Protests

Today there are protests in many countries although the message isn't 100% clear. The two main issues seem to be corporate greed and government spending cuts. The mainstream media and the vocal majority seem to think that this is where the problems lie although they don't seem to have any reasonable solutions or understanding of the subtleties of the situation.

Firstly corporate greed - the vocal majority would prefer to live in a world where corporate profits are distributed to the poor and needy. Whilst this might seem fair it goes against capitalism as well common sense. Companies must seek to be profitable otherwise they won't attract investors and won't exist. Companies must act in the interests of their shareholders.

So what about Governments? Our Governments are given te responsibility of managing the public interest and therefore raise money through taxation and spend this money for our benefit. They, at least in theory, have the ability to improve the current economic situation. However many seem to miss the subtleties of their actions. For example most are calling for heavy taxes or company profits and high earners to raise money and prevent the austerity measures. However companies and individuals can often move countries to lower their tax burden - as noted in a previous post where Wolseley's move to Switzerland cost the UK over £20m in tax revenue. The Government's job is very difficult and the only long term solution is to try to encourage growth and job creation in the private sector. Public sector jobs are important but shouldn't be created just for the sake of the employment figures as it is public money paying those salaries.

Introduction to Credit Rating Agencies

There has been a lot of press over the last fee months about countries being downgraded by credit rating agencies. The US made the headlines over the summer and more recently Italy has had it's economy both formally downgraded and generally ridiculed. Despite this many still aren't too sure what credit rating agencies really are, what they do and what the implications are of these downgrades.

What are credit rating agencies? The big 3 agencies are Standard & Poor's, Moody's and Fitch and they are widely regarded as credible and independent in assessing credit worthiness of large-scale borrowers. These borrowers being large corporations, banks and countries who typically borrow by issuing bonds. The agencies assign credit scores to enable investors (lenders) to quickly assess the risk of purchasing various bonds.

Why does it matter if a country is downgraded? As with consumer credit the lower tour credit rating the more costly your borrowing and the more difficult it is to raise money. The implications for countries, particularly certain ones in Europe, are potentially very damaging. Rating downgrades mean the government bonds have to carry a higher yield to attract investors and are therefore more expensive to repay. Countries like Italy, who already have significant debts and little or no economic growth to help manage repayments, could experience long term economic problems as a result.

Are credit ratings agencies ever wrong? The short answer is yes - most recently the subprime mortgage crisis was in part blamed on the agencies for giving financial products far too high a rating when the underlying security was actually very high risk and carried a high chance of default. Bankers took the brunt of the wrath from the press but the credit rating agencies were equally at fault.

Consumer Spendthrifts

About a week ago I suggested that I thought the Eurozone would eventually act decisively to dampen fears of a total Euro meltdown. Despite a turbulent week I still feel this is the case although I am being accused of being overly optimistic in what are undoubtedly very tough economic times. So I thought I'd address an area I am less optimistic about, that of consumer spending, or lack of, and the struggle ahead for retailers.

Many retailers have been struggling for sometime with some notable names completely absent from the high street. Consumers are being far more frugal and the austerity measures to keep the national debts in check are likely to mean it will be an even slower recovery for many retailers. Many towns and cities across the UK have many vacant units
In their centres and I expect this to continue to worsen in the short term. The demise
Of the high street may also be part of a longer term trend towards online shopping meaning retailers will need to change there business models to survive.

The most resilient section of the consumer spenders has been tourists from overseas. A weak pound has helped attract record tourist numbers although this only applies to certain locations, most notably London. It will also be sensitive to exchange rate fluctuations.

From an investor perspective I would focus on retailers offering essential items, such as the more aggressive supermarket chains, rather than what might be considered less essential retailers such as high street fashion. I'd particularly be wary of those who haven't got a strong web presence.

The Poor are Getting Richer

There is a global long term trend of wealth creation and the common misconeption is that it is only making the world's wealthiest even richer. Whilst it is true that the rich are getting richer, the poor are not getting poorer. Generally speaking the poor are getting wealthier over the long term and despite some recent large economic wobbles the wealth creation machine is still firing across most of the world.

Poverty as is a huge problem and is a long way from being solved. However in countries known for having large populations of people living in poverty, the improvements are encouraging. Take Brazil, a country known for a huge wealth divide, according to IPEA those living in extreme poverty halved in just 5 years to 2008. In that period those labeled as 'middle class' increased by 10% which in turn has increased consumption and expanded access to credit fueling further economic growth. India's growth has also been driven by an expanding middle class and those living below the poverty line has halved over the last 20 years.

Similar statistics can be found for most developing countries and with it comes consumption of covetted products such as mobile phones, consumer electronics and cars. This consumption has some far reaching implications for other problems, most notably global warming but certainly debunks the myth that the poor are getting poorer. This certainly needs to be addressed and there is still a long way to before poverty is defeated - India aims to have eradicted poverty by 2020 which seems unlikely but no doubt progress will have been made.   

From an investment point of view I put a lot of faith in robust long term trends and their implications. In this case of the growing middle classes the desirable global brands should continue to thrive. Apple have seen unbelievable growth in the last decade but there are still huge markets in the developing world that are relatively untapped. The luxury goods market has also continued to expand - most of these brands are from the US or Europe where domestic consumption has been slow, however global consumption has more than comensated for it.

European Treasury?

Inaction in Europe to meaningfully address the Eurozone criss is not a maor surprise due to the political forces but we're comign to a point where something has to give. They have responded with emergency action when required, typically by buying up bonds of the deificit nations, which shows that they can move swiftly to avoid disaster. They have been necessary measures but the heart of the problem lies in the structure of the Euro which can't be solved by buying up bonds.

During the turmoil of the summer there was a feeling that certain countires may consider exiting the Euro to save themselves and this is still a widely supported strategy in Germany. The alternative is to commit fully to the Euro, pool national debts and have a central European Treasury able to issue jointly backed Eurobonds. Up until recently this idea has been opposed in Germany as it is likely to be very costly to them however they are begining to digest the implications of abandoning the Euro altogether, which is likely to result in a total meltdown and deep recession.

In my opinion the common European Treasury is the only feasible option and may finally settle the markets and convince the wider populous that the heart of the problem has been address. There would be significant austerity measures to pay for the move so it won't be an overnight solution but the sentiment should change for the better.