10th November 2010

7IM - "Open fire"

So welcome to the QE Currency wars. As mentioned over the past few weeks, the growing push towards competitive and aggressive currency policies has seen the first major volleys being fired by the central banking authorities. From the Fed, the ECB and even the BoJ, all have been trying to prosecute their own policy with (as yet) the Bank of England holding fire. All of this sets the scene for what may well be a quite unpleasant G20 meeting in Korea this week. The Brazilians are already furious as they suffer the pressure on the Real and will no doubt be venting their anger on the Americans for attempting to export their problems through currency manipulation - which of course is exactly what the Americans accuse the Chinese of! Welcome to the International Currency Soap Opera.

Did we finally see the signal last week that the Germans were no longer going to be so patient with their profligate friends in the Eurozone? Chancellor Merkel made it clear that she wanted to see the Stability and Growth Pact to have more bite and effectiveness, and whilst on the subject made it clear that Germany was in no mood to be bailing anyone else out. This also spread to the threat that private investors would have to be prepared to take some of the pain and responsibility.

What does that mean? Well it's the best indication of a threat that we should be prepared to see a potential default - sorry no we can't call it that - a 'restructuring' and that investors should be prepared for some haircuts in repayment terms and expectations. At last we are going to be seeing some reality being faced as countries are made to pay for their profligacy and squandering of the opportunity they had of lower rates, and equally investors be made to realise that sovereign debt can be highly risky.

Additionally, I think it is also fair that complacent banks be made to take some of the pain as well - after all, that was the risk they were expected to take and were being paid for. The trouble is if more pain is put on the banks, we feel the pain thereafter.

Following on from my musings on Stamp Duty and its obsolescence, how about some other more constructive tax ideas? We already have sin taxes here of some size, to us if not the government, such as alcohol and tobacco, so why not take this further to help the health of the nation and additionally its finances?

Why not a fat tax? Not on people but on the food content and even extend that to sugar and salt? I would suggest that our Americans cousins certainly need this, but why not try addressing this for our increasingly obese population, most of whom will eat whatever is put in front of them? I am sure some would say this is just taxing the poor again but actually I would see it as a far more progressive form of taxation through encouraging healthier diets.

My colleague has quite rightly pointed out that this of course is not new as the people of Bethselamin in Hitch Hikers Guide to the Galaxy had a similar idea. To protect their planet from gradually disappearing from erosion by billions of tourists, any tourist who put on weight had it surgically removed prior to their departure. Thus it is vitally important to get a receipt after every trip to the lavatory while on the planet.

Obviously a good solution for the economy of planet Earth.

It is interesting to see the shift in influence and power that is occurring as China's increasing strength both financially and politically is being recognised and felt. What did emerge recently was the realignment of the voting rights and directors' seats at the IMF.

There has apparently been an increase of 6% quota shift which makes China now the third largest shareholder within the organisation. This may develop further when the formal review of the quota structure is carried out in January 2013. There are 24 seats on the IMF's Executive Board and it is quite likely that European members will give up two seats - probably in favour of the developing nations. The economic world has changed shape and now the financial structures are changing shape.

An interesting comparison I noticed - around 70% of Chinese GDP comes from capital investment, which is just about as unhealthy and unbalanced as is America's 70% of GDP coming from consumer spending.

And finally... A mature lady in her 60's was walking her pet dog in Moreton-in-Marsh, Gloucestershire, when she was approached by a flasher. Apparently as the man exposed himself, her terrier growled. It then leapt and bit him on the upper right arm.

Sergeant Ian Dowling, of North Cotswolds police, said the dog seemed "to have acted instinctively". "This was clearly an upsetting incident for the woman and her dog. The animal seems to have acted instinctively and was not urged to attack the offender.

Naturally because of the nature of the incident, we are keen to hear about anyone seen with a dog bite on his right arm in the last 24 hours."

Now with proper training it wouldn't have been his arm that was bitten.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

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