Queens Speech - letter to Santa!

So you need a new law to get pupils a good education? Or one to halve the debts the Government has built up?

It's like saying that I will get up at 7 o'clock every morning - just do it man!

No fiscal Golden Rule has remained unbroken, and now we have the news that borrowing is nearly the same level as this country's GDP. Include unfunded public sector pensions, and its twice GDP.

Which means that spending will be cut, and tax WILL rise. Maybe some inflation too - after all VAT goes back up to 17.5% on 1 January (Happy New Year from Team GB). The highest rate of income tax is already set for 50% from April 2010. Maybe it will go higher yet.

And - to depress us more - analysis of all the recessions in the last century shows us that they last between 47 and 55 months. We, by the way, are at about month 19. Nationwide expects house prices to move on down next year as unemployment drives demand down. More good news.

The next 6 months will be characterised by all the political parties spending most of their time and energy on getting elected, and NOT on sorting this out.

Which mean that businesses who are getting by (just) will be further weakened. Many more will fail, especially in the next 3 months. The remainder will see their tax bills rise.

That is, unless they do something about it - to survive (even grow as some of our clients are doing) and minimise their tax. I have lots of cunning plans!

After all, it's not about cheating the taxman - it's about having enough cash to survive. I'm expecting a busy few months. I just don't want to hear people tell me afterwards - "I wish I'd taken your advice". Take it now!

Confidence tricks – has the recession been caused by over confidence?

NatWest has surveyed nine thousand young people about salary expectations. Because of the recession, expectations have dropped. Instead of expecting to earn £70,000 when they are 35, they now only expect to earn £54,000. How’s that for confidence – when an average salary for a 35-year-old is just under £24,000?

In an international study, American students who ranked last in maths abilities ranked first when they asked how they felt about their maths abilities. Their positive thinking had completely deluded them about their actual abilities.

But we want to be confident, and we want our children to be confident as well. We are told regularly that thinking good thoughts will bring good results. Well, we have thought good thoughts over the last decade and look where we are now. We have assumed that the boom would continue. We have closed our eyes to history. And I don’t mean by that the previous centuries, I mean the previous few decades which we have lived through. Why did we assume that the last recession would never be repeated? History does repeat itself.

Yet confidence, and in particular financial confidence, and more particularly the bankers and financiers who broke the system, has at least in part caused the problem that we are now going to be living with for the next umpteen years.

Just because I’m an accountant does not make me a pessimist! It might, I hope make me a realist. That’s that old definition isn’t it – a pessimist is a realist described by an optimist!

Apart from the financial implications of my clients’ actions, I deal with their personal objectives and to some extent their emotions. They are all interrelated. I’ve even done courses and taken qualifications in an attempt to understand why people act the way they do, and to try and find ways to change that when necessary.

As a country we are determined to fill our lives with self belief and good thoughts as a method of driving ourselves towards good outcomes. I think we have caught this disease from over the water. There is a whole industry which started in the United States and is now throughout the Western world which peddles the mantra that if you think bright positive and optimistic thoughts good things will be drawn to you without any further effort on your behalf. It’s not positive thinking, it’s magical thinking.

I do believe that you can influence the way that you act and hence your outcomes by the way you think. And I help people with this. But I do not inculcate them with a belief that they can overcome any obstacle just by wishing it so. I try and give them a realistic outcomes and realistic plans to achieve them. Plans which can be amended and adapted to fit changing circumstances.

As a society, we have not done this in recent years. We have assumed the best, and even worse, assumed we had to do nothing to achieve it.

Individual self-esteem is a good thing based on realism. Perhaps more of this would lead to a community with more chance of achieving realistic goals and with more sense of purpose and values.

Individually, and in businesses, be realistic (not pessimistic!), set realistic goals with some slack in them, and enjoy what you’ve got.

Why banks repackage assets, and what it means for us

It's all about de risking the bank's balance sheet. It's so difficult to decide when bankers really make money because the financial instruments they use are so complex. And look how many dodgy securities they are sitting on at the moment.

So what's a poor banker to do to improve matters? How about selling some of these securities to a brand new offshore company, and lending the company the money to buy them? It gets over the following problem: you have to write down your securities if you don't think you're going to collect on them, and that makes a hit on profits, and worries people. But if you have lent money on a house for example, as long as the repayments are still being made, even if the house is in negative equity, you don't have to write it down on your balance sheet. so if I were a banker, I would be delighted to sell a dodgy asset and get a loan in exchange which I don't have to write down. Is

And this is what has just happened. Barclays had just sold $12 billion worth of securities to a brand new company and lent it just about all the money to buy them. It's bought itself some time. Banks need all the time they can get at the moment.

What does it mean to us? Well, the bank gets a bit safer. That's good. But if the bank has lent its money to this company, it can't lend it to us. So credit has just got a little bit more difficult, and a little bit more expensive all round. and that means that the value of assets you buy with this credit is likely to fall to prop up the price of the assets that Barclays now don't think they will collect on. this deal was done under very, very favourable terms to the lender. Not the actions of a bank that thinks that its assets are worth what it paid for them.

Anyone think that the recession is over?

Boom & bust?

Where is the economy going on? And equally important, in what timescale? I wish I knew!

Unemployment is up a whole 10% in the last quarter to 2.26 million. Yet there has been a bounce in the stock market, and our oh so short term memory is leading us towards the end of the recession. After the stock market collapse last year, people expected a bear market rally and that is what we have had. There has been a bounce in economic activity as businesses were forced to restock after cutting back so sharply last year. But the rally continued, and people have started to question whether this is a bear market after all. They wonder if the recovery is actually genuine. Surely this is what bear market rallies do – they suck in investors, stocks rise, until eventually there aren’t any buyers left, and stocks plummet again.

It’s always wise to consider the fundamentals. Any recovery in corporate earnings is probably short lived, because it has been made by cost-cutting, and by government spending money that we don’t have. At some point the economy must generate growth without the benefit of extra government money fuelling it, and cost-cutting in corporations can only go so far. What cost-cutting does is make life harder for businesses in the future. By all means cut out waste now, but remember on a countrywide scale that firing people leads to higher unemployment, which leads to less spending power, which leads to fewer sales for your company.

The general public is desperately paying off debts as fast as it can, and so are companies. I make no complaint – it’s what people should be doing, but people also need to be aware of the long term implications of this policy. Companies are doing everything they can at the moment to reduce their indebtedness, usually by selling more shares to their shareholders to repay debt. They’re not raising money on the market to invest in future growth. They’re even repaying debt when interest rates are low.
And it can clearly be seen that interest rates are likely to rise – look at the standard variable rate mortgages now, and what a building society will offer you as a fixed rate of two to five years in the future. There is about 1½ percent difference – higher of course. They expect interest rates to rise. So does everybody else.
Which in the long term tends to leads to inflation. The government will be pleased, because then it will be repaying at the enormous amounts of debt that it incurred in bailing out banks etc with cheaper money. We, as taxpayers, should be pleased as well because it will reduce the amount of time that we have to pay interest to the people who have bought this debt. But we as consumers will be paying out through an inflationary period in the longer term.

In the near term, we are still in a recession and there may be some deflation. In short, we’re back to boom and bust.