Spoilt for choice - the next bubble to burst

They say hindsight's a wonderful thing but actually, particularly when it comes to money matters, it mostly leaves you rueful and feeling slightly foolish. How come you didn't see that great looming disaster when all the signs were staring you in the face? For example, did you see this last recession coming? The various property crashes we've had in the UK over the years? The dot com boom turning to bust? Or did you spot before anyone else that Japan was going to fall from economic star to the land of the permanent slump overnight? Maybe you did. Because none of these things came out of the blue; there were plenty of warning signs and sceptical voices pointing them out.

It occurs to me that there are some great crashes in the making at this very moment. There are certainly plenty of booms going on. Surely some of these are going to come to a juddering halt and go into reverse causing mayhem. So as we turn towards the last week of 2010 what would you nominate as the most likely boom-to-bust story in the making? What will we be talking about in the next few years like we talk about Greece and Ireland or the Sub Prime crisis? Here are some candidates:
China -

A bit like Japan in the 80s - the turbocharged economy that just continues to move astoundingly upwards and the country that everyone thinks is the future. There are apparently 65 million empty unsold properties in China, making Spain´s million or so property overhang look pretty puny. This article is typical of the sceptical view The China Syndrome - A Building Bubble
Gold -

Up more than 500% in less than a decade. Dinner party conversations about how much Cash4Gold gave you for granny's locket. I don´t see it myself but many people are calling a gold bubble e.g. 11 signs that gold is in a bubble

US Dollar -

A more or less permanent and enormous trade deficit. A massive fiscal deficit and a central bank that prints money for fun. The mother of all bubbles? Scary YouTube video says yes The Dollar Bubble
Government Bonds -

Government bond yields in most countries like Japan, Germany and America have slid and slid as a decades long bull market in sovereign debt has barely paused for breath. Cracks are appearing now though surely?
The Euro -

Sceptics have called this a disaster in waiting since its birth but it hasn't fallen apart yet. Matter of time?

Oil and other commodities -

A two year high for oil - 93€ Are they having a laugh? That can't be sustained with the weak recovery we are having.


Or maybe you think none of the above; everything is cool. Of course, with the possible exception of the Euro which is very much a political issue, these bubbles - if that's what they are - are all related. A super dollar bubble that has been blowing ever bigger since the 70s.

For what it's worth I think the Euro will avoid mayhem and destruction because the politicians will do whatever it takes to avoid a collapse however much it costs their taxpayers. I don't think the high gold price is a bubble even though, short term, there is a risk of a correction as interest rates rise next year. Oil and commodity prices merely reflect the inflationary consequences of the policy choices made by the US and China which lie at the heart of the whole show. The question is not "will it all end in tears?" but when and who will start blubbing first. I am not even going to hazard a guess though I can easily see the US Treasury market unravelling before the great China crash.

Latest article on the Advoco website covers these sort of themes in a review of the prospects for investors in 2011 What Should You Do With Your Savings in 2011
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One Great Idea

It's one of this little irritants of modern life - the ban on taking liquids through airport security. Unless you want to shrivel and dry up on your journey, it's a choice between buying a bottle of water from one of the shops on the departures side or seeing what those nice people from Ryanair (or whomever) are charging these days for a bottle of water.

Choosing the former option the other day as I waited to board my flight to Spain, I stumbled across the option of buying One Water from the Duty Free shop. It's spring water from Wales and, besides being considerably cheaper that the French stuff on offer from WH Smiths, all of the profits from its sale go to clean water projects in Africa. Specifically funding Playpumps - these are pumps driven by the power of a children's roundabout which deliver clean water from underground aquifers. A look at the website http://www.onedifference.org/ explained a bit more about the company and it's quite a story. Since it's been going since 2004 you may well have heard of it so I won't repeat the facts which you can read on the website, but a couple of things did occur to me:

- more and more charity, particularly relating to developmental and environmental issues, is getting interwoven with business. As an example look at the plethora of Fair Trade type logos you see in the supermarkets; this is straightforward commerce but with an ethical twist. The time when all green and anti-poverty campaigning groups used to instinctively line up against "big business" and hated multi-nationals seems to have passed. They have seen the benefit of harnessing the power of capitalism for their own ends. Good to see for someone like me who is a free market capitalist through and through but is also acutely conscious of environmental and poverty issues.

- as a general rule I find bottled water annoying and in fact somewhat immoral. I cringe at the amount of money and resources that is wasted on packaging, advertising, transporting stuff that is no better than tap water. Certainly anyone with any pretensions of caring about the environment or global warming should not buy bottled water. Maybe I am missing something but it's a view I have always held. Now that I have found a bottled water which grew out of a great idea and supports a great objective I can soften my opinion. I will still only ever buy a bottle if I have to, but I will always look for the One label. You can like One water on Facebook too http://www.facebook.com/onedifference.

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EU bonus curbs are bad for Britain

Banker-bashing - it’s become a December ritual to rank up there with carol singing and Christmas lights. Investment banks announcing big bonus pots inevitably attract criticism of the “greedy casino capitalist fat cat” variety, particularly from politicians perhaps keen to deflect critical reviews of their own performance and economic management.

This year the EU has weighed in with some new rules limiting the amount of bonus that can be paid in hard cash and also restricting the right of the recipient to cash in all of their bonus for several years. It’s an easy sell for the Eurocrats politically – few voters are keen to see bankers getting big bonuses, particularly when they amount to rewards for failure (AIB which almost bankrupted Ireland tried to pay out €40 million in bonuses).

But nevertheless the new restrictions are a clear erosion of freedom – the right of private organisations to pay their staff how they see fit – and deserve some scrutiny. The excuse for their introduction is the “systemic” risk posed by banks; the idea that if banks pay their staff big cash bonuses, this will encourage excessive risk taking and sow the seeds of future bailouts and crashes.

However many studies into the subject have failed to find a link between bonus systems and risk taking at banks. I just read a great book about the collapse of Lehmans (“A Colossal Failure of Common Sense”). It is scathing about the bank but doesn’t mention anything about cash bonuses being the problem – in fact Lehmans always paid its bonuses mostly in shares, just the like the new rules propose. If it is felt that banks pose a systemic risk this should be tackled (and is being tackled) in the right way – requiring they put up a bigger capital buffer as a requirement of doing business – not in a politically motivated attempt to stigmatise bank employees.

There is of course a hidden subtext behind the unjustified attack which will undoubtedly contribute to an erosion of the City’s competitive position as a financial centre. Our European “friends” have long been envious of the power of London which was supposed to decline when the Euro came in but actually thrived. The financial crisis has been a great opportunity for left-leaning, anti-capitalist and unelected Europeans to lay into one of the UK’s main strategic industries. The British government should be doing everything possible to delay and block these new rules.

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‘Tis the season to pay Spanish taxes

A rather dull topic this week but an important one for anyone with property in Spain, because the deadline is looming for declaring non resident taxes. All Spanish income tax declarations for non residents (modelo 210) have to be in by 31st December. The tax is collected either directly from the taxpayer’s bank account on the last day of the year or it can be paid in cash at the bank, with the completed modelo 210.

Resident property owners don’t have to pay this tax but it is worth noting that the Spanish tax office will not consider you a resident unless you have registered as such and filed at least one tax return (even if it is a “nil” return with no tax paid).

Also be aware that the system for non resident property owners who rent out their Spanish homes has changed. As in previous years the annual modelo 210 is not appropriate if you actually earn rental income – you are supposed to file quarterly form 215s. The change is that this year, for the first time, expenses “exclusively relating to the rental” can be claimed against the gross income. Rates (IBI), agents’ fees and advertising costs would fit under this category.

Back to the modelos 210 which non resident property owners have to declare if they don’t rent out. Full chapter and verse on the tax can be found on our website which has a special page (Spanish Tax Form 210) explaining all about it and giving details of our service where we will do it all for you for 30€.

Alternatively you can do it yourself - it is not a particularly complicated form to fill in and you can download it from the Agencia Tributaria’s website here. Remember that you have to register first before you declare (modelo 30). You pay it at the bank, but you will need to fix Agencia Tributaria identification stickers on the form before the bank will accept it. These stickers can be obtained from the Agencia Tributaria offices simply by showing your NIE (once you are registered with them).

The advantage of our service is that you can do it all online / by email even if you are not in Spain, and that includes the registration process. We even allow clients to settle our bill in pounds to a UK bank account.

Zapatero gets the message

If he means what he says (a big if since he is a politician) it seems like the Spanish PM, Jose Zapatero, has finally got the message. At a meeting with business leaders to discuss reforms this week he said all the right things:

Zapatero accepts the need to accelerate reforms

He's talking about reforming pensions by February and restructuring the weakest savings banks by Christmas. In addition he says that regional governments, who account for about half of Spain's public spending, must start reporting their deficit-cutting progress every quarter.

Up until now he has dragged his feet on reforms, mindful of how unpopular they are on the left of his party and indeed with the electorate as a whole who I suspect mostly don't accept that things need to change if Spain is going to survive and compete. Now Zapatero talks about "accelerating reforms to the max" ... "whatever the personal cost". His new-found zeal as a reformer presumably owes its origin to the Irish crisis and the widespread view that Spain could go the same way ("The difference between Spain and Ireland is timing").

Another reason for urgency is the need to restore some credibility ahead of the first 4 months of 2011 when, according to Barclays, Spain and its banks need to raise 70bn€ in the bond markets, which they think will lead it to ask for a bail-out next Spring. Sounds plausible if you think Zapatero' reforms are too little too late, the Spanish banks are in worse shape than they admit and that austerity measures announced so far will push the economy back into recession. In this case now would be a good time to reduce your exposure to the Euro (or even short it if you are feeling brave) because this will be a calamitous bail-out too far for the currency to bear. On the other hand European leaders know this and may have a few tricks up their sleeves to ensure Spain pulls through e.g. I could easily see the ECB printing money to buy Spanish government or bank debt. Whatever happens it's going to be an interesting 2011.

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The difference between Spain and Ireland is timing

So Ireland finally caved in and went to the EU and the IMF for a loan. The point for Spain though, is will they eventually be brought down by the same pressures that did for the Irish?

The consensus appears to be no it won't. The markets and most commentators seem to accept that Spain is a different proposition and can pay its way. At an important bond auction last week, in the midst of the Irish uncertainty, Spain did manage to sell its latest batch of debt for an acceptable yield (10 year funding cost them 4.6%). There are good reasons to think that Spain is in a much stronger position:

Ireland's economy has shrunk more than any other in the EU economy during the crisis, shows no sign of recovering and the fiscal position of the government (excluding bank bail outs) is getting worse. Spain's economy has at least stabilised in 2010 and is at least not shrinking (Q3 GDP Spanish growth was 0%). The government's deficit as a % of GDP is narrowing to single figures and the government has set up major public spending cuts and tax rises to bring it down further.

Ireland was sunk by its banking sector more so than its public sector debt. In 2007 the Irish public sector deficit was the lowest in the EU at 25% of GDP and even with the crisis had only risen to just over 60% this year. However in 2010 the Irish deficit has ballooned to a remarkable 32% mainly as a result of the cost of bank bailouts, principally the AIB and the Bank of Ireland.

The markets just did not accept that the Irish could afford the guarantees given to these banks - the government had guaranteed 100% of their deposits and made some commitments to the bondholders of backing these bank. Ireland could not afford a bank bailout and get its deficit under control at the same time.

So, Spain in the clear? Not quite. There are some worrying similarities between Spain and Ireland's predicament:

- both economies are stagnating even before austerity cuts and tax rises have started to bite. Neither have the option of devaluing their currency to boost exports as they are stuck in the Euro.

- both not only had massive house price booms and bust they are both (unlike say the UK) still suffering the aftermath in terms of mountains of unsold properties dragging down prices

- Spain has its bank problems too. See Spain's economic crisis turns nasty

- Spain and Ireland have both lost control of their monetary policy so cannot engage in Quantitative Easing policies like the UK and US have done

- Spain is struggling to make its budget deficit-narrowing plans work (partly because tax revenues are stagnating and partly because the autonomous regions are not cutting spending to plan)

- if it were to suffer a double dip Spain would have nowhere to turn. In 2008/9 the government was able to spend its way to prevent the worst of the recession and even then it was pretty awful.

So if both economies are in the same predicament - deficits, austerity, stagnation, stuck in a Euro straitjacket - what sets Spain apart? The markets seems to accept that the scale of the Irish banks' problem set it apart. But I have my suspicions that Spain is more vulnerable than it appears on this front. The banks avoided much of the pain of the housing market crash by dodgy accounting and putting off foreclosures. They have in any case become the most reliant in Europe on borrowing cheaply from the European Central Bank. Another spiral down in house properties and an increase in repossessions - hardly outlying propositions - and the game could be up. Ireland today, Spain tomorrow? Watch the housing market.

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Calculating the autonomo tax burden

Autonomos retain their expenses allowances

I spotted this news article in the Spanish press:

http://www.europapress.es/economia/fiscal-00347/noticia-economia-fiscal-gobierno-mantiene-rebaja-tributacion-modulos-2011-pymes-autonomos-20101111123251.html

In essence the message is all in the title and the article doesn't add that much: the government keeps the 5% deduction for small and medium-sized enterprises (SMEs) and autonomos (self-employed) for 2011. This refers to a rule that can save autonomos money if they do their quarterly "modelos" correctly i.e. return a simplified "objective" declaration of their business profits rather than the full version. This allows them to report a taxable profit equal to income minus allowable expenses minus a further 5% of net income as an additional expense allowance. The idea is that the small business will have expenses which they cannot easily claim because of a lack of receipts or justification and this allowance makes up for it.

In a sense it is more than necessary because otherwise the system of what is and what is not deductible in terms of business expenses is quite harsh particularly when compared to the UK. There is a full guide on our website (autonomo expenses guide) but as examples :

- if a self employed businessman flies to London on business the flight can only be claimed as an expense if it is demonstrably 100% business-related. If the spouse travels or there is any day spent away from business then the whole cost of the trip is disallowed. The assumption is that the trip has been at least in part for pleasure.

- it is routine in the UK to claim for business lunches and entertaining but practically verboten in Spain

Reading the article, the authorities are making it sound like retention of the 5% deduction is a temporary measure because of the crisis. It could be removed when (if) things pick up for the Spanish small business sector. With Spanish GDP growth coming in at an invisible 0% for Q3 it looks like business needs all the help it can get.