10th October 2006

Three men in a vote

The great thing about politics and the politicians is sometimes they don't seem to realise how much of a soap opera they provide us with. In the US we have the farce of the Tea Party sect who are doing their level best (much to the President's delight I am sure) to ruin the Republicans' mid-term campaign. From dabbling witches, to pigs with lipstick, they make an amusing but worrying charade.

Meanwhile back in Blighty, we have another charade of the Labour Party leadership results at their conference last week. The winner didn't get the majority of the MP support or the Shadow Cabinet or the members' vote - but he did get the backing of the Unions and they of course are at the behest of the 3 Union Barons of the GWB, Unite and Unison. Democracy is such a great thing - all votes are important, it's just that some are more important than others.

Oh well we will have to wait and see what the new look Labour front bench looks like. After the brother stomping off in a huff to play with his own toys (presumably his younger brother's nationalised train set) the 'new generation' has an amazing chance of looking remarkably like much of the old generation. Queue the Eastenders' theme.

Last week's data only served to confuse - again. US consumer confidence down, and UK growth in Q2 was 1.2%, growing at its fastest rate since 1999. These UK figures were quite encouraging as they seemed to show that this was not just a rebuilding of inventories (stock) but rather an increase in business investment. However, one quarter is just an indicator and we need at least three to see a trend develop. It also seemed as though consumers were spending, possibly spurred on by the thought of the VAT rise at the turn of the year, but tie this with a fall in savings and this is unlikely to continue. At some stage the consumer will start to save more and in all likelihood spend less. Whilst the MPC member Charlie Bean wants us to spend more to get the economy moving, I hope he realises that this is not a bottomless well - raiding savings just for spending will only store problems for later. I regard this as a rather patronising comment to the many of the British who are worried about the future and financially concerned. Mr Bean's comments almost fall into the "let them eat cake" file - yes let's eat into our savings - and have nothing for the future!

So the US is threatening sanctions for currency manipulators. I assume they don't mean themselves? There is a fine edge of interpretation between currency intervention and currency manipulation. The truth is that all countries are concerned and do what they can to manage their currency levels either directly or otherwise. The threat of populist sanctions and protectionist measures has little effect other than to reduce trade and that hurts all, and usually the initiator most. I would ask the Americans to remember the passing of the Smoot Hawley Act in 1930 which served only to exacerbate the Great Depression at the worst moment, by raising the tariff on over 20,000 goods in the name of 'American jobs for American people'. For the flag waving Mrs Palin this may seem logical; for the more objective it is just objectionable.

However, countries with surpluses have to play fairer in the world economy. Amassing surpluses with no regard to their trading partners is as equally selfish. This is not just a Chinese issue but for others like Germany, who must also act to stimulate domestic demand.

The no surprise 'astonishment of the week' has to have been the FSA revealing of the banks having over a million complaints against them. Some of the comments from one bank employee on the radio that 'This has to be put into perspective with other industries', was astonishingly complacent and naive. Surely this must spur some movement in bank reform to address these issues. Of course after a recession and a banking crisis one expects a high level of consumer dissatisfaction, but banal advertising campaigns about commitment to service and 'for the journey' are frankly pathetic.

'God save Ireland', because the bond market won't. Ireland has to do its best to get itself off the front page. It has acted bravely in the face of the seeming unending woes of property losses within the banking system. I would have thought the Eurozone support fund could have been brought to bear but apparently this has been ruled out. Frankly now I think the time has come when the limping Celtic tiger could turn around and bite back at some of its creditors. Why should the Irish take all the blame and losses for overseas lenders who were as equally incautious as the Irish banks themselves? The Irish worry about the credit ratings agencies - they shouldn't. The spread on the debt is probably much worse than their rating anyway. So why not start to reschedule the debt - at least the secondary line debt - after all, we can't call it default can we!

And finally ... A notable anniversary - 9th October 1940 - the birth of John Lennon during an air raid in Oxford Street Maternity Hospital, Liverpool. I prefer to celebrate the births than recall the deaths.

Also ... from New York, so much for a weak economy, with its ghosts or goblins or candy and costumes, Americans are ready to spend far more on Halloween this year than last - an estimated $5.8 billion (3.6 billion pounds).

"This year, people are expected to embrace Halloween with even more enthusiasm," Matt Shay, the chief executive of the National Retail Federation said in a statement, noting that the pagan holiday has given Americans a welcome mental break from the stress of the economic doldrums.

Two out of five Americans plan to wear a costume this year, up from one-third last year, and about 11.5% of consumers will dress up their pets. Americans will spend an average of $66.28 on Halloween, including $23.37 on a costume, $20.29 on candy and $18.66 on decorations.

The total represents a 17.7% increase from last year and will be roughly on par with 2008 levels. Although spending on Halloween is small compared to the Christmas holidays and back-to-school, it will give a boost to U.S. retailers, who are still struggling with sluggish consumer spending.

The survey showed that many people are still spooked by the state of the economy. About 30% said economic concerns are affecting their spending plans, with cuts most likely in candy but not costumes.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited