Lack of posts

Apologies for the lack of posts in the past week or so, I have been extremely with work. Service will now resume as usual and I will be posting several times a week throughout the christmas holidays. I would also like to extend a massive thank you for 2,000 page views !

U/E falling

Interesting news from the Independent which suggests an upturn in the fortunes of the UK economy :

"Britain's unemployment rate has slipped to a four-and-a-half year low of 7.4%, edging closer to the "threshold" at which the Bank of England has said it will consider raising interest rates.

The Office for National Statistics (ONS) said on Wednesday that unemployment in the three months to October was 2.39 million, or 7.4% of the working age population, down from 7.6% in the three months to September.

Under the Bank's policy of forward guidance, governor Mark Carneypromised that borrowing costs would remain on hold at least until unemployment has fallen below 7%.

When the policy was announced in August, the Bank's monetary policy committee expected that to take three years; but its latest prediction is that this could be as soon as 2015.

"The jobless rate is falling far faster towards the Bank of England's 7% threshold than policymakers envisaged when establishing the marker back in the summer," said Chris Williamson, chief economist at City data provider Markit. "Employment is surging higher and unemployment collapsing in the UK as the economic recovery has moved into a higher gear."

Sterling jumped after the unemployment data was released, rising by almost a cent against the dollar, to $1.635, as investors bet on an earlier-than-expected rate rise. A stronger pound was one of the concerns of the Bank's nine-member monetary policy committee at its December meeting, according to minutes also published on Wednesday.

The MPC pointed out that the value of sterling has risen by 9% against the currencies of the UK's major trading partners since March, and warned that "any further substantial appreciation of sterling would pose additional risks to the balance of demand growth and to the recovery".

The minutes suggested that the latest evidence pointed to a "burgeoning recovery" in the UK, but one which was unlikely to prove sustainable unless productivity picked up, finally lifting real incomes. The MPC voted unanimously to leave rates on hold at their record low of 0.5%, and the stock of assets bought under quantitative easing unchanged at £375bn.

MPC member Martin Weale suggested last week that if unemployment is falling rapidly at the point when the 7% threshold is breached, he would regard that as a reason to tighten policy.

The details of the jobs data reinforced the view that the labour market has strengthened markedly over the past six months. The number of people employed across the economy has hit a fresh record high above 30 million, while there are more vacancies than at any time since the summer of 2008, before the UK slipped into recession.

On the claimant count, which measures the number of people in receipt of out-of-work benefits, unemployment fell to 1.27 million in November, its lowest level since January 2009.

John Philpott, director of the Jobs Economist consultancy, described the data as "wonderful". "The quarterly 250,000 net increase in total employment is as big as one might once have expected in a full year. Employment is up in all parts of the UK, except Northern Ireland, with a sharp rise in job vacancies helping an additional 50,000 16 to 24-year-olds into work. And while the overall figure of more than 30 million people in work still leaves the UK employment rate (72%) below the pre-recession rate (73%) it is a landmark worth celebrating," he said.

Despite the improving conditions in the labour market, there is little evidence that the prolonged squeeze on wages is easing. The ONS said total pay rose at an annual rate of 0.9% in October, or 0.8% including bonuses. That compares with an inflation rate of 2.2% in the same month, suggesting that on average, living standards are continuing to fall. Frances O'Grady, general secretary of the TUC, said: "These are undoubtedly positive figures, but we should not forget how far we still have to go to restore pre-crash living standrards through better pay and jobs."

Rachel Reeves, the shadow work and pensions secretary, said: "Today's fall in unemployment is welcome, but families are facing a cost-of-living crisis and on average working people are now £1,600 a year worse off under this out-of-touch government."

Accounting for Growth

Just a quick post to let you know that I have been reading, and highly recommend , the book "Accounting for Growth" and terrysmithblog.com,  both of which by Terry Smith, head of Tullett Prebon  . They are  excellent reading for anyone with even a passing interest in Accounting, Finance or Economics.

Innovation stagnant

An interesting article was published on the Independent today regarding the lack of innovation within UK industry, largely as a result of a lack of capital. As one of last week’s posts following the festival of economics reported, only 0.35 % of banks’ overall assets were distributed to “innovative “companies, which is particularly revealing and pertinent to the article.

The basic premise is that innovation is not prospering within the current economy , largely due to a lack of funding from banks. The evidence behind this is strong and decisive:  A Grant Thornton study states that one third of London’s promising technology companies are missing out on growth due to a lack of capital. Despite promising government initiatives such as the SEIS raising £82 million from investors and helping 1100 small businesses , many of which being in the technology sector , the UK is ultimately lacking in the high-risk, high-reward, high-growth Venture Capital sector which helps to drive growth within the US economy, for example.

The reason that banks are hesitant to lend to small, risky companies is because they are just that: risky. As a result, banks are much more happy offering highly-collateralised loans to established companies or mortgages to people whose houses can be repossessed, whereas innovative new companies have value because of the ideas that drive them ; Not the assets which underline them. Of course, ideas are much more prone to failure and value fluctuation than tangible assets.

In my opinion, more government initiatives such as the SEIS should be created in order to help these ailing innovative companies, for, at the present state of bank lending, we will never be able to keep up with the heaps of innovation arising from areas such as America’s “Silicon Valley “. 

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.”