Degrees are shrinking in value but all anyone talks about is cost

Students protesting against fee rises in line with inflation should actually be more concerned about the shrinking value of their degrees. Increasing numbers of students are exiting university and entering jobs they could just as easily have obtained without a degree. This renders many complaints about fee growth irrelevant since graduates’ earnings often mean that they are unlikely to ever pay off sums anywhere near their accumulated debts.

The government is developing a system in which well-performing universities are able to increase their fees in line with inflation. Despite students’ claims that such changes are unfathomable, it is clear that they were both inevitable and necessary for students to be able to enjoy the same quality of education from year to year. Students currently pay £9000 per year for the privilege of a university education. If inflation were on target each year at 2%, it would take around twenty years for this amount to fall in value by a third.

Expecting universities to maintain a good level of education with plummeting income from students seems far more unfathomable than tying university fees to inflation. Given that inflation in the cost of providing a university education currently sits well above the headline rate of inflation, tying fees to this latter figure will still encourage increased efficiency of provision whilst enabling universities a chance at maintaining quality levels.

Whilst the anger of students who are facing fee hikes and believed themselves to have signed contracts stipulating fees of £9000 per year is understandable, the outrage of those yet to start university is not. Nobody is forced to go to university. Those who go choose to do so because they believe that the value to them of attending university exceeds the costs. Though the university fees increasing in line with inflation should not have any bearing on the intrinsic value of a university degree, those who believe that it does, to the extent that the benefits of university fail to outweigh the costs, can simply choose not to go.

What should be of far more concern to current and prospective students is the falling value of having a degree. Work by Bryan Caplan suggests that much of the financial benefit accruing to graduates is the result of the signalling effects of their degrees rather than the skills they learnt during their degree per se. Whilst many find their time at university to be the best years of their lives, it seems a shame that the skills acquired during the process constitute so little of the financial value of having a degree. University certainly shouldn’t be all work and no play, but when students report that the work is barely harder than A–Levels, there is clearly an issue.

Indeed, many institutions have seen a trend shifting away from teaching students the valuable skill of how to think for themselves towards encouraging students to develop their ability to rote learn answers to questions. Something is amiss when students are complaining about exams containing questions on topics they’ve covered but of types they have not encountered before. In many jobs in the real world workers come across challenges, the likes of which they have never experienced before. Being able to problem–solve in such a situation is far more useful than being able to recite past answers to past paper questions.

One major complaint of those protesting against nominal fee rises is that they discourage those from poorer backgrounds from applying for university educations. This is both factually dubious and reliant on significant misunderstandings of how university debt works. In 2015, the BBC reported that more disadvantaged students were entering university than had entered when fees were lower. University education is actually becoming more accessible despite fee increases. This apparent reversal of logic can be easily explained by both increased access efforts of university admissions teams and the fee system itself, amongst other factors. Pretty much everyone embarking on a degree will leave university with a large lump of debt.

The amount of debt each student accrues (excluding maintenance costs) is not dependent on their parents’ income but upon their university of choice and length of degree. The amount of debt each student pays off is dependent on their future incomes alone. Poorer students should be no more sensitive to fee changes than their richer counterparts. The fear of high levels of debt may be greater for those from a poorer background, but the nature of the fee system makes this fear somewhat irrational – the debt is only repaid by those earning above a particular level, making it very different from “normal” debt. Fears about nominal fee hikes reducing social mobility are unfounded and should therefore not be used as an argument against them.

University fees are not Freddos rocketing to ridiculous levels; they are rising in line with inflation in the same way that all other goods and services in the world are. If universities are to be able to provide education of a consistent quality then they must continue to receive fees of a constant real value, and that means increasing them in line with inflation. Students protesting against the increasing of fees as such are fighting a losing battle – in vain.

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?

Sponsored Post: Tips for playing online slots

Online slot games are pretty simple to play but, everyone can sometimes benefit by getting a better understanding of the game they love. Slots are the most popular among online casinos as well as land based. Let’s face it, they are downright addictive. The fact that huge jackpots can be won from the comfort of your own living room makes them even more appealing than ever before.

With winning money being a big part of the appeal, getting in on a few tips and tricks to better insure your chance of leaving your computer a winner would probably make your day. Well, I am about to make your day for you by first telling you that the higher the bet the more likely you are to win.

With that said you are probably wondering why I am telling you to bet a lot of money right off the bat. Well, it is simple really. With slots, the more money that is bet on it, the more pay-lines become open. You could possibly double or triple what you bet in the first place.

The next thing that I am going to tell you is that you should stick to slots that fit into your budget. Knowing when to cut your losses and walk away will keep you from going broke. Another way to keep from breaking the bank is to set a certain amount of money aside for gambling and NEVER, EVER touch any other money during gambling. Even go as far as to NOT using any of your winnings from previous rounds to bet with. Doing this will guarantee that you leave the game with money in your pocket.

Looking out for online slots that offer bonuses such as free spins is another great way to get ahead of the game and make bank if you are lucky enough to get a match up on your free turn. If not then you didn’t lose anything. In a sense, this puts you ahead in the game because that is one turn closer to the jackpot.

It is important that you know that some slots are predetermined in what order the items land per so many turns and how much they pay out. You may want to try to avoid any slots that seem to be rigged. You could on the other hand learn the predetermination of each that you find to be rigged and know just when you are going to hit the jackpot.

A CEO Pay Cap Would Cap The Welfare Of All

The share of national income going to top CEOs is going up and up. Government intervention to restrict this commits twin errors of assuming that rising pay at the top is an unwarranted endemic and assuming that intervention seeking to constrain pay at the top will necessarily improve the labour market opportunities of those at the bottom. Neither of these assumptions holds true. Governments trying to restrain CEO pay will hamper economic growth whilst simultaneously doing much damage to the living standards of those at the bottom of the earnings distribution.

A recent Institute of Economic Affairs publication by Ryan Bourne and Professor Len Shackleton reviewed a series of damaging changes proposed by those across the political spectrum. This included Jeremy Corbyn’s plan to “institutionalise fairness” by setting a maximum pay ratio between CEOs and the lowest paid worker and a proposal from the High Pay Centre that publicly listed firms in the United Kingdom should be forced to publish data on the ratio of CEO pay to median earnings. It concluded that concern over inequality at the top end of the pay distribution would be better dealt with by “a fundamental simplification of income tax to eliminate exemptions, loopholes and tax shelters” which would also work to affect other high–earning individuals such as private equity investors, business owners and celebrities.

Before exploring the potential harm that the proposed regulations could inflict, it is first interesting to challenge the idea that rising CEO pay necessitates regulation at all. Many politicians argue that extreme income inequality at the top is a symptom of some terrible corrosion of societal morals, holding back growth and damaging the life chances of those at the bottom. These claims are simply unfounded. The OECD found no evidence that “those with high incomes pulling away from the rest of the population harms growth”.

Conversely, rising CEO pay is actually associated with increasing firm value. When former Prudential Chief Executive Tidjane Thiam announced his move to Credit Suisse, the total value of their shares rose by £2 billion. The high pay earned by Thiam was clearly deemed worth it by shareholders. Increasing pay at the top is a reflection of an increase in the (perceived) value added. It has not caused those at the bottom to get any poorer. Why should the government intervene?

Attempts to regulate or cap CEO pay could seriously damage economic growth. Switzerland dodged a bullet by voting overwhelmingly against a reform that would see CEO pay capped to twelve times that of the lowest paid worker in the firm. Jeremy Corbyn’s proposal that the UK should adopt similar regulation is a plan to shoot oneself in the foot. There are three obvious ways that businesses can reduce the pay ratio between their cheapest worker and CEO: slashing CEO pay, grossly augmenting the pay of the lowest–paid, and cutting low–paid workers altogether. None benefit the economy.

FTSE–100 CEOs are currently paid almost two hundred times the pay of the average worker. To bring this ratio down via a reduction in CEO pay down to any so–called “sensible” level would require extreme cuts. Since few countries have regulations requiring the publication or capping of such a ratio, in an increasingly globalised market CEOs would simply jump ship.

Top CEOs bring much value to their organisations – such a loss of talent could seriously harm companies. Many businesses would be forced to either relocate to regain access to top executives or shut down altogether. Both responses damage economic growth and result in unemployment, particularly amongst immobile lower–paid employees.

Since a slashing of CEO pay appears unviable, firms might instead reduce their ratio by increasing the pay of the employees at the bottom of the pay scale. Since labour expenses often account for a large portion of business costs, this would be hugely damaging to a business’s profits. Furthermore, for competitive companies with large numbers of employees, the extent of wage augmentation needed would simply be unfeasible. Increasing the wages of those at the bottom of the wage ladder would lead to increases right up it to ensure some extent of differential pay based on value. This would be extremely expensive.

To add to this, a cap on the ratio would severely restrict the size of these value–based differentials, crushing incentives for workers to add to their human capital or encouraging higher–value workers to move abroad where regulations would less stringent, enabling them to earn fairer wages. Regardless, in the long–run, workers cannot be paid significantly above the value they add to a business. If firms are forced to pay some workers more than their value it is likely that other workers will pay the price: unemployment.

It would clearly be difficult for businesses to artificially manipulate their ratios by cutting CEO pay or increasing the wages of the lowest–paid workers. This means that many companies would likely be forced to take the uncomfortable step of making workers redundant. There is already a huge shift towards the mechanisation of work; the laws and requirements proposed above would unnecessarily and inefficiently speed up this process. Low–paid jobs would be outsourced or removed altogether. This would increase unemployment, with the bulk of displaced workers being the less–educated. Such a policy would not help the low–paid or the well–paid. It would help noone.

Bourne and Shackleton conclude that a war against high CEO pay would both be unsuccessful and highly detrimental, causing “collateral damage” across the economy. Basic populist rhetoric on the topic skates over many of the important issues and so should not form the foundations for effective policy design. They state that the government should not extend requirements on firms to publish data on executive pay. If, despite the overwhelming evidence suggesting otherwise, high pay is felt to be a problem, “it should be dealt with through simplifying the tax system and eliminating loopholes” not through rules and regulation which leave everybody worse off.

What Now for Bitcoin?

Over recent years Bitcoin has had a habit of defying expectations. Since its dramatic 2013 price rise it has held level in spite of the constant predictions of naysayers that it’s just a fad, that regulation will catch up and that it will ultimately fail.

Yet today, bitcoin is used seriously in a wide range of roles, including everyday transactions, venture capitalism, currency exchange, charity and even dedicated bitcoin gambling.

The future of bitcoin is now the subject of intensive debate. Will this success continue, or will it soon be a thing of the past?

The block-chain technology underpinning it is undeniably revolutionary, but some have suggested the success of the technology may overtake Bitcoin itself.

But while some of the advantages of the decentralised system may be adapted by the mainstream in the future, a lot of Bitcoin’s success lies in its role as an outsider to the conventional financial system.

Indeed much of its criticism also stems from this point. Some countries and territories have banned its use, while others have been quick to point out that payment and consumer protection rights don’t apply.

Likewise its potential for anonymity makes it attractive to black marketeers and those wishing to hide their online purchases. That in turn makes it a target for regulators and opens it to calls for clampdowns on its free use. However the anonymous nature of Bitcoin is itself a subject of debate.

Another threat to Bitcoin is also one of its most exciting aspects. There is an increasing threat of conventional currencies moving to a cashless system, removing the facility for individuals to store their own money away from the threat of negative interest rates and transact without fear of monitoring.

Bitcoin presents one possible escape from that, in being a currency not beholden to the will of any central authority and, at least for the moment, largely anonymous. If the prospect of a cashless economy does come on line in the future, that could well be good news for Bitcoin and other crypto-currencies.

on the other hand, its unregulated nature and the speculation over its future does leave it open to wild price fluctuations. That volatility may settle as it becomes more established and if it becomes widely accepted as a mainstream means of transaction, but until then having money in Bitcoin has the potential to lose, or make, the holder a lot of money, depending on how well it fares in the future.

Ultimately Bitcoin’s future is at the mercy of a lot of external factors, particularly government regulation and economic policy, as well as the development of the system and potential competitors. However currently Bitcoin is an unchallenged force in this space, and in a time where the use of money is rapidly changing, that status gives it the potential to grow massively.

Already it is being taken increasingly seriously, with Bitcoin ATMs in operation, major retailers accepting it and blockchain technology being seriously pursued by mainstream institutions. There is still a great deal of growth ahead if it is to become a permanent, established medium of exchange, but some recent news has been very encouraging.

Ultimately, whichever way it goes, it’s exciting to watch and be involved with something with so much potential to radically alter the way we do business. Bitcoin is one great example of how technology has radically altered economics in the internet age, and whether or not it ultimately succeeds, it and the technology it has brought into widespread use will undoubtedly continue to disrupt and reshape the world.

That alone seems reason enough to be optimistic.

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.

Why Do So Many Traders Fail?

The idea that 90% of people who take up trading fail and end up blowing their accounts is a commonly heard one in articles, videos and on trading forums. The exact number varies, with 95% and 99% also being commonly quoted, but the general idea seems to be that the vast majority of retail traders end up losing money and never succeed.

To start with, this statistic is very hard to source. Different brokerages give different figures for their proportions of profitable clients, and these are skewed by the time frame being assessed, the mix of asset classes in question and various other factors.

However it does remain true that a large proportion of new traders never manage to get off the ground. It isn’t hard to find a large volume of online commentary from people who lost out and wrote the whole concept off as a giant scam. A look at social trading networks like Etoro reveals an massive proportion of loss making accounts.

The likely major cause of this lies in basic human psychology. People come into trading looking for big, short-term profits. They want money now, and they aren’t prepared to invest time or effort in the education, be that self-education or something more formal, that’s essential to getting anywhere in the markets.

That means that a lot of these traders are going in far too inexperienced to ever stand a realistic chance of success. If you can’t read price action, analyse a chart or understand fundamental news releases, you’re going to get wiped out pretty quickly.

But even those who do take the time to study and learn still have another hurdle to overcome.

When people are trying to do something like lose weight, give up smoking or take up exercise, it’s quite common for them to give up after a short period of time. Activities like these don’t deliver their rewards straight away; it takes several weeks of dietary change or exercise before the body starts to seriously change.

Trading is much the same. You start out losing in demo mode, then ideally progress to breaking even and then profiting in demo mode before moving to a live account. But the way that trading feels completely changes when the money becomes real, and there’s a complete repeat of that process of building up to profitability once live trading starts.

It’s at this point when it’s really easy to throw the towel in. In my own experience I had nine weeks of live trading losses, wiping out a quarter of my account, before I broke back through my deposit and started profiting. Most people aren’t prepared to wait that long on top of the months of demo trading before it, especially if inexperienced trading takes their losses even lower.

On the psychological front, revenge trading is another common killer of accounts. This is where a major loss leads to an urge to ‘make back’ the lost funds, resulting in greater risks, larger lot sizes and a complete abandonment of rational strategy. Keeping a cool head is essential, as is knowing when to acknowledge that it’s time to walk away, do something else and return when the mind has moved past the emotional reaction.

It’s all too easy to dismiss the system as rigged when it takes far more effort, time and dedication to succeed than most people are willing to invest. True enough, some products offered by brokerages are just gambling, particularly binaries and some derivatives, but trading in of itself is a skill that takes serious effort to hone.

The fact that some countries, including the UK, treat the unfortunately named ‘spread betting’ as gambling doesn’t mean it actually is. It’s a far more involved and detailed system than a simple binary bet. There’s a lot more to it than just ‘will this market go up or down?’, which is nicely illustrated by comparing real technical trading on a market to betting on a binary derived from that market.

Trading will always involve losses. It’s impossible to be right all the time, and in the case of binaries, the words of Qui Gon Jinn certainly apply. “Whenever you gamble, my friend, eventually you’ll lose”. But most trading is a matter of skill and strategy, and with the right commitment and the right approach personally suited to your own psychology, risk appetite and aptitude, consistent profitability is certainly possible.

The fact that there are people who do it should be a sign that it can be done. The fact the majority don’t is more a reflection on them than on the concept.

This article does not constitute investment advice. Please see our full disclaimer.

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.

Meddling Regulator Plays Havoc With BT Shares


BT shareholders have had a bit of a rollercoaster ride recently thanks to the actions of national telecoms regulator Ofcom.

The company’s share price has been in an erratic downward slide over recent weeks thanks to the regulator’s protracted review into the future of Openreach, BT’s broadband service arm.

This morning, Ofcom announced that the feared breakup of BT and Openreach would not occur, causing BT’s share price to once again rally.  However the regulator is still insisting that the Openreach business become more independent within BT.

There are a lot of problems with this kind of regulatory meddling. The consumer focus of Ofcom’s intervention is misguided, for a start. Their chief executive has established their motive as being “to make sure the market is delivering the best possible services for people and business across the UK”.

That sounds noble enough, but in many respects, a company’s first responsibility is to their shareholders, not their customers. The idea that the customer comes first is simply good business practice, not a moral principle. If a company doesn’t value its customers it will have a harder time achieving good returns for its shareholders.

Shareholders are the people who have invested directly in the company, giving it the capital it needs to operate. When the regulator intervenes and sends the share price tumbling, they’re effectively taking money out of the pockets of the people who make the business possible in the first place.

There’s a deeper problem with the mentality of Ofcom’s position though. Good broadband provision is not a right. In a free market, providers will come where there is sufficient demand to warrant investment in such a service. It is not a bad thing that some areas will end up with weaker service. Some areas have poor road provision too. Nobody expects motorways to be built to remote villages in Mid Wales.

This idea that BT, a private company, has a responsibility to provide high quality broadband infrastructure has been pervasive in government for some time. This stems largely from the fact that BT has ownership and control of the vast majority of the infrastructure that provides these services to homes across the country.

That in turn is a direct result of the fact BT used to be state-owned. It was a mistake of the government in 1984 to privatise the company as one whole, rather than splitting it into separate operations that could compete at that stage, as was done in a wide range of other privatisations.

As a result the situation where BT has a monopoly on this infrastructure is now one that must be worked with. Rather than intervening in an established business that plays a major role in the country’s overall economy, the best thing government could do would be to level the playing field and encourage other providers to install competing infrastructure.

The idea that telecoms, like transportation, utilities or postal services, has to be a natural monopoly is outdated. Technology is advancing to a point where physical infrastructure to homes is unlikely to even be necessary in the future. Even if it is, there’s nothing preventing multiple providers running separate networks in an unregulated market.

Ideally the government should not use taxpayer’s money to invest in a non-essential service in the first place, but if it must, that would be best done by putting that funding into research and development of disruptive technologies and potential competitors, not re-enforcing the existing monopoly. But even that kind of intervention disrupts the market’s natural ability to produce the most efficient outcome based on consumer demand.

Fundamentally, it is not the role of government to ‘make sure’ the market delivers the best services for consumers. The market will do that for itself if left free to do so. The problem in this situation is a legacy of nationalisation, and a return to that would only serve to replace a private monopoly with an even less accountable public one.

In short, Openreach and BT, such as they are, shouldn’t really exist, but the fact is that they do. They are the product of an outdated mindset and continuing to apply that mindset will not serve to improve the situation for either consumers or the market. It’s time that regulators stepped back and let the industry innovate and compete in response to demand, not in response to government policy.

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.