As Boris might say, crikey. Prudence has well and truly packed her bags and I suspect we won't be hearing any more crowing from the Dear Leader about having "put an end to boom and bust". The Tories have been saying for ages that the amount of unsustainable debt and borrowing created by Brown will come back to bite him. If this analysis is correct, they will sadly be proven right.
The immediate political effects are that oil (I guess would spike at $140) by the end of the year. I would expect there to be fuel strikes because of the high costs of petrol. I also expect the sentiment in the country to swing strongly against fuel tax because it will be seen as an indirect tax on food. This "spike" will break Gordon Brown and his political rating will slump well below any other political leader in history. I also expect there will be a vote of no confidence late in the year and Jack Straw will become PM.
I work for a global tier 1 investment bank - yet - with a good record in Credit Derivatives. I can can see if the price of oil keeps going up this will trigger a number of bankruptcies, for example in consumer facing industries dependent on oil, such as the airline industry, where margins are thin. The way credit derivatives work is that they are an insurance policy against companies going bankrupt - if this starts (or even a strong rumour) to happen there will be a second (much larger) credit crunch as banks will be uncertain who is holding what losses across their non-mortgage bonds. If that happens then we will really be in unknown territory in terms of how deep a recession will go.
Wednesday, May 07, 2008
Gordon Brown's Imperfect Storm
THIS article from Goldmans says oil will reach $150-$200. Frightening stuff. Even more frightening is this analysis from one of my regular correspondents...
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43 comments:
"their" or "there"
The price of oil aginst gold is has been flat fro years. This is government fuelled inflation.
Straw as PM? now that is quite frightening.
He will, obviously, try to portray himself as the man who can bring all sections of the Labour Party together. A man who does give the impression of a thinking caring individual. BUT his record in his previous roles needs forensic examination especially the rather strange move away from Foreign Secretary..perhaps David Cameron should speak to his American friends to ascertain the truth!!
He was a disaster in the Home Office and his present role is not full of excellence!
He can be beaten....a second unelected prime minister..you can read the headlines.
I thought your interview with steve Richards was excellent and confirmed the closeness of Paul Dacre with Brown....Now the Daily Mail readers should be informed of this!!
I have stopped buying that paper due to their licking of Browns nether region.
I agree with your correspondent about the effect of an increase in the price of oil might have but that is (simply) economics.
Unlike the mortgage backed credit derivatives (mbs) most corporate credit derivatives are either written to investors or other investment banks. In the case of investors their exposure is limited to their initial investment. In the case of investment banks, as they are facing each other, it will quickly become apparent who is short protection. As these are generally "synthetic" credit derivatives the banks only need write enough to satify demand. In the case of mbs they kept much of the exposure on their books which is where the problems occured as it was not clear how much "overhang" they had.
I know there are other nasties hanging around but most of the exposure is in the vanilla corporate CDO market and the single name cds market. There are millions of mortgages but (only) hundreds of corporates.
Your correspondent is nearly right.
GB will hang on even while international seas surge and flow, but the real domestic, home-grown self inflicted killer will be the road fund licence - thats VED to you Iain.
Rich geezers with you new flash Audi's don't mind paying shedloads of road tax, but when Mondeo man is asked for £445 next spring just to put it on the road - then Gordon dies...
Stand by for lots of nonsense about how this is due to 'speculators' rather than an increasingly tight and vulnerable supply plus rising demand. This will have very far reaching effects. To take just one, the CEO of BA said a couple of months back that if oil prices hit $200 and stayed there for any length of time it would wipe out their entire trading profit and they'd have to rethink their entire business model. The big effect though is on the price of food.
In almost all bear markets it is the second round effects that really do the damage. Once the first crisis passes, as it now seems to be doing, it is the consumer and business reaction to the uncertainty with steep reductions in spending and borrowing, and the inability to service old debts as cash flows decline that cause the second round crash. Stir in some extra price shocks in oil and food and this brew will be particularly nasty.
Iain, we are already seeing it in the travel sector. Airlines are going bust (three this week), ATOL bonds are being called in, and companies are ceasing trading.
Most of this is down to a combination of increasing operational costs (i.e fuel costs rising) and cash flow problems (i.e. reduced lines of credit).
Anyone who can is moving debt off the balance sheet to make the books look better.
The only people who stand to benefit are highly liquid VCs who can buy-up otherwise healthy companies with good EBIT but poor cash flow for next to nothing - because the banks won't lend, and there is no alternative.
This bodes particularly badly for the SME sector, particularly those who rely on sporadic short term loans. The banks are increasingly demanding secured rather than unsecured debt, and are increasingly risk averse - or charging a fortune to fund debt.
The whole economy stands in danger of grinding to a halt because no lender is willing to take even the slightest risk, and because there is no reliable information.
It will make the last years of JOhn Major's government look like a blip!
This isn't boom and bust, this is borrow and go bust! Everyone loses!
Rest assurred though - if a bank looks wobbly, the tax payer will bale it out.
Privatise the profits, but nationalise the debts!
Don't forget Ian, as the price of oil goes up, Gordon collects ever more taxes on the crude product and VAT on the refined liquid.
The UK taxpayer has little idea that VAT at the pumps is not just levied on the price of fuel but also on the Fuel tax. Gordon could easily reduce fuel tax to offset the gain from his VAT income but he does not. WHY?
The reason why we in the UK pay the highest road fuel costs in Europe has nothing to do with the price of oil and all to do with the taxes collected at the pumps.
Gordon Brown is responsible for this rip off, yet David Cameron is culpable.
At that price, England really will be living off the Scottish tit.
What's intersting in this is the way Credit Derivatives work - they are basically insurance against a company going bankrupt. Alot of them are baskets, and in a basket of 100 companies the payout only happens once more than one (let's say 4) companies goes bankrupt. So what happens is that the banks sit on thousands of these instruments and start to see companies going bankrupt 1 .. 2 .. 3 then 4 BINGO - they have to pay up in a highly geared manner. If a bank is sitting on enough of these things the losses will be large.
But, and this is the important bit, once banks see 1 or 2 companies going bankrupt they know that other banks will be seeing the same thing, and other banks run the risk of going bankrupt. So they then are reluctant to lend these banks money. This is what happened with credit derivatives that were backed by mortgages (banks saw one or two mortgage backed bonds going into default) when they stopped lending.
So getting round to the point - the credit derivatives do not have to trigger to start another round of banks not lending to each other. It only takes a few companies to go bankrupt to start banks withholding loans from one another.
Sounds like we should be getting rid of these gambling bankers rather than any politicians.
There are no real downside penalties and huge incentives for risk taking.
Who gives a toss about airlines or others having debt problems.
What are you going to do about the 8 trillion in unfunded government liabilities when the goverment 'income' is 0.5 trillion a year for all its expenses, plus the short term borrowing on top?
'living off the Scottish tit'?
well if it means getting rid of Gordon, that will be a change from living WITH the Scottish tit.
Everywhere I read "Gordon Brown is John Major"... "Gordon Brown is Antony Eden"... "Gordon Brown is James Callaghan"... "Gordon Brown is Neville Chaimberlain"...
No no no! Gordon Brown is Gordon Brown. The worst of the worst, the new benchmark for being a terrible Prime Minister.
But the PM can do Sweet FA about the pil price. So gettid rid of the leader is waste of time. Wait till after the oil crisis and then if after that he has not recvoered then take stock. But to change leader before then would surely be madness for who ever took over.
Here is my prediction. Bush is causing ther oil price rise. For his buddies in the oil industry. Virtually everything he has done as president has been to feather his own bed with cash. He has huge connections to the oil industry. I predict oil prices rises are dude to him. The world needs to recognise who is casuing this problem.
Javelin,
investment banks make money out of CDOs (and baskets) by initially selling them as bonds to investors. They make money by selling protection as a hedge on the underlying single names so they start to lose money when 1 default happens not as you claim in your example 4. They actually start to make money if there is more than 4 defaults. The real problem with investment banks is they have different models for marking to market their positions.
I dont know if you have heard the expression "open the kimono" for when you are given a peak at a potential juicy deal I call this "opening the dirty nappy" - everyone can smell the s**t - they take a look and put it back and go la la la cant smell a thing.
I do not support Straw getting the job. It should be longer leadership campaign, with one of the new one getting the job.
Anyway mark my words president bush is causing the oil price to rise to make cash for this buddies in the oil industry. I do not put it beyond him.
@ john h miller -
You are right. Tax discs are the next big blowup in Broon's face. £450 to tax a £600 car? I think not!
@ steved -
The oil price is where it is because of speculation. If $120 were the true value of a barrel the oil companies' stock prices would reflect this, but they don't, they have been going sideways for years. If the equity markets don't believe this is real sustainable value, neither do I. You are right re airlines though. Fuel is now 40% of their opex and at $200 it would be 70%. Screw up your fuel hedging and you'd be out of business. Even if you survived it would completely wreck pricing and make your business residually horribly vulnerable. I am burning up my BA Miles ASAP because I think they could go bust.
@ chris paul -
You don't know what you're talking about on any subject. Best you just shut up, you ignorant socialist muppet.
Several years ago, Head of Investment Bank to CDO traders:
"Would any of you invest your own money in our CDOs?"
Silence.
I thought votes of no confidence tabled and made successful automatically results in a General Election, nor another swop out of suits...
Only tories who want labour to lose the next election are putting forward Jack Straw. No labour guy thinks their next leader will be Jack Straw it will be someone fresh young and charsimatic. Not English version of the present PM. Jack Straw is good politician, maybe he could be chancellor but not PM.
tom fd 9.19
Not only the worst PM but the worst Chancellor by a million miles.
I think Jack Straw could be Deputy PM or chancellor. But gettig rid of the PM for Straw would be a bit stupid. But as I have said. We should hold a long election campaign if the PM goes Then if Straw turns out to be the best then OK, but i doubt he would be the best candidate for winning votes.
Iain - its taking a lot longer than usual to reload your blog. Maybe my prob but wonder if it because of your (excellent) Pickles chat session? Can you send it to Coventry?
Iain, OT, listening to you on 5Live tonight. Did one of the other guests just say "...there is virtue in repetition, especially if those you're talking to are deaf..." ? Outstanding. How do you keep a straight face?
Why is Steve Richards being interviewed by Jonathan King?
Iain: "The Tories have been saying for ages that the amount of unsustainable debt and borrowing created by Brown will come back to bite him. If this analysis is correct, they will sadly be proven right."
No need for any qualification to this statement Iain - the entire economic strategy IS coming back to bite Gorgon Brown. The 'financial genius' tag is just a creation of the left-wing media, and nothing more. There has never been, and never will be "an end to boom and bust" under a socialist government.
Gorgon Brown is just the latest in a long line of incompetent labour chancellors.
In my view the PM is the reason Rangers for to the final of the UEFA cup. He used his connections to get them there. He also got Man Utd and Chelsea through to the European cup final. Making him the most sucessful British PM of all time. McLaren wrecked his international football success.
Gordon Brown is up right now:
Once upon a Midnight dreary, while I pondered, weak and weary,
Over many a quant and curious volume of forgotten lore-
While I nodded, nearly napping, suddenly there came a tapping,
As of some one gently rapping, rapping on my chamber door.
"'Tis some visitor," I muttered, "tapping at my chamber door-
Only this and nothing more"
.......
Open here I flung the shutter, when, with many a flirt and flutter,
In there stepped a stately Raven of the saintly days of yore.
Not the least obeisance made he; not a minute stopped or stayed he,
But, with mein of lord or lady, perched upon my chamber door-
Perched upon a bust of Pallas just above my chamber door-
Perched, and sat, and nothing more.
etc etc..
Only for "Lenore" read Tony Blair
Get James Earl Jones (Darth Vader and "this is CNN") to narrate (as in the Simpsons )
Vince Cable as "The Raven"
and you have the first 10 minutes of this week's Headcases (ITV Sunday at 10pm).
We should have done a deal with Saddam on oil. It's as simple as that.
Is oil going up because Gahwar is running dry and the Saudis are keeping it secret?
But why would they keep it secret?
Pass the silver foil.
And the Raven, never flitting,still is sitting, still is sitting
On the pallid bust of Pallas just above my chamber door;
And his eyes have all the seeming of a demon's that is dreaming,
And the lamp-light o'er him streaming throws his shadow on the floor;
And my soul from out that shadow that lies floating on the floor
Shall be lifted - nevermore!
Jack Straw is the creepiest individual in British politics. People shudder upon his approach. He peaked far beyond his merit, but he is not going to be PM. Even temporarily. They will find anything else out of the ragbag that is ZanuLab in its dying throes.
I would say he might go back to having a toke or two, but judging by (my opinion) his grey, inept, inappropriate performance, he never stopped.
I thought Tony Blair was as low as the British people could go, as he had no equal in our history for glistening snail trail; and I would judge Gordon Brown a second to Blair, but a close second.
Jack Straw ... with his fake accent. And his sheer coarseness of taking Condoleezza Rice by the arm to "help" her (a pathetic stab of an inadequate underling trying to force himself above his station, to establish dominance - oh, pulleeeeze!) down some perfectly ordinary municipal steps. So jumped up and pathetic he didn't even know that one doesn't touch people more powerful than oneself.
Any ambitious underling coming forward to "help" Cleopatra down two three normal steps would have found he was the perfect asp-hole.
Tone Made Me Do It - Edgar Allen Poe is compelling. "Quoth the raven, 'Nevermore'".
If you read through the whole poem, it is absolutely chilling.
brawn's talking bawgie and others
The oil price is almost certainly not just speculation. Oil production is falling in Mexico, North Sea, Russia, Iran. For various reasons it is unlikely that Saudi Arabia either can or will raise its production to meet the shortfall. We are effectively at the point of global peak oil production. With rising demand (China, India) the oil price will continue to rise from here with no clear upper limit.
It's unclear why the share prices of the larger oil companies are underperforming, but one reason may be the realisation they won't be able to replace their reserves.
Anonymous 7.44 p.m. said...
"The reason why we in the UK pay the highest road fuel costs in Europe ...."
According to the latest (April) report form the AA UK prices unleaded petrol are NOT THE HIGHEST in Europe. Prices are higher in 10 other countries.
Iain.
Have a think about oil dropping like a stone in the run up to May 2010.
My calculations suggest that 18Months is a maximum time limit for all things becoming good.
Have fun of popular U turns or 'weak' leaders but please remember that Socialists actually like a bit of Socialism.
That doesn't mean we have to invent the concept of National Health or National Railways, it just means observing social justice and acting upon it.
Tories are riding high at the moment but are way too cocky and confident.
There is nothing new in 'mid term blues' and there is nothing new in winning the day. Ask the reject, John Major (circa 1992) for further advice on this subject.
No chance will Gordon lose an election for us and nowhere am I hearing he should go.
It's tough at the moment but the winning formula is to make it easier.
Gary
Iain! You were on Radio 5 yesterday evening, I didn't hear it, could you put up a link please.
Apparently you mad a total arse of yourself, love to hear it: thanks!
On the plus side, high oil prices:
"have reached a "break point" that will spur a shift away from an oil-centric transportation sector toward alternatives, energy analyst Daniel Yergin said on Wednesday."
So less Saudi petro-dollars for Islamist terrorists.
I think we've seen the yearly high in oil.
to anon @10:03
Shame on you for being impolite to Iain on his own blog.
You are obviously a nasty piece of work.
Here's the link you asked for:
http://www.bbc.co.uk/radio/aod/mainframe.shtml?http://www.bbc.co.uk/radio/aod/fivelive_promo.shtml
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