The Joy of Mince

Congratulations to Greggs, the bakers, who enjoyed a bumper Christmas thanks to their mince pies.

Customers were chomping through a million a week during the Christmas period, a 6% rise on the previous year.

Overall sales for 2009 were 5% higher than 2008.

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Virgin Enters Retail Banking

Virgin Money today acquired Church House Trust (a regional bank) for just over £12M, with a plan to inject a further £37M.

This acquisition offers Virgin the opportunity to expand into retail banking, enabling it to offer mortgages and deposit accounts.

It is expected that Virgin Money will change its name to Virgin Bank during 2010.

However, this is not the first time the Virgin have been involved in the mortgage business. Virgin once had a JV with the Royal Bank of Scotland (RBS), and offered the "Virgin One Account" mortgage. In due course RBS took 100% ownership of this.

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Up, Up and Away!

Inflation is on the rise again, the "reliable" and "up to date" Office for National Statistics (ONS) reports that the Consumer Price Index (CPI) has risen to 1.5% in October.

Analysts expect that it may rise to 3% in the coming months.

The Retail Price Index (RPI), which includes housing costs, rose to -0.8% in October, from -1.4% the previous month.

Whatever rate of inflation is followed, the modest rise should be seen as no threat to the economy. A good dose of inflation (not at the levels seen in Zimbabwe) is what the economy needs to inject some life back into it.

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Banking Bonuses

The Conservative Shadow Chancellor, George Osborne, is calling on the government and the Financial Services Authority to ban large cash bonuses for retail bankers; he wants cash bonuses capped at £2K, with the rest of the bonus paid in the form of shares.

The theory being that the £20BN saved could be lent to consumers and businesses.

Fat chance!

Osborne laid out his views at a Reuters, in Canary Wharf.

The cap would only apply to High Street retail banks, and the investment arms of banks that also lend to consumers.

All very well.

However, the dilution of shareholdings (as a result of the issuance of new shares in lieu of bonuses) will not necessarily please the shareholders.

I would also remind the Tories that one of the route causes of well publicised spectacular frauds, such as Enron, was rewarding executives with shares in the company. This provided them with a massive incentive to talk/manipulate the performance of the company up, in order to increase the value of their shares.

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Turner Gets Heavy

Lord Turner, chairman of the Financial Services Authority, last night at the Mansion House launched another attack on the banking industry.

Turner said that bankers faced a future stripped of profitable businesses:

"British citizens will be burdened for many years with either higher taxes or cuts in public services because of an economic crisis ... cooked up in trading rooms where many people earned annual bonuses equal to a lifetime's earnings of some of those suffering the consequences."

He added:

"Top management, in particular of banks involved both in complex trading and retail banking, needs ... to be willing to recognise that there are some profitable activities so unlikely to have a social benefit they should voluntarily walk away from them."

I would make a number of observations:

1 The higher taxes, needed to plug the fiscal black hole, are in part due to the fact that Brown failed to "put something away for a rainy day" during the "years of plenty". Instead he chose to "spend, spend, spend".

2 Where was the FSA during the period of "reckless" lending, when banks "cooked up" these failed schemes?

3 The financial catastrophe is in no small part down to the failure of regulation, emanating from the "bugger's muddle" of the tripartite regulatory system created by Brown.

4 Labour was happy to "schmooze" with the City during years of plenty, and had its fingers in the till earning billions in tax from the profits and pay of the banks/bankers.

5 The country did well out of the years of plenty, we are a far wealthier and more advanced nation than we were 30-40 years ago. This is a direct result of globalisation and freeing of currency flows. The current financial crisis has not set us back 30-40 years; ie we are still better off.

There will always be financial crises, each one different from the other. Turner and the G20 are unlikely to find a panacea that will prevent the next.

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Inflation Steady

Analysts were surprised to day to learn that the Consumer Price Index (CPI) measure of inflation for July has remained steady at 1.8%.

The "experts" had predicted a further fall, indeed the Bank of England are expecting it to fall below 1% at some stage.

However, reality is a cruel mistress and the figure remains stuck at 1.8%.

The Retail Price Index (RPI) measure of inflation (which includes housing costs) rose from -1.6% to -1.4%.

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Inflation Falls

The Consumer Price Index (CPI) has fallen below the Bank of England's 2% target, for the first time since September 2007, to 1.8%.

The alternative Retail Price Index (RPI) measure, which includes housing costs, fell from -1.1% to -1.6% as a result of falls in mortgage costs.

RPI is used to determine some pay deals.

When CPI falls to below 1% (as it is expected to do) Mervyn King (Governor of the Bank of England) will have to write to the Chancellor to explain the fall.

However, before the champagne corks start popping, people should realise that by next year the downward pressure on these measures (as a result of lower mortgage deals and cheaper oil) will have abated and the measures will start to rise again.

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King Clashes With Darling

Mervyn King, Governor of The Bank of England, publicly clashed with Alistair darling at the Mansion House dinner last night over the best way to improve the regulation of the City.

King said:

"It is not sensible to allow large banks to combine high-street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure.

Privately owned and managed institutions that are too big to fail sit uneasily with a market economy."

However, as the Chancellor noted, restricting the size of banks is not that simple.

King also asked for more regulatory power to be given to the Bank:

"We need instruments to prevent the size, leverage, fragility and risk of the financial system from becoming too great. The resulting macro-prudential toolkit will contain a number of instruments to reduce risk, both across the system and over time."

However, the fundamental problem is the tripartite regulatory system which has no effective head. Until the system, which was introduce by Brown, is replaced regulatory issues cannot be satisfactorily addressed.

Unfortunately, as long as Brown is PM, the tripartite system will remain in place.

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Dead Cat Bounce, or Green Shoots?

There are tentative signs of a recovery in the housing market. The Times reports that the Royal Institution of Chartered Surveyors (RICS) have stated that 41% more chartered surveyors are reporting new buyer inquiries rising rather than falling in April, this is the highest reading since August 1999.

RICS also reported that estate agents sold an average of 10.6 properties between February and April, this is up from 9.7 in the three months to March.

On the retail front, the British Retail Consortium (BRC) reported an increase in like for like sales in April of 4.6% (the largest increase in 3 years).

The question is, are these green shoots or merely a dead cat bounce?

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Bigging It Up

On the eve of tomorrow's budget The Times reports that the UK went into deflation for the first time in 50 years:

"The country edged into deflation last month as the RPI (Retail Price Index) measure of inflation tumbled to -0.4 per cent from 0 per cent in February, official figures showed this morning.

This is the first time that RPI inflation, which includes housing costs and is used as a benchmark for UK wage deals, has turned negative since 1960."

As to what the budget will bring it is fair to assume that although the headlines will be "big", as Brown and Darling do what they do best namely "big it up" to the media, the reality will be uninspiring and dreary.

We have already witnessed the headlines wrt Lord Mandy's "electric" car subsidy of £5K. All very nice, but this vehicle at best will not be available for another 5 years.

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Food Inflation

Despite the recent fall in the RPI rate of inflation (which includes housing costs) to 0%, the British Retail Consortium (BRC) report that shop price inflation rose to 2% in March from 1.9% in February.

BRC estimate that within this figure is a food inflation figure of 9%, resulting from a weaker pound attracting foreign buyers of British sourced food.

In the short term it is likely that the major supermarkets will absorb much of this increase. However, as time progresses, they will start to pass this on to the consumer via smaller/poorer quality food products and higher prices.

The outlook for the average Birtish family is not good.

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Dunfermline Building Society "Saved"

The Dunfermline Building Society has been broken up, with its non toxic elements going to the Nationwide Building Society; whilst the taxpayer has bought the toxic assets.

Under the deal the Nationwide absorbs the brand name, £2.3BN of retail deposits, 34 branches and £1.02BN of mortgages.

The taxpayer takes on poor quality buy-to-let loans.

FYI, the Dunfermline Building Society resides not a stone's throw from Gordon Brown's constituency. Fortunately for Brown, with only a few days to go before his much vaunted G20 summit, he will be saved the embarrassment of seeing his local building society going bust.

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RPI Hits Zero

The Retail Price Index (RPI) for February hit 0% for the first time in 49 years, according to government statistics today.

All very well, but why then are prices of life's necessities (eg power, fuel, food, council tax etc) still rising?

Then one needs to consult the Consumer Price Index (CPI), which rose to 3.2% from 3% in January. Mervyn King was forced to write to Alistair Darling to explain why the CPI was still above target of 2%.

All of the above statistics are doubtless fascinating for the politicians, media and chattering classes. However, as they are out of date and indeed do not reflect the reality that people face, their value to the "man in the street" is limited to say the least.

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RPI Falls

The Retail Price Index (RPI) fell to an annual rate of 0.1% in January, giving rise to fears of deflation.

Despite the fall, the cost of living as experienced by those who inhabit the real world (as opposed to the statisticians' virtual reality), feels uncomfortably high.

Power and gas prices have risen significantly over the last year, as have food prices. This year's council tax rises will also be inflation busting, averaging around 4%-5%.

Low "inflation" or not, the actual cost of living remains ruinously high for many families at the moment.

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The Ring of "Strength"

The Times reports that the Icelandic company Baugur (which means "Ring of Strength") is about to fall into administration.

Baugur owns/controls a number of UK retail companies including Iceland, Hamleys, House of Fraser, Goldsmiths, Mappin and Webb, Principles and Whistles.

The move to administration has been brought about by the collapse of talks with Landsbanki, an Icelandic bank, over restructuring Baugur's £1BN debts.

A classic example of the dangers expanding too fast using other people's money.

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The Retail Crunch

Things must be bad in the high street if even the Queen's shop, Fortnum and Mason, is having to lay off staff.

Maybe now the bottom is finally being reached?

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National Lending Scheme

Alistair Darling, exasperated by the banks' refusal to resume lending, is (according to The Times) considering a national lending scheme.

Under the scheme the government would guarantee new lending to businesses, on the condition that it is genuine new lending and not an attempt by the banks to reschedule old loans/debt.

Ironically figures from the Office for National Statistics (ONS) show an unexpected rise of 1.5% in retail sales in the UK last month. Needless to say, the veracity of the figures are being called into question.

Like it or not, unless there are further pro active measures taken by the government and Bank of England, the recession will worsen significantly. Three key measures should be taken instantaneously:

1 Cut interest rates to zero.

2 Initiate a national lending scheme.

3 Initiate a policy of quantitative easing (akin to dropping money from a helicopter), whereby the Bank of England buys debt using government bonds.

These measures will draw a firm line under the rapidly failing economy, and provide the bedrock from which to grow again.

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Halifax Collar Unenforceable

The Times reports that the 3% mortgage "collar" imposed by Halifax on over 500,000 of their tracker mortgage customers, which allows Halifax to evade passing on rate cuts below 3%, may in fact be unenforceable.

Jon Pain, the FSA's retail market manager, said that collars should be included in a lender's key facts illustration (KFI). Halifax, rather oddly, removed the details of its collar from its key facts in 2005.

Mr Pain told the Council of Mortgage Lenders (CML):

"If it is not [included] you run the real risk of both breaching our disclosure requirements and having an unfair contract term you cannot enforce."

The question is will the FSA follow their warning through, if Halifax and others ignore it?

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London Scottish Fails

London Scottish Bank (LSB) went into administration this morning.

LSB specialises in offering fixed rate savings accounts and loans to customers with poor credit histories.

Its structure was somewhat top heavy, it had only 10,000 savers, £250M in deposits but employed 700 people.

In the six months to April 2008, it made a loss of £7.4M.

The Treasury issued a statement guaranteeing all deposits (even those above the FSCS £50K limit):

"The Chancellor has put in place arrangements to ensure that all eligible retail depositors in London Scottish Bank will receive their money in full, including those with balances above the current 50,000 pound FSCS limit."

Shares were suspended at 2.62p.

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Woolworths In Administration

As expected, Woolworths is now in administration. Deloittes, who are acting as administrators will keep the stores open and pay staff in the period up to Christmas; there are expressions of interest in the company.

However, this sorry state of affairs could have been avoided if certain lenders had not blocked the company's plans for selling the retail unit to Hilco.

The lenders who blocked the plans included Barclays, and Bank of Ireland subsidiary Burdale Financial.

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