Pennies and Dimes and the 99%

It was this time last year that I fell out of love with London.  I was staying in a three story walk-up flat, in Kensington.  Close to shops, tube, and some great pubs.  And walking distance to the Chelsea Flower Show and Q&A amongst other museums.  From my bower window I could sit in the afternoon spring sun and watch the pedestrians far below, hithering and thithering.

Kensington was dirty, and the people grasping.  The young women wore stiletto heals that were reminiscent of the foot binding days of the Chinese.  All the shops had sales, although I am not a shopper, it was noticeable that along the strip the retailers were doing it tough.  Clear signals of a weak economy. 

The fact that it rained most of the week could have also contributed to my gloom.  In one day alone we had boiling heat, torrential and flooding thunderstorm, hail, and a wind storm.  

Across the street from my flat, and a floor lower was a gorgeous apartment.  Decorated and furnished in the old English style it was immaculate, with real old world charm.  The curtains were always open as though the owner was inviting people to glance in and admire.  

The owner himself was of old world charm style, an English gentleman.  Maybe ex military, because he stood tall and ramrod straight despite his clearly many years, and groomed to within an inch.  

As I sat in the evening, it was the only time I saw him, despite having a clear view the entire length of his apartment.  At that time, he would sit beside the window and read the paper, on occasion leaning into the window as the light faded, holding up the paper.  

Maybe I am slow, but it took a few days to realise that he was using daylight to read by rather than turn on an overhead light.  And further, that I at no time when glancing out the window saw lights – either overhead or from a flickering TV – in the evening.  In the kitchen, I only ever saw tin cans on the bench, despite the inviting décor.  It took me a little time to understand that all over London some, like this elderly gentleman living in a million pound apartment, and others less fortunate, were not turning on the lights nor cooking, because they couldn’t afford it from their income.  I wasn’t just the poorer demographic.  The seemingly wealthy were suffering also.  

And maybe like this gentleman, they lived a proud existence, and told nobody for the shame.

I have written about inflation and ivory towers, in which I suggested that the governments would soon (and again) be adjusting how they measure inflation to grab back money on say, pensions.  Inflation is a number on which the whole world spins, whether measuring real investment returns, pensions adjustments, or planning for future expenditure.  

And that the western economies are experiencing stagflation, whereby the cost of essentials – food, water, energy, healthcare – are rising faster than the income on which we rely to meet these essentials.  And I don’t see how it is going to be any better for decades.  (I took my own advice and bought a farm.)

Then a month ago there was this extraordinary article, as if to prove me completely correct.  So that I am sure you have the benefit of reading it (and the following comments) here is the link in full.

http://www.bloomberg.com/news/2012-04-25/chained-cpi-switch-is-a-slam-dunk-even-in-election-year.html

I learnt various things from this article.  First, that Bloomberg now had its own editors publishing editorials.  When did that happen?  Second, that they also posted comments about an editorial.  Again, since when?  Third that Bloomberg is still getting its facts wrong.  Evan when written by the “editors” themselves, whose primary role is, after all, to edit the facts.  

Here is the opening line:  “Sadly, Congress and the White House seem incapable of agreeing on substantive measures to tackle the $10.4 trillion mountain of U.S. debt.”

Now the interesting thing about that line, is that the US debt is in fact US$15 trillion, because I looked it up on Bloomberg.  

The article then goes on (the “slam dunk” in the heading is a tip to its quality) to say that the government should switch to a Chained Inflation measure rather than the standard measure used today.  

Chained inflation is a measure, that reputedly tracks changes in consumer purchasing behaviour.  The example they use is that when the price of a granny smith apple rises, the consumer switches to the lower cost red delicious apple.  

Now, for sure you are getting the drift.  As inflation on food essentials (as an example) keeps rising, people will continuously switch to lower and lower cost products.  Cat food comes to mind, as it did to the many commentators who overwhelmingly mocked this article.  Dog bones anybody?  What inflation?

The “editors” suggested that this would save the government US$300 billion over ten years.  No suggestion how this was going to pay down the debt.  And at 0.2% it isn’t even enough to pay the interest on the debt. 

And you guessed it, the savings came from:  social security and cost of living adjustments;  pensions; and probably food stamp recipients.  The 99%. 

And again this turns to a continuing theme in this blog – penny and diming the 99% whilst the 1% carry on.  As pointed out in prior blogs, taxing the OTC derivative market, US$700 trillion and counting, just 0.1%, would raise US$700 billion.  And if the duration of the OTC market is 3 months, that would be US$2.8 trillion per year, or enough to pay off the USA debt in total plus a huge surplus using Bloomberg’s 10 year measure.  

Of course the USA is not the home to all the global derivatives, but probably a lot of them.  There would be quite a material amount in other financial centres such as London.  

And you guessed it, the Telegraph reports that that government is about to pennie and dime its citizens by adjusting how the RPI is measured.  That's the retail price index.

It reports “A reduction in RPI would save the Government up to £3bn a year on the interest payments it makes on index-linked gilts, but would also slash income for pensioners and those whose pay packages are linked to the measure.”

Like the pension for that charming elderly gentleman living in Kensington.  Or should I say, surviving, just! 

Directors & Officers, Bloomberg has arrived!!

It was several years ago now, I can’t even remember if it was pre or post GFC.  Maybe 2008.

On the front page of the Wall Street Journal, reporting about the lack of liquidity in the markets, it quoted a prominent investment banker as saying “all the brains are in Wall Street, and all the money is in China”. 

Overlooking the complete disgust in this racism, and narcissism, and ignorance, it was a fascinating comment for many reasons.  But the main one was the complete ignorance of this prominent investment banker representing his entire professional community on Wall Street about a country that is now a critical global player. 

I felt the shame he failed to recognise. 

I had just spent many years as a global equity analyst covering China (amongst others of course).  One report in particular that I wrote, in January 2000:  China:  From Command to Demand, China’s Century  was about China’s financial services sector.  It proved very popular I recall, as there had been little written to that date.  Most data was in Mandarin and my trusty team helped me translate and analyse it. A decade later so far so good; the Chinese banks are now listed and the largest in the world and the insurance companies are up there also.

My clients were the top 200 investors internationally; which included of course the largest fund managers in the United States.  So I was fortunate in meeting some very smart people.

But it also included a long period with the heads of some of the China’s largest financial institutions, doing due diligence, writing reports, and as a team leader on large scale transactions. In so doing I met some of the smartest people that I had met anywhere.  Including Wall Street.

Of course Wall Street is listening now, as China continues to exercise its significant strategic skills.

Why I am telling this story, is to illustrate the enormous gap in knowledge that can occur between “Wall Street” and a particular current and relevant subject.  A subject that is vitally important, as China was at the time [as an emerging power] but completely ignored by investment bankers.  And Bloomberg for that matter.

The same applies to the subject I have covered in the series of blogs on Directors and Officer and Peak Everything, about climate change.  I mentioned in this blog,  that Bloomberg was now gathering, analysing and reporting data from companies with respect to Sustainability. 

That information is likely to only be available on its Professional service on a screen that sits about three feet from every fund manager and investment banker around the world.

I now note that Sustainability is on the front page of Bloombergs Public website, with a big heading “New” [sans the analysis, which you have to pay for].    Can’t miss it.  By gathering the data from companies, and in the face of disparate reporting, it will be exposing those companies that are not reporting sufficient information, and those not reporting at all.  That’ll get the companies moving, and over time there will be convergence in standards and compliance which is critical for relative analysis.

[As an aside for those not in the "know".  Bloomberg offers a Professional service with almost unlimited analytical data and comparability for about US$5,000 per month per screen.  However you can view its 'free' website without those facilities on the net.]

This is of course magnificent news.  And I see two clear outcomes.  First, despite the best will of the organisation I covered in this blog to standardise reporting on climate change issues, Bloomberg’s data collection, analysis and reporting will, I am suggesting, have the greatest impact. 

Second, the reputed lack of fund manager interest and the ignorance in Wall Street, will disappear.  As the desk jockeys in the investment banks and fund managers around the world sit on their hands during this liquidity crisis, what better way to fill the time than to open up the new Bloomberg Sustainability site and have a look around.  A bit of analysis here, and bit of analysis there, and before you know it they will have invented a climate change CDO Swap product that will turn everybody into Sustainability experts.  Maybe even Moodys and S&P will rate it. 

Bloomberg setting up this site may well be one of the most critical tipping points in Sustainability.