After an 87% drop in the share price of Satyam last week on the arrest of some of its board members including the financial director, Vadlamani Srinivas, with the charge of falsifying accounts, the price rallied back 44% today with the announcement of a rescue plan and the appointment of new directors.

The false accounting was an overstatement of cash reserves by $1 billion dollars which was done pretty much by moving the decimal point by one place. $0.11 billion become $1.1 billion

Deepak Parekh, one of the new directors, is currently appointing a new set of accountants and hopes to have restated accounts made public in the near future. A fast response is required to restore confidence.

Evidence of the recession hitting hard in the US was seen through the latest unemployment figures which show the biggest loss in jobs since the end of the Second World War, some 2.6 million jobs in 2008

Obama’s response is a Keynesian one: operating contrary to the downward market; the new US government will borrow and invest in the infrastructure to limit unemployment, welfare payments and try and create real growth in the economy. The other side of this approach is the need to reduce public spending, repay government debt through a higher tax income through the good years.

In the in the 1990s in the UK Gordon Brown as Chancellor started off on this route by reducing debt as a percentage of national income from 45% down to 40% with the intention of reducing the level to 36.5% based on Gordon’s sustainable investment rule. As the table below shows below he allowed debt to grow in now what looks like the good years of 2003 through 2006 when he should have been retaining the level of UK debt well under 40%

1997 : 413,2 £ billion, i. e. 49,8 % of GDP (ONS)
1998 : 410,2 £ billion, i. e. 46,7 % of GDP (ONS)
1999 : 405,7 £ billion, i. e. 43,7 % of GDP (ONS)
2000 : 400,6 £ billion, i. e. 41,0 % of GDP (ONS)
2001 : 385,5 £ billion, i. e. 37,7 % of GDP (ONS)
2002 : 402,9 £ billion, i. e. 37,5 % of GDP (ONS)
2003 : 441,1 £ billion, i. e. 38,7 % of GDP (ONS)
2004 : 487,9 £ billion, i. e. 40,4 % of GDP (ONS)
2005 : 529,4 £ billion, i. e. 42,1 % of GDP (ONS)
2006 : 573,3 £ billion, i. e. 43,1 % of GDP (ONS)
2007 : 618,8 £ billion, i. e. 43,8 % of GDP (ONS)

Source: http://cluaran.free.fr/debt.html

Now in the depth of recession the UK has depleted coffers when we need to spend our way out of the recession. The additional borrowing or printing of sterling that may ensue will result in GBP staying at a lower level, below or around the level of the Euro. Transition to the Euro in the UK would be so much easier at parity however the UK does not look anywhere near meeting the 5 economic tests

The Bank of England dropped interest rates by 0.5% to 1.5%, the lowest level ever.

This is unlikely to have much effect on the level of bank lending as banks will take the opportunity to wider the spread between the rate thay borrow at and the rate they lend at.

The 363 rule of banking, just got better: borrow at 3% , lend at 6%, golf course at 3 o’clock.

The pumping of government money into the banks has helped over the last 3 months as the spread between LIBOR and Bank of England rates has narrowed to 0.85% prior to yesterday moved.

I would expect LIBOR to creep down to about 2.5% and hence allow the bankers to be on the golf course by 14:30, which is very amiable given the dark winter evenings.

This evening, I found myself at Broadgate Circle, drinking champagne at the bridge of the boat-like, Corney and Barrow, overlooking the ice skating rink, safe from the icy winds in the warmth of the bar. It was a New Year’s drinks party with some colleagues and recent ex collegaues.

I was reminded of the scene of the band playing on the deck of the Titanic as the lifeboats were manned. The talk was not of jobs or markets (or icebergs) but of iPods, HDTVs, digitals cameras, holidays in warmer climes and new online businesses. The only recognition of the state of the current economic hardships was that we were drinking the cheapest champagne on offer, a Laurent Perrier Non Vintage at £46.96 a bottle (only £23.95 at anybooze.com. Well, at least we were doing our bit for the economy, spreading the wealth around

As I left, after a couple of hours of amiable chat, I drew my scarf more tightly around my neck. It is going to be a long cold winter.

In the UK, David Cameron set of an alternative to the consensus view of increased public investment and spending, in response to deepening downturn in the economy.

Is he a) enlightened? b) economically inept? c) partisan?

Let’s look at his proposals:
• Remove tax on savings up to the basic rate of 20%.
• Increase tax free allowances on savings for the retired.

Cameron the Enlightened

The problem that Cameron is trying to solve is that of the low returns to savers. It is generally recognized that giving people their own money back is a more effective way of growing the economy than large scale public investment so his proposal is encouraging in this respect.

Also Cameron’s proposal is cheap at this time because interests rate are so low. If you are getting a 2% return on your money, then the tax saving under Cameron’s plan is 0.4%. With the average saver having £10,000, that amounts to £40 a year or about £0.80 per week for the saver.

Cameron the Inept

This compares to the 2% reduction in Valued Added Tax ( a natonal sales tax). If the average person spends £75 a week on vatable items that this reduction will result in a £1.50 per week saving. So Brown’s proposal is on average about twice as effective as Cameron’s.

However, look at who is affected by the changes: the VAT savings proportionally help lower income families more while savings tax changes would benefit middle income more.

Cameron heavily criticised the VAT reductions but his proposals are even more ineffective.

Cameron the Partisan

The increase in tax allowances is really a give away to his supporters. It is targeted at the retired, middle income who are indeed suffering a fall in income as the returns.

The tax system already allows £7000 in tax free ISAs and through Post Office accounts, so the most substantial beneficiaries of his the proposed tax allowance increase would have savings of over £10,000.

However, now consider the scenario where interest rates resume normal levels of 6% as they must do in the next couple of years. The cost of the tax giveaway will be six fold what it is now and with the benefits going into the pockets of his supporters.

Conclusion

Savers will reap the just rewards of their savings but only once when we come out of recession.

Cameron does need to come up with alternative policies to the Labour Government but he needs to demonstrate he has some understanding of the economy and what is good for the country as a whole.

For example, he should agree with the current level of public investment but come up with a different set of priorities on that spending and propose putting in place a set of measures and controls to ensure the public is getting the best possible value for money for these initiatives. This would be a credible approach.

Today saw Waterford Wedgwood call in the administrators, Deloitte. Wedgwood is a traditional name in fine bone china dating back to 1759. Waterford Crystal acquired Wedgwood in 1986 and then Royal Doulton in 2005. I own a number of Royal Doulton ladies.

 

On my wedding I was given some beautiful Waterford Crystal glasses. I expect that these famous Irish and UK brands will be acquired, and the bulk of remaining 2700 jobs in Eire and the UK will be relocated further east leaving only some management and marketing functions on home turf.

Even though the company has transferred 75% of it operations overseas to Indonesia and Eastern Europe this was still not enough to escape the downturn in sales of its luxury product.

In the USA house prices fell around 6% this year, while the UK saw a much steeper decline of 16%.

House prices are expected to fall further as the recession deepens with higher unemployment and even tighter credit. Banks are building their capital reserves and hence levels of lending remain low.

We can expect the Bank of England to cut interest rates by 0.5% to 0.75% next Thursday. You will reap the benefits of this if you have a variable rate mortgage without an interest rate floor.

Investors saw a third wiped off the value of their shares in 2008 in the USA, Europe and the UK and two thirds in China

• UK FTSE 100 – down 31%
• USA Dow Jones - down 34%
• France CAC 40 – down 43%
• Germany DAX – down 40%
• Japan Nikkei – down 42% 
• China Shanghai  SSE 180 – down 65% 

Have we hit the bottom? Probably not.  But I think the markets will be higher by Jan 1, 2010.  The billions pumped in by national governments should be having some considerable effect by then.  

References

http://news.bbc.co.uk/2/hi/business/7805644.stm

http://uk.reuters.com/article/eurMktRpt/idUKLV62946620081231

http://finance.google.com/finance?q=SHA:000010

http://finance.google.com/finance?q=DAX