Month: March 2012

With the U.K. base interest rate at a record low of 0.5%, many mortgage payers have given up chasing special deals and have reverted to their lenders’ standard variable rates (SVR). However, the Halifax is raising the cap on its SVR from April 2012. Does this signal the beginning of a move by other lenders to raise their SVRs?

The Halifax will increase the cap on its SVR from 3% above base rate to 3.75% above base rate from April 2012, although the actual SVR will remain unchanged. Currently, only 40,000 borrowers are affected by the change. But, with an estimated 1 million Halifax borrowers currently on its SVR, it can only be a matter of time before further changes are made.

The Halifax differs from most major lenders because its terms and condition allow it to change its SVR cap simply by giving borrowers one month’s notice of the change. Affected borrowers can repay their mortgage within 3 months without incurring early redemption penalties. Other major lenders with capped SVRs, Lloyds TSB/C&G and Nationwide, have no clause in their contracts allowing a similar change. A large number of their existing borrowers are enjoying a capped SVR of 2.5%, although new borrowers and those who have transferred to a new product have a new “revert to” rate of 3.99%.

Halifax recently brought in a new Homeowner Variable Rate of 3.99% for new mortgages. It seems likely that, over the coming months, it will bring its SVR in to line with this new rate. It is highly unlikely that the Halifax would risk the adverse publicity from the change in the capped rate simply to leave rates unchanged or to raise the SVR for a relatively low number of borrowers.

Impact on Borrowers:

The weak economy, combined with lenders reluctance to extend credit, means that borrowers affected by a change in the Halifax SVR may struggle to find an alternative source of finance. They could be stuck with higher monthly payments. On a £150,000 interest-only mortgage, a rise from 3.5% to 3.99% would equate to an additional £735 per year in mortgage payments. The knock-on effect is that affected borrowers would, at the very least, have less disposable income. Some borrowers, already under pressure in the current economy, may struggle to maintain their mortgage payments, leading to a potential increase in repossessions.

Impact on Other Lenders:

When considering whether the Halifax is leading the charge for other lenders to raise their SVRs, it is worth noting that most other mortgage companies do not have the flexibility to make such a change, due to the terms of their mortgage contracts. In addition, most major lenders currently have an SVR lying between 3.89% and 4.24%. It is likely that the Halifax’s increase in its SVR cap will simply allow it to bring its SVR in to line with other lenders’ current rates. This makes it unlikely that we will see a surge in SVRs until the base rate begins to increase. Financial analysts predict that the base rate will remain low for at least another 2 years.

The borrowers most at risk of SVR rises are those whose lenders are no longer lending to new customers or whose mortgages are sold to another company. This is exemplified by the Bank of Scotland’s move to an SVR of 4.95%. Bank of Scotland is now part of the Lloyds Banking Group and no new mortgages are being issued under this brand.

In Summary:

While the Halifax’s increase in its SVR cap is potentially bad news for its current borrowers, it is unlikely to signify a trend across the board.

Guest post contributed by freelance finance writer Elizabeth Goldman on behalf of Everest FX where you can learn forex and read about different forex strategies. The views and opinions expressed are of the writer and do not necessarily represent those held by Everest FX or Countingpips.com

Dollar Index Technical Update

• The USD-X has attempted to break beneath the pevious swing low and subsequently gained support at the confluence 78.20 area which has 38.2 ret and a FE61.8 expansions aligned with structure.
• The bullish engulfing candle which followed, after a failure to sustain the break lower, gave good follow through after an initial hesitation doji day.
• EURUSD price action is pointing towards further potential downside if the  1.3171 area can be broken below on a daily basis.  This would see associated upside on the index.
• This move higher has us looking towards potential resistance with price now close to the 38.2% retrace of the major swing lower around 79.50.  This wave began mid January through to early this week and has price pivot zone interaction.
• A failure to hold below the above technical resistance level would see the 80.00 psychological round number and the 50% retrace of the aforementioned wave come into play.

The Bulgarian National Bank announced on the 29th of February that its base interest rate would be reduced by 3 basis points to 0.15% as of 1 March 2012, compared to the previous rate of 0.18% set for February, and 0.22%, set in December for January.  The March rate of 0.15% compares to 0.18% in March 2011, 0.18% in March 2010, and 3.49% in March 2009.  Bulgaria reported inflation of 2.8% in December last year.  The Bulgarian economy was unchanged in 3Q11 (0.3% in 2Q11), placing annual GDP growth at 1.3% (2.0% in 2Q11).  Bulgaria's currency, the Bulgarian Lev (BGN), is pegged at 1.95 against the Euro; the USDBGN exchange rate last traded around 1.49.

Following is a list of all the headlines on Central Bank News during the month of February. The most notable developments during the month included the ECB’s second LTRO, China’s RRR cut, further quantitative easing from the Bank of Japan and Bank of England, and a number of releases from Central Bank News on the new monetary policy rate indexes.

Yelp began trading today on the New York Stock Exchange. The San Francisco based company sold 7.15m shares in the IPO that was priced last night at $15 per share, that makes the total amount raised to $107M. Like the several tech companies went public at the end of last year, Yelp isn’t profitable yet and has high operating costs. It had a loss of $1.10 per share in 2011 on revenue of $83.3M, and 64c loss per share in 2010 on revenue of $47.7M. 70% of Yelp’s revenue come from local advertising and another 21% come from national advertising.But if history is any guide, none of the concerns stopped the recent tech IPO’s from popping chart on the first day of trading. Yelp’s indirect competitor Groupon received lots of criticisms from investors but still jumped 31% in its November 2011 debut, and Yelp opened today above $24, which is more than 60% above the IPO price.

AT&T announced it will start slowing speed for mobile users who exceed 3GB/month, citing rising mobile traffic has been limiting its network capacity. The wireless carrier received piles of customer complaints about slowing data speed and hopes this announcement will offer clarity. CEO Randall Stephenson said the company expected the T-Mobile acquisition would add network capacity, but the regulatory opposition to the deal left AT&T with less time for network expansion.All national carriers are facing the network squeeze. Verizon Wireless ended the unlimited data offering last July and took away the long running New Every Two discount on phones. T-Mobile canceled the unlimited data plan in April 2011. Sprint remains the only one with unlimited data available for new customers.

25 out of 27 European Union leaders signed the fiscal treaty in Brussels today. The treaty aims to monitor budget discipline by imposing automatic corrections of deficits that fall away from agenda and will start to take effect on Jan 1, 2013.The EU leaders’ effort to coordinate came in the day after Eurozone reported another record high jobless rate. Among the 17 countries using the euro, jobless rate climbed to 10.7% in Jan followed a slight upward revision in Dec to 10.6%. Spain continues to hold the highest unemployment rate in the Eurozone at 23.3%. Austria sits the lowest on the spectrum at only 4%. Italy, which is going through the second recession in four years, has its unemployment rate rose to 9.2% in Jan from 8.9% in Dec.

Insight into this Molydenum company’s Q4 2011 earnings and business outlook from Chief Executive Officer Kevin Loughrey.

By MoneyMorning.com.au

For the ordinary person, life didn’t change a jot from pre-history to around 1800.

It didn’t matter whether you were born in bucolic 17th century England or a Stone Age cave. Your lot in life would be hardscrabble toil, a cramped dirt-floor home and a swift death at the age of around 30. It would be the same life as your grandparents and your grandchildren.

Why didn’t 10,000 years of civilisation improve people’s living conditions? Because wealth comes from work per person, and work per person comes from innovation. And the process of innovation back then was agonisingly slow. Hundreds and thousands of years separated breakthroughs like stone tools, agriculture, iron ploughs and sailing ships.

Slow progress would never be enough to improve man’s lot because something else instantly pulled down average living standards – children. Bigger families and bigger populations kept humanity at starvation level for thousands of years. So even though we gradually built great civilisations and towering cathedrals, the ordinary person fought a constant battle for his family’s survival.

So the rate of technological advance was the crucial factor. When technology improved slowly, general living standards couldn’t rise. Before 1800 the economy was like any other ecological habitat. Any improvement in conditions could only be temporary, because more mouths pulled living standards back to subsistence level in the long run. The stock of new ideas grew, but it grew too slowly. It couldn’t outrun the birth rate. Better farms led to bigger farm families, and not idle farmers.

Mankind was caught in a trap. To escape infant mortality and dirt floors, we needed new ideas. We needed to speed up the adoption of new technologies, new rules and new values.

The change finally came in Britain, at around 1800. It was the crucial turning point in human history. That’s where the ‘birth rate’ of new ideas passed population growth. Ideas are like families: they propagate and they proliferate. They spark off each other to form newer ideas, and those ideas do the same, and on and on exponentially.

From 1800 on, new ideas created wealth faster than population growth could take it away. Ideas had the momentum on their side, and since then new technologies and rules and values have created wealth at an accelerating pace. Before 1800, wealth per person stayed more or less static. Now we’re ten to 20 times better off than before, and our wealth doubles every generation or two. Humanity has sprung the trap.

But why Britain? And why then?

There are plenty of theories. But one writer – Deirdre McCloskey – thinks it all comes down to cultural values.

McCloskey is a scholar of economic history, and she believes that the revolution in living standards ultimately stemmed from a change in attitude towards commerce and the pursuit of wealth.

Economists think in terms of what’s calculable: trade volumes; average height; tonnes of grain. McCloskey is trying to move the economic conversation towards, well, human conversation. She argues that words and values are badly under appreciated by economic historians. Culture and attitudes are a powerful force, she says, and they shape how individuals choose to live their lives.

Why does McCloskey believe that causation ran from rhetoric to wealth, rather than the other way around? She reaches her answer by carefully dismissing the other explanations offered, leaving her culture story as the last man standing.

It wasn’t down to property rights – these had been around for hundreds of years. It wasn’t about the empire either – imperialism wasn’t a new development, it didn’t enrich the ‘mother country’, and also the timing was wrong. Foreign trade was too small and it was prevalent everywhere.

As for religion, Catholics prospered alongside Protestants in bourgeois societies. And science? British science was, if anything, behind China and Arabia’s. “In short,” says McCloskey, “the Europeans were not economically special until about 1700.”

So that just leaves a change in attitudes. The pre-industrial world’s hostility towards and scorn for commerce cannot be underestimated. Status came from the royal court, the battlefield or the church. Dealing and trading was seen as vulgar. To buy and sell for profit was to take advantage of others – in the same way that usury was strictly banned by canon law.

In France or Spain at the time, a nobleman caught engaging in commerce could be stripped of his rank. In Confucian China, merchants were the fourth and lowest of the social classes.

Trading was seen as a threat to the old order. Thomas More typified 1516′s view of merchants: “They think up… all ways and means… of keeping what they have heaped up through underhanded deals, and then taking advantage of the poor by buying their labour and toil as cheaply as possible… these depraved creatures.”

It wasn’t until the 18th and 19th centuries, that Dutch and then British culture began to treat merchants and townspeople with respect for the very first time. There came to be a new dignity in making, building, inventing, and profiting where there was none before.

At around that time the first texts in ‘political economy’ were published, mainly in England and Scotland. Adam Smith’s ‘The Wealth of Nations’ in 1776 could be seen as a manifesto for the new bourgeois order. It explained clearly for the first time how grubby traders improve the nation while they enrich themselves. Economics was the new philosophy of a confident merchant society.

Even the language changed. In Shakespeare’s plays, the only bourgeois characters are fools or worse, like Antonio or Shylock. They don’t even feature in Jane Austen’s rarefied worlds. When Shakespeare wrote the word ‘honest’ he meant noble, in an aristocratic sense. By the 18th century in Britain it came to mean truth-telling – the merchant’s virtue of reliability.

British society was learning the first lesson of economics: trade can be a ‘positive sum game’. As McCloskey puts it, “By the new, pro-bourgeois talk, the positive-sum game was freed partly from zero-sum politics.”

The novel idea that decent people could make profits took root. Aristocratic cultural dominance was coming to an end. That freed both landed gentry and lowly artisans. With the stigma removed, people ‘broke rank’ and came together to pursue opportunities and ideas, which led to further inventions and further opportunities.

Cultural barriers had kept innovation hemmed in. When these dissolved, ideas were finally free to proliferate. So the new culture made all the difference between ideas forming slowly and in isolation; or quickly, and together.

In return, the merchants made Britain stunningly rich. The newly respectable middle class bought and sold and invented a new type of economy. They built machines and cities and they made Britain the centre of the world.

Their values spread and eventually destroyed the feudal order from Tokyo to New England. French bourgeois, German burghers and American freeholders took control of their nations. And the gentry didn’t stand a chance against the inventive, trading, scheming, prospering townsfolk.

Napoleon sneered that Britain was “a nation of shopkeepers”, and he was right. But British shopkeepers could innovate and trade their way to a better life. It might be that British culture harnessed the potential of ordinary people, and invented a new world in the process.

Séan Keyes
Contributing Editor, MoneyWeek (UK)

Publisher’s Note: This article originally appeared in MoneyWeek (UK)

From the Archives…

Gold Shares vs. Gold Futures – Lessons From a Scandal
2012-02-24 – Dan Denning

2012 – The Year Gold Exploration Stocks Explode
2012-02-23 – Dr. Alex Cowie

Why the Australian Economy is Much Weaker than the RBA Thinks
2012-02-22 – Greg Canavan

Aussie Implications From a Greek Default
2012-02-21 – Dan Denning

Opportunities for Government Policy Profiteers
2012-02-20 – Nick Hubble

How Britain’s Cultural Revolution Transformed the World

By MoneyMorning.com.au

Reuters reported last year that Bert Hoffman, World Bank chief economist for East Asia and Pacific is confident business and bank and economic managers in China have it all under control.

He’s so convinced China’s central planners can bring about a soft landing he said…

‘On balance, we believe that while there are issues (in China), they are being managed and the magnitude of those issues does not add up to something that would lead necessarily to a major slowdown as some have talked about.’

It may look like the People’s Bank of China is able to control the economy. But its China’s wealthy that control the central bank.

Here’s how.

China has a country of 1.3 billion people. Out of those, 590,000 make up the richest people in China. A tiny 0.5% of the population. Together these ultra-wealthy own $2.7 trillion of assets, or roughly $4.57 billion per person.

In fact, China officials care most about these super rich. Looked at another way, combined they possess the buying power to potentially pay off one-sixth of the US national debt.

And this group of rich Chinese could be driving the latest bank policy.

In February, the People’s Bank of China (PBOC) lowered the reserve requirement ratio (RRR) by 0.5% to 20.5%. At face value it looks like the PBOC is doing it simply to keep the Chinese credit binge going.

Or, it could be because actual cash is leaving the banking system in record numbers. This is known as ‘capital flight‘, when vast amounts of cash leave the banks. This is important because capital flight sucks the liquidity out of the financial system. How? By taking out deposits that ‘balance’ the loans on a bank’s books.

The Wall Street Journal wrote earlier this year:

‘Estimates of capital flight are sketchy, but it appears there was $34 billion of it in the third quarter of last year and $100 billion in the fourth.’

Okay, so $100 billion is barely 0.005% of the combined wealth of China’s richest citizens. But China has extremely strict controls on how much money ‘leaves’ China.

Firstly, no ordinary person can take more than RMB20,000 in cash out of the country… unless of course you’re heading to Macau – China’s government-controlled version of Las Vegas.

If the report from the Financial Times is right, some Chinese have worked out how to get around the limit.

Gambling in the casinos is up 35% in January. While it’s easy to blame it on Chinese New Year celebrations… there’s a little more to the story. After the New Year’s celebrations had ended, the FT wrote:

‘[it’s]… widely believed to be another way to get money out of China, evading the legal limit on cash taken out of the country by gambling on credit and then receiving any proceeds on (foreign currency) cash outside China.’

Again, it’s still only small amount of yuan leaving China. But it could be an indicator of what’s to come.

Victor Shih, a political economics from Northwestern University in the US, estimates the Chinese banking system could handle half a trillion dollars due to capital flight.

But should it continue, Shih anticipates up to a trillion dollars could leave China’s grasp and see the government lower the RRR to 5% or 6% to combat the lack of cash left at the banks.

This means for now, China has a ‘cushion’ of roughly a trillion US dollars. That’s a lot of money. It’s the equivalent to 15% of China’s yearly gross domestic product.

However he predicts the real problem, is those who follow the ‘smart money’, China’s wealthiest 1%:

‘Sizeable outflows from the smart money would see the remaining 9% of top 10% of households follow the smart money.’

Meaning, if the rich see the super-rich moving their assets out of the country, they’ll quickly follow suit.

This exodus of cash could potentially cripple the Chinese banking system. Simply because the loans in Chinese banks don’t really have an end date. They’re either paid or not. So banks constantly ‘roll over’ bad debts. According to Shih:

‘A lot of loans in China are in reality non performing, they just get rolled over, time and time again, so they don’t ever get paid back. So you have a deposit base shrinking and on the asset side the loans are still there which means after a while you have illiquid banks.’

And should this happen, Shih reckons China’s authorities won’t be able to save China’s banks and recapitalise them. ‘China can’t liquidate its entire $3 trillion foreign exchange portfolio… some of it is already invested in Chinese banks and Chinese institutions.’

‘Chinese bank share prices would completely collapse if the Foreign exchange itself began to sell Chinese bank shares…’

But Shih is quick to point out that a capital flight of this level is more a black swan type of event. He says, ‘It’s a tail risk, but one investors should be aware of.’

In that case, what would cause the super-rich to move their cash out of China?

To protect their investments.

When there’s no longer a return on investment, the rich folks would start to move their cash out of China.

And that could have a huge effect on the Chinese economy.

One trillion dollars leaving the banking system may seem farfetched… but if it happens, a capital flight of this size could be the trigger for an economic crisis in China.

Shae Smith
Editor, Money Weekend

The Most Important Story This Week…

Economics teaches us that prices are a signal. It stands to reason then, that the price of oil – the most important commodity in the world – is the most crucial signal to watch. A rising price spells trouble because so much economic activity is dependent on cheap oil. Everyone will feel a rising oil price painfully. It means expensive petrol. Higher food bills. Less air travel. Less discretionary income to spend.

The only way to benefit from a higher oil price is to have an investment correlated to that same price. Trading oil futures is for the hedge funds and investment banks. But oil stocks are within reach of even the most modest retail investor. And right now, these stocks are trading at depressed prices. Many people are risk averse due to the state of the world economy. But energy is a sure bet in one sense. There is no economy without energy: that means guaranteed demand. Low stock prices? A rising oil price? This makes NOW the best time to move into energy, according to our resource specialist Dr. Alex Cowie in Higher Oil Prices – Government Guaranteed.

Other Highlights This Week…

Dan Denning on When Banks and Bonds Go Pop: “The financial system is surviving on massive air/money pumping by central banks to prevent debt deflation and outright collapse. Central banks – at the very centre of the world system they have created – have taken extraordinary measures without precedent to prevent that world from crashing in around them.”

Matthew Partridge on How Expensive Oil Could Hit the Global Economy: “You can also look at oil companies, and shale gas in particular. While it may not be a miracle cure, that doesn’t mean the companies involved can’t profit from the hunt for alternative sources of oil.”

Kris Sayce on Why You’ll Want to Watch This ‘Bad’ Retail Stock Very Closely: “But a time comes when a market is saturated. In the case of retail businesses, it usually means it has opened as many stores as is economically possible, without it having a negative impact on the business. That’s when management has a choice. Do they stop the business growing or do they look at other opportunities?”

Greg Canavan on Gold’s Down… But Still Our Favourite Asset in Today’s Market: “Gold is insurance against the stupidity and vanity of central bankers and politicians. End of story. Even after gold took a beating last night, it’s still the investment that will offer you protection in this bear market.”

Chinese Banks: Will Missing Yuan Trigger a Capital Flight of China’s Black Swan?