actually put the book together

But anyway, whoever came up with this piece of research obviously knows very little about how writers actually work. There is a big difference between the writing we do for a living, which on the whole we take very seriously, edit and polish and worry about, and the writing we do like everyone else, which is dashed off without much thought.

Now obviously I don’t have much in common with Austen. I’m better at tank battles, for starters. Plus I’m still alive. But my e-mails, letters, Xmas cards, and indeed blog entries might well lead you to conclude that I couldn’t possibly have written my books either.

But, of course I did. And so, of course, did Jane Austen.

We Die Alone

2010-10-12T10:18:00.000-07:00

One of the pleasures of writing for a living is that you come across all kinds of unexpected stuff. I’ve been getting stuck into the writing of ‘Ice Force’, the forth book in the Death Force series. As you might guess from the title, its set in the Arctic. To get my mind into the right place, I’ve been reading as much polar stuff as I get my hands on.
Most of it is exploration stories, and its useful for the atmosphere, and survival techniques. But not much has been written about Arctic warfare. Eventually, I stumbled across a book called ‘We Die Alone’, which was written in the early 1950s by David Howarth. It tells the story of Jan Baalstrud, a fairly ordinary Norwegian guy during the Second World War. He signs up with the British Army, and is sent on a commando mission into the far north of Norway. It goes terribly wrong from the start, the rest of his unit is killed, and he has to trek a massive distance chased by Nazis to escape.
The brilliance of the book is in its descriptions of Arctic warfare, and the endurance and fortitude of its hero. And it reminds you of what an extraordinary conflict WWII was, and how many ordinary people were caught up in extraordinary events.
The scene where Jan saws off his toes with a bread knife and a bottle of brandy to prevent them getting frostbite is memorable.
It’s now been reissued, with a forward by Andy McNab – and highly recommended.

Why Ireland Should Follow Iceland

2010-10-11T05:47:00.000-07:00

In my Money Week column this week, I've been looking at why Ireland should follow Iceland. Here's a taster...

A year ago, there was a joke in the City that went like this. “What’s the difference between Ireland and Iceland.? One letter and about six months.” But right now, you could turn that around, and make the punch line. “One letter, and a realistic economic policy.”
The Irish crisis goes from bad to worse. Despite making the deepest cuts to public spending imaginable, there is little sign of a durable economic recovery. Last week, the government raised the cost of the banking bail-out to 50 billion euros. Its deficit will amount to an eye-popping 32% of GDP this year.
In fact, the country should consider the Icelandic option instead. Go bust. Apologise to the rest of the world, but point out you can’t possibly pay all the debts your bankers ran up.
That is precisely what Iceland did. And despite the warnings of disaster, it is now looking in remarkably good shape. It is possible that the Irish, and indeed the rest of the world, have got it all wrong. You don’t have to bail out the bankers after all.
Two years ago, when the credit crunch hit, governments around the world bought into the idea that they had to rescue their banking system, no matter what the ultimate cost to the taxpayer. Lehman Brothers in the US was allowed to go under, but after that no significant bank was allowed to fail. In Britain, we rescued out Royal Bank of Scotland and Lloyds-HBOS. In France, BNP was helped out. Ireland was the most dramatic example. Its government was forced to bail out Anglo-Irish bank, Irish Nationwide, and others. On a worst-case scenario – and worst cases have a depressing way of coming true – the total bill for the rescues will come to 50 billion euros. The country has been close to bankrupted by the recklessness and irresponsibility of a small group of financiers. In other countries, the cost hasn’t been quite so horrendous, but taxpayers were still saddled with bills running into billions that will take a generation or more to pay off.
Only one country took an alternative route – Iceland. It is such a small place, and its bankers had run up such enormous liabilities, that it simply wasn’t feasible to keep all the Icelandic banks afloat. The country was bust.
The banks have successfully sold the argument that a country has to rescue its financial institutions when they run into trouble otherwise the whole nation will be ruined. The economy will collapse. The global markets will slam the door in your face. If the banks go down, so the argument goes, pretty soon we’ll all be living in caves again, scraping flints together to start a fire.
In fact, however, it turns out that a banking collapse isn’t so bad after all. In fact, Iceland is looking in remarkably good shape.
With some help from the IMF, the country is starting to recover. The economy will shrink by 1.9% this year but is forecast to grow by 3% in 2011. Interest rates are coming down again – the Icelandic central bank in September took interest rates down to 6.25%. Inflation is falling, and the Icelandic krona is rising again – it is up 17% against the euro this year. Capital controls, introduced during the emergency, are expected to start being lifted soon.
Despite all the warning of catastrophe, the country has survived and is putting itself back together again.
That isn’t to say it hasn’t suffered. Real incomes have fallen by about 20% since the financial collapse. Jobs have been lost on a huge scale, and savings wiped out. Ordinary people are angry enough about what happened to put the Prime Minister Geir Haarde, who presided overt the reckless expansion of the financial system, on trial for negligence.
But Iceland still functions. People still eat. The country has survived. By next year, it should start growing again. Modestly, no doubt, at first, but with a sharply devalued currency, and with credit starting to flow again, it should be able to pick itself up. It may be a surprisingly short time before it is allowed back into the global capital markets – after all, Russia defaulted on its debts amidst its financial crisis of 1998, but less than a decade later you could hardly move in Moscow for investment bankers looking for business. The financial markets don’t hold grudges. If you have money, they will do business with you.
So what lessons should we learn from the country’s experience?
Almost every government in the world has accepted the idea that they have to bail-out their banks if they run into trouble. But Iceland suggests it isn’t really true.
In fact, governments could simply protect domestic deposits. After that, they could just say they were very sorry, but there wasn’t enough money left to pay back all the debts the bankers had run up.
It would be better morally. Reckless, irresponsibly behaviour would not be rewarded. Bankers would have to think a lot harder about what risks they were taking, and what their consequences might be. And depositors would have to be a lot more careful about where they put their money, rather than just lazily assuming the government would pick up the tab for any losses.
And it would be better financially as well. Bad debts would get written off immediately, rather than remaining a millstone around the neck of the country for years to come.
Ireland is the most exposed country right now. The debts run up by its banks may well turn out to be quite literally unaffordable. But other countries should keep the Icelandic experience in mind next time a big bank gets into trouble.
It would be better just to let the banks collapse. So long as you protect domestic depositors, and keep the payment system working, it needn’t be the end of the world. Indeed, it may be well be quicker route to recovery the struggling for years to meet all the obligations run up by a handful of bankers.

Fire Force Audio Book

2010-10-07T06:18:00.000-07:00

I received the audip book of Fire Force today. It sounds great. You can buy it here.

Judging A Book By Its Cover,,,

2010-10-05T06:43:00.000-07:00

One of the questions writers get asked is how much they say they have over their covers. To which the simple answer is: About as much say as we do over the weather.

My experience is that publishers send you the cover, and then whilst theoretically you could throw a tantrum and say you didn’t like it, that probably wouldn’t be a very welcome response.

Fortunately, I’ve never been in a position where I haven’t like a cover. I’ve just received the jacket for ‘Shadow Force’ and I think it’s fantastic: exciting, direct, in keeping with the previous two books in the series, but different enough to mark out its own space. (Then again, when a book is about mercenaries and pirates, it’s quite hard not to come up with a decent jacket).

And, of course, authors shouldn’t assume they know what is the best cover for their book. The editor and the illustrator will have their own take on it, and how it fits into the market, who it is going to appeal to, and how it will stand out from the rest of the books on the market.

That said, it would be awful to see a cover you really didn’t like on your book. After all, it is the most obvious statement about your work.

Putting Voices To Characters:

2010-09-28T06:01:00.001-07:00

I got a call out of the blue the other day from an actor called Paul Panting. He was about to start recording an audio version of Fire Force, and he wanted to have a chat about accents, as well as checking the pronunciation of some of the military hardware.
As anyone who has read either ‘Death Force’ or ‘Fire Force’ will know, there is a big group of character in the stories, and they all come from quite different places. Steve is South London, working class. Ollie is a public schoolboy. Dan is an Australian, Maksim a Russian, Chris a South African, and so on.
We were discussing what kind of voices to give the different men, and how far too push it. In the books, I don’t really give them different accents all the time, in the sense that, Chris, for example doesn’t talk about ‘Seth Eefrica’. That’s partly because I’m not very good at writing accents, but also because it could turn into an accent fest, and get very silly and distracting. I prefer to let their characters comes through by the type of things they say, and how they react to situations, rather than by giving them funny voices.
Paul and I agreed that that was the way to do it in the audio version as well – even if it meant he didn’t get a chance to show off all those accents he learned in acting school.
But it also struck me that just hearing the audio book – which I’m really looking forward to – is going to change my perception of the characters. I already hear Steve and Ollie’s voice in my head when I’m writing them, but of course an actor’s interpretation will be slightly different to mine. It will be fascinating, but also a bit strange to hear a different take on all the guys in the unit. It may even change the way I think about them.

Lay Off Vodafone.

2010-09-27T04:40:00.001-07:00

In my Money Week column this week, I've been looking at how the City is constantly attacking Vodafone. Here is a taster...

What’s the most successful British company of the last twenty years? Tesco would be a contender, but it is still a marginal force outside of Britain, and lags Wal-Mart and Carrefour in the global retail market. Royal Bank of Scotland would have been a possibility until Sir Fred Goodwin blew the whole bank up. GlaxoSmithKline has been treading water since its 1980s to early 1990s heyday.
In fact the answer is easy. Vodafone.
The telecoms conglomerate has 347 million subscribers, and runs the largest mobile network in the world, measured by revenues, even if it is slightly behind China Mobile in terms of its total customer base. It operates networks in 31 countries, and has partners in another 44. Not bad for a company which three decades ago was just a small unit of the long-since forgotten Racal.
And yet you would hardly guess that from the way the City treats the business. The share price is beaten up. The chief executive Vittorio Colao is under constant pressure to dispose of assets. There is an endless stream of stories about how he should be selling his businesses in the US, or France, or somewhere else. Demands are tabled for special dividends and share buy-backs.
It is crazy – and an illustration of the City’s short-termism at its most destructive. There are plenty of criticisms that can justifiably be made of Vodafone. And yet the mobile industry is still in its infancy. Its play for global dominance may yet pay off. It may be able to take full control of units it holds minority stakes in. The City should be supporting once of the UK’s few industrial leaders, not trying to tear it apart.
The last week has seen yet another round of pressure on Colao to dismantle the empire that his predecessor Sir Chris Gent so expensively put together at the turn of the last decade. The company’s $6.5 billion stake in China Mobile was sold off, amid pressure for divestments. The 45% that it owns in Verizon Wireless, the largest mobile network in the US, is constantly under review. So to is the 44% stake it owns in the French operator SFR, of which Vivendi owns the other half. The 25% stake in Poland’s biggest mobile operator Polkomtel could be on the block. One shareholder group to lobby for the break-up of the business has been active since 2007. The demand for deals to boost shareholder returns builds all the time.
Some of the criticism is fair. Amid the telecoms bubble of the late 1990s, the company spent almost £200 billion on acquisitions. The $175 billion it paid for Germany’s Mannesmann remains one of the largest hostile takeovers ever attempted in Western Europe. Of the largest fifty deals of all time, Vodafone was a party to three of them. Shareholders didn’t see much of a return for all that frantic, and expensive, activity. Spending £200 billion only produced a company worth £85 billion today: not a great return, even if much of the money was in shares rather than cash. The share price has perked up this year – its dividend is one of the most generous and safest on the London market – but at just over 160p is still a long way short of the 444p it reached in March 2000.
But so what? All that is ancient history. The fact remains that whilst it may have over-paid for its acquisitions, Vodafone is today an industrial giant. No other mobile company comes close to its reach and scale in the mobile market: China Mobile may have more customers, but it doesn’t have anything like the same global reach.
There is still a good chance that its ambitions may pay off one day. No one knows precisely how the mobile industry will develop. It is, in truth, still in its infancy. It may end up destroying fixed line networks. It may merge with the computing and social networking industries. It may develop into something completely different. Whether having a global presence, in the way that Vodafone does, will pay off remains to be seen. It’s a gamble. But it is hardly a foolish one. Being the biggest gives you muscle in a market. It doesn’t guarantee success – there are plenty of big companies that completely mess up – but it’s a good place to be starting from.
Many of its minority stakes are frustrating. It hasn’t received any dividend on its Verizon shares since 2005: the two companies appear locked in a stand-off that makes the War of the Roses seem amicable and straightforward by comparison. Vivendi shows no interest in selling Vodafone majority control of the French operation they share. In some countries, it has already abandoned its ambitions. In Japan, for example, it sold out in 2006 after years of making little headway in one of the world’s most competitive, and technologically advanced, telecoms business.
But is still crazy to pressurize the company to sell out of successful businesses in France, Poland, and most crucially the US. It may be a long struggle to get control of Verizon. But the prize is surely worth having. Likewise, it doesn’t make much sense to sell out of the Polish market, which must surely have some of the best growth prospects in Europe. It may not have complete control of that business. But who is to say it won’t be able to win it one day.
Mobile telecoms is one of the world’s most lucrative and innovative consumer industries. For the UK to have the global leader is a remarkable achievement. It is an indictment of the City that it only wants to rip that apart – and can’t seem to see any virtue in supporting the company. The German stock market doesn’t try and break-up its most successful business, and neither does the Swiss or the Japanese. The London market should be more worried about supporting the country’s few world-class companies – and should spend a lot less time thinking about where the next deal is coming from.

How China Will Change Investment....

2010-09-20T08:23:00.000-07:00

In my Money Week column this week, I've been looking at how the rise of China as the world's largest stock market will change investment. Here's a taster....

Any serious investor will already be comfortable with the emerging markets. They know the BRICs - Brazil, Russia, India and China - are doing a lot better than the traditional developed economies. They probably have some money in a fund specialising in those stocks. They might even have dipped into what the investment industry calls the frontier markets – places such as Pakistan, Tunisia, or Vietnam.
But over the next twenty years, the amount of attention they will need to pay to them is going to vastly increase. The emerging markets are going to stop emerging. They are going to turn into the establishment.
The mood of the global markets used to be set in London or New York. Over the next two decades, it will increasingly be set in Shanghai, Moscow on San Paulo. That is going to change the way the markets operate, the signals that suggest you should buy and sell, and the way that investors get rewarded. It will make investing a lot more scary, and the markets will be a lot a more volatile. But you need to get on the right side of that trend, or end up getting badly burned.
Last week, Goldman Sachs published a set of long-range forecasts for global stock market capitalisations. It predicted that by 2030, the value of emerging market
stocks would rise more than fivefold to $80 trillion. Their share of world equity capitalization would, the bank forecast, rise to 55% from 31% today. China will be the world’s largest market. Its total value, Goldman predicts, will increase to $41 trillion by 2030 from just $5 trillion today. It projects that the US market will be worth $34 trillion by then, making China easily the worlds biggest.
That will be a big change. Right now, the US stockmarket still accounts for almost 30% of global market capitalisation. China is just 7.2%, only a little ahead of the UK at 6.6%. Brazil accounts for only 2.8% of the world markets, just slightly more than Switzerland (although there are 205 million people in Brazil, compared to 7.6 million in Switzerland).
There is nothing very controversial about that. The emerging market economies are growing at a far healthier rate than either the US or Europe. The International Monetary Fund predicts the emerging economies will grow at 6.4% next year, compared with 2.4% for the developed world. They keep on growing at double or triple our rate every year. Nor is there any reason to expect that to slow down. The demographics of the developing world are in far better shape. So are government finances. And they still have a lot of catching up to do to match living standards in the West. It’s hardly a surprise that their stockmarket will overtake ours. A hundred years ago, New York surpassed London in importance. Fairly soon, Shanghai will overtake New York.
The interesting question is how that will impact on the way the markets work.
We are used to a world where the dominant investment themes and ideas are set mostly in New York, and partly in London. The Dow Jones index might just be thirty companies. Its rather strange composition might well mean that it isn’t even a very accurate reflection of the American economy, never mind what was happening in the rest of the world. As a general rule, however, if you knew what was happening to the Dow, you’d have a pretty good idea where the rest of the world’s markets were heading. Likewise, the FTSE is an oddball mix of companies, largely dominated by oil and mining companies, plus a big bank and drugs company. It doesn’t tell you much about the British economy. But if mining stocks are all the rage in London, you can be certain they will soon be just as popular in the rest of the world as well.
The themes in New York and London dominate the global markets everywhere. If dividends are in fashion in the U, they will be growing in importance globally. If stock buy-backs are a more popular way of rewarding investors in London, that will be replicated around the world.
Expect all that to change in the next twenty years. What will count is the mood in Shanghai, Moscow or San Paulo. The one number you really want to know won’t be the Dow: it will be the change in the Shanghai Composite. It will be the way those markets are developing, the way that money is flowing through them, and the demands that investors are making, which will set the tone for the global markets. European and American markets will take their cue from the emerging market, not the other way around.
That may well turn out to be scary for investors. It’s dated to portray the Shanghai index as an old-fashioned gangster market, with some mysterious Mr Chan sitting in a dark basement dictating whether it rises of falls with a click of his fingers. But it operates to very different rules to the stock markets of the West. It is heavily manipulated by the government. It has no clear and transparent rules governing what firms can be listed, and what they need to disclose to investors. It is not fully open to foreign investors. And the Chinese, who make up the bulk of investors, are inveterate gamblers, who have always thought stock markets should be casinos without the neon lights and cocktail bars rather than places where you try and seriously analyse a company’s likely future earnings. The critics who point out the New York and London market promote a casino culture, treating stocks like gambling chips, haven’t seen anything yet.
The stock market right now is volatile, short-termist and self-interested. But as it comes to be dominated by Shanghai and Moscow it is going to get a lot more so. The market will be dominated by the state, because that is the way that business works in China and Russia. It won’t be very interested in small investors, because they don’t count for very much in any of those markets. Nor are the standards of honesty likely to be the same.
There is no point complaining about that, however. It is where the money will be. The rules of investment are about to change, and investors need to make sure they understand that. Because one thing is always true: if you don’t understand the rules, then you haven’t much chance of winning the game.

Thriller Writers Need More Relevance

2010-09-14T01:58:00.000-07:00

One of my favourite themes is how thriller writers aren’t keeping up with the times. Britain and the US have been involved in two major and very nasty wars in the last decade, both in Iraq and Afghanistan. But you wouldn’t guess it from reading the thrillers on the shelves at your local WH Smith. The y are all old-style Cold War spy thrillers, stuff about hidden scrolls, serial killers, or lawyers. There is almost nothing about the wars we are fighting now.

There is a fascinating piece related to that in the New York Times. It points out that the most vibrant story-telling about contemporary warfare is in the video game industry, not in the thriller industry. Games like Medal of Honour and Call of Duty are far more relevant to what is happening in the world today than just about any book.

I’m trying to address that with my ‘Death Force’ series, which are bang up to date. But not enough writers are taking up that challenge. I suspect that is partly the fault of the publishers, who should be looking for more contemporary material. But it also because writers have lost the desire to be relevant.
The video game already poses a big challenge for writers. In many ways it is a more interesting narrative form. But surely it is silly to leave the field completely top gaming, rather than the novel

Questioning Bank of England Independence....

2010-09-13T06:12:00.001-07:00

Given the poor track record of the UK economy since 1997, I'm surprised more people have't been questioning whether an independent Bank of England was a great idea. I've been addressing that in my Money Week column this week. Here's a taster....

All of sudden, everyone seems to want to claim credit for giving the Bank of England its independence in 1997. In his memoirs, Tony Blair rather surprisingly said it was his idea all along. Until then, Gordon Brown had always insisted he thought of it. In response to Blair, the Labour leadership candidate Ed Balls popped up to say that he had the idea before anyone else.
The debate is fairly infantile. The idea of an independent central bank had been around for decades, so there was never anything very original about it. The interesting point is how they all assume it was a triumph, a move of such brilliance that the only real debate is about is authorship, not about its effectiveness. But that isn’t nearly as clear as they seem to think.
In reality, thirteen years on, the record is, to put it mildly, mixed. The independent Bank has presided over catastrophic period of British economic management. Growth was disappointing. A debt bubble built up. The housing market went crazy. The banking system collapsed. The inflation target has barely ever been met. It has hardly been an unqualified success.
That hasn’t stopped the Labour tribe squabbling over it. “When I suggested it, he readily agreed,” Blair writes his memoir “A Journey,” published last week, of the decision to give the Bank sole control over interest rates. “I allowed Gordon to make the statement and indeed gave him every paean of praise and status in becoming the major economic figure of the government. In truth, too, as with the Bank of England independence, the broad framework of the economy, never mind anything else, was set by me.”
Gordon Brown has on countless occasions claimed credit for Bank independence as one of the triumphs of his ten years as Chancellor. And Ed Balls has been just as keen to claim it was all his idea right from the start. He points to a pamphlet he wrote in 1992 advocating independence for the Bank. "When I presented detailed proposals to Gordon and Tony in 1995, they both agreed in principle it was the right thing to do," he said in an interview with the Sunday Times last weekend.
In reality, there was never anything particularly original about the idea. Independent central banks had worked very well for a long time in the US, Germany and elsewhere. You could argue the UK already had one in the late 1980s when the then Chancellor Nigel Lawson was shadowing the deutschemark – it just happened to be the Bundesbank rather than Bank of England. Ken Clarke as Chancellor under John Major had increased its powers over interest rates. The decision was part of an evolving policy, rather than a sudden and brilliant innovation.
And yet the fact that suddenly in 2010 Blair was to take credit for the Bank’s independence is, in truth, confirmation that the man knows nothing about economics. After all, looking back at the last thirteen years, it is hard to conclude that Bank independence has been a great success.
Growth has been fairly modest. Over the years 1997 to 2009, the British economy grew at an average annual rate of 2%, according to calculations by the National Institute of Economic and Social Research. Under the previous period of Conservative rule, from 1979 to 1997, it grew by 2.2%. Between 1960 and 1973 it grew by an average of 2.9%. So it’s only compared to the chaotic years of the mid-1970s that the growth figures for the years of Bank independence look good. Judged by the whole of the post-war period, 2% is a slightly disappointing rate.
An enormous debt bubble built up. According to McKinsey data, over the last decade the UK saw the largest increase in the ratio of debt to GDP of any developed economy. Total public and private debts rose from 350% of GDP at the start of the decade to 449% at its end.
The hosing market went crazy. Admittedly, the UK has always had a fairly bonkers property market. But the problem got worse under an independent Bank. Between 1979 and 1997, house prices grew by 146%, according to Nationwide figures. Between 1997 and 2009, they grew by 230%. Housing was already very expensive. On the Bank’s watch, it turned into a bubble.
The Bank didn’t have control of the financial system – that was hived off to the Financial Services Authority. Even so, the fact that the UK saw the most catastrophic series of banking collapse in more than a century since it was granted its independence is hardly a great advert for its role.
Nor has the Bank even been particularly successful at meeting its inflation target. It is mandated to maintain inflation at 2%, with no more than a 1% deviation in either direction. But it has consistently failed to deliver that. This year, for example, inflation has been above 3% for more than seven months in a row, and shows little sign of coming down. Few ordinary people looking at their household bills would conclude the record on rising prices had been great over the last thirteen years.
Naturally, it is unfair to blame the whole of that record on the Bank. The growth rate has more to do with the overall thrust of government policy than just interest rates. Against steadily rising taxes, and more and more regulation, the UK was always going to struggle to grow. The credit bubble was part of a global trend, even if the UK took part in it with even more enthusiasm than any other country. It is hard to disentangle where responsibility lies for the economic mismanagement of the last thirteen years between the government and the Bank.
But it is certainly possible that the Bank could have done better. Interest rates look to have been held too low for too long for the health of the economy. It fretted publicly about house prices, but shied away from doing anything about them. True, it’s hard to prick asset bubbles: but lots of things in life are hard, and that’s not really an adequate excuse for not trying.
Indeed, given the generally disappointing record of the British economy since the Bank was given its independence, it’s surprising that more people haven’t started to question whether it was really a good idea.
And it is even more surprising that so many politicians are so keen to claim credit for it.

Fact vs Fiction....

2010-09-08T08:38:00.001-07:00

Fact vs Fiction:

I haven’t been writing very much on this blog, largely because I’ve been rattling out a quick book on the Greek crisis for Wiley. The book was written at huge speed – a couple of months – and will be out in November. That was exhilarating in itself. As most of us know, the process of writing can be pretty leisurely. It takes a long time to write a book, and just as long for the publisher to bring it out. This one will be about five months total from Wiley getting in touch about the idea to the book hitting the shelves.

For me, it was also a chance to reflect on the difference between writing fact and fiction. I wrote a couple of business books much earlier in my career, but this was the first one I had done since I took up writing fiction.

It is a very different process. Obviously, the non-fiction book involves a lot more research. On the other hand, the story is just there. You collect the facts, marshal them into a coherent argument, then tell the story.

In fiction, you have to create every detail of the story yourself. You have to create the characters, and make them real. You need twists and denouements. It’s far harder work.

The funny thing is, most people looking at ‘Bust’ would assume it was a far more serious book than, say, ‘Fire Force’. But a book like ‘Fire Force’ is far more difficult to write.

Why Humans Are Better At Investment Than Computers....

2010-09-06T08:38:00.000-07:00

In my Money Week column this week, I've been looking at why humans are better at investment than humans. Here's a taster.

Two years on from the start of the credit crunch, it is easy to observe that not a great deal has really changed. The banks have gone back to paying big bonuses, the traders and dealers are as speculative as ever, and the hedge funds are still raking in fortunes.
Still, one corner of the capital markets has been hammered hard – the so-called-called ‘quant funds’.
A few years back, the intellectually super-charged hedge funds that used mind-bogglingly complex formulas to trade assets and make huge profits for their owners were the hottest sector on both the City and Wall Street.
But now the combined assets of the quant funds are down from around $1.2 trillion at the industry’s peak to around $470 billion now, a drop of more than 60%, according to data from the research firm eVestment Alliance. Around a quarter of the quant funds have closed in the last two years, according to figures from Lipper Tass.
In part that tells us that investing styles go in and out of fashion. Sometimes people want gurus, sometimes charts, other times they want geo-political trends, and so on.
But it also tells us something more interesting.
Despite the best efforts of thousands of incredibly bright people, and despite the billions of dollars at stake, no one has ever really managed to mechanize the markets. They remain stubbornly human.
The quants, as they became known in the markets, were obsessed with taking the human element out of their trading strategists. The scoured university campuses, taking astro-physicists and mathematicians blinking out of the library, and paying them hundreds of thousands to have a shave, put on a suit (or at least some Boss chinos) and sit all day in an office on Mayfair’s hedge fund alley.
Once installed, they came up with programmes that could trade on minute price discrepancies between different markets, and make a fortune on the results. Or the scoured the record books for past price relationships, and when they found them, built trading computers that could exploit them.
Sometimes they came up with interesting results. The price of oil, for example, expressed in gold has remained virtually static for generations: as soon as it deviated from that norm, there was a trading opportunity.
But, although they had some big successes in the bull market, the quants were undone by the crash. None of the complex mathematical models they built predicted the credit crunch. All the expensive computer programmes were about as useful as a bucket and spade in Birmingham. The quants reputation was largely destroyed. The reason the value of the funds fell so fast was because they preformed so poorly, and because disillusioned investors withdrew their money.
In fact, the markets remain impossible to mechanize. If you could build a programme that predicted the markets, you would make, quite literally, billions. Yet no one ever manages it. Indeed, the harder they try, the worse the results usually are. In the 1990s, another hedge fund, Longer Term Capital Management, which had more Nobel prize winners on board than Man City have expensive footballers, collapsed with vast losses and bought down the markets with it.
There are three reasons why the market remains so defiantly human – and so resistant to smart mathematical models.
First, the markets are chaotic. Computers are very good at capturing fairly straight-forward relationships. They are very bad at modeling complex ones. Chaos theory is one explanation for that. For example, a butterfly flaps its wings in China, and it causes a thunderstorm in Britain. There are so many complex inputs making up the way weather works, you can’t hope to capture them all. It’s the same with the markets. A mortgage defaults in Florida, and a month later The Royal Bank of Scotland is bust. They are inherently chaotic, and so incredibly hard to predict.
Secondly, computer programmes are very bad at capturing human reactions and emotions – and the more people are involved the worse they get. That’s why they are good at chess, but not very good at bridge or poker: both card games are essentially about judging what your opponent will do, whilst chess is mainly about crunching a lot of numbers. The markets are much more like a card game than a board game. Investment decisions, and hence the direction of the markets, are driven as much by emotion as anything else. Sentiment is strong some months, and weak in others, even if not very much really seems to have changed in the meantime. It is tough for any computer programme to understand that, let alone model it, and start building it into its predictions.
Finally, behavior changes. The way that investors behave and the markets respond, evolves all the time. It isn’t static, or predictable, like the way the moon revolves around the earth. It will be different today from yesterday, and different again tomorrow. The quant funds were building predictive models based on the way market behaved in the past. But, whilst interesting, they didn’t really discover anything very useful. Just because a price has moved in a certain way historically does not mean it will move the same way in the future.
The lesson is a simple one. The markets will remain an arena for great traders, with an instinctive feel for where assets prices are going. They can’t be predicted with any kind of precision by computer programmes, no matter how much brain-power has gone into creating them.
And all those astro-physicists who for a few years could drive around in Porsches as they got paid million by a hedge fund can go back to the dusty poverty of the university library.
Still, there is one comforting thought. You might find it fiendishly difficult to predict what any market will do in the next years. But the smartest brains from the best universities couldn’t do it either – the markets caught them out, the same way they usually do the rest of us.

Zero Rates Have Lasted Too Long....

2010-09-01T10:24:00.000-07:00

In my Money Week column this week, I've been discussing how almost zero interest rates have lasted too long. Here's a taster....

On March 5th last year the Bank of England cut interest rates to just 0.5%. It was the lowest rate in the Bank’s 315-year history. Accompanied by a package of asset purchases, it was part of an emergency package designed to shore up and economy which, at that point, appeared to be teetering on the edge of an abyss.
In the last few months, however, something very interesting has happened. Near-zero rates have started to become the ‘new normal’. Rates have stayed at that all-time low for 17 straight months now. No one thinks that they are about to rise any time soon.
And yet, the evidence is starting to emerge that the market is beginning to be seriously distorted by money that is virtually free. An M&A boom is bubbling up, created by cheap money. The housing market is kept buoyant by bargain-basement mortgages. Savers are abandoning deposits accounts for corporate bonds.
If rates stay at these levels much longer, behaviour will have changed so much that the shock once they start to get back to realistic levels again is going to be huge.
In the three centuries that it has been in existence the Bank has never pushed rates as low as this before. As a temporary, emergency measure, it was perfectly understandable. The credit crunch had tipped the global economy into a deep recession. There was plenty of talk of the threat of deflation (even if there was not much actually evidence of it). Something had to be done. And pushing rates down to almost zero was about the only weapon the Bank had available.
But now that low rates have been maintained for nearly a year and half, they are starting to be accepted as completely normal. For the first few months, people realised they were exception. Now they just think that is what money costs.
There is little sign of rates rising soon. At the last meeting of the Monetary Policy Committee, only one member, Andrew Sentence, voted for a rate rise, and that was only by a quarter of one percent. The rest of the MPC seems happy enough to keep rates on hold for the foreseeable future.
And yet at these levels, money is not just cheap: it is, in real terms, effectively free. Inflation remains stuck stubbornly above 3%. The real interest rate is negative, and has been for more than a year now.
A basic rule of economics is that once you change the price of something, you change behaviour as well. With money now virtually free, three things are happening.
First, there is a big upsurge in M&A. BHP Billiton’s $43 billion bid for Potash is only one example. This August has seen more takeover deals than any August since 1999, at the height of the dotcom boom. No doubt the autumn will be even busier.
It makes sense. If a company can borrow money at less than 1% and go out and buy a business yielding 6% or 7% a year, then it isn’t very hard to make a deal stack up financially. When chief executive’s thought 0.5% rates were temporary, they held their fire. Now they are looking permanent, they are starting to do deals based on very cheap money.
Likewise, the housing market remains suspiciously buoyant despite the slump in the economy. Again, it is being propped up by ultra-cheap money. There aren’t any mortgages available at 0.5%, but there are plenty of trackers available at less than 3%. Initially, record low rates were a windfall for home-owners. Their monthly mortgage payments came down dramatically. By now, however, we should assume that many people have bough properties on the assumption they will be paying about 3% a year interest on their mortgage forever.
Savers, too, have started to change their behaviour. There isn’t much point in putting your money into an account paying 0.25% a year or less. It’s hardly worth the trouble of filling in the form. There are plenty of anecdotal reports that savers are switching to corporate bond finds, or high-yielding equities, in record numbers. It is hard to blame them. There isn’t any point in collecting practically nothing on a deposit account when you could be making 5% or more on a bond fund.
The trouble is, as near zero rates come to be accepted as completely normal, behaviour is changing in all sorts of ways. People are starting to act as if those rates will remain indefinitely.
But, of course, they won’t.
The one thing you can say for certain is that if a price is at a three century low, there is nothing normal about it. It’s clearly exceptional. The think tank Policy Exchange predicted last weekend that interest rates could be back up to 8% in two years, as the impact of the huge expansion of the money supply fed through into prices. That may or may not be accurate. Whether it is or not, however, a return to a more normal rate of around 5% is guaranteed at some point in the next two or three years.
When it happens, it is going to be a huge shock to the system. Companies will have made huge takeover deals based on free money. People will have bought houses thinking they would only have to pay 3% on their debts. Savers will be invested in bond funds that may well fall sharply in value once rates start to rise again. The economy will have adjusted to near zero rates – and it will be extremely painful to have to start paying for borrowing again.
The Bank of England probably made the right decision in slashing rates close to zero. The economy did need rescuing. But by allowing that rate to remain in place so long, it is taking a big risk – that companies and individuals get so used to free money, they won’t be able to cope once rates do finally start to go up again.

How to Read the Uk Economy....

2010-08-24T00:46:00.000-07:00

In my Money Week column this week, I've been discussing how we need to look at a different set of indicators to get a feel for how the UK economy is doing. Here's a taster....

Is Britain about to face a double-dip recession? The media and the economic forecasters in the City have been in a flap about that much of the past month. House prices have stalled, and may be falling again. Consumer spending is sluggish. There are big cuts in government spending coming down the track. It isn’t hard to make the case that the reasonably robust bounce back from the collapse of 2009 we are witnessing right now might be about to go into reverse, and that another recession is just around the corner.
Then again, perhaps we are looking in all the wrong places for signs of life from the British economy. Over the last twenty-five years we became used to watching house prices and the retail sales figures to get a sense of where the economy was going. That worked perfectly well during a property, debt-fuelled bubble. But that economy has vanished forever. The British economy of the coming decade will have to be based on exports, small businesses, and making things. And to get an idea of how that is going we will need to get used to a very different set of indicators – the trade balance, the savings ratio, company formations, and private sector job creation. Those are the numbers that will tell us whether the economy is showing signs of life or not.
For most of the past couple of decades, you could get a pretty good idea of where the economy was going just by looking at the monthly mortgage approvals figures. If people were borrowing more money, pretty soon they’d be buying a new house, and a few weeks later house prices would go up. All the people who’d bought new houses would soon be loading up their credit card with all the stuff they needed to put into it. And everyone else would see how much their house had gone up in value in the past year, book themselves a winter holiday to celebrate, then head down to the shopping mall to buy some new clothes for the trip.
The sequence was pretty simple. In an economy based on property and ever rising levels of debt, if you just kept an eye on house prices, and the sales figures from a couple of the big high street chains, you’d have a very accurate idea of how the economy was doing.
But along with the rest of the developed world, the UK has reached the end of that road. The easy-money days are behind us. The credit has all dried up. The British economy might do well or badly in the next decade, but the one thing it won’t do is go through another house price, retail spending led consumer boom. If it is to have any chance of prospering, it needs to create real wealth in the private sector instead.
So what indicators should we be looking at instead?
The trade balance is good place to start. It used to be headline news every month, but has been largely forgotten about in the last twenty years. But with a big depreciation of the pound, the British should be making things and selling them around the world. They should be importing a lot less as well, as they tighten their belts and concentrate on repairing their balance sheets rather than getting a bigger flat-screen TV to put on the wall. Both should result in an improving trade balance.
The savings ratio might be another good indicator. The UK needs to save more and spend less, and much of that saving needs to be directed towards re-building the economy so that it is less reliant on financial services and government spending.
So too is the rate of company formation, and the rate of bankruptcies. Again, the numbers of new small companies getting started, and the percentage of them that fail or flourish, will be a clear measure of whether a fresh wave of entrepreneurs are establishing new industries. The rate of private sector job creation will be important as well. For most of the last decade nearly all the new jobs were in the public sector. In the next ten years, it will be private companies, and mostly small ones, that have to create the jobs.
As it happens, most of those figures are looking pretty good right now. The trade gap is indeed starting to narrow. Last month, exports rose by more than 4%, and imports by only 1%, producing an unexpected narrowing of the deficit. Exports to non-EU countries were the highest on record. Our car exports were up 11% month on month. That’s pretty encouraging.
Manufacturing is currently up 4.1% year on year, with the biggest increases in the machinery and equipment industries. Company formation figures are not regularly produced (and many new companies are just tax reduction vehicles). But company winding up orders in the court s are down 17% year-on-year, according to the latest figures from the Office for National Statistics. That’s a good sign as well.
Unemployment is down slightly, and more jobs are being created. Most importantly they are in the private sector. The numbers of people employed in the public sector fell by 7,000 in the first quarter of this year, whilst private sector employment rose by 18,000. It is a small step, admittedly, particularly when you remember that 29 million people have jobs in the UK. But a small step is still valuable when it is in the right direction. Britain needs a lot more private sector job creation in the years ahead.
The important point is not whether those numbers are looking good or bad. Sometimes they will be up, and at other times down. They are, however, the numbers that count.
None of the pundits writing about house prices or retail sales or government spending are adding anything to the debate. They are referring to an economy that’s vanished. There are a whole different range of indicators we need to pay attention to now.

The City's Fresh Challengers....

2010-08-18T01:47:00.000-07:00

In my Money Week column this week, I've been lookig at the fresh challenges the cuty faces from financia;l centres in the emerging markets. Here's a taster....

Three years on from the start of the credit crunch, plenty has been written about how not much has changed. The banks are all paying big bonuses again. Trading levels are close to where they were before the crisis began, and equity markets have recovered the bulk of the losses they suffered when the markets crashed. At this rate, even Sir Fred Goodwin will be able to show his face in public again soon.
But one thing has changed, and decisively so.
In the wake of the credit crunch, all the traditional financial centres have lost ground. The City of London, along with New York and Tokyo, is being challenged by rising group of new capital markets in places such as Seoul, Mumbai, Shenzhen and Dubai.
That trend is not going to reverse anytime soon. In response, the City has to work out how to remain competitive in the decade ahead. It should focus on three tasks. Concentrate on its Northern European heartland. Encourage more inward investment. And focus on selling expertise and advice more than financial products themselves.
There is little mistaking the way the hierarchy of financial centres has been shaken up in the wake of the credit crunch. We were used to a financial universe in which New York, London and Tokyo were the dominant forces (and pretty much in that order). Hong Kong, Singapore, Frankfurt and Geneva played supporting roles, taking the stage to perform character parts, but never threatening to hog the main action, rather like John Cleese playing Q in a James Bond movie.
Now, however, there are signs that is starting to change. The traditional centres are gradually losing their share of the market. For example, the US and the European Union between them accounted for 75% of global stock market capitalisation in 2001, but are down to 50% this year. The number of listed companies from the BRIC nations (Brazil, Russia, India and China) was just 2% of the global total in 2001. It is 22% now. Last year, more than half of the world’s IPOs were in China alone. Likewise, Asia’s share of the total investment banking revenue pool rose from 13% in 2000 to more than 20% in 2009.
Not surprisingly, new financial centres are emerging to capitalise on that boom. In the annual ranking of the competitiveness of financial centres published by the City of London, London and New York have remained at the top for years. But look at the smaller cities racing up the table. Cities such as Beijing, Seoul, Shenzhen, Shanghai, and Dubai have improved their global ranking hugely since 2007: Beijing is up 20 places, Seoul up 17, Shenzhen up 14, Shanghai up 13, and Dubai up seven spots. Seoul has increased its competitiveness by 42% in just two years. They are clearly the rising powers of global finance.
“In the long-run, emerging financial centres, especially in Asia, are likely to succeed in establishing the scale and scope in their market environment that will help them advance into the top group of global locations,” concluded a recent report on the subject from Deutsche Bank. It predicts a ‘multi-polar’ financial market, with many different centres sharing the available revenues. The big three will remain strong, but they will never be able to recapture their traditional dominance.
It is no great surprise that Seoul and Shenzhen are ring fast up the rankings. That is where the growth is. Other centres may join them. The Russian President Dmitry Medvedev spoke recently of turning Moscow into a major financial hub, and the rouble into one of the world’s reserves currencies. For a country that was defaulting on its debts only slightly over a decade ago, it might not sound very likely. But with Russia’s rapid growth, it would be foolish to bet against it.
So how should the City respond?
There are three ways it can remain competitive.
First, it needs to focus on its Northern European hinterland. All financial centres have strong ties to their local markets. The City has spent too much time focussing on being a global hub. But having decisively bested Frankfurt and Paris to become the main European financial centre, and with the euro not looking like much of a threat to anyone anymore (except possibly to itself), it should be serving the French, German, Dutch and Scandinavian markets. It should be the place entrepreneurs from Eindhoven, Hanover or Lyon come to raise funds, and stage their IPOs. The City needs to widen its definition of its backyard – then make sure it dominates it.
Next, encourage more inward investment. It has done brilliantly as a base for the giant American and European investment banks. Big JP Morgan and UBS offices have made it hugely powerful. But those banks are not the rising forces. What the City needs is to attract a new wave of incomers. It should be the place that Indian, South Korean, Chinese, Brazilian and Russian banks and brokers set up their European offices. It needs to figure out what they need, and how to offer it to them. Ideally, London should be the place a Shenzhen bank plugs itself into the global money markets quickly and cheaply.
Thirdly, get into the picks and shovels business. In a gold rush, it’s the guys selling the digging equipment who make the most money. The new financial centres still have weak infrastructure. They need IT systems, back offices, and the expertise to run banks and bond markets. London should concentrate on selling it to them. Just as the German economy benefits from the rise of the BRIC economies by selling them the machine tools they need to build all those factories, so London should be selling them the machine tools they need to get into the financial services industry.
If London can do all of that, it should be able to remain competitive. But it needs to guard against complacency – because it isn’t going to be easy.

Lethal Force - A Short Story

2010-08-06T04:19:00.000-07:00

The Red Bull magazine has published a short story that features Steve from the 'Death Force' series. You can read it here.

Dubai As Thriller Central...

2010-07-24T01:06:00.000-07:00

In the Telegraph today, I've been explaining why Dubai is thriller-central, a natural place for anyone writing about spies and mercenaries to set a story. And there is, of course, a scene there right at the start if 'Death Force'. You can read the piece here

Fire Force In the Charts....

2010-07-21T02:20:00.000-07:00

I've just been checking The Bookseller chart for last month, and Fire Forece made number 12 in the Heatseekers chart. Fantastic stuff....

Steer Clear Of The New Lord Hansons...

2010-07-21T02:17:00.000-07:00

In my Money Week column this week, I've been arguig that investors should steer clear of financiers such as Nat Rothschild, and Hugh Osmond. They look like the new Hansons. Here's a taster....

In a dull, nervous market, they have at least provided a splash of colour. In the past few months, investors have seen two high-profile IPOs by celebrity financiers – Nat Rothschild and Hugh Osmond – raising huge sums of money to create new listed acquisition vehicles.
Investors appear to have bought into the concept enthusiastically. Both men come across a new generation of Lord Hanson’s, the fabulously successful 1980s tycoon, who used his company as a vehicle for a series of high-profile takeovers, gobbling up huge chunks of British industry, and making a fortune for his army of loyal and devote shareholders along the way.
But the Rothschild’s and Osmond’s investors are making a big mistake. This is the wrong decade to be trying to recreate the acquisitive conglomerate that was so successful three decades ago. There is very little money left to be made through financial engineering. If investors want high rates of return they should be looking to small companies, technology entrepreneurs, or the emerging markets. The new generation of mini-Hansons are not going to deliver it for them.
There is little escaping the ballyhoo that surrounded both IPOs. When your name is Rothschild, it is not too hard to get pulses racing in the financial markets: it remains, a couple of centuries after the dynasty was founded, the best brand name in high finance. Nat is the latest in a long line of Rothschild’s to play the markets with consummate skill. He may be best known in this country for his very public row with George Osborne in 2008: it was Nat Rothschild who claimed that Osborne tried to solicit a donation from the Russian billionaire Oleg Deripaska after visiting his yacht off Corfu that summer. But Rothschild has been known for some time as a hedge fund manager with excellent links to the Russian mega-rich.
Last week, he successfully floated Vallar in London, raising £707 million from investors for a shell company that plans to make acquisitions in the mining and natural resources industry. Together with James Campbell, a former Anglo-American executive, the new business will hunt out lowly-rated assets and piece together a new conglomerate. Investors loved the concept. The company raised comfortably more than its £600 million target for the float.
They were just as keen on Hugh Osmond’s new venture. Back in March, the financier raised slightly more than £400 million for his vehicle, Horizon. Osmond first made his name on the floatation of Pizza Express with his colleague Luke Johnson, and went on to create the pubs chain Punch Taverns. He’s made plenty of money for his backers over the years. The idea behind Horizon was to find companies that had taken on too much debt, buy them, restructure their balance sheets, and get them back into good shape. It has been linked with the homebuilder Crest Nicholson and the car repair chain Kwik-Fit, although it hasn’t completed a deal yet.
Both companies look to have ambitions to become the Hanson of the new decade. Through the 1970s and 1980s, Lord Hanson built up a hugely successful conglomerate. He’d buy up companies such Imperial Tobacco, strip out and sell-off irrelevant subsidiaries, toughen up the financial discipline of what remained, and make a fortune for his shareholders in the process. One of Mrs Thatcher’s favourite tycoons, he helped re-shape British industry in that turbulent decade, and although he didn’t leave much of a lasting legacy – the Hanson that remains is quite a small building products company – he was a hugely influential figure in his day.
Just like Hanson, Vallar and Horizon are acquisition vehicles run by celebrity financiers, built around the idea that they can buy up assets cheaply, work them harder, and piece together a conglomerate founded on the personality of a dominant financier.
The trouble is, it is not likely to work. The climate in which they are operating is very different from 30 years ago.
First, there aren’t many underperforming conglomerates out there ready to be broken up. One of the most successful tactics of the corporate raiders of the 1980s was to target big companies that had lazily put together a mix of businesses they didn’t understand very well. But every company has slimmed down to its core business at least a decade ago - there aren’t any left to break up.
Next, there are not many companies that are being inefficiently run. Two decades of chief executives mouthing the mantra of shareholder value mean there aren’t many companies that can be easily made leaner, or more focussed – and certainly not by men who are better know for their financial connections than for their ability to actually run a business.
Thirdly, two decades of pressure from the private equity industry mean that most assets are ‘sweated’ about as far as possible. There isn’t much fat out there to cut, and certainly not in the way there was in the 1980s. Likewise, if there was value to be created out of re-structuring a balance sheet, the chances are one of the leveraged buy-out funds would have already bought it.
True, Osmond may be looking to restructure companies that have taken on too much debt. But if they are good businesses, their existing banks or shareholders will surely do that for them. Rothschild may use his contacts to find mining assets that are worth a lot of money – but why won’t their owners list them themselves, or sell them to one of the resources giants?
The reality is, there is no low-hanging fruit out there, which is all these kind of
acquisition vehicles can pick.
Investors should realise that there are likely to be very meagre returns from financial engineering in the next decade. That era is over. If you are looking for above average returns, you should be looking at small entrepreneurial companies, at technology stocks, or to the emerging markets. That is where the growth is coming from – and not from celebrity financiers, no matter how illustrious their track record or family name.

The EU Still Hasn't Got to Grips With The Greek Crisis....

2010-07-12T04:21:00.000-07:00

I've just agreed to write a quick book for Wiley and the Bloomberg Press about Greece, the euro and the sovereign debt crisus. More about that later. In the meantime, my latest column for Money Week is about just that.....here's a taster.

The debate about whether Greece can survive in the euro is getting more surreal with every week that passes. The leaders of the European Union and the European Central Bank are still insisting that a Greek default on it debts is impossible. It doesn’t even need to be thought about.
But a glance at the price of Greek debt, and the cost of insuring it against default, tells you something very different. The country isn’t going to be paying back the money it owes – not in full, anyway.
There are almost certainly going to be defaults sooner or later. The problem is, the bland, myopic assurance from European finance ministers that it can’t even be contemplated is only going to make the crisis worse.
It is time, they stopped burying their heads in the sand, and started figuring out how to cope with the consequences of Greece going bust.
The degree to which central bankers and politicians are still in denial is neatly illustrated by the fiasco of the ‘stress tests’ that are currently being carried out on Europe’s major banks. At an EU summit last month, the German Chancellor Angela Merkel and the French President Nicolas Sarkozy cooked up the wheeze of testing the ability of the continent’s main banks to withstand whatever economic storms might get thrown their way.
It was not, in principle, a bad idea.
The markets have been speculating feverishly for months over the possibility of huge losses on dealings in Greek, Spanish or Portuguese government debt lurking somewhere within the banking system. The tests will probe the soundness of each bank, look at how it might stand up to different shocks, decide whether it has enough capital to pull through, and recommend if it needs to find some more cash from somewhere.
That, surely, will reassure the markets?
Well, probably not? Why? Because the possibility of a Greek default will not be among the scenarios under consideration.
According Jose Manuel Gonzalez-Paramo, the Spanish board member on the ECB, the regulators don’t need to test the scenario of a sovereign default by one of the euro zone countries. Why not? Because the idea is “absurd”, apparently. “ The euro cannot allow a default and therefore there’s nonsense doing a stress test based on that,” Gonzalez-Paramo said last weekend.
That is, to use his own phrase, ‘absurd’. The possibility of a default is the one thing that the markets are really worried about. It’s a bit like BP saying it has run though all the possible future scenarios it might face, and costed them fully – but it has ignored the ‘absurd’ possibility that it won’t be able to cap the oil currently spilling out of its well in the Gulf of Mexico.
A Greek default is precisely what the EU should be worrying about. Greek government bonds currently yield 10.2%. That is more than four times the 2.5% yield on German government debt. If both Greek and German government bonds are rock-solid investments, on which there is zero possibility of default, how come the German bond is four times as valuable as the Greek one? Simple. You’ll almost certainly get your money back if you buy the German bond, but if you buy the Greek one you probably won’t. Indeed, a survey released this week by CMA DataVision concluded that Greek debt was now the second riskiest in the world. Venezuela was still a worse bet. But Iceland, Egypt and Romania, those paragons of fiscal rectitude, had all pulled ahead.
It is nonsense to pretend that there can’t be a default by a euro nation. Greece is stuck in a deflationary trap, from which there is unlikely to be any possibility of escape unless it restructures its debts, or devalues its currency, or quite possibly both. Even if the austerity programme for Greece agreed with the EU and the International Monetary Fund works, and there is not much sign that it will, Greek debt will still rise to 139% of GDP by next year, according to calculations by the Bank for International Settlements. The debt burden just keeps on growing, the capital markets remain closed to the country, and sooner or later the interest payments are going to become unsustainable.
And yet, the EU and the ECB are sticking to the line that Greece will be just fine, and the euro will look in great shape once the markets calm down.
That is the wrong way around. Instead, they should be planning for an orderly, managed default by the Greeks, and possibly the Spanish and the Portuguese as well.
In truth, a default need not be catastrophic. A decade ago, Russia defaulted on its debts, but came back quickly. Thailand effectively defaulted on its debts during the 1997 Asian financial crisis by devaluing it currency sharply. But a decade later the Asian countries, including Thailand, are all growing strongly again.
But it is far better if the default is managed and controlled.
There are two big problems that need to be addressed if Greece goes bust.
First, the European banks have huge exposure to Greek debts, as well as the rest of the highly-indebted euro zone countries. Between then, French and German banks have an estimated $1 trillion in paper issued by Greece, Spain, Portugal and Ireland. If that suddenly has to be written down to nothing, it could trigger a wave of banking collapse right across the continent.
Next, the cost of borrowing for Spain and Portugal, and possibly Ireland and Italy as well, could soar as investors start worrying they would be next. If they were locked out of the capital markets, it could make default inevitable.
But both problems can be addressed easily enough. Make sure there is enough support for the banks to make sure there are no collapses. Next, make sure there is money available to fund the Portuguese and Spanish deficits until the markets get back to normal.
It is far better to deal with problems early and decisively. Just denying that Greece could ever default is not doing anyone any good --- it almost certainly will, and the sooner the EU owns up to that, and start planning for the fall-out, the better.

Still Time To Break Up The Banks

2010-07-07T10:32:00.000-07:00

In My Money Week column this week, I've been arguing there is still time to break up the banks. Here's a taster....

Nearly two years on from the collapse of Lehman Brothers, and there is still little sign of fundamental reform in the way the global banking industry works. In the US, President Obama has allowed the regulation of Wall Street to be watered down so much that it won’t make much difference. The Europeans have lost interest. And the banks have gone back to behaving pretty much exactly the same way they did before the crisis struck.
Despite that, the British should ignore the rest of the world. Even if no one else is prepared to attempt it, the UK should press on with splitting up its biggest banks. Britain is a relatively small economy. It simply can’t afford to shoulder the risk of another calamitous banking collapse – and should get on with doing something about it, even if no one else wants to.
In the immediate aftermath of the credit crunch there were plenty of calls for a radical break-up of the banks. We were constantly told that there would be no return to the wild risk-taking, the bonus culture, and the short-termism, that characterised the financial markets for much of the past decade.
But, two years on, there is plenty of evidence that everything has gone right back to the way it was. The banks are paying out big bonuses. They are trading in high-risk sovereign debt, even when it is obvious many of the countries whose paper they are buying are bust. They are expanding enthusiastically.
In the US, President Obama, last week ducked the challenge of serious change. The financial reform bill that emerged from Congress was watered down so much by the big banks and their lobbyists that it is not going to make any real difference to the way the industry works. Instead of prohibiting the big banks from trading derivative on their own account, and investing in hedge funds, it merely limited their ability to do so, and not very effectively either. The big Wall Street banks - Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley – have emerged two years after the credit crunch with an even tighter lock on the American capital markets.
Neither has the European Union done any better. It has proposed new legislation on the hedge funds and private equity funds, its two favourite targets. But since the hedge funds didn’t create the crisis, that is about as relevant as blaming our cricket team for the failure of our footballers to perform better at the World Cup. It simply misses the point. The Swiss central bank has talked about splitting up its two giant banking groups – UBS and Credit Suisse – but has so far failed to actually follow up its words with actions.
It would be easy for the UK to give up. If the rest of the world isn’t getting serious about financial reform, then it is hard for the one, smallish country to do it by itself. Easy, but wrong. In fact, the UK should press on with splitting up retail and investment banking.
The Chancellor George Osborne has already established a commission to study precisely that issue. We don’t yet know what it will conclude. But whatever the outcome, it is too risky for the UK to allow the City to carry on as before.
There is no reason to worry about the foreign banks. If JP Morgan, Deutsche Bank, or Credit Suisse want to have big offices in London that is fine. It doesn’t matter in the least to British taxpayers if they take wild and crazy risks. If they make money, they will have to pay taxes on the profits, either in corporation tax, or as income tax on the bonuses they pay to their staff. If they lose money, then it is American or German or Swiss taxpayers who will have to bail them out. For the British, that is a heads-we-win-tail-you-lose deal. There is nothing to complain about in that.
But the British banks are a different matter. As the Governor of the Bank of England Mervyn King put it in a speech: “If a bank is too big to fail then it is simply too big.”
True enough. The UK is a medium-sized economy, with an out-sized financial sector. RBS grew to be one of the biggest banks in the world, trading in every corner of the globe, but when it ran into trouble, it was the British government that had to pick up the bill.
It was affordable once – it won’t be affordable a second-time around.
Banks such as Barclays, mainly through its Barclays Capital division, and HSBC, are simply too big to be under-written by the British taxpayer.
The solution? Force them to split out their UK retail arms from their investment banking and global operations. When a bank fails, the risk to the UK economy comes from ordinary depositors losing their money. If an investment banking division, mainly trading derivatives on Wall Street or in Singapore, collapses, it doesn’t matter very much to the economy in Woking or Wigan.
Of course, the banks will fight it. The business model of collecting money from millions of ordinary depositors, then deploying all that capital in the world markets has worked very well. It has paid for a lot of bonuses. But the risks ultimately gets transferred to the taxpayer – and they are no longer sustainable.
The rest of the world may be ducking the challenge. It will be hard to be the only country demanding serious change. But the UK should stick to its guns. If the don’t like it, allow them to re-locate elsewhere. It would be better to allow one or two of the big UK banks to switch their headquarters to the US, or an offshore centre, than run the risk of another calamitous collapse.

Fire Force Makes The Tesco Chart....

2010-06-25T03:10:00.000-07:00

Fire Force is at 38 in the Tesco chart this week. Great stuff.