The Interest Rate: Will They, Won’t They?

Hardly any time seems to have passed since the last time the Bank of England was gearing up to reveal its new interest rate.

That time, of course, the BOE defied expectations and kept the interest rate at 0.5%, the same level it’s held since 2009 when rates were slashed as the central bank rushed to react to the financial crisis.

This time, as was the case a few weeks ago, markets are anticipating a rate cut down to 0.25%. However, this time, probabilities as high as 98% are being quoted for the cut to go ahead.

The high probability comes off the back of the Purchasing Managers’ Index data released a few days ago, which along with a slowdown in employment growth indicated that the economy was going into a post-Brexit contraction.

That led banking experts to heap pressure on the Bank of England to take action to steady the economy.

But current BOE governor Mark Carney has demonstrated a reluctance to cut interest rates in the past, most recently in the previous announcement on 14 July, where the decision to keep the rate at 0.5% sent the pound into an unexpected, albeit brief rally.

Carney has indicated in the past that he is decidedly against taking rates below zero into negative territory, and his reluctance to reduce the rate last time suggests an appreciation for the fact that such measures can in themselves send a signal that the economy is suffering enough to be in need of that support.

This casts doubt over what action will be taken this time, but given the pressure and the predictions coming out it’s hard to see what other options are open at this point. A decision to hold the rate a second time may be taken as a signal of strength and could provide an economic boost, but sadly many are looking to the central bank for interventionist support rather than signs of confidence in the economy at this stage.

Assuming the rate is cut to 0.25% this time, that opens the bigger question of what steps are taken further down the line. A token cut of an already insignificant interest rate is unlikely to provide the stimulus required, even alongside potential quantitative easing and other measures. The next destination is seen to be zero and then negative territory, and that’s a prospect that sends entirely the wrong signal about Britain’s economic health.

That really gets to the core issue. We are only a little over a month into this post-Brexit economy. The financial industry is still in shock from the event and the wider economy needs time to adapt to the new situation. Furthermore, there is ongoing uncertainty about how Britain’s exit will even take place.

At that time, calls for serious stimulus, over-reaction to data in the immediate aftermath of the event and predictions about future measures of even greater severity only serve to increase the uncertainty and worsen the situation. It becomes a self-fulfilling cycle where proposed measures effectively create the need for themselves.

In the short term, an interest rate cut may help Britain’s economic health, but in the long run it adds to the impression of a declining economy in need of help.

It may seem crazy, but perhaps it would be better to let the shock happen, endure the worst of it and have a little confidence in the ability of the country and markets to recover in their own time. The short term crisis may be worse, but the long term impact could be quite different. It’s hard to know when such a hands-off approach never gets tested.

As always, traders will have a chance to benefit from tomorrow’s decision whatever the outcome, although it will certainly be an interesting day for the many in presumptive short positions if Carney does pull another surprise stunt and keep the interest rate where it is.

Government “Investing in Small Businesses” is a Farce

A recent press announcement reported that Scottish Enterprise, the main economic development agency funded by the Scottish Government, has £15.2 million investment in Aquamarine, a wave energy company that went bankrupt last year. This follows a £16.3 million investment in Pelamis, another wave energy company, which was biggest write-off in the agency’s 25 year history.

One thing you can guarantee is that if the government has to fund it, it’s not worth funding.

To most people the idea of Government giving grants to small businesses is relatively benign. Why not give the little guy a leg up to compete with the big boys?

Sadly this attitude belies a basic lack of understanding of market forces and the role of the investor on a free market.

The purpose of an investor is to try to predict – from all of the potential projects and producers they can possibly choose from – which ideas are most likely to be successful. Consumers have to make choices over what to buy with their limited resources out of every product available to them, so what they buy is a pretty good indication of what they value. Most consumers are money oriented and always on the lookout to save a dollar.  Small business owners need to apply various trending techniques to engage with their value-oriented customers by offering freebies, after sale services and also by issuing discount vouchers. The huge increase in usage of vouchers has given massive impetus to online shopping.

Managing to guess correctly what people are going to want in the future is no easy feat, and doing it well is providing an invaluable service by limiting waste through overproduction of things people don’t want. Resources go on advancements which people decide, of their free volition, improve their lives.

If an investor chooses wisely then they will receive a more generous a return on their investment, and vice versa. This means that people who make good decisions with financial resources become more wealthy and have more resources to invest in projects, while those who make bad decisions will soon find themselves out of pocket with less capital to squander on wasteful investments. In this way the market has a natural mechanism for allocating resources to good custodians of those resources: people who excel at spotting a good idea.

It’s a beautiful system because the only way investors can grow their wealth is by making it available to the community. If they decide to spend it instead it goes to someone else, if they hide it under a mattress their wealth will stagnate, and if they save it in a bank someone else will lend it out on their behalf.

Government simply does not have “skin in the game” and therefore is likely to allocate money along political lines rather than those which serve the preferences of average individuals.

There remains a prevalent belief that the enlightened self-interest of investors who stand to gain from investing will be insufficient to inspire the rich to part with their money, and so there is a necessary role for Government to step in as an investor. This, in fact, was one of the central doctrines of John Maynard Keynes who believed that markets, left to their own devices, were likely to suffer from a chronic lack of investment as-such because they were inherently unstable, and so there was really no rational basis for making investments in long term projects.

If entrepreneurs who do have “skin in the game” are unwilling to risk their hard-earned pennies on a potential failure then the government certainly has no place playing poker with the hard-earned pounds of the tax payer.

Fundamentally, the idea that small business will always be at the mercy of large conglomerates is largely a left wing myth. Yes, in several ways big business has the advantage – they can buy inputs in bulk for cheaper giving them economies of scale, they can avail themselves of large advertising campaigns, they can (regrettably) lobby the government for special privileges, contracts and unearned advantages, and may have other privileges, but they are at a disadvantage in at least one important respect. The larger a company is the more difficult it is for any one individual or group of individuals to keep a handle on all the relevant information necessary for making good decisions in the interests of the entire body. Large organisations tend to chunk down into smaller bodies of up to 150 people, and then these bodies have to be coordinated from the top down.

Because of this, some areas of the body are likely to be running more inefficiently than others, and changing the protocols of production over a mass scale may be slow, and slower still the larger scale the production is. Picture the relative difficult in changing the course of an oil tanker as opposed to a number of smaller, more agile crafts. Small agile businesses – which may not be able to compete with Goliath competitors as a whole – can still chip away at sections of their markets by being more in touch with consumer preferences on the ground. They can cater to niche preferences with personalised services and superior, custom-made products, while Goliaths produce standardised products for mass consumption. A good selection of Davids and Goliaths will give consumers the best choice. A large company may be in many markets, while a David only needs to monitor a few, and can monitor them with precise clarity owing to the small scale of their operations. A number of Davids can chip away at a Goliath from all angles and even bring him down if he gets too complacent.

Sometimes people worry that large corporations will just buy out successful small businesses to prevent this from ever happening, but even those worries are misplaced. If David has a great product, and Goliath has a large infrastructure and access to larger markets, absorbing David’s product into his company can only help a far greater number of people get access to whatever advancement might otherwise remain a niche product.

All this is not to say that there is nothing government can do to even the playing-field for start-ups. There are many ways the Government can help small businesses compete with large established conglomerates, and in doing so help increase the number and quality of option available to consumers, but these do not involve handing out tax payer money to pet projects. Making it easy for small businesses to hire people without too much (or any) form filling and bureaucracy will save them time and money consulting experts, simplifying the tax code will stop them having to employ expensive accountants, and stripping back the regulatory structure so that rules are intuitive and easy to comply with will save a heap on lawyers. Big businesses can afford to have these employees on staff, small businesses often cannot.

When anyone can start selling and hiring the moment they have an idea for an innovative new business we will soon see a renaissance of people “pulling themselves up by the bootstraps.”

Rupees, Pounds, and Pints

As a Brit, I love a good bargain, and a bargain in the Mediterranean sun is better than any other. There I was on a recent trip to Italy seeking such financial relief, only to be left retorting the impotence of my home currency. Political risk in the UK is seeing the pound creep ever lower against the dollar and the euro. The pound is now 0.4 per cent lower against the former and down 0.2 per cent against the latter. What was once a crisply chilled (albeit frothy) cheap beer abroad has become a distant memory. Escaping London prices has never been so difficult. All this has me begging the question: Will we ever get our so very British pound to once again go the proverbial extra kilometre? How should we expect the resurgence of the pound to come about?

The rhetoric surrounding Brexit since the referendum has been somewhat limited but none the less consistent. The word uncertainty has never been so prominent on the English tongue, and this uncertainty, specifically economic, is born from British political risk. As a member of the single market one is able to trade freely with 31 different states (including four non-EU states) with the main benefits being the free movement of resources e.g. people and goods, resulting in great efficiency and security. You know where your materials and labour will come from and that they can be brought together without too much hassle.

Upon leaving the European Union the UK steps into the unknown. The security and efficiency of the single market will be left behind. This is not to say that it cannot be found elsewhere, it is just we don’t know exactly where Britain will find such security and efficiency. Or even whether such economic comfort can be mirrored in, for example, the World Trade Organization (WTO).

In an effort to reassure the government’s wide economic prospects, The Chancellor, Phillip Hammond, has visited India to discuss possible future trade deals with our friends from the Commonwealth. On the face of it India may seem like an investor’s goldmine. It is the strong hold for growth in the South Asian region with their GDP for this year being measured by the World Bank as 7.6 per cent and rising to 7.8 per cent in 2018.

Philip Hammond with Sushma Swaraj, External Affairs Minister

But trade deals involve politics, and politics inevitably introduces complexities beyond mere statistics. A trade deal with India could throw up various conflicts of interest for a government that is supposed to be delivering on the will of the people.

Currently, only 1.7 per cent of British exports go to India in comparison to the 44 per cent that is sent to the EU. As a destination, Britain is last on the top five list of countries India exports to. The stronghold developed during the British Raj has very much depleted and yet the legacy of colonial rule is something many Indians still feel very strongly about. Realistically, our position for bargaining is not as strong as Theresa May would like to make out.

Phillip Hammond wants to offer India further sales of the UK’s financial services, our second biggest export to the EU after IT and Telecoms. British financial services have always been internationally regarded with London seen as the world’s leading financial city, however, such sales wouldn’t come without a cost. Immigration and working visas are a hot topic for the Indian government who will want to push for freer movement of Indian workers to the UK. A cost that would undermine the main reason why many of those on the leave side voted as they did: to tackle and reduce migration.

The conundrum of maximising economic growth while satisfying national political demands has never been so tricky. The government’s initial efforts with India do well to highlight this. British economic hopes took a further blow after the Financial Times reported officials have rendered the possibility of a deal obsolete. Negotiations with the EU will continue for at least two more years. In the meantime, our position in said negotiations could be damaged by the Chancellors failed efforts for pragmatic economic discussion outside the EU.

Risk is determined by uncertainty. The failure of a bilateral between the UK and India leaves Britain even more uncertain about the harsh realities of life outside the EU. The economic risk surrounding Brexit will continue to build until we find some concrete positives results regarding negotiations or talks beyond Europe. Trying to deal with Brussels, consider the British electorate, and open up to the rest of the world all at the same time will be the hardest political economic task undertaken this century.

India hasn’t dampened the markets’ mistrust in the pound and the British economy moving forward. It will most likely be years before we can determine our currency so proud once again. What is worrying is the realisation that historical links and so called old friends do not necessarily pave the way for bilateral development. Something the government like to emphasise as a foothold for British influence across the globe.

As risk increases, life in the pound will continue to become more expensive. The price of a cold beer has never been so complicated, nor uncertain. As summer roles around, we continue to wait for an economic reprieve.

15 September: When the US Fed Called Time on Lehman

Having been in the market place for 53 years I suppose 15th September 2008 has to be the worst day in the history of banking by a country mile. Erin Callan, the FD of Lehman Brothers had been less than economical with the truth as to the robustness of Lehman’s balance sheet. Nor, as I recall, was CEO Richard Fuld as helpful to the market as he might have been. In fact it was all over for Lehman, with this bank loaded up with humongous amounts of bad sub-prime lending, little did the market know what was going to unfold! Lehman was largely regarded as the largest bond house on Wall Street. On 14th September 2007 Lehman’s share price stood at $59.50, valuing the share capital at $41 billion. When Lehman went down the share price was a derisory 21 cents. When Lehman Brothers filed for bankruptcy with $639 billion in assets and $619 billion in debt, Lehman’s bankruptcy filing was the largest in history. With the writing down of assets, losses close to $600 billion would have been incurred.

US Treasury Secretary Hank Paulson had been very comfortable in conjunction with FED Chairman Bernanke in getting JP Morgan to bail out Bear Stearns for $10 a share and Washington Mutual for next to nothing. Shortly afterwards AIG was shored up with a $182 billion bail-out facility. However the moment Lehman came up with its ‘Oliver Twist begging bowl’, Paulson threw the towel in – ENOUGH he cried and that sent the biggest shock waves across the international banking system. Everyone had erroneously assumed that Paulson would come galloping over the hill like a white knight in shining armour. Consequently, all the trading banks never had a chance to ‘cross’ outstanding trades, which could have mitigated some of the gargantuan losses rather than exacerbating these losses, which the banking sector was forced to absorb.

Eight years on the banking sector has still not fully recovered. Though the market is grateful for small mercies – massive quantitative easing, which bought time and restored confidence, regulation’s hob-nailed boots left their wheels of pain across the backs of every bank in the world. It is fair to say that the restoration measures taken by the FED, US Treasury and the ‘Dodd Frank Act’ with considerable cajoling from Volcker enabled the US banking system to recover more quickly, but at a price. The US regional bank is not as prevalent as it was; so many went by the wayside. With the regulators all over the sector like a bad rash, banking will never be the gravy train it once was, though US banks are making a better fist of it than other parts of the world. Regulation and capital requirements are so tough it is hard to see the kind of increase in valuations that were made in 2009/10. Let’s face it, apart from in the US the gains made in other parts of the world have been more or less surrendered.

The one criticism I have, is, that the authorities have been quick to impose painful fines for transgressing banks, but no prohibitive jail sentences for the real offenders who abused their privilege. Traders and middle ranking mangers have been easy pickings for the regulator. That is not balanced justice and some senior people in very exalted positions have got away Scott-free! There is, of course, a very fine line between reckless incompetence and fraudulent behaviour.

I am still dramatically worried about the European banking sector. The sector is short of €300 billion of fresh capital required. Deutsche is a problem with a heavy balance sheet weighting in derivatives and capital markets. Deutsche has had problems lightening their book and selling assets. However, whatever Merkel says about bail-outs, ‘hell has a better chance of freezing over’ than Deutsche Bank not beating the hangman, if matters became dire. I think Andrew Bailey has done a brilliant job in regulating the UK banks and though the capital requirements are penal the banks are in better shape in the UK than they are in Europe, though RBS remains an on-going carbuncle that needs lancing, but will eventually recover. Low interest rates have not helped the banks’ cause, but a zero rate policy and QE have been essential. However that all said, the UK banking sector in terms of profitability has performed worse that US, Japan and EU thanks to the dire state of RBS huge PPI payments proportionately to much associated with Lloyds and on-going individual issues with HSBC, Lloyds, Barclays. There may not be a non-performing loan issue with UK banks, as there is perhaps in the EU, but UK bank profitability is very poor – chart & data below provided by Panmure’s chief economist Simon French.

In closing, Brexit is a total red-herring. London is the most influential centre in Europe by far in terms of trading and M&A activity and having spent 70 years building infrastructure it is not going to be allowed to be usurped by Frankfurt, Paris, Dublin or anywhere else. Negotiations will be fierce over ‘passporting’ but good sense has to prevail, however painful. London is pre-eminent at financial services – fact. Some banks may move staff for a year or so. They will return. Why? London is where it is at. Not arrogance but fact!

Will there be another replication of the 2008 banking crisis? One hopes not. However it’s the bond market that concerns me. Is the regulation of large bond operators draconian enough?

What’s it like going to the job centre in modern Britain?

At the beginning of September, I found myself in need of a job. I was a civil servant on a fixed term contract which ended a couple of months prematurely, this without a doubt left me on the back foot but I wasn’t overly concerned; I figured I could get a job easily. I was wrong.

After four weeks of juggling job hunting, volunteering for Activate UK and spending every other waking moment wondering how I was going to pay the bills, I had to make a decision that the foolish prideful me never wanted to have to make. I needed help and so I went to the Job Centre to sign on.

My reasons for not wanting to go straight away were ridiculous. I worked with a lot of claimants in my voluntary work, I had no problem being associated with them, I saw myself as no better or worse than any of them. The problem for me was the DWP staff, I have read one too many horror stories of employees in the Job Centre treating claimants with disdain, horrific stories of sanctions and other such mistreatment; I am not saying that such things do not happen, but I want to write about my personal experience of going to the Job Centre and hopefully I can help someone else in a similar situation to mine reach the same conclusion as me far sooner.

I applied for Universal Credit online, after spending fifteen minutes on some rather cruddy online form I was told my application could not be processed online and I had to call a number (great start right?), I then rang the number, click a few dozen options on the automated system, to then be told this is the incorrect number to dial and I should claim online. At this point I started thinking how ridiculous this was, someone who is just trying to help is having to jump through pointless hopes just to speak to a human being. Slightly discouraging to say the least. Eventually after much googling I found the correct number and got to speak to a human, an actual human! I took about 40 minutes of some rather odd questions and then I eventually got an appointment at my local job centre, hurray!

I went to my appointment dressed in an open collar shirt and I sat down and looked around at the 20 or so people sat with me, bar a few exceptions most were dressed similarly to me; certainly not the stereotypes in tracksuits and hoodies. I went to meet my careers coach, Stuart and instantly all my previous expectations went out the window. Stuart didn’t grill me, he didn’t treat me like a second class system and more importantly he didn’t judge. Every question he asked me was centered around one thing, finding out about me as a person and towards the end of our meeting he said he had the perfect job for me. He slide over an A4 piece of paper and said “This isn’t you dream job, but it pays more than claiming and they are looking for someone exactly like you”. Ten minutes later he had spoken to the employer and secured me an interview and we joked that this could turn out to be the quickest turn around ever at the JC+, before I could go to the interview though I had to go back the next day to the “group signing” so I could actually be paid my benefits.

The group signing was a bit like an AA meeting, we all sat in a circle (15 of us + two career coaches) and shared success stories and tips about jobs. They told everyone about a course that is being run, you spend a week on the course, get a qualification and then get a guaranteed job at the end, about half of the group signed up to do it and I thought to myself how different the experience is from my initial assumptions. When I went back in to the JC just before my interview, I met again with Stuart and he praised my job seeking efforts over the last few days and we chatted a bit about my interview later on. When I went for the interview I was surprised, that one week training course and guaranteed job was provided by the company now interviewing me! They explained they were new into my area and wanted someone to engage and recruit people from the Job Centre onto their courses and the subsequent job. They offered me the job the same day and I went out for a smoke with Stuart and told him he under sold the job to me. I explained that the pay didn’t matter, but this job is amazing because I can actually help people. I sat on one side of the fence and now I can use that experience on the other side.

My experience on benefits was very different to what gets published in the papers and I think we all need to remember, that the papers are there to sell papers. They will only publish the most outrageous stories because that is what sells. It is not a true representation of what the system is actually like and for anyone in a situation like mine I can only advise this: Unbend your pride as soon as possible and just go. Everyone needs help sometimes and you are a fool if you don’t take it.

It is Time to End the Attack on Buy-to-Let

Over the last year the Cameron government used the tax code to heavily discourage buy-to-let investment, through such means as the 3% surcharge on second homes, the changes to mortgage interest relief and the exclusion of buy-to-let from the cut to capital gains tax, leave landlords paying almost 150% as much tax on their profits as other investors. Even before these developments the IFS showed that rental properties faced a worse tax environment than owner-occupied and social-rented housing. Now that Cameron has given way to May, the time is ripe for a rethink.

There are two motives for the policies Cameron was pursuing. First, it is a politically expedient way to raise revenues for the treasury: few will cry for landlords. Second, and far more important, it is intended to raise home-ownership – alleviating the housing crisis through tax tinkering. If buy-to-let investors are discouraged fewer will buy new houses and more will sell off their properties, which means more houses sold to owner-occupiers and a rise in home-ownership. It is, tentatively, working: the National Landlords Association predicts 500,000 properties will be sold from the rental sector in the next 12 months. That means 500,000 more people, couples and families in homes of their own.

But there’s another side to this story. Those are 500,000 homes drained from the British rental stock, and many more properties that would have become rentals in another climate. The sudden drop in supply will lead inevitably to higher rents, poorer service, or both, in what remains of the rental sector. The increased costs faced by landlords will also be passed on to their tenants. This will harm students, the young and the poor most: the very people increased home-ownership is supposed to help. They are also people who don’t usually have the £33,000 required for the average deposit on a mortgage, or even the £10,000 or so needed for deposits on some of the cheapest properties, so the added houses for sale won’t do them much good.

It also discourages mobile professionals who will find fewer accommodations when they look to move for work, lowering labour marketing mobility and so damaging the wider economy. What’s worse, it may well mean less house-building: between 1996 and 2013 83% of all new dwellings created in England were created by investments in the private rented sector. Don’t just take my word for it: the treasury select committee has said much the same thing.

All of this is to say that the attack on buy-to-let investment is misguided. It temporarily alleviates symptoms of the housing crisis by shifting a fraction of the existing housing stock from owner to owner, true, but its unintended consequences are likely more damaging than any benefits. Policies like the expansion of shared ownership housing are a far more pragmatic and less damaging way of increasing home-ownership, but also are not enough. The housing crisis comes from demand outstripping supply. Increasing supply by building more houses is a solution to the housing crisis. Decreasing demand by decreasing net immigration or increasing the rate of cohabitation is a solution to the housing crisis. Nudging people with the tax system to shift the pre-existing supply is not, and the May government should abandon its predecessor’s efforts to do so, and end the counterproductive attack on buy-to-let.

Should Spread Betting be Considered Gambling?

In the UK, profits from spread betting are not subject to tax like those from other forms of investment and trading are. This is because British law treats spread betting as a form of gambling.

Whether or not spread betting truly qualifies as gambling is, however, subject to a lot of debate.

Spread betting is a form of highly leveraged trading where the positions traders take are typically far larger than the actual sizes of their accounts. This obviously makes it extremely risky, although that risk can be mitigated to some extent with the use of stop losses and sensible risk limitation strategies like limiting risk per trade to 1% of one’s account size.

The high-risk nature of spread betting, combined with its unfortunate name, contributes to its image as a gambling-like activity.

But true gambling is quite a different thing. A casino game, for instance, will have a form of inbuilt house advantage, exemplified most obviously by the zero on a roulette wheel. Roulette is a game of pure chance; whether you hit red or white is out of your control, and the zero makes sure that the house has a small probabilistic advantage per throw that, over time, virtually guarantees them profitability over a long series of games.

The spread in a spread bet can be seen like that, but in reality it functions more like a commission in a direct investment. Unlike the casino, a lot of spread betting brokers (namely direct access brokerages) aren’t betting against traders, but simply facilitate exchange and extract a portion of it for their profits. Sadly some brokers are literally taking the opposite position and hoping the trader loses, and that behavior isn’t helping the image of legitimate spread betting as a form of trade. Others hedge clients’ trades as a way of profiting in either eventuality.

Gambling can also refer to betting on a binary outcome, such as betting on a horse or any kind of news event. In these situations the thing being bet on is out of the gambler’s control; they may have some knowledge giving them a better chance, but fundamentally they’re gambling on the outcome.

There are certainly some leveraged products offered by brokers that do seem to qualify as gambling in this kind of way. Chief among these are binaries. Binary products reduce a trade to a simple yes/no dichotomy, such as “will the FTSE 100 close above or below this level today?”

The kind of complex technical analysis that is used in regular spread betting goes out the window with binaries. The ‘trader’ is simply making a bet on the outcome, buying or selling at a price determined by the broker’s changing assessment of the likely outcome, much like the odds offered by betting firms.

But spread betting is a far more complex activity. Whilst a lot of trading essentially boils down to “will the price go up or down?”, there is a wealth of technical and fundamental analysis that goes into this. Provided risk remains within margin trades are effectively open-ended, they can be managed, added to and closed at different levels at any time.

The leverage is the key thing that sets spread betting apart from conventional trading. A large market move is going to wipe out a trader’s account far faster in leveraged spread betting than it ever could in direct investment.

Yet other leveraged derivative products aren’t legally classed as gambling. CFD trading, for instance, provides much the same functionality, a lot of the same risk, but does not come with the tax advantage. This is a legal distinction between trading a derivative product verses ‘betting’ per point on a price movement.

Likewise, a lot of countries will charge capital gains tax on spread betting profits. After all, in a long position the profit is made from selling something that has appreciated since its purchase. If that is gambling, then so is any investment.

Short selling is technically more challenging to define, but ultimately trades are still being made. Unlike a binary bet, it’s not a stake on an outcome so much as a trade in the hope of value change. So ultimately the classification of spread betting, and indeed calling it by that name, seems misrepresentative.

That can be very off-putting to a lot of prospective traders, who may miss out by writing off as gambling something that is really just another form of trading. However the risk factor is very much there, and the statement that perhaps spread betting isn’t gambling is not a denial of the massive risk involved. There’s massive risk involved in virtually any attempt to generate large profits.

Ultimately that is the lesson here; generating large profits is always going to be risky. Gambling, in the casino sense, is literally set up to ensure ultimate loss. Trading is not. The probability is still overwhelmingly against the novice trader, but it is a skill that can be learnt and people do consistently profit from it.

It would be idiotic to ignore the huge inherent risk in spread betting, but to label it as gambling is to associate it with something entirely different.

The Economics of the ‘Underclass’

Poverty: the norm of the third world and the scourge of the first. In Britain, it conjurers images of economic deprivation, homelessness and empty plates. But what does the term ‘underclass’ bring to mind? Is it an image of extreme poverty? An image of a life akin to that led by Diogenes? For most, it’s a difficult term to define. It is the product of Charles Murray, an American political scientist whose definition of the term was that it referred not to a degree of poverty, but a type of poverty. This ‘type of poverty’ was not defined by wealth or general lack of economic capital, but more specifically by behaviour, social position, education and single-parenthood. In essence, Murray’s definition laid the blame for the underclass with the welfare system which he characterised as over-generous, allowing a group of what were, in his mind layabouts and drop-outs to sustain themselves without the necessity to find a way out of their deprivation.

Now, this is a hotly debated topic, and I have no intention of getting drawn into the debate surrounding Murray or his theories of the underclass. Rather, I wish to re-appropriate his term ‘underclass’, define it in a different way and show how in fact, the problem is very much one of economics rather than social or cultural deprivation.

My definition of the new modern ‘underclass’ is of, as Murray argues a type of poverty not categorised by social factors, but fundamentally economic ones. My argument is that this ‘underclass’ is a group whose poverty is the result of an economic system and policy which by its very nature disadvantages them. It is not, as Murray argued the result of the welfare system propping them up and allowing them to survive, but of an economic policy forcing them down and thus perpetuating their ever elongating miserable existence.

Two examples will suffice to demonstrate how our current economic policy acts as it does, or at least has the potential to force people into an economically-deprived underclass. The first is the elderly, or more specifically those without private pensions to rely on. This group has always been one of the most disadvantaged by the economic policy and system of the past decades, relying in many cases entirely on the state to support them in their old age; but the state and its policy has routinely failed them. These people are not part of the underclass because they are socially-deprived or simply lazy; on the contrary, most have worked all their lives, often in the public sector and have always done the right thing; ‘no one in their right mind believes that this group has volunteered for membership’, as Frank Field put it. Yet, so many live in abject poverty which has even been known to kill.

They are poor because the economic policy, particularly of the past 7 years has brought the axe down hard on this section of the population. Councils, whose responsibility it is to care for these pensioners have seen such harsh cuts that most are now ‘at breaking point’ and simply unable to fund social services for elderly pensioners. Fuel poverty is at record levels among this group (1 million live with this Victorian affliction), as is the number who say they struggle to feed themselves, or have to chose between a warm home or a full stomach. And despite this, our economic policy continues to force them ever further into the underclass, or it at least has the potential to. The announcement in the Conservative Manifesto of the intention to scrap the ‘triple lock’, the system whereby pensions rise by either inflation, average earnings or a minimum of 2.5% depending on which is the highest is deeply troubling in relation to this group. Until now, this in many cases has been the only thing keeping many elderly pensioners with state pensions above water, and its removal could spell disaster.

Ultimately, these people are and will be the victims of an economic policy and system fixated on economic growth for the sake of economic growth; money for the sake of money and profit for the sake of profit. Statistically, the economy may be growing, but most elderly pensioners, like many other members of our underclass do not feel its benefits because it is quite simply not orientated towards them. They are the victims of a policy which fails to recognise the reliance upon it of these people, who it swats into the dirt in favour of paper growth over real benefits: it forces these people into the underclass and it keeps them there.

But what of our second example? This is a difficult one to define, and I do so by simply calling them working-class blue collar families, often with children. Now, here again economic policy has forced them into the ranks of the underclass; in many cases disproportionately effecting the children caught in the underclass ‘trap’. Between 2011 and 2015, 4.6 million people were recorded as living in ‘perpetual poverty’; and a large proportion of this group was, and still is low-wage family units. Over the past 7 years, they have been systematically deprived of vital state aid which has seen the number of children living in poverty rise to 3.7 million. Food-bank use too is into astronomical territory. Even those whom one would not associate with food poverty, yes that’s a real thing in 21st century Britain, like nurses are relying on the charity of others just to survive. Now, Theresa May famously tried to argue ‘there are many complex reasons why people go to food banks’. But, as many have very helpful pointed out, the main reason people have to use food-banks is because they can’t afford to eat and put food on the table for their families, as unbelievable as this is in modern Britain.

And again, as with elderly pensioners, the economy may be statistically growing, but these millions fail to feel its benefits. The inflation rate in April 2017 was 2.3%, but for the same period average weekly earnings adjusted for inflation and excluding bonuses stood at just 0.1%. The problem is plain; the economy is being fixed for the sake of fixing it. Inflation is rising, but house-building is not and a 300% increase in homelessness over the last 7 years is the result yet further adding to the ranks of our underclass. In places, Britain resembles something Hogarth would recognise.

Current economic policy and its practitioners treat the poorest, our underclass, like lazy ‘proles’, failing to realize that in doing so they are making life worse for many thousands of already struggling people. The assumption that people are poor because they are too lazy to solve their own problems, and a general distain for the most vulnerable is all to clear. The removal of certain benefits from the unemployed for instance, a clear symptom of this ‘poverty is your own fault’ mentality has had a detrimental effect upon thousands, in so many cases bouncing the most severe consequences onto the poorest and most destitute children in our society.

And, returning to this subject of children in our underclass, many of whose parents already rely on food banks and who routinely go to school hungry, the proposed removal of free school meals from many millions of poverty-stricken children has to be the last straw. No longer does our economic policy by its innate nature cause child poverty, now its actively trying to find savings by taking food out of the mouths of the most vulnerable: Its no longer simply enough to deprive poor children, now we have a policy which seeks to starve them as well. ‘Decrease the surplus population’; no doubt this will be the next conservative slogan!

The Price of Brexit: The Martyrdom of Business?

With Brexit now only a matter of months away, and nothing agreed, either with the EU or within the British cabinet, the martyrdom of our business to the cause of an ideologically driven Brexit appears as real a possibility as ever. It seems that there are some in Government, and millions across the country hell-bent on Brexit at any cost; a cost which I fear they can neither fathom nor understand. Recent studies which showed most Brexit voters would rather a hard-border in Ireland than remaining in the customs union are the epitome of the Brexit farce, and the inability of so many to realise the effects of such actions. They would have us create the biggest security hole anywhere in the world at a time when international terrorism is highly dangerous: and if ever radicals in Ireland needed fuel for action then this would be it…

But as the title suggests, the sinking of our economy seems to be the last concern to most in Government, with no positive noises and even less progressive action. Lets just take a second to review what business has been saying in the past week.

Jaguar Land Rover, which employs near 40’000 people in the UK as of yesterday questions the logic of a hard Brexit, calculating that it would lose in the region of £1.2bn per year to trade tariffs; the inevitable result of a destructive Brexit. The company even questioned whether remaining in the UK would be profitable should this eventuality occur? Similarly, Airbus which employs around 11’000 people in the UK has raised concerns about Brexit and the risk it may be forced to withdraw funding should a poor or no deal be the result of thus far fruitless negotiations. In this instance however, Jeremy Hunt, who clearly knows a lot about running a large organisation, which must be why the NHS is doing so well at the moment (in his mind at least, if not to the rest of the population), declared Airbus’s concerns “completely inappropriate”… as if he expects everyone to just say nothing and wait for the end. Funny really, it was okay for businesses who backed Brexit to speak, and its okay for those still brave or stupid enough to invest in Britain to do likewise, but anyone who fears the real and present dangers of this calamity must be silent: how’s that for democracy?!

And lets not forget the comments recently from the Society of Motor Manufacturers and Traders (SMMT). They have warned that the current Brexit process is “death by a thousand cuts” for an industry which relies on frictionless trade. Recent figures show that investment from companies represented within the SMMT has been halved from the first half of 2017.

The director of the CBI summed up the current situation best, when she said “facts ignored today mean jobs lost tomorrow”. Worryingly, we live in a world where facts are just what politicians say they are, when the people chose to believe them. No longer are experts, business and those with years of experience listened to, but cast off as “traitors” to the cause. What we need, as Stephen Martin argued, is “less antagonism and more pragmatism”: we should be so lucky. As long as it suits individuals like Boris to sabotage the governments position on Brexit, we will continue down the slippery slope to disaster.

For me, much of the government’s position can be summed up in one short phrase: “F*** business” in the words of our eloquent Boris… which is ironically what he and the government will end up doing if they don’t get their act together pretty damn quick! The complacency is galling, as is the complete disregard ministers seem to have for the thousands of workers and their families whose futures are threatened by their ideological squabbles.

So many in this country are so eager to sacrifice their children’s futures, the economy and business to the blood stained alter of Moloch. It genuinely terrifies me. But then, every country ends up with the government it deserves, and I truly believe that we have just that, populated by pompous self-opinionated toffs who think they know more about business that business.

What Brexit Showed us About People’s Understanding of Markets

In the aftermath of the Brexit vote, a lot of remain supporters were very quick to point to the markets for evidence of what a calamity the outcome was going to be.

Surely enough, stories aplenty emerged from the mainstream media with such headlines as “FTSE 100 and Sterling Plummet“, “Sterling Falls and Bank, Airline and Property Shares Tumble” and, perhaps best of all, “More Than £50 Billion Wiped off FTSE 100“.

The charts presented in the BBC article show massive moves with values plummeting as Brexit shocks the economy. But anyone who’s taken aback by these images is clearly unfamiliar with how markets operate.

bbFirstly, these are hourly charts, showing the price action over the course of one week. Conversely, to the right is a weekly chart for the FTSE 100. Brexit is represented by the fifth candle from the right, the red one with large wicks on top and bottom. The relatively small red area indicates the total drop from the start of the week to the end, while the wicks represent the total price movement during the week.

Suddenly, the move doesn’t seem all that significant. The thing is, as many central bank interest rate announcements will show, markets react violently to news all the time. A chart with a sudden drop will be a common sight to any trader. Certainly, the post-Brexit one was particularly large, but that was to be expected. As the chart to the right shows, the FTSE quickly recovered.

This is how markets behave. When major news happens, traders react quickly, either to profit from the move or shield themselves from losses. Price will drive down, or up, and then retrace back somewhat. After a while it’ll carry on with its usual movements and the event will disappear into the background noise.

Furthermore, the idea that £50 billion was somehow ‘wiped off’ the FTSE 100 is even more problematic than this over-hyped reaction to a short-term move. A large amount of the force behind this move is intra-day traders moving their positions around to try and protect their profits and assets. Any investor who sold at the bottom of this move would have been mad. As soon as the main move had passed, bullish traders returned and money quickly began flowing back in. Again, this is just how markets work.

Unlike the FTSE, sterling hasn’t recovered its losses in quite the same way. However the drop in value of the pound is a two-edged sword, as it can drive up import prices and make holidays more expensive, but it also makes exporting more lucrative and offers an incentive for tourists to come to the UK.

The overall point here is that it’s very easy for the media to show people a dramatic graph and exclaim about how Brexit has ruined the economy. The fact that’s been so successful points to a serious lack of understanding about how markets operate.

Part of this is down to the lack of finance and economics in mainstream education, while part of it is also down to the way in which the media presents the information. Most people have next to no understanding of how the finance industry works, and telling them that the FTSE has ‘plummeted’ is as good as saying that the economy is completely wrecked, when in fact all it means is that traders did what they always do and traded a news event.

The longer term economic consequences of Brexit are another discussion, and the markets will react to whatever developments transpire over the coming months and years. The real take-away from this is that market moves need to be seen in a longer-term context. They should be taken simply as traders reacting to news, not news in their own right, and certainly not a sign of major economic calamity.

It would be a much better world if schools taught economics and finance the way they teach citizenship. Perhaps then people would understand markets and their movements, and maybe even get involved, instead of perceiving the industry as an impenetrable world reserved for a privileged few.