Gold depreciation

Whilst reading the Guardian today, I came across an interesting article which states that Gold is set to decrease in price, as demand from institutional investors switches to other assets such as stocks, which are now thought to offer better risk-adjusted returns. This is significant for a number of reasons : Firstly, this means that stocks are deemed to offer better risk-adjusted returns, which are broadly calculated by the asset’s beta rating. Furthermore, Gold is seen largely to be a safer alternative to stocks and derivatives. This is demonstrated by the following graphs showing Gold prices and the FTSE 100 index:

 Note the inverse relationship between Gold price changes and the FTSE index in the midst of the financial crisis and subsequent recession. As such, one can interpret the Gold depreciation as being ultimately a good indicator of economic recovery, or at the very least, increasing confidence.

Royal Mail underpricing

As I predicted just a few weeks ago, Royal Mail shares have proven to be, at least for the time being, to be chronically under-priced., not only due to the aforementioned property assets held by Royal Mail, but also for the recent revelation that pre-tax profits at the postal giant have more than doubled this year.

“Royal Mail investors who bought large stakes in the postal service following its £3.3bn privatisation last month are to be asked by MPs why they have staked hundreds of millions of pounds on the view that the government sold the firm on the cheap.

The news emerged after the Commons business committee investigating the Royal Mail flotation questioned the business secretary, Vince Cable, and his ministerial colleague Michael Fallon how the offer was valued, prompting an assertion from Cable that there was no need for an independent inquiry into the process.

Committee chairman Adrian Bailey said he will be writing to the The Children's Investment Fund (TCI) and GIC, Singapore's sovereign wealth fund, which have built up their Royal Mail stakes since its listing to more than 6% and 4%, respectively – having decided the shares would rise far above their 330p flotation price.

He said: "Yes, we might well want to [write to major new shareholders to ask why they value Royal Mail so highly]. We are reviewing the transcript [of evidence] to identify areas to follow up."

The committee has been investigating whether the taxpayer has been shortchanged by the Royal Mail flotation, in which 60% of the shares were sold to outside investors last month. The share price has since soared by about 70%, prompting criticisms that the government could have demanded a higher price. The Bow Group, a thinktank led by former prime minister Sir John Major, has called for an independent inquiry into the privatisation.

When asked if he thought an inquiry was required, Cable replied: "Absolutely not. We think this is a good process for the taxpayer."

He added that the valuation was only one criteria in deciding whether or not the taxpayer had received value for money, as the company could have withered – and its services put at risk – without access to private capital to invest in its future.

"Bearing in mind the set of objectives which we set at the very beginning ... the value for money is partly dependent on the offer price, it's partly dependent on the continuing value of the state's [30%] share, and it's partly dependent on what happens to the company. If the company isn't able to invest successfully [in its business], you could be left with a serious casualty. When we take all those things together, I think the conclusion will be, when people have settled down, that this has been a very professional well-managed and successful operation."

Royal Mail floated at 330p a share when the government sold 600m shares last month. Once the shares began trading on the stock exchange, they quickly soared. The shares were up 5% on Wednesday afternoon following the group's first results statement as a public company, changing hands at around 563p.

Also being questioned alongside Cable and Fallon were Mark Russell, the chief executive of Shareholder Executive which holds state stakes in businesses, and William Rucker, the chief executive of the government's main financial adviser, Lazard.

Russell said the government had been taken by surprise by the surge in the share price, telling the committee: "We did not anticipate the share price to move to the extent that it did."

He added, however, it had been anticipated that the shares would rise following privatisation, which was part of the reason why the government had retained a 30% Royal Mail stake. Typically, the City hopes the shares rise by around 10% on the first few days of trading following a flotation.

Bailey also asked the witnesses if it was predictable that Royal Mail shares would surge so strongly, with the offer was 20 times oversubscribed by investors.

Lazard's Rucker claimed not: "A lot of the orders [for shares] that go into the books ... there is a heavy element of gaming. The three biggest orders were $1bn each. That would have represented 20% of the company. Those institutions had no expectations of ever receiving anything like that quantity of the stock.”

Margaret Hodge on tax avoidance.

Yet another indictment of the UK tax system with regards to high-income individuals and large multinational corporations has come to light to day, as Margaret Hodge has attacked the increasingly flexible taxation laws which are pertinent to these individuals and companies. As the research I conducted during my EPQ project on corporate tax avoidance correlates , despite much noise surrounding corporate tax avoidance , little to nothing has actually been done to address the tacit complicity which permeates the tax avoidance culture of large companies and HMRC alike.

“The chair of parliament's public accounts committee, Margaret Hodge, has delivered her most outspoken attack to date on the coalition's tax policies, describing the tax system for corporations and the super-rich as "increasingly voluntary".
She also criticised the "growing gap between rhetoric and reality" coming from David Cameron on tax reform.
Speaking at an event organised by tax campaigning charities in London, Hodge said: "They [ministers] believe we should engage fully in the global race to the bottom … I now believe David Cameron doesn't mean what he says when he says multinational companies should 'wake up and smell the coffee'."
Despite tough language on combating tax avoidance, the coalition government has been acknowledged among tax professionals as accelerating the pace of tax competition in a drive to lure in foreign investment. Measures such as new rules for overseas finance subsidiaries, tax breaks for groups owning patents in the UK, and the plunging corporation tax rate, have been cited by critics of Cameron's approach to tax reform.
Hodge's attack on Cameron harked back to a speech he gave at the World Economic Forum in Davos in January, shortly after the use of aggressive tax avoidance strategies at Starbucks' UK operations had been exposed by a Reuters investigation. The coffee chain had taken £3bn of sales in the UK over 14 years, but paid only £8.6m in tax.
Cameron told the audience of business leaders in the luxury Swiss resort: "When some businesses aren't seen to pay their taxes, that's corrosive to the public trust … Some forms of avoidance have become so aggressive that I think it is right to say these are ethical issues and it is time to call for more responsibility."
In a blunt jibe at Starbucks, he urged multinationals to "wake up and smell the coffee".
Hodge has spent the last two years leading the cross-party committee of MPs through a wide-ranging investigation into how multinational firms pay UK tax. Her tough questioning of company executives, big-four accountancy partners and HMRC bosses has played a major role in keeping tax reform high on the political agenda.
After firms such as Google and Amazon were subjected to a barrage of angry questioning from Hodge's committee, George Osborne responded a year ago by issuing a joint statement with his German counterpart Wolfgang Schäuble, calling for urgent reform of the international tax rules. "Some multinational businesses are able to shift the taxation of their profits away from the jurisdictions where they are being generated, thus minimising their tax payments compared to smaller, less international companies," they said. "We want global companies to pay those taxes."
Since then, however, Schäuble has dramatically switched his view of Britain's commitment to shoring up the integrity of international tax regimes, attacking Osborne's "patent box" tax break. "That's no European spirit," he said. "You could get the idea they are doing it just to attract companies."
Behind the scenes, a growing number of fellow G8 nations have also become increasingly irritated at the apparent gap between Cameron's use, on the one hand, of a language of ethics on tax reform, and, on the other, what some see as begger-thy-neighbour measures to poach business activity from rival economies.
"You are fast turning the UK into a tax haven, aren't you?" one senior tax treaty negotiator privately told the Guardian this summer.”

Festival of Economics

Recently I attended a talk entitled “The State of Economic Recovery “ at the Bristol Festival of Economics. Speakers included Will Hutton, Margaret Heffernan, Andrew Sentence and Simon Wren-Lewis. The premise of the talk was whether the current economic “recovery” we are going through in the UK is both real and sustainable , or indeed if it can even truly be deemed a “recovery “ given the apparent structural weaknesses which are prevalent in our increasingly disparate economy.

Not only were the points raised fascinating from an economics perspective , but there were also many revelations about the finances of the banking sector, which is particularly pertinent and interesting for me given my desire to study accounting and finance related subjects at university and perhaps enter the city or entrepreneurship subsequently.

Whilst it would be difficult to succinctly and concisely summarise the divergent arguments presented by the speakers, I can list and explain some of the points which I think are paramount to understanding what is, in my opinion, merely an illusion of a recovery. Without further a due :

Banks hold Assets and Liabilities of 4.5 X GDP

The current value of the assets and liabilities held by investment banks is 4.5 X the UK’s annual GDP of £1.5 trillion. This is, in my opinion, a frightening statistic which demonstrates how much wealth and income is in the pockets of institutions, which as we have seen before, don’t really act in the public’s best interests.

5 % of these assets are linked to corporations and only 0.35 % of assets are deemed to be “innovative”

Of the huge assets owned by banks, only 5 % of them are derived from corporations, and only 7 % of this 5 %, or 0.35 % of total assets, are deemed to be derived from “ innovative “ companies. The reason for this is that “innovative “ companies present a far greater risk to banks than collateralised loans such as mortgages, and as such, given the current economic climate, banks are not willing to take excessive risks to generate profit. Instead, they would rather make loans with less risk and hence less reward to more proven consumers.

The worldwide value of derivatives is $700 billion

Another huge figure which is difficult to really explain or draw any meaningful conclusions from, but which truly demonstrates the scale of the economic behemoth which is the global financial system.

Productivity growth is decreasing

Productivity, the gap between unemployment decreases and GDP increases, is increasing at a decreasing rate, likely due to reduced investment in capital goods as a result of decreased bank lending. Productivity is of course crucial to the economic well-being of a country, an example illustrated by Henry Ford, the US industrialist who raised his worker’s wages and slashed their hours.

London can be considered a separate economy

London house prices have risen by around 10 % in a month, and wages in London eclipse the rest of the country, swaying wealth and income statistics greatly.  Perhaps an interesting indicator of how skewed economic data is, despite the average wage being £26,500 per annum, 2/3rds of people actually earn less than this

Bank balance sheets are too opaque

Banks own and use a series of complicated financial instruments which are not easy to quantify and place on a balance sheet. As a result, it is becoming increasingly difficult for regulators to monitor banks and ascertain their financial health , which is almost certainly an aggravating factor when considering the risk of another major bank collapse such as the Northern Rock fiasco of recent years.

Help-to-buy is as much a political as an economic policy

In the run-up to an election, it is of course in any politicians’ best interest to portray himself as best as possible to his electorate. As such, Right-to-buy is an excellent policy for David Cameron, raising house prices and allowing more people to get onto the property ladder. From an objective economic perspective, however, Right-to-buy is actually a profoundly flawed policy, with critics citing the possible overheating of the housing market.

The Horsemeat saga continues !

Alas, there is nothing pertinent or useful with regards to Accounting and Finance or ultimately business in this article. I am posting because it is either funny, tragic or worrying depending on your perspective.

 “The environment secretary is due to meet the Food Standards Agency, food suppliers and retailers on Saturday to discuss the horsemeat scandal after Aldi became the latest supermarket to confirm its withdrawn beef products contained up to 100% horsemeat.

Owen Paterson said it was unacceptable that consumers were mis-sold products, but that the problems originated overseas.

"We believe that the two particular cases of the frozen burgers from Tesco and the lasagne from Findus are linked to suppliers in Ireland and France respectively. We and the Food Standards Agency are working closely with the authorities in these countries, as well as with Europol, to get to the root of the problem," he said.

Paterson said he believed the food was safe but urged consumers to return products to the retailers. "The French authorities are saying they are viewing the issue as a case of fraud rather than food safety. Anyone who has these products in their freezer should return them to retailers as a precaution.".

Findus denied reports that the company first knew there was horsemeat in its products last year.

"Findus want to be absolutely explicit that they were not aware of any issue of contamination with horsemeat last year," it said in a statement. "They were only made aware of a possible August 2012 date through a letter dated 2 February 2013 from the supplier Comigel. By then Findus was already conducting a full supply chain traceability review and had pro-actively initiated DNA testing."

The Metropolitan police said in a statement it was not carrying out a criminal investigation. "Although we have met with the FSA we have not started an investigation and will not do so unless it becomes clear there has been any criminality under the jurisdiction of the Metropolitan police service."

Aldi said it felt "angry and let down" by its French supplier Comigel after tests on Today's Special frozen beef lasagne and Today's Special frozen spaghetti bolognese found they contained between 30% and 100% horsemeat.

Comigel, which also produced the contaminated Findus beef lasagnes, has blamed its suppliers. Erick Lehagre said he believed his company was buying French beef from a company called Spanghero but it had since told him it had come from Romania.

A spokesman for Aldi said random tests had shown that the products they had withdrawn contained between 30% and 100% horsemeat.

"This is completely unacceptable and like other affected companies, we feel angry and let down by our supplier. If the label says beef, our customers expect it to be beef. Suppliers are absolutely clear that they are required to meet our stringent specifications and that we do not tolerate any failure to do so," he said.

The company added that it would test the meals for the veterinary drug phenylbutazone, often referred to as bute, but said it was confident the meals were safe.

Hospitals and education authorities were also checking the food they provide for traces of horsemeat. A spokeswoman for the Local Authority Caterers Association said: "We are as sure as we can be that this is not affecting the school catering area."

She said there were strict guidelines around food safety and supplying dinners in schools, including transparency and traceability of ingredient provenance, and this was written into contracts.

Food businesses have been told to send test results on all their products to the FSA by Friday but Paterson is expected to tell MPs in a statement on Monday that some suppliers have been complaining to departmental officials that they have come under pressure from supermarket suppliers to cut corners.

As David Cameron indicated that he would have no qualms about eating the sort of processed meat dishes that have been at the heart of the recent scare, authorities insisted there was no evidence that frozen food in general was a risk to human health.

But the FSA advised consumers who had bought affected beef lines from Findus not to eat them. They had not been tested for the presence of phenylbutazone, which is banned in the human food chain. It can cause a serious blood disorder in rare cases.

The Guardian has also established that the FSA has been unable to trace all the horses slaughtered in the UK that tested positive for bute last year. The agency has routinely been testing less than 1% of slaughtered horses for the drug, but found four positives in a sample of 82 carcasses in 2012. It carried out a special additional survey on a further 63 horses last year and found 5% of those contained residues, bringing the total of positives to nine.

The Red Lion abattoir, owned by High Peak Meat Exports, has admitted that two of its slaughtered horses had tested positive for bute "historically" but said this was typical of the industry as a whole and that residue levels were so low as not to be a public health issue. The abattoir is currently under investigation by the FSA for alleged animal welfare abuses, and three of its slaughterers have had their licences to kill horses rescinded. The company said it was the FSA's responsibility to inspect horses at abattoirs and decide whether they were fit for the human food chain.

The FSA found six of the horses found to contain bute last year had been exported to France, two were still being traced, and one had been allegedly returned to two owners in the north of England for personal consumption. However the family of one of the owners, in Chorley, Lancashire, told officials they had never received the carcass nor expected to receive it.

Some companies have told the Guardian they began testing their own products soon after the first cases were reported in Ireland in mid-January. Full details of the testing requirements will be sent to the industry on Monday, although the agency says companies already have enough information to get on with the job and return results by next Friday.

The agency said evidence of the significant amounts of horsemeat in burgers and lasagne pointed "to either gross negligence or deliberate contamination in the food chain".

It said two particular cases of horse DNA in frozen burgers from Tesco and the lasagne from Findus were linked to suppliers in Ireland and France respectively. "We are working closely with the authorities in these countries to get to the root of the problem. Our priority remains to protect UK consumers."

Tesco – which withdrew burger lines after one of its products made at an Irish plant had 29% equine DNA and withdrew lasagne made by Comigel – said it had already begun testing other beef lines at independent laboratories.

Cow and Gate, one of the UK's major baby food companies, began testing its 14 lines containing beef in the second half of last month. The results were due soon, it said. The company, part of the French-based multinational Danone, has no production plants in Britain but has factories in France and Spain. It insists it can trace meat back to a specific cow. Heinz said it did not source from Comigel and would be responding to the request for testing.

"We only source beef for our baby food recipes as whole muscle meat. We are continuing to keep the issue under close review with our suppliers as more information becomes available about the incident and root cause."

Baxters and Bird's Eye were among other companies who said they had begun their own tests. Both said none of their products came from any suppliers so far implicated. The Food and Drink Federation, which represents the interests of the UK food industry, emphasised the "small number" of products where significant levels of horsemeat had been detected so far and said it was "unlikely" the national testing programme would reveal negligence or fraud by other suppliers.

Meanwhile Findus said it knew there was a potential problem with its lasagnes two days before the products were withdrawn. It was looking into claims by the Labour MP Tom Watson that meat used by Comigel may have been suspect since August last year.

Labour has claimed the loss of 700 trading standards officers in three years has made this type of consumer fraud more widespread.

It also points to FSA's Meat Hygiene Service suffering cuts of £12m in the four years to 2014, with the result that the amount of food checked in laboratories has gone down by as much as 30%”

Inflation

In contemporary economies, inflation ( a rise in the general price level of an economy ) is often seen negatively, for it erodes the purchasing power of money and may lead to a knock in confidence for consumers, investors and speculators alike.

To simply regard inflation as an absolute negative for a given economy or economic region, is however, incorrect and ignorant of the positive benefits and intricacies that can be associated with a small amount of inflation. Firstly, there are two ways in which inflation is instigated; There is both cost-push, and demand-pull inflation, which, as their respective names suggest, denote differing causes for rising prices. Cost-push inflation is generally seen as a negative, as the cost of production for a given economy has increased , which could insinuate productive or allocative inefficiency. On the contrary, demand-pull inflation is inflation caused by increases in aggregate demand and by extension GDP/ economic growth, which is crucial to any economy and manifests itself in some inflation due to the basic supply and demand mechanism.

Furthermore, inflation is often targeted by central banks and governments; The Bank of England , for example, aims to keep inflation below a certain rate and manipulates monetary policy to do so. Inflation targeting brings with it the obvious benefits of transparency and accountability, which can infuse the economy with confidence and promote spending. A perfect example of how a small amount of healthy inflation can be beneficial to an economy would be the recent deflationary pressure negatively impacting confidence of investors.

FTSE CEO Statistics