gleedsaling

So a couple of articles caught my eye in Friday’s FT (31st May – I know this post is a bit late but the weather really has been good!). The first was a prequel to the Banking Commission’s final report – due in June apparently (let’s hope it doesn’t clash with Wimbledon).  This whinged on about the need for a more diverse banking ecosystem (“Rivals sought for Big Five banks” – of course, it would have been the Big Four a few years ago, so perhaps the arrival of Santander means a 20% increase in competition??).

The second article contained the potential solution – it featured the arrival of the new head of PopeBank – or, for the more traditionally minded, the Institute for the Works of Religion (IOR), a Teutonic gentleman by the name of Herr von Freyberg (appointed by the outgoing pope, who helpfully gave him a rosary). No it has to be said that there are a few technical difficulties to be sorted out at PopeBank, but just think of the impact it could have on the UK High Street:

• guaranteed ethical standards
• free advertising at every mass
• cash distribution system already there – just drop another envelope with your account number into the collection
• plenty of premises for extra ATM machines
• no need to “bail in” bondholders in the event of difficulties – just ask the faithful to stump up
• ready-made cadre of financial advisers (viz priests – touch of extra training should do it)

One might even call it a solution made in heaven!

Yup, that’s right – nil. Here is the key sentence from the OBR : “The ‘giveaways’ and ‘takeaways’ net to zero when aggregated over the forecast. We have made no significant adjustments to our economic forecast to reflect these measures.” [italics are mine] See para 1.7 of the OBR’s Economic and Fiscal Outlook –  at http://goo.gl/C23eR

“No rest for the wicked”, as my (Catholic) grandfather used to say – or as the latest evidence from the famous LBS stable of Elroy Dimson, Paul Marsh & Mike Staunton shows, no rest for those trying to earn a “decent” (5% real?) return from their savings. They foresee a world of virtually zero real rates on “safe” bonds and an equity risk premium of 3 to 3.5% on a “long” (20-30 year) view. This is all set out with impressive academic rigour in the excellent (and free, as far as I can see) Credit Suisse Global Investment Returns Yearbook for 2013 (http://goo.gl/CHmU7).

They also pretty effectively dish “market timing” strategies in favour of buy and hold – for those of you with access to the FT, there is an excellent video of an interview with Elroy by John Authers which is also a must see.

The only saving grace I can see in this is that we should, on this basis, expect a boom in capital investment, especially in long-lived capital investment projects, which should now require lower real returns. So now should be the time for new water ring mains, Crossrail Mark 2, third London Airport et al. The trouble is, I cannot see our crotchety Coalition government and rather antique planning laws delivering on this in the foreseeable future.

I see the FT on Monday morning was announcing that Britain had been “outgunned” on EU bank curbs – a proposal from the European Parliament to limit bankers’ bonuses to twice base salaries looked likely to go through. However, a visit to Southwold Pier on the east coast of England at the weekend showed an alternative approach to the banking crisis – one that so far seems to have escaped the notice of the Basel Committee, the EU, the Obama administration, and the Financial Stability Board.

The picture gives a clue – it’s simply a “whack the banker” pier game, where, putting your 40p in the slot, you get the pleasure of whacking bankers for 60 seconds, with an accompanying audio commentary about your role as a taxpayer in funding their pensions and bonuses.

Of course, this may be dangerous territory for Southwold, as one suspects that some of the mouth-watering property prices in the vicinity may owe just a tad to – yes, you’ve guessed it, bank bonuses!

I first saw clips of Obama’s second inaugural speech (see http://goo.gl/S62Wi) on newsroom reports – and was so encouraged by the clips that I thought I should listen to the whole twenty minutes. It doesn’t disappoint.

In parallel with this I’ve been reading Stiglitz’ book on Inequality. He documents clearly the rising levels of inequality in income & wealth in the US since the Reagan years. While not all of this increase has been driven by policy (globalisation has played a major part), there is no doubt that the favourable treatment of non-labour income is a a major culprit.

How do these inequalities stand up against the Declaration of Independence’ “self evident” truth that all men are created equal?  Obama is clear: “..while these truths may be self-evident, they have never been self-executing; .. the patriots of 1776 did not fight to replace the tyranny of a king with the privileges of a few or the rule of a mob. They gave to us a Republic, a government of, and by, and for the people, entrusting each generation to keep safe our founding creed.”

He goes on “ But we have always understood that when times change, so must we; that fidelity to our founding principles requires new responses to new challenges; that preserving our individual freedoms ultimately requires collective action.”

The collective action he envisages turns on using the power of the state to provide (cost effective) safety nets, education and opportunity – “we must harness new ideas and technology to remake our government, revamp our tax code, reform our schools, and empower our citizens with the skills they need to work harder, learn more, and reach higher”.

And it isn’t all “socialism” – there are references to initiative and enterprise, hard work and personal responsibility, and America’s prosperity “resting upon the broad shoulders of a rising middle class”.

Stiglitz may have done the analysis – but it will take all of Obama’s campaigning skills to do something about it.

So there I was, working away in H M Treasury in the last Great Recession (1980-84 from memory), when one of my colleagues piped up – “so I suppose evidence of seasonality in stock market prices would be prima facie evidence against them being efficient?”

It was a rhetorical question, as the answer was obviously yes – if stock prices exhibited seasonality, say rising in the spring and falling in winter, you could trade to beat the market. So markets were not, in some sense, “efficient” – they did not price in all of the available information (in this case, the seasons). And if you had information they did not appear to have (in this case, whether it was spring or winter) you could do what Margaret Thatcher advised you could never do – buck the market.

“Oh come on”, I can hear you say, “can’t you find a better and less trivial example?” Well, how about this? As David Schwartz pointed out in an FT article on 30th November, in 19 of the previous 21 years since 1989, the stock market had risen in December. 2012 proved no exception, with a rise in the FT 100 (and FT All Share) – but by only 0.5%. However, the end of December was mired by worries about the US fiscal cliff, so had you hung on till the markets opened on the second of January, you would have done much better – a gain of over 2.5%. Hence the argument about Santa being delayed.

Evidence that perhaps markets are not as efficient as all that also comes from a more academic source, where Pontiff & McLean have published a paper on whether published academic research destroys stock return predictability – a paper also picked up by the FT. “Not completely” appears to be the short answer, although publication of a “profitable” trading strategy (ie buy before December) does then reduce the returns you can expect significantly – especially for large, easy to trade stocks.

Bit of a mystery, though, we still see the Santa effect in stock markets – after all, it must now count as a published strategy. Transactions costs? End of year trading constraints? Or are the arbitrageurs too busy at their Christmas parties?