Wednesday, 16 April 2014

"I hope Putin wins"

I know it's cheap and tawdry to base an essay on a comment on the Daily Mail website but bear with me OK?

The Mail pointed out that the Ukraine crisis might just be the start of WW3. Personally, I think this unlikely. I doubt Russia will even Annex Kiev, but will take eastern Ukraine back into its fold. Next up is Moldova, with Russian bases in Transnitria, already swirling down the plughole of Russian annexation. Further conflict with Georgia beckons as does closer ties with Kazakhstan, Uzbekistan and Belarus. None of this will be fought over by anyone in the West. Meanwhile the damage this will do to the Russian economy, will be immense.

By far the most entertaining comment to this story, and there are many such on the Daily Mail website, reads

I hope you are RIGHT! the west has started this, with its Liberal ways, forcing our ways on to the rest of the world whilst our own communities suffer and fail... I hope Putin wins.
By someone calling themselves TheTruthHurts. However lumpen and stupid wishing a war over our "liberal ways" or thinking "our communities", which are amongst the richest and most free on earth, will "suffer and fail" might be, he has stumbled onto a Truth. Putin's Russia IS seeking leadership of socially conservative countries that reject gay rights, women's equality and all that messy democracy stuff. And there will always be a market for people like our friend above who admire a dictator's "strength" over what he perceives as a democrat's weakness.

It is precisely this Fuhrerprinzip that led Farage to suggest he admired Putin "as an operator". And there are no shortage of CyberKIPpers ranting about how the Ukrainian crisis isn't a failing former superpower meddling in its former empire, but actually the EU's fault for daring to enter trade deals with sovereign countries on its borders. Of course UKIPpers blame the EU for the rain, but Putin knows free market, liberal democracy works. He, as a former KGB operative, just doesn't know why.

the world's queer-basher in-chief.

But for now, Putin, and his pathetic little Lord Haw Haw, Nigel Farage, have a ready audience of people whom the world has passed by. People who reject Gay rights, ethnic diversity, immigration, women's equality and who yearn for strong rulers from an imagined past. In Britain's case, Churchill and Thatcher, and in Russia's case Peter the Great and Stalin, who're associated with the pomp and power of empire.

Of course democracies aren't weak. We are quite capable of expending enormous amounts of blood and treasure, if we can persuade the people our cause is just. Which is why free men from around the world stormed ashore in Normandy, to defeat the most odious tyranny, and why we maintain expeditionary forces round the world to this day. Indeed, we're stronger now than then and can win wars without making the Guns/butter trade-off. The US defence budget is just 4% of GDP, yet it dwarfs the next dozen or so. All but 2 of the 10 largest defence budgets on earth are NATO democracies.

It's economies that win wars. Putin's isolation from the rich, free and extremely powerful west will eventually cost the people (and more importantly, the oligarchs) money. In the short term, the Russian regime will absorb more economic pain than can the administrations in the west, but in the longer run, Putin needs German money, even more than Germany needs Russian gas. Already the isolation is hurting Russian growth, which far from the days of the BRIC boom, is forecast to grow a measly 1.3% this year. And if the Oil price falls, Putin will struggle to pay his over-manned and decrepit army.

The Annexation of Eastern Ukraine will isolate Russia, and even potential allies like China are keeping their distance, fearful over their own shared and disputed borders. This is not the Beginning of WW3. Putin's isolation and Russia's economic weakness will see to that. The friends Putin can reliably call on, fellow gay-bashers like Iran, have no power or pull. There's no alliance of powers capable of posing a threat to NATO, so long as our political will remains. The risk to the west comes with Estonia, an article 5 NATO country and member of the EU. Will we fight for a few Eastern Counties of Estonia? If we do not, NATO which has guaranteed security in Europe for so long will be finished. But there is a lot of water to cross before we get there, and I'm not sure Russia has the appetite, or even the economic and military capacity for the journey.

The Borders of Europe will be redrawn, and not for the last time. If you want historical parallels, this is probably the Galtieri Gambit, not the march into the Sudetenland. Like the Argentine general, Putin's military adventures were popular. For a while, until the cost of taking on a democracy, and rousing it to anger became apparent.



Monday, 14 April 2014

Prediction: a Year Out

The Tories are going to win the General Election next year, there's an outside chance of the Lib-Dems securing enough to be worth hanging onto as coalition partners.


Everything is in place for a Tory victory in 2015. Don't believe me?
  1. Even Gordon Brown secured "swingback" in the last year of his Government: in his case at least 8 points. The Coalition, Tories especially will enjoy the same effect. Given the Tories are 4% behind (polls currently running 6%-1% labour leads), this alone will give them a small lead at the poll.
  2. The trend is already in the Tories' favour, though this alone will not extend Cameron's lease on Number 10. 
  3. UKIP, currently polling 13-20%, are most likely to be disaffected Tories. (50% of their current polling are ex-Tories). It's obvious a fair number of these are 'lent' votes for the Euros. UKIP are not going to poll 18% in General election. You can give at least a third of the UKIP vote to the Tories for the GE. And there you have it. Enough for a Tory government. But that's not all.
  4. Labour is led by Miliband for whom voters will not turn out. Cameron at least isn't repellent.
  5. New incumbent effect generally helps Tories.
  6. The return of the shy Tory?
  7. Lib-dems are harder to shift than herpes. (This hurts Tories at least as much as Labour)
  8. The UK is the fastest-growing major developed economy in the world. The cost of living crisis is over, and the public may well be feeling a bit more optimistic come May 2015.
  9. The Tory election narrative will be a combination of "look, things are going well, don't let Labour ruin it" combined with "look at Ed Miliband, what a wally". This is powerful.
So, if you think it's inconceivable that the Tories will win a GE out right, the chances are you're talking your own book.



Wednesday, 2 April 2014

The Post Office IPO

Most of the objections raised in the media concerning the sale of the Royal Mail are spurious. Most IPOs get away at a discount. Investors are taking on significant risk in buying a share for which there is no established market, and therefore price. Get it wrong, and your investors lose a great deal of money. No further money can be raised by the business in future except at high costs of capital.

A lot is being made of the advice as to the price range:

At the time of the flotation, and more specifically the book-building process, there were significant threats of industrial action. This faded as the floatation day approached. At 330p, the top end of the range, the shares yielded 6% or so, which appears about right for a floatation of a regulated utility the sale of which was driving the trades union movement nuts. SSE at the time yielded significantly more than that and 5% or so is about normal. 290p was cheap but 330 looked about right to me at the time.

Setting the price too high would ensure much less demand. And there are big magnifying effects at work.

There are known problems with the book-build process. The main one is that it is inflexible should demand prove higher than expected. And it was massively over-subscribed. Politicians running round telling everyone it's undervalued might have something to do with this. There was an immediate buzz, as everyone tried to get as much as they can. This flattered the figures for demand. Once it is clear the demand is greater than supply, this creates more demand and so on in a virtuous circle. It became clear, as I endured my busiest week ever that everyone would get substantially less than they put in for. This in turn encouraged retail customers to bid for £20,000 in the hope of getting £3000 worth, further flattering demand.

So was the demand really 24 times over-subscribed by institutions as reported by the National Audit Office? No.

If the issue was priced at £5, just over 10% below the trading range it established following the flotation, it's unlikely, at a yield of around 4% that I'd have been recommending it to clients. There would have been no politicians running round telling everyone how under-valued it was, and in the absence of the excitement, there wouldn't have been people putting in for significantly more than they actually wanted. The issue may have been a flop, and been pulled. The Government would have been left with egg on its face, and the price it could achieve in future may well be worse than the 330p it actually achieved for the 60% of the company it sold, if it could get it away at all. This is of course the real objection from Labour and the Unions, who simply object to any and all privatisations.

Could the Government have got more than 330p? Yes, but not much more, and at significant risk to a successful flotation.

People are objecting that institutions which took part in the flotation have sold some or all of their holding. Well why shouldn't they if they think as I do that at 560p, at a yield of 3.7%, Royal Mail is over-priced? I simply don't understand this fetish for long-term holders. Royal Mail is a successful flotation with a deep and liquid market in its stock and so as a result, can if needs-be raise money at a low cost of capital. Those institutions which put in for the flotation early did so at some risk. They have been paid for this risk handsomely and early, as have the 600,000 or so retail investors, many of whose holdings of 227 for which they paid £750 are worth well over £1200. I don't regard this as a bad thing. If you think the shares were sold off cheap, you could have bought some (unless, of course you were overseas, or an MP).

Should more have been made available to retail investors? Yes. But at the cost of securing the IPO, when it was not at all clear what demand for the shares was out there. Could a different flotation mechanism be used in future - an auction perhaps? Yes but these are a great deal harder for retail clients to understand and access. And if there are to be privatisations in future, we want to allow retail clients - individual British people to take part.

These quibbles aside, the IPO was a great success, and most of the objections to it are mere left-wing cant. The risk of owning Royal Mail to the tax-payer has been reduced. You can still post a first class letter from the Scilly isles to Shetland. Private money now underpins the business, and thanks to a hugely successful flotation, the Government can, at a time of its choosing, sell some of the remaining stake for which it will get a better price. The National Audit Office made an estimate of the value to the taxpayer of keeping the company in public ownership of £1. Labour is not making much of this figure. It has been sold to people who value it significantly higher. This is why capitalist, free-market economies are richer than the kind of economy Labour MPs want: everyone is better off now the Royal Mail is privatised and no-one is worse off.

Isn't capitalism marvellous?



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