Thursday, May 31, 2012

Spain's Fred Goodwin has sunk the country's credibility

If there was any doubt that Spain is headed the way of Portugal and Ireland (if not quite Greece just yet), the Bankia affair has just removed it.

The country is in dire straits and the public face of the disaster is Rodrigo Rato (roughly translated as Roland Rat) who was forced to resign as boss of Bankia when it was forced to seek a €19bn government bailout.

With strong echos of Fred Goodwin he walks away with a cool €12 million or so in compensation and accrued pension benefits.  He was only at the bank a year and, while he can't be blamed for the property losses which sank the mega-bank (they were accumulated long ago by the various dodgy institutions that were roped together to form Bankia), he is certainly culpable.

This bank had already been recapitalised once when it took the opportunity to raise €3bn from the markets (i.e. pension funds and private investors who have now been almost wiped out).  The bank continually lied to the outside world about the true extent of its losses even declaring a profit of €300m just months before an external investigation revealed the true scale of the disaster.

A parliamentary inquiry and a judicial investigation into criminal charges have been called but the rat will scurry away from the sinking ship unharmed no doubt.

The Spanish public are angry and somewhat scared I think.  They have every right to be on several counts:

- Spain obviously doesn't have the money for the bailout and its European "friends" are not about to stump up

- The scale of the losses at this one bank tells the markets that the dire predictions about the Spanish banking sector as a whole (€200 billions of undisclosed write-offs) might not be far off the mark

- Spain has lots of similar hidden liabilities like the unpaid bills of its regional governments (€37 billion they say but no one knows) and a €24 billion slush fund I wrote about recently (are Spanish electricity bills about to soar?)

- But the worst thing is that the government's credibility is also sunk along with Rato's.  The previous administration encouraged the initial merger and the current one signed off on a much smaller recapitalization only days before the final shocking denouement.

The markets have given up on Spain and the spread over German bonds (the extra interest that Spain has to pay for its borrowings) is now at a record 5,4%.  It would be much higher if the markets were not wary of the ECB suddenly changing course and directly intervening in bonds markets; that is the only thing making Spain other than a one way bet.

This risk premium - la prima de riesgo - is now watched by the public like football scores or lottery draws.  They know that the game is almost up - financial chaos and humiliation is inevitable unless the ECB or Germany come up with some kind of deal.  And fast.

From our website   A guide to Spanish pension benefits

Saturday, May 26, 2012

Could a China hard landing end gold's bull run?

Gold has been one of the best performing asset classes for a decade now but recent price declines (it's about 15% down from last year's high) have led some to call the top of the market.

Are they right?  Is there any value left in buying into gold at this stage?  Are the many owners of gold and gold investments like ETFs headed for a fall?

Almost certainly not is the answer but there is a very apparent danger in the short term from a hard landing in China.

To understand why gold will remain in a bull market, consider what has driven gold this far.  Some people crudely characterise gold as an inflation hedge but it's more a form of insurance against monetary collapse and chaos which often leads to inflation.

When governments abuse their currencies and lose fiscal discipline like they did in the 70s it is very difficult to find safe places to put your money. With falling bond and share prices and negative real interest rates at the bank, gold offers a last chance at preserving wealth.

Before the 2008 crash investors bought gold because they saw Central Banks stoking a monetary  bubble which portended some 70s style chaos.  Since the crash worsening government finances and extreme monetary policy have exacerbated these fears and so we have had 10 years of gold price rises without much of the inflation that it is supposed to protect against.

Crucially, on top of gold's appeal to investors as insurance, we have had very low interest rates, often negative in real terms. This negates one of the drawbacks of owning gold - it doesn't earn anything.

Indeed if you want to know when gold is going to peak then the measure to watch is real, inflation-adjusted interest rates particularly dollar interest rates.  If there were any hint that the Fed were going to normalise interest rates at a level a percent or so above CPI then gold would fall a long way in a short time.

But this is not going to happen for a while and the Fed have publicly stated that rates will stay low until 2014.  That will put a floor under the gold price, probably not much lower than where it is now.

The Eurozone crisis makes more money printing likely and is just the sort of thing that gold as an insurance policy is made for, even if in the short term the Euro's weakness is a negative for the US$ gold price (the dollar has been at its highest level for years versus the sickly Euro).

The one cuckoo in the nest could be China. Private sector Chinese demand for gold, like its demand for just about everything else in the last decade, has been relentless and is still growing rapidly.  But a lot of the Chinese economic growth since 2008 has been artificially stimulated by its government, is ill-balanced and unsustainable.

The slowdown this year has been marked and I am sceptical of the soft landing claims.  The papers have been carrying stories like this one about Chinese buyers refusing to take delivery of iron ore and honour commodities contracts - Chinese steel mills defer iron ore shipments.

It is easy to see Chinese demand turning from a positive to a negative for the gold price.  Indian demand, usually a mainstay, has already fallen sharply this year as the economy slows.  But with the financial crisis dragging on with no (happy) ending in sight the overall case for gold is as good as ever.

Wednesday, May 16, 2012

How many mental problems do you have?

I was delighted to see snooker's great entertainer Ronnie O'Sullivan win the world championship on bank holiday Monday.  Unfortunately I switched on late, just as he was picking up the trophy and giving his post-match interview.  I was surprised to hear him give credit to Dr Steve Peters for his win because I am currently reading Peters' book "The Chimp Paradox" but knew nothing of his work with O'Sullivan.

That book claims to contain a mind management programme for confidence, success and happiness and is endorsed by other sportsmen Dr Peters has worked with like Olympic cyclist Chris Hoy, who says that his techniques helped him win gold.

I read the book because it seemed a rare combination: a self-help book by someone who was scientifically qualified to give advice.  Usually I wouldn't be seen dead near the self-help aisle but I am glad I gave this book a chance because I think it is going to help me with my own mental well-being.

I was specifically interested in finding ways to control my temper - things like shouting at the kids, over-reacting to perceived injustices and ranting about things that are not that important.

The book has helped, by explaining why we get angry and lose control of our emotions at times and how to combat this.  But I found as I read the book that I have much more than anger management issues to deal with!  While looking for tips on staying calm under duress (e.g. severe provocation from the kids) I couldn't help but recognise other things that Dr Peters was talking about.

Essentially he says (time for a massive simplification) that our human, true self is often hi-jacked by the primitive chimp part of our brain and we end up saying, doing and feeling things we don't like very much and regret once the moment has passed.

He also says that self-confidence and performance can be impacted by the chimp's interference as this short clip shows:

So you could say that, by his definition, we have mental problems if we experience emotions and feelings that we don't welcome.  So, when I lose my temper and get angry and later recognise that I overreacted, this is a problem which can be treated.

Some of the other things I recognised that fell into this "unwelcome emotion or reaction" category were:

- stomach-churning feelings of fear and dread at moments which are (if I stop to think about it) not that threatening
- feeling like things are spinning out of control and that I am being swamped by things to do
- undue pessimism
- inability to assert myself or say or do something for fear of upsetting someone
- allowing bad news to ruin a day or a weekend (or a week!)
- struggling at times to relax and enjoy the moment
- being overly harsh on myself and self-critical
- lying awake at night (usually a Sunday for some reason) and fretting about things which, when I wake up, seem silly

That's just a few of the bad mental habits that I recognised in the book that I now think I should work on.  That list probably makes me seem like a screw-up but I think a lot of people would come up with longish one if they thought about it.

If, like me, you think you are relatively normal but have a surprising number of mental traits you would prefer not to have, then consider trying to get rid of them.  Not necessarily with this book but I do think it is very good.

I had always assumed that you can't change your nature and that the best you can do is keep the bits you don't like in check.  I now believe, after reading this book, that all your unwanted mental traits can be turned around with the right approach.

From our website: Massive Spanish tax rises in 2012

Tuesday, May 8, 2012

Are Spanish bank accounts safe?

MARCH '13 UPDATE:  I wrote this assessment in August 2012 and there have been some developments since.  On the plus side, the Eurozone crisis seemed to ease after the European Central Bank said it would do everything it took to backstop the weaker countries like Spain.  This has made Spanish banks look safer.

On the negative side now we have Cyprus where a Euro-area country has begun confiscating a % of people's deposits without warning and preventing them accessing their accounts.  Could that happen in Spain?  See Could Spain "do a Cyprus" and raid Spanish bank accounts? for the very latest.

The Telegraph recently ran an article entitled "Pain in Spain could spell trouble for expats" asking whether money deposited in Spanish banks was safe.

It's a good question if you live in Spain and have a current account with a local bank and also some or all of your savings in a deposit account.  Perhaps you bank with one of the big banks like Santander or BBVA or one of the cajas which are like building societies (but with less money!).

The article was prompted by a wave of downgrades of Spanish banks by S&P which followed a downgrade of the whole country to BBB+ status the previous week.

Even national giants Santander and BBVA were on the list of threatened banks although they still get a rating higher than the national one.

The article focused on the government deposit guarantee scheme which ensures you get €100,000 back from the government if your bank goes bust.  It suggested that you might want to review if you have assets more than this.  However that only partly answers the question in my view.  How good is the goverment guarantee?

Given that the Spanish government is also deep in a debt mire along with the country's financial institutions, it is unclear whether they have the financial strength to bail out the banks and honour these guarantees.

Spanish national debt is not actually that high as a % of GDP but there are all sorts of hidden liabilities and big doubts over whether government cuts and tax rises will bring it under control or simply make the economy even weaker.  The Spanish have been struggling to sell their bonds at reasonable rates of interest rates and indeed it is only the local banks that have been buyers recently.

Spanish banks have been stepping in to buy their government's bonds using dirt cheap  ECB loans they got in exchange for dodgy property assets.  Just who is propping who up?

There are no guarantees in Spain that inspire confidence - the banks have insufficient capital when compared to the optimistic values they contine to attach to their assets and the government cannot afford to pay its own bills nevermind bail out the banks.  Best therefore to stay clear.

There are plenty of alternative homes for Euro deposits but remember if you live in Spain but park your money offshore then you still have to pay tax on the interest.  It is definitely not a good idea to try and hide interest income because the Spanish tax office has information on all accounts including places like the Channel Islands and Gibraltar.  Given the pressure on them to bring in extra revenues, offshore accounts of Spanish residents are just the sort of place they will look.

This brings me onto another reason why I would be wary of holding much more than "walking around money" in a Spanish bank account: the authorities are getting desperate and are not afraid to confiscate money from people they suspect of avoiding tax using bank account "embargoes".  Even if you successfully appeal against the tax office when they wrongly make a grab for your money would you want the expense and hassle of fighting to get it back?

Finally there is what you might call the "Argentina factor" - the outside chance that things get really nasty with Spain's economy worsening further, leaving (or being ejected) from the Euro and deafulting on the national debt.  It dosen't take the world's greatest pessimist or cynic to envisage the government in these circumstances reneging on the bank deposit guarantee or repaying euro balances in new pesetas worth a fraction of the account's Euro value.

From our website:  Spanish maternity benefit

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