Thursday, February 24, 2011

Resist the oily logic on interest rates

It doesn't seem so long ago that petrol was under 90 cents a litre in Spain and the international oil price had slid below 40$ from its peak of over 140$ Actually that oil price low was around 2 years ago and prices have climbed steadily since until, with the crisis in the Arab world, crude went close to 120$ yesterday - Oil prices hit fresh high on Libya fears

Nomura are warning of oil prices above 220$ I am not in the oil price guessing game - who knows? All sorts of things, good and bad, could come out of the crisis in North Africa and the Middle East. Who can predict what discoveries will be made on the supply side.

But one thing I would take odds on is that many commentators and policymakers will use the oil price spike to justify interest rate cuts or, in the case of most countries, to justify delay raising them from near zero.

I have long argued that the deeply negative real interest rates (the UK rate is 0.5% versus inflation of 4-5% depending on the inflation measure you use) is a weapon to be used in extreme circumstances only and for only short periods to get through a crisis. Holding rates too low for too long is extremely dangerous and asking for bubbles and bad lending which store up future crashes and disaster - just ask Spain and Ireland.

The oil price rise will strengthen the hand of the oil price doves on the Monetary Policy Committee of the Bank of England who have been under pressure of late. They will be able to blame high inflation on this "one off, temporary" factor and will point to the danger of raising interest rates when the economy is struggling to deal with an oil price shock. Rising oil prices drain demand from the rest of the economy and higher rates risk doubling the demand shock - households get hit at the pumps and the monthly mortgage statement.

There will be a lot of this kind of talk in coming weeks and no doubt many will refer back to 2008 when many Central Banks raised rates during the last oil spike which some blame for precipitating the economic crisis.

There are several reasons to resist this pernicious logic. One is technical: if monetary policy is to be used at all to control inflation it should be aimed at a general level of prices across the range of sectors which make up our cost of living. Specific rises in one area - energy for example - are not should not be inflationary in general terms. They are a signal that we should use less energy and find more sources of energy to reduce its price. In the meantime we will reduce our spending on other things which should then fall in price. IE a rising oil price should be neutral overall but be a powerful incentive to do the right things to correct the problem (e.g. invest in energy saving ideas).

If we constantly "fight" oil price rises which owe more to long term issues of supply and demand (particularly from the developing economies) with low interest rates we will stop this natural market process from occurring and risk a very serious bout of stagflation like we saw in the 1970s when the biggest ever oil price shock occurred.

Think of the main cause of oil price rises - China. That country's incredible growth (e.g. doubling of car sales in 5 years) is driven by loose money both at home - negative real interest rates while growing at 10%! - and in its main markets in the West. That wild and unsustainable growth in turn causes oil price inflation which causes, um you guessed it, more calls for loose money policies. And it goes on.

We need to recognise that low interest rates are not a panacea. If anything is going to get the Western economies in particular through the economic and energy problems it faces it is more saving and investment, less consumption and debt. Ludicrously low rates are not the answer.

Sunday, February 13, 2011

Electric cars: pie in the sky or investors' heaven?

Electric cars have been the stuff of fiction and speculation for as long as I can remember but, in practice, have posed little threat to the standard gas guzzlers. There are over 600 million combustion engine cars in the world but only a tiny number of electric cars, a fact which is unlikely to change dramatically despite an apparent surge in interest from governments and carmakers.

There are issues of consumer resistance, battery technology, recharging infrastructure, price (including uncertainty over government subsidy) and economies of scale. But there are plenty of interesting initiatives out there : Denmark and Israel are building a network of charging points and "switching stations" where you swap your flat battery for a charged one in less time than it takes to fill a tank. The 2011 Car of the Year was the electric Nissan Leaf which the UK government is trying to get manufactured in the UK. Spain is aiming for 1 million electric or hybrid cars by 2015 though there are doubts about electric car sales in Spain taking off to this extent. One of the main issues in scaling up electric car fleets in Europe is the lack of a common standard for plug sockets.

But despite all the doubts, there is a future for electric cars simply because the alternative of burning through the planet's oil is not going to be viable for much longer. Exhibit 1 - oil price back over 100$ despite a weak economic recovery in most countries. Exhibit 2 - China. Already the world's biggest car market and growing at 50% (and it has a long way to go - only 2% of Chinese own cars). Exhibit 3 - other emerging markets. As India and the rest follow China's path their middle classes will want cars just like everyone else.

Yes, there are bio fuels, hydrogen cells, liquified gas and other alternatives but I suspect that electric will be the biggest part of the solution. In 2010 the Chinese government threw its weight behind the electric car and aims to be the world's biggest producer by 2012. This will be decisive. Which of course means a massive increase in the need for electric power generating capacity which in turn suggests some investment themes:

- forget the prospect of windturbines and solar powering all the new cars; the world will have to turn to the fuels it has in abundance to achieve the necessary scale. That means coal and gas whatever the carbon consequences might be.

- the electric grids themselves will need expanding and upgrading and will be even more important to the economies they serve. This will mean governments have to allow these monopolies to charge inflation-beating prices for decades. Great if you think like me that stagflation is the main threat and need to find good dividend payers (see what do with your savings in 2011)

- presumably controversial nuclear power will have a role. Uranium miners should benefit though their share prices have already surged in recent times.

- battery makers and battery technology companies but you need to do your research. Warren Buffet, the greatest investor of all time, is a fan - see

This is just a thought to tuck away for the long term (and a fairly obvious one at that) not specific investment advice - a lot of related shares in this area have shot up recently any way. One FTSE share that I would be quite keen on for a variety of reasons as a long term play is National Grid.

Latest from the Advoco website: Spanish income tax rates 2011

Thursday, February 3, 2011

Big brother is watching your Spanish bank account

The Spanish authorities must be getting desperate for money - the papers have been full of scary stories about the tax office (Agencia Tributaria) saying how they are going to raise billions of Euros by cracking down on tax fraud. News of last year's haul even made the New York Times as everyone worries about the prospect of Spain struggling to finance its budget deficit (Spanish fraud crackdown nets 10 billion). This year's priority is to cooperate with the Social Security department to catch people operating in the, erm, "informal" economy without registering for tax. The intention is to use new powers to demand information from utility companies, credit card providers and banks.

The full story is on our website Authorities tackle tax avoidance in Spain but a couple of aspects to all this are worth highlighting. The first is a new rule in force from 2011 but applying to transactions that go back to 2010, that all banks report all transactions over 3.000 with the following details:

- name and NIE (or company name and CIF) of payer/recipient
- amount
- whether deposit, withdrawal or transfer
- date account

Worth bearing in mind if you are paying for a property partly in cash or making a gift transfer which should be declared for gift tax (see explanation Spanish Gift Tax).

Also the Agencia Tributaria are keen on catching more people who don't declare rental income. Already they boast of trapping 200.000 shifty landlords by simply requiring that anyone claiming a tax deduction for rent paid has to state the catastral reference (Land Registry number) of the house or apartment on their tax return. This is used to check the owner's tax return to see if they have declared the income. The once sleepy Spanish tax authorities are waking up!
OctoFinder Blog and ping Spanish Insight - Blogged