Pariah nations re-join the global community

187 million new opportunities

A tsunami of pessimism overwhelms the Western world today. The cauldron of war and death in the Middle East, the refugee crisis, Islamist terrorism, Trump’s ascent, increased chances of Brexit, Brazil’s implosion and huge economic uncertainty, to name a few.

Having recently returned from Colombia, I beg to differ. Like most things in life, perspective is all. There, an historic agreement is being forged between the government and the FARC, a terrorist organisation that thrived for 50 years. Although a deadline has been missed, US Secretary of State John Kerry recently gave impetus to the talks, while the double digit growth of tourism reflects the atmosphere of optimism.

Yet Colombia, even with its troubles, was never an international pariah. There is even more of a reason for hopefulness when you look round the globe at previously isolated nations that are now re-joining the international community. Their combined populations add up to 187 million people.

In November 2015 Argentina voted out a government that was nothing but a wealth accumulation machine veiled in a thin film of ideology. President Mauricio Macri now runs a centre-right government that is briskly dismantling the Kirchner legacy by slashing currency and trade controls and normalising relations with the rest of the world, including awkward creditors.

Much more dramatically, Cuba and Iran are heading back into the mainstream. President Barack Obama’s historic visit to Cuba in March marked the end of a Cold War remnant and an official welcome to the West. In truth, changes in Cuba were already well on their way, with the government of pragmatic President Raul Castro sending officials to the West to learn how to run the country better, while economic liberalisation continues apace under the ludicrous state banner of “actualisation” of the system.

Meanwhile, lifting sanctions after a 15 year standoff with the Islamic Republic of Iran is already leading to economic opportunities for Western countries. Few doubt that with 80 million people living there, including a large and educated middle class, there is massive potential.

Still in Asia, Myanmar, a country with a population of over 54 million is also returning to the global system, grappling with a form of democracy and with forecast growth of over 9%.

There are countries whose situations are less clearly positive but where the potential exists for major transformation. Venezuela is still on the US sanctions list. But the opposition Democratic Unity Alliance won two thirds of the seats in Parliament last December. There has been a stand-off with President Nicolas Maduro, the uncharismatic successor to Hugo Chavez, and a military coup is possible. But given the dire state of the economy, even his government has had to confront reality, devaluing the currency and raising fuel prices.

On the economic front, commentators generally focus on the negatives, of which there are indisputably many. However, a record low oil price and low commodity prices benefit consumers and manufacturers. As for the lack of inflation, shoppers are profiting. Employment is at a record high in the UK, while the US has had six years of uninterrupted job gains. Both their governments have realised the need to ensure the working poor share in the good fortune by raising the minimum wage. In fact, California, one of the world’s largest economies, just agreed to raise the minimum wage from $10 to $15 by 2022. For those who argue against these sort of measures, let us remember the capitalist system needs consumers who have the income to consume.

On a multinational level, the Paris climate agreement signed in December 2015 is ground-breaking: 195 countries adopted the first universal, legally binding global climate deal to limit global warming to well below 2 degrees centigrade. The accord is also a pathway to achieving other deals on issues of world importance, such as water scarcity.

I could go on, writing about medical and scientific advances, or about gay couples being able to kiss in public, or about the Starbucks and Googles of this world finally realising they will need to pay tax. Then again gentle reader, perhaps it is enough for all of us to consider our lives and give thanks for what we have.

This column appears in Dialogue, the leadership and management review

Russia’s cash crisis and its Syrian bombing

Hermitage Capital’s Bill Browder speaks

I met a ghost the other day. Bill Browder, last seen in Davos when he was riding high on waves of adulation for his bold bet on Russia’s future, should have been dead. Few opponents of President Vladimir Putin and his favoured oligarchs remain alive, encountering death through startling “heart attacks” and plutonium poisonings.

“The reason I am still alive is that the Putin regime hasn’t figured out a way of killing me where they are sure to get away with it, “says Browder equably.” They have made lots of threats both to kill me and to kidnap me. Unfortunately, they get more brazen by the day so my safety is far from certain.”

His bold claim that Russia will run out of cash by July 2017 must be shortening the odds of his remaining alive: “In simple terms, Russian companies have approximately $600 billion of hard currency debt and the central bank has only $350 billion of reserves (of which I believe that $150 are fake). That means if sanctions aren’t lifted, the debt repayment schedule will deplete the country’s reserves within about 18 months.”

Russia is suffering economically from Western sanctions on the back of its incursions in Crimea and the Ukraine, and even more so from the collapsed oil price. Oil and gas accounted for over 50% of its budget revenues until 2014 – this year it is forecast to be a paltry 35%. A recent agreement between the Russians and the Saudis to boost the price appears to have evaporated.

President Putin is planning major privatisations to boost the state’s coffers, according to the FT, but it is not clear who would buy the substantial stakes. Foreign investors are wary of the regime’s trampling on the rule of law, while oligarchs are keen to keep extra funds safely parked abroad for when they fall out of favour with the regime.

London’s reputation for welcoming Russian money has been heightened by publicity stunts such as the new “Kleptocracy Tour” of London, organised by the Russian Anti-Corruption Foundation and two Western think tanks. Forget Buckingham Palace and Big Ben, this bus weaves its way between the multimillion properties bought by the corrupt elite.

In the summer of 2015 Prime Minister David Cameron announced that he would tackle foreigners investing dirty money in London using anonymous offshore companies. There have been no subsequent announcements. Meanwhile, the report into the poisoning of Alexander Litvinenko in London concluded that the former spy was most likely a victim of a state-sponsored murder sanctioned by President Putin. Yet again no action has been taken.

“The British government has been completely weak-kneed when it comes to standing up to Putin. I attribute it to fear – they believe it is easier to appease a bully than confront him – and greed – many powerful people in this country are feeding at the Russian trough and they don’t want the flow of money to dry up,” claims Browder.

His story is the stuff John Le Carré novels are made of. As Founder and CEO of Hermitage Capital Management, adviser to the largest foreign investment fund in Russia, worth $1 billion in 1997, Browder was a fêted man. Until in 2005 he wasn’t. There appears to be no middle ground in a country where one minute you are clasped to the regime’s bosom in lifelong friendship, and the next you are a mortal enemy whose days are numbered.

Browder’s campaigns against corporate corruption saw him declared a threat to national security and forbidden entry to the country, while the authorities stole $230 million via the Fund’s investment companies. Sergei Magnitsky, the lawyer he hired to investigate the crime, was tortured and killed in custody in November 2009. Since then Browder has dedicated his life to seeking revenge for an innocent man. His missionary zeal resulted in the US Congress passing the 2012 Magnitsky Act, which imposed visa sanctions and asset freezes on those involved in the lawyer’s death.

Browder believes that Putin has stepped up his bombing campaign on the rebels and civilians in Syria in order to create a negotiating position to force the West to withdraw sanctions in relation to Ukraine. (Russia and the US have agreed to enforce a ceasefire in Syria from Saturday, February 27. But the omens are not favourable, given the last time one was attempted it failed, and not all groups fighting in the war have agreed to it).

“Putin has created an existential problem for us by triggering swarms of new refugees. Many EU governments are on the verge of falling because of the refugee crisis. Putin is hoping we will beg him to stop and his condition for stopping is no more sanctions,” says Browder. “Secondarily, in the long term he would like to break up the EU and the best way of doing this is to create the conditions for hard core nationalism, which is another consequence of all the new refugees.”

Other experts agree that Putin’s aim is to make German Chancellor Angela Merkel’s position untenable, given that she is the only leader who can keep the EU united on Russian sanctions and, arguably, hold the EU together in the midst of an existential crisis. Already the Schengen open-border agreement is moribund, Hungary and Poland are evermore hostile to the EU and the political shenanigans around a possible Brexit are an unwelcome and divisive distraction.

Browder disagrees with the widely-held view that Russians are used to suffering under a Tsar-like figure and thus a revolution to unseat Putin, who has been in power for 17 years, is highly unlikely.

“That’s a myth. They have just never been rewarded for bravery because the instruments of state repression have been so effective…If at any moment there is an opening, the Russians will jump on it just like the Ukrainians, Tunisians or Egyptians did with their citizen revolutions,” he says.

Let us hope this brave man is there to see it happen. As Browder writes in the mesmerising book about his struggle, Red Notice, anyone who has read Chekhov, Gogol or Dostoyevsky, knows that Russian stories don’t have happy endings.

If it’s not bust, don’t Brexit

Destroying the Norway/Switzerland myth

The UK is tying itself up in knots over Europe. The pro and anti camps come up with ever more outrageous statements: “If we leave, the UK will float in a sea of isolation comparable to North Korea’s“ vs “The EU costs up to £10m per head of population and is responsible for the death of all puppies.”

In truth, the numbers can be added up in all sorts of honest and/or creative ways to make the case for staying in, or leaving. Even those of us who believe that it is key for the UK’s future to remain within the club are disgusted by the incompetence, waste and corruption within the EU. In the face of this, it is difficult to argue against the emotionally-appealing view of an island utopia, as propounded by Brexit supporters.

But let me, as an immigrant and an adopted Brit, who has lived for longer in London than anywhere else and holds this country dear, give it a try:

1. Stop this fantasising about the UK (population 63.5m) being able to access a “favourable deal” a la Norway (population 5m) or Switzerland (population 8m) if Brexit takes place. Both countries have similar agreements with the EU which give them access to the single market. Except they have no say over regulation, which they have to sign up to, nor a say on product standards. Plus the Swiss do not have unimpeded access to the financial and other services market in the EU, which would be a major blow for the City of London and our services sector as a whole. And, a fact that seems to have been ignored by Brexit proponents, both countries have to abide by free movement of labour rules, meaning they must remain open to EU immigrants.

2. Stop blaming the EU. It is excuse number three in the lexicon of all British governments, as a Minister recently told me. Perhaps it is time to admit publicly that much of the excessive regulation this country suffers from is due to the British civil service’s addiction to gold-plating EU Directives when they turn them into UK legislation.

3. Drop the outmoded argument that the EU is seeking ever closer union and we don’t want to be part of it. The reality on the ground is totally different. Schengen is dead. The migrant cum refugee crisis is seeing the re-emergence of barbed wire and border controls. Meanwhile, the former East bloc countries are not going to join the Euro. In fact, a number of them are becoming ever more hostile to the EU itself, including the largest of them, Poland, which is following in the steps of Hungary’s autocratic government.

4. Get over the inescapable loss of sovereignty. Welcome to a world where even giants like the US and China have to balance national interests, those of their allies and the world economy. Global integration is a fact. The world is coalescing into blocs and we want to be included in treaties like the US-EU Transatlantic Trade and Investment Partnership (TTIP).

5. Britain must become a leading protagonist in the EU, alongside Germany. That is its rightful role. There are a number of EU meetings at which no UK official bothers turning up because our direct interests are not affected, an unspoken policy that started with Gordon Brown’s government, according to top UK civil servants. All meetings are important, not necessarily because of their content, but as a way of cultivating colleagues for future coalitions. A proactive policy will yield results – not least, because the world view of the UK and Germany are much more alike than that of Germany and France, with whom Germany is forced to partner due to the UK’s disengagement.

6. On the security front, the more ties that bind us to our allies in a dangerous world, the better. Sir John Scarlett, former head of spy service MI6 recently wrote in The Times that “British agencies…collaborate intimately with their European partners and benefit greatly from their capabilities.” President Barack Obama has called for the UK to remain in Europe as it gives the US much more confidence about the strength of the transatlantic union, which has made the world a safer and more prosperous place.

Brexit is a siren call. Let us not crash on the rocks, but sail on. And turn up to those meetings, guns blazing and charm turned on.

This article is due to appear in the next issue of Dialogue.

Predicting the Spanish December elections

¡Viva la diferencia!

Spain is different.

In the midst of disillusionment with the usual parties and politicians in Europe and the US, with citizens in France heading off to the far right, voting for Marine Le Pen and her National Front; with those of Poland voting for the Law & Justice Party, which sees Hungary’s anti-democratic government as a role model; with those of Greece…well, dear reader, you get the picture.

What is Spain going to do, with general elections on December 20? After all, Spaniards have more reason to complain than many other nations: tough austerity measures and unemployment over 20%, even with the economic recovery.

But Spain does not move in sync with any country, let alone France, Greece and Poland. The governing Partido Popular despite all the corruption and the charisma black hole of its leader, the country’s Prime Minister, Mariano Rajoy, scores highest in the opinion polls with 27%.

Why? Spaniards are more pragmatic than many of their European neighbours. They’re focusing on the economic revival, which has come about due to hard-hitting austerity measures and labour reforms, helped by a low oil price, the euro’s depreciation and private sector restructuring.

The traditional opposition party, the PSOE or Socialists, whose policies are social democratic, is clinging to second place in the polls with 21%. It suffers from its own corruption scandals and a leader, Pedro Sánchez, whose party is not fully behind him.

Meanwhile, a new party, Ciudadanos (Citizens) is snapping at its heels, scoring 19% in the polls. It stands to be the kingmaker and will likely ally with one of the two traditional parties to govern from 2016.

Yet again, Spain is different. It is the only European country post the crisis to boost a new party whose politics lie squarely in the centre. Cuidadanos is fiscally conservative, while its social policies are liberal; it is pro-business and calls for corporation tax to be lowered. Rumour has it that large Spanish companies have helped fund its coffers. Be that as it may, its high poll results speak for themselves. The leader, Albert Rivera, is a fresh-faced 36-year old Catalan, a useful weapon at a time when Cataluña’s independence and its lack of governability are key issues.

Over the last three years 3,000 companies have moved their headquarters from Cataluña, mainly to Madrid. The pace and size of the companies relocating accelerated this year.

In truth, the fault for the current state of the Catalan question lies just as much on the shoulders of an intransigent, unimaginative Prime Minister. The best result for Spain’s unity and its economic health, which happens to be the most likely result, is either a Socialist/Ciudadanos coalition, or a Popular Party/Ciudadanos coalition, with PM Mariano Rajoy forced out of the picture.

In point of fact there is another protest party, Podemos, but its support in the polls has plummeted to 14% from 28% a year ago. It is led by a pony-tailed academic who has been moving briskly away from the extreme left towards the centre, where the majority of Spaniards feel most comfortable.

On the economic front, growth this year looks like being 3.2% and next year is estimated at 2.7%. The highest sustainable growth rate in Europe. Spain’s stock market may provide a buying opportunity for 2016, with the IBEX index forecast to rise over 12%, according to BNP Paribas.

Moderation, aspiration and consumption are not words that set the world on fire. But for Spain, they are likely to ring true on December 20.

¡Viva la diferencia!

An anti-globalisation duet: Trump & Corbyn

Why domestic bank M&A is set for a boom

As Donald Trump and his toupee continue to ride high in the US presidential opinion polls, I find myself musing on his fellow jockey, UK Labour Party leader Jeremy Corbyn.

Mirror images of each other on the political spectrum, they will never lead their respective countries. Yet the unelectable duo are worth listening to, for they represent large elements of the population that are opposed to the globalised world we live in.

Take their attitude to free trade. Trump calls for a 15% tax for outsourcing jobs and a 20% tax for importing goods, and sees trade deals as “killing American jobs.” He believes trade negotiators are a bunch of “saps” and says he would appoint corporate leaders to do the job properly. Corbyn warns that TTIP, the prospective trade deal between the EU and the US, is nothing but a capitulation to “greedy bankers and multinationals.”

His refusal to campaign for Britain to stay in the EU has, ironically, withdrawn a major weapon from the Conservative government’s armoury for its future referendum. Corbyn and his allies, who embody the discarded remains of the Left’s 1970’s euro scepticism, see the EU as representing the interests of big capital. Rather paradoxical, given that big business sees the EU as excessively defensive of workers’ rights and the progenitor of too many regulatory burdens to protect citizens.

Trump and Corbyn, one 69 years old and the other 66, both fail John Maynard Keynes’s three imperatives for a balanced government. The economist and statesman wrote: ““The political problem of mankind is to combine three things: economic efficiency, social justice and individual liberty….the third needs, tolerance, breadth and appreciation of the excellencies of variety and independence, which prefers, above everything, to give unhindered opportunity to the exceptional and aspiring.”*

For Corbyn, social justice can be achieved without economic efficiency and individual excellence. This would result in a country with not enough profits to pay for a safety net for the disadvantaged. The reality for Trump, who would lay claim to both economic efficiency and individual liberty, is a country where protectionism kills efficiency and individual liberty applies to some, but not all. And certainly not to the roughly 11 million illegal immigrants who water his many lawns and serve in his many restaurants.

Just as surprising as their similarities, are their allies in the anti-globalisation movement. Joining them in the stop-the-world-I-want-to-get-off gang, are financial regulators on both sides of the Atlantic.

The European Central Bank’s post-crisis conventional wisdom is that geographical diversification of multinational banks does not protect against risk and adds a layer of complication. Long gone are the days when banks followed their corporate clients abroad and then proceeded to buy local entities and grow. The European Central Bank “comes out in a rash” when a Spanish bank mentions buying bank assets in emerging economies, affirms a bank CEO. The Federal Reserve in the US takes the same position, according to most accounts.

Regulators learned a lesson from the last financial crisis. It may, of course, not be the right lesson, for every crisis is different – the drying up of wholesale bank funding markets in 2007/2008 was very different from the run on the deposits of 37 banks in the Japanese Empire in 1927.

With foreign expansion off the cards, cost cutting reaching its finale, new digital entrants threatening the traditional business and financial supervisors breathing down their necks, banks will focus on local acquisitions to grow their profits. A domestic M&A boom is forecast for 2016.

Regional movements like those in Cataluña and Scotland are part of the anti-globalisation trend. Allied to the sense of alienation from their existing rulers is an almost blind belief that raising the barriers will lead to paradisiacal economies with full employment.

To these misguided idealists I would add proponents of Brexit, the exit of the UK from the European Union. The world is moving into ever larger trade groupings. Being outside is not a reasonable option for a major country – unless there is an appeal to being emailed instructions from Brussels without having a seat at the table. Norway pays a heavy price for its nominally freestanding position since it is forced to incorporate EU legislation into its own.

In 1944, Keynes warned in the House of Lords against “little Englandism” which pretended that “this small country” could survive by a system of bilateral and barter agreements or by keeping to itself in a harsh and unfriendly world. His words continue to ring true.*

Both Trump and Corbyn remind me of the rutting impalas I saw in Zambia this summer. A fresh male impala, the handsomest and most macho, fights off the others to breed with the herd of females. After around three weeks of non-stop sex, with no time to feed or groom himself, he is weak and easily taken out by a challenger, a young buck from the group of male impalas. If he’s lucky, the exhausted male impala might then re-join the all-male herd or, just as likely, be eaten by a herd of lions.

The only question about the future disappearance of fraternal twins Corbyn and Trump is whether they slip back into their old lives or are gobbled up by the forces of globalisation.

*Universal Man: The Seven Lives of John Maynard Keynes by Richard Davenport-Hines

Predicting the VW share collapse a year ago

Who else will fall?

Companies that do outstandingly well on the back of a “hero” CEO will crash, we predicted a year ago. The hero generally turns into an over-controlling, hyped up central figure who spends way too long in the job; who has the blind enthusiasm of investors and the public; who indulges in a stream of acquisitions; and who ensures there are no obvious successors.

Volkswagen was on our list. Which are the other companies? Take a look at our video on YouTube.

Why the UK’s output lags behind

August 18, 2015

School holidays and their effect on the Establishment

In a lighthearted post in the Financial Times, To boost Britain’s productivity, cancel August, Karina’s Column addressed the UK’s efficiency conundrum via the City’s holiday habits.

Six Steps to Retaining Your Promising Female Executives

Six Steps to Retaining Your Promising Female Executives

686 Lord Mayor Fiona Woolf advises

The City of London retains its ranking among the top two global world centres, but Asian centres are snapping at its heels. The City is only as good as the talented workforce that joins, grows and leads it. The fact that too many promising female executives drop out is a problem that must be addressed as part of the ongoing work to boost its international appeal.

Dame Fiona Woolf, 686th Lord Mayor, instituted the Power of Diversity programme in her 2013/14 term, a strategy followed by subsequent Lord Mayors. Here are her six practical steps to retaining women and supporting their rise.

1. Think of it as Talent Development

I ran a survey a while ago that delivered the unsurprising answer that the quality of supervision and personal development were the top factors that would keep people in a job. Next came the quality of work – everyone wants access to the top jobs. In people businesses (and most businesses claim that they are), success depends on recruiting, training and deploying the best talent so that it gets better all the time. When I ask how many of us have been trained in on-the-job talent development, very few hands go up. We should teach managers how to develop skills and create an environment where everyone learns from on-the-job experience. Regular “what went well, what went less well” conversations would be good. I am a fan of sharing individual development plans. Transparency about the way work is allocated will help to deal with unconscious bias, such as the assumption that a woman with a family will not want to get involved in a big deal, without asking her.

1. Identify and Motivate the Keepers of the Talent Pipeline

Many of the keepers of the executive talent pipeline are managers at mid-level who are busy doing the work, generating the income, looking for new business and trying to go home at night. They may not realise that they are responsible for talent development and that they will really benefit from it. There is a saying that you are only as strong as your weakest link. So it follows that these keepers of the talent pipeline need to be motivated to value and invest time in talent development. They need to be a part of a workplace culture that regards it as mainstream in the day job and do a little of it every day. The senior leadership can do a lot of messaging but also lead by example and be seen to monitor and celebrate promotions and vibrant teams. Understanding the costs to the business of losing and replacing someone is key. More positively, remember that the attractiveness of someone who is developing well to a client is a terrific marketing tool (and if they go and work for the client they will return as a client)!

1. What Gets Measured Gets Done

I have not come across many organisations that actually measure individual performance in talent development and reward it, but there are some. Diversity and inclusion is often a soft, but important value rather than a performance indicator. Income generation and new business acquisition as performance indicators are easier to measure and reward. We are now working with Business Schools and firms to find ways to monitor and reward talent management and development looking at the outcomes. An obvious example is to measure the number of people who leave a manager each year and to understand the reason through exit interviews. Another is the number of promotions and lateral transfers.

1. Senior Leadership Commitment to a Concerted Culture Change

In a survey that was part of what is now the continuing Power of Diversity programme, we discovered that 84% felt that their senior leadership were doing the right thing to create diversity and inclusion but only 27% felt under any pressure to do anything about it at their level. There are clearly many good initiatives like affinity networks, unconscious bias training, mentoring and sponsorship schemes but none of them will work unless they are embedded in a big change programme involving everyone. Think of it more like a campaign, led from the top but full of excitement in the big middle that then becomes the new normal!

1. Develop Support for all Rising Talent

My motto is “Get lucky and say “yes”!” because everyone these days wants women to succeed and we will be supported. We all need support when we take on something new (however senior we are) and we can be smarter at asking for it and giving it. It is not a sign of weakness. So often, we adopt the “sink or swim” approach, “dumping“ rather than helping, in the hope that people will figure it out for themselves. The same applies to returners after a career break. We should be seeing a growing market in “returner courses”. Mentoring meetings on a regular basis are good, but what about asking for someone to go to who can give you the background or a quick second opinion on what to do next?

1. Recruit and Promote on the Basis of Intellectual Capacity and Transferable Skills, not just Experience

Is it a stereotype that, unlike men, women are reluctant to apply for jobs and promotion unless they tick all the boxes? Some people do recruit and promote square pegs to square holes based on all the “previous experience” boxes. I have always hired on the basis of intellectual capacity, motivation and transferable skills. I was seldom able to find people with directly relevant experience and turn them into international electricity lawyers, so an excited engineer working in South Africa who spoke Russian was a good answer! I was not taking much risk in hiring or promoting bright people with transferable skills, nor did I have to invest excessive time in supporting them. They learned very quickly, brought new ideas and make a great contribution. Women can do this too and we should not worry about moving from a square hole to a round one!

Homage to Spain

Why recent local elections don’t change the investing scenario

All politicians are required to get out and “press the flesh,” as shaking hands with voters is dubbed. As my flesh was being pressed by Carmen,* my mother’s longstanding masseuse, the results of last Sunday’s local elections in Spain seemed a fit subject for discussion.

Mention the governing Partido Popular (PP) and her strength redoubles with indignation at the constant revelations of corruption in its midst. She pays little attention to the party’s labour reforms and austerity measures, which allied to a low oil price laid the seeds for this year’s recovery. GDP in 2015 is forecast at 2.8%, the fastest growth since the crisis in 2007, although unemployment at 24% remains high (if overstated due to the immense black economy). Exports are shooting through the roof on the back of a weak currency and the private sector’s restructuring.

Mention the opposition Partido Socialista Obrero Espanol (PSOE) and her outrage at the revelations of their corruption – less than the PP only because they have been in power less in the last twenty years – turns into the pummelling of a 25-year old. Not one knotted muscle remains untouched.

Podemos (We can) is the only party that almost makes the massage gentle and ineffective. Almost. The new protest party had to tiptoe back from its flattering embrace of Venezuela’s leaders and bankrupt political system, as its poll ratings plummeted. Spaniards may be fed up with the corruption of the main parties and with a recovery that has yet to be felt beyond the confines of the privileged. A number of them were willing to use their votes in the elections this week to punish the two behemoths of old by voting for Podemos and its other incarnations and sympathisers. But it is doubtful that this will be repeated in national elections.

When a year and a half ago Podemos was at its height, gaining 28% of the intention to vote poll, there was a whiff of concern in the Circulo Empresarial de la Competitividad which groups together top executives from the 17 largest multinationals in Spain, including Telefonica and Santander. The elite business group reportedly opened its collective wallet to support another protest party, Ciudadanos (Citizens), as a counterweight. This was a small, pro-business Catalan-based party which advocated the autonomous region remaining part of Spain.

Ciudadanos has now spread out on a national scale and won over 6% of the vote. It would have won more seats if it had put up more candidates. Carmen, whose family was on the side of the Republicans in the Civil War, sees it as little more than a mini-PP. The pressure intensifies and any tennis elbow I thought I had disappears under her disapproving strokes.

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Carmen is 70 years old. Her power reflects that of her generation in Spain. But where she is stepping back from her metier, giving me a massage in memory of old times, too many of Spain’s oldies are clinging on to power.

Over 50% of the Presidentes (Executive Chairmen) of the Ibex-35, the Spanish equivalent of the FTSE-100, are over 65 years old. One, Francisco Gonzalez of bank BBVA, has just re-taken the CEO title as well. Another, Emilio Botin of Santander, gave up his role only on his death.

“We have spent too many years with our bums ensconced in our chauffeured cars,” says a 65-plus year old Spanish tycoon over drinks at the Ritz Hotel.

Despite the intransigence of the over 65s, renovation is happening in the political class. Forty-seven year old King Felipe VI, known as the best-prepared Borbon king in history, took over from his father Juan Carlos I at the end of last year. Alberto Sanchez, a photogenic 43 year old, is the leader of the PSOE. Cuidadanos is headed by fresh-faced 36 year old Albert Rivera, while Podemos’s 37 year old leader Pablo Iglesias sports a rather last-century ponytail.

Only 60-year old Mariano Rajoy, who continues to deny knowledge of massive illegal payments by his party treasurer, Luis Barcenas, clings to power. His party garnered only 27% of the votes versus 38% in 2011. Unfortunately, the abysmal results came too late for him to step aside before general elections due in late autumn.

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The outcome of May 24th means the end of the bipartite system that governed Spain from the advent of democracy 38 years ago and the beginning of endless horse trading between all the parties. In September, there will be elections to the Catalan parliament, and six months from now, general elections. A similar panorama will probably unfold.

Investors who have sold Spanish shares are panicking unduly, for economic policy will remain within a narrow band of the acceptable for three reasons.

Firstly, even in a local election where voters were understandably angry and more likely to experiment, the PP and the PSOE ended up with the most votes. In a general election, that is even more likely to happen. Either of the mainstream parties will need to govern in coalition with Ciudadanos or informally supported by them. A condition of supporting the PP may well be Prime Minister Rajoy’s disappearance and substitution – no bad thing. The distance between the centre-left PSOE and the radical left is as wide as the Grand Canyon; that between PSOE and Ciudadanos is infinitely narrower, and thus Podemos will probably be left out in the cold at a national level.

Secondly, Spain is centrist. Moderation, aspiration and consumption are three words that ring true for the majority.

Last, but not least, Spain’s economic policy is mainly decided in Frankfurt by the European Central Bank and in Brussels by the European Commission.

A couple of years ago, in November 2013, this column advocated investing in Spain. We were right and prices have since gone up. But they have further to go.

*Carmen is not her real name.

How to make your charity donations surge

A Google guru’s advice

One statistic stood out from all the damning ones included in the presentation. The charity sector’s digital spend on marketing is falling – now at a measly 1.7% from 2.3% a few years ago. Ludicrous, given that 75% of donors use online resources to look for information and the private sector has been increasing its digital spend massively.

Dan Cobley, author of the presentation, had one heartening message: there is a vast amount of free help available to boost the online presence and interaction of charities. The former head of European Marketing at Google, and now the CEO of a fintech investor group, Brightbridge Ventures, gave key pointers on how to raise donations and awareness.

He spoke at a meeting of the Kilfinan Group, where we mentor CEOs of charities, and we have passed his advice on to all 180 of our mentors, who also sit on charity boards as trustees. Do please distribute this link to anyone you know who is involved in the charity world.

Whatever policy changes the new government brings – and ’tis a very welcome government! – it is clear that funding cuts to the charity sector are set to continue. Leveraging free help to increase contributions is a powerful yet simple technique.

Below are the valuable links:

Here is a link to Google’s Get Your Charity Online site which is full of useful stuff, especially for smaller charities.

Here is a link to the YouTube non-profits playbook.

Here is a link to the Technology Trust site, with links to the software exchange, gift aid reclaim programme, etc.

Here is a link to Charity Digital News, managed by Technology Trust and full of useful info for not for profit practitioners and trustees.

Time to call a halt to regulatory overkill

…and why even Archbishop Welby agrees

None can disagree with the need for a regulatory transformation of the banking sector following the 2008 financial crisis. Yet after seven years the blitzkrieg of rules continues amidst a confusion of overlapping and contradictory requirements. It beggars belief that the rules on too big to fail were only agreed in principle in November last year by the G20, while the details have yet to be made final.

Speaking to bank CEOs and Chairs in the UK and Europe, who dare not complain publicly, the regulatory fatigue that Bank of England Governor Mark Carney spoke of is apparent, as are a number of the unintended, negative consequences.

Capital has become local as global banks withdraw to their home markets. Surpluses of capital are not being used, while demand lies unfilled. When you add in Anti Money Laundering and Counter Terrorism requirements, even long-standing, legitimate businesses in Africa are having their bank accounts closed down. Let alone HSBC’s strategically absurd decision to exit Brazil, still responsible for approximately 60% of South America’s GDP, and to do so at the worst time possible time, when the country is in the doldrums.

Secondly, loan capital has diminished substantially. The creation of credit is a problem. And which sector or instrument that credit goes to is determined by regulatory requirements rather than business sense. This can itself lead to a new crisis.

Competition has contracted, with banks either going bust or being absorbed by others, while regulatory requirements have increased the barriers to entry. As the latest results from the big US banks testify, only the large can absorb regulatory burdens and fines. JP Morgan has moved from being a big financial institution pre-2008 to bestriding the world like a colossus. There are some so-called challenger banks – new entrants unencumbered with the legacy of old systems and debts – while internet-only loan providers are growing at a dizzying pace, but it will take a very long time for them to fill the gap, if they manage to do so.

Fourthly, the myth that Brussels is responsible for myriad new rules is helping push the UK out of the EU. In fact, with regulatory equivalence, the UK would not escape more regulation even if it did leave the EU.

Lastly, even as banks cut down on front line staff, there is a vast increase in their recruitment of compliance specialists, as well as the information technology personnel needed to change systems to comply with new rules. Regulators are asking for the traceability of all credit decisions, even the smallest, all of which consumes management time. Top bank executives complain that they spend hours in meetings with junior, inexperienced supervisors who have never worked in banks and are more intent on protecting themselves from criticism by painfully ticking every box.

Complexity is not progress.

At board level the situation is no better. Bank board meetings are about the modelling of risk, rarely about strategy or how to grow the business, according to board members. One FTSE-100 financial services institution conducted 29,000 different simulations. The Non-Executive Director in charge of the Risk Committee was dismissive of the exercise. Meanwhile, potential NEDs with insight and experience say that you would have to be “reckless” to jeopardise a 30-year career by taking up an appointment on a bank board – even more so if criminal liability is extended to independent directors, as has been proposed in the UK.

The Bank for International Settlements, the so-called central banks’ bank, recently said the wave of regulation is coming to an end. Bankers disagree.

Seven years after the financial crisis, regulation needs to focus on being an enabler of financial services rather than an obstructer. To change the mind-set of the regulators – and the bankers – a system of secondment needs to be set up. Modelled on the very successful Takeover Panel, which has been ruling on mergers and acquisitions in the UK since 1968, bankers would be seconded to regulators for a pre-agreed period, with their salaries paid for by the banks. This is idea has been mooted before in the Salz Review of what went wrong at Barclays Bank, but sunk without trace.

On the macro front, the focus should shift to stimulating the capital markets so that the provision of credit does not lie mainly on bank balance sheets, as it does in Europe, while capital requirements should be lowered and the focus should shift to the leverage ratio.

Speaking to the Worshipful Company of International Bankers a couple of months ago, the Archbishop of Canterbury, Justin Welby said: “2008 continues to lurk around as an impediment, which undermines confidence. Creativity and confidence go hand in hand…Creative leadership that does more than manage is essential.”

It is time to move on.

This column is based on private conversations with bank CEOS, Chairs and board members in Europe, as well as knowledge gained in my prior career as Senior Editor of The Banker and a former banking columnist for the International Herald Tribune.

It will be published in the next issue of Dialogue Review.

Geopolitics and a Muslim narrative

Why there is nothing inherently wrong in deflation

The mountain guide promised us three things as we faced climbing Wildspitz, at 3,800 metres Austria’s second highest mountain, in glacial winds. That the glacier we were going to traverse on the way there in our skis-on-skins was flat. That there would be a Group A, determined to make it to the top, and Group B, those who couldn’t take it anymore and could quit with honour, to be lead down the mountain by the second ski guide. That it would be easy to climb, roped together with ski boots and crampons.

We were misled.

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The West’s visualisation of the world tends to be geopolitical – maintaining access to natural resources and trading markets, impeding the rise of rival systems of governance and, where these emerge, undermining them. Not since the Crusades between 1095 to 1291 has religion been the main reason for a war between states in the Western world.

A Muslim visualisation of the world appears to be primarily about religion, an alternative narrative that is difficult for us to understand in a 21st century where church attendance barely deserves the name. The West does not see war in Iraq, Libya or Syria as being about faith or a conspiracy against Islam, but about oil and/or power.

Western politicians very rarely resign because they disagree with one part of the government’s foreign policy. Yet Baroness Warsi, a British Muslim who was a Foreign Office Minister in the Conservative government, quit in 2014 over its “morally indefensible” inaction over the Gaza crisis.

She said the UK’s support for Israel risked becoming the “basis for radicalisation [that] could have consequences for us for years to come.”

We must never change our foreign policy, be it right or wrong, because a minority of our population – Muslims represent about 3 million or 5% of the UK population – disagrees with it. That would be succumbing to blackmail, which would not, in any case, solve the problem of those already converted to terrorist violence. Nor should we ever stop satirising religious inanity and hypocrisy, as the heroes of Charlie Hebdo were doing, and will courageously continue to do, in Paris.

What we all need to work on, including figures in authority in the Muslim community, is integration. Harun Khan, Deputy Secretary General of the Muslim Council of Britain, admits that “we have failed as a community and as a nation to educate youth as citizens.” Multiculturalism as government policy has been declared a failure, but more must be done on assimilation. That is the mountain we have to climb. There isn’t an easier route.

We can also work harder at distinguishing in the media between extremists and moderates. Let us not forget, in the heat of atrocity, that it is the moderates who are the overwhelming majority of Muslims. Using pseudonyms like “Jihadi John” for an ISIS executioner is an offensive use of the word “jihad” for peaceful Muslims. For many of them it refers to an internal spiritual struggle, not unlike our interpretation of the violent Old Testament – no longer literal, but metaphorical.

Warsi, who co-chaired the Conservative Party, says that for her generation, the nightmare is to have a daughter bring home an Islamic extremist boyfriend. Islamic radicalisation is as much, if not more, an abomination for the decent Muslim community, as it is for everyone else. That should not be forgotten in finding our way through this.

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“There is nothing inherently wrong in deflation,” says Geoffrey Wood, Professor Emeritus of Economics at Cass Business School and a former Special Advisor to the Bank of England. Consumer prices in the year to December fell 0.2% in the Eurozone.

The spectre of deflation haunts governments in Western Europe. They have lost sight of the wider picture. Rather than focussing on the growth windfall from a record low in the oil price – the EU is the world’s largest importer of oil and gas and has long complained that this is a major factor in its lack of competitiveness versus the US – all eyes are on the European Central Bank and its possible decision to launch a programme of quantitative easing.

Between 1870 and 1914 in the UK and the US, the general price index ended up at the same level as it began. In the first half of those years it drifted gently downwards, in the second half gently upwards. Consumers did not stop spending in the late 19th and the early 20th century, points out Wood, in reference to the theory that they will put off purchases in the expectation that items will be cheaper in the future and thus send the economy into a spiral of non-consumption. “If it really is deflation, then money wages will be falling as well as prices,” he notes.

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We made it to the top of Wildspitz. The glacier was not flat; there was no option B to drop out with dignity intact; the descent was terrifying.

Being roped together with six others for hours on end was awkward and ungainly. Nevertheless, our strength came from our mutual dependence, as experienced mountaineers will attest. That is a lesson for us all, be it in politics as in economics.

From Ethiopian emperors to CEOs

Companies to sell, companies to buy

Emperor Tewodros, who reigned over much of Ethiopia for a decade from the mid-1850s, was a visionary leader. His star rose as he unified a great deal of the country, abolished the slave trade, looked to undermine the excessive power of the Church and was vocal in his disapproval of battlefield mutilations.

Yet as the years wore on, excessive power, a sense of God-inspired destiny and probably some mental imbalance, lead him to become a monster of massacres and murders, as detailed in a gripping book on his reign titled The Barefoot Emperor, by author Philip Marsden.

The pendulum often sways from recognition to obscurity, from undue heroism to disproportionate opprobrium, both for human beings and institutions.

Continuing on our royal theme, consider the British Royal Family. Following Princess Diana’s death, they were perceived as unsympathetic, cold and out of touch with the nation. Seventeen years later, they are riding high with the support of over 75% of the British people.

And so to the corporate and financial world.

Assuming the pendulum that has swung too far will always swing back, which company is due for a fall? There are common threads in many examples – the hero CEO who turns into an over-controlling, hyped up central figure; over a decade in the job; the blind enthusiasm of investors/the public; a stream of acquisitions and the lack of an obvious successor.

I propose creating an index, called CRASH, based on companies where a minimum of two of the above factors apply. Its motto would be the Biblical quote, “I have seen everything that is done under the sun, and behold, all is vanity and a striving after wind.”

Investors who shorted CRASH would be winners.

Tesco captained by CEO Terry Leahy was the retailer of choice in the UK and the darling of the City for a decade. Then it started losing market share to new competitors and in the autumn of 2014 discovered a £260m black hole in its accounts. Many blame his successors – but he was in power for 14 years and a gung-ho company culture takes many years to reverse.

Something similar may be about to happen at SKF, the Swedish ballbearings makers, transformed by CEO Tom Johnstone, who is stepping down after 11 years.

Jeff Bezos’s Amazon is already in the index, not least because like Jamie Dimon of JP Morgan Chase, the founder has gathered a triumvirate of titles to himself: President, CEO and Chairman.

A similar story is to be found at Fiat Chrysler Automobiles. CEO Sergio Marchionne turned around the Italian and subsequently the American car company. He proceeded to merge them. He hasn’t looked back from 2004 when he became CEO of Fiat. So far so good.

In October 2014, a decade on, he listed the shares of the merged entity on the New York Stock Exchange in order to gain access to larger capital markets, a necessary step on the road to creating the world’s largest car maker by taking over another target, a grandiose notion that Marchionne toys with in interviews. Plus, last month, he engineered the resignation of Ferrari Chairman Luca Cordero di Montezemolo and appointed himself. There is a whiff of hubris in the air.

Another example, also in the car sector, is Volkswagen. Martin Winterkorn has been Chairman of the Management Board since 2007, fulfilling our ten year criteria. He insists on personally signing off on every model design change and refuses to speak English when dealing with investors and analysts.

Or Samir Brikho, the CEO of Amec, an energy-focused engineering services business valued at over £3.6bn. He took over in 2006 and transformed the company by ditching its construction arm, yet now his office is awash with photos of himself with world leaders like George Bush and in February he agreed the takeover of a £1.9bn US company.

Last but not least of the many examples that spring to mind is Simon Wolfson, CEO of retailer Next since 2001. When the Financial Times writes in an article that, “As so often, Simon Wolfson at Next is showing how to do it” and other press calls the company “the City’s darling,” you know Lord Wolfson’s company is a worthy component of the index.

Companies in CRASH might be taken out of the index if the CEO took on a fool (a reputable successor or Chairman), like King Lear’s, to point out his conceit. If the company head actually listened to the fool – unlike Shakespeare’s famous king – we would slip them quickly into our BULL index, whose companies we would fervently buy.

Hank Paulson’s take on the financial crisis

JP Morgan’s Dimon on trial; business opportunities in Libya

Reading former US Treasury Secretary Hank Paulson’s gripping account of the 2008 financial crisis while playing at cowboys in Colorado’s Rocky Mountains was perhaps not as much of an incongruity as it seemed.

As we rode by a vertiginous cliff, I ruminated about On the Brink, the former Goldman Sachs CEO’s aptly titled memoir of the race to stop the collapse of the financial system.

What emerges from the book is how close we came to a total breakdown, how well the team of Paulson, New York Federal Reserve President Tim Geithner and US Federal Reserve Chairman Ben Bernanke worked together, how irresponsible Congress was and what an outmoded mishmash of regulatory bodies governs the US financial system.

What is worrying is how little has changed, not least the fact that the largest financial institutions have become even larger, more interconnected and more complex, posing unimaginably big risks to the global system. JP Morgan Chase, which acquired Bear Stearns and Washington Mutual during the crisis, now has a market capitalisation of $206bn compared to $157bn in 2007, before the financial crisis. Its total assets are $2.3tr.

That makes it all the more disquieting for Jamie Dimon to have held on to his dual roles of CEO and Chairman in a shareholder vote in May via the implied blackmail of his departure from the bank.

We learned a lot about cowboys at glorious Vista Verde ranch. The lone Marlboro man from the old advertisements is a myth. Herding cattle is a group exercise, as is running a bank. Dimon may have been brought up on the East Coast but he would do well to head West for a lesson, accompanied by supine shareholders and, for that matter, some regulators.

A harsh judgement? If Fred Goodwin, the former boss of bailed-out Royal Bank of Scotland, had not been as powerful, his shareholders as greedy and his regulators as unwitting, he might still be Sir Fred.

Timely excerpts from the book include Paulson’s account of how in August 2008, while in Beijing for the Olympics and severely preoccupied about the health of government-sponsored mortgage finance duo Fannie Mae and Freddie Mac, he learned that Russian officials had made a top-level approach to the Chinese suggesting that together they might sell big chunks of their holdings to force the US to use its emergency authorities to prop up these entities.

The Chinese declined to cooperate with such reckless stupidity.

Last week President Barack Obama cancelled his planned summit with President Vladimir Putin as the Cold War continues, albeit in a rather more farcical way with the delicious irony of National Security Agency whistleblower Edward Snowden’s political asylum in Russia.

Still, the Chinese are not always the good guys. A large agricultural vehicles manufacturer from the West was launching a new model at a trade show. Two stands down, it found the Chinese had produced the same one at half the price. The company had hacked into their computer systems and stolen the blueprints, according to Mark Shepard, Head of EMEA for iSIGHT Partners , a cyberthreat intelligence agency.

When I put to him that boutiques like Robinson Hambro were surely not on anyone’s radar, he noted that we had a very juicy database of the great and the good.

“We’ve all got something that in the dark cyberworld market has value,” he said.

There is a lot of value in the Middle East and North Africa (MENA) even as the press focuses on Syrian carnage and the Egyptian upheavals. Arabia Monitor one of the most influential research companies on the region, has just published a report titled “Algeria, Libya, Iraq: the next big spenders.”

Highlights include the fact that with a combined population accounting for a third of MENA, and an average GDP growth of 9% this year, Algeria, Libya and Iraq together are set to emerge as the next big retail spenders. Founder Florence Eid notes that “as an expanding middle class becomes more sophisticated, opportunities emerge for international retailers to offer new shopping experiences, with sales growth expected to reach 14% per annum in 2012-2016.”

Although she does not dismiss the security risks, Eid believes the retail market in these countries will offer substantial rewards for early movers able to absorb operational risks.

New Bank of England Governor Mark Carney said last week that he found the dearth of females on the Bank of England’s influential Monetary Policy Committee “striking”. He aims to help change this to pave the way for a qualified female governor in years to come.

Things are different on the other side of the pond. The US, if the best candidate is chosen, will see Janet Yellen take over from retiring Federal Reserve Chairman Ben Bernanke in January. Although no-one can dispute rival Larry Summers’s brilliance, he is a controversial figure with a penchant for outspokenness and a reputation for freezing out those he does not agree with. These are not sought-after attributes in a central bank governor.

Federal Reserve Vice Chair Yellen, however, is an exceptional forecaster who is not afraid to disagree with the majority view and is steeped in central bank culture. As an added bonus, Yellen would be an outstanding female role model at a time when research has proven the benefits of having women in senior positions.

This is one of the reasons I sit on the judging panel of Women in the City an organisation that aims to promote talented women. We are currently seeking nominations for our annual Woman of Achievement Awards in sectors ranging from law to banking. We are looking for women with proven leadership abilities who have gone out of their way to help other women in their organisations prosper.

If you know of any, do please fill out the short form by clicking on this link .

Nominations close on September 20.

Why Putin is heading off the world stage

The energy paradox

The events of the last few months have set in train Vladimir Putin’s disappearance from the world stage. The only uncertainty is how long it will take, whether it will be months or years. It will happen due to unintended consequences – a concept first analysed in 1936 by American sociologist Robert Merton – of his Crimean annexation.

US Defense Secretary Robert Gates, in the memoir about his years serving under Presidents Bush and Obama, notes that during the Cold War Soviet interests were taken into account to avoid military conflict. However, “when Russia was weak in the 1990s and beyond, we did not take Russian interests seriously. We did a poor job of seeing the world from their point of view, and of managing the relationship for the long term.” He confesses that he “dutifully” supported the effort to bring Georgia and Ukraine into NATO, even knowing that this would feed Russia’s “paranoia” about the West.

Russia’s feeling of geopolitical weakness, allied to an economy that has failed to diversify and a mistrustful leader, resulted in the Crimean invasion and current troublemaking in Ukraine. But the unintended consequences of its escapade are an increase in its irrelevance to the world and the beginning of the end for Putin.

Consider these factors. Europe depends on Russia for one third of its gas needs. From complaining half -heartedly about their dependence on Russian energy, the Germans have woken up to the reality. Nuclear power could well be back on their agenda, although in 2011 it was announced that it was to be phased out by 2022. Who can doubt that serious discussions are now taking place behind closed doors between ministers and energy companies?

Meanwhile, the vociferous voices against extracting shale gas from the soil in Europe have lost ground to more widespread fears about a resurgent Russia, and the US export of shale gas to Europe, a contentious issue for some Americans, now has strong government backing.

As for Putin, he has infuriated his main constituency, the oligarchs who long ago agreed to keep out of politics in exchange for permission to carve up Russian’s economy in a monopolistic and oligopolistic way. As the stockmarket falls, the currency plummets and targeted sanctions start to bite, they are not a happy bunch. IPOs are on hold, foreign customers are wary of dealing with any company that is substantially owned by Russians and domestic banks are having trouble with their wholesale funding.

Whatever Putin does on the Ukrainian front, whether or not he compromises with the West on other multilateral issues to soften sanctions, the Russian leader has fatally undermined his own rule.

Does this scenario sound too complicated and therefore implausible? As humans we generally lack the ability to figure out what the unintended consequences of actions might be, even knowing they will always occur. Nassim Nicholas Taleb, the philosopher cum trader best known for The Black Swan, talks about narrative fallacy, in other words our tendency to construct simple stories to explain the world. Narratives about the past are often wrong. Hindsight is a myth because we do not and cannot know what did not happen, which would have resulted in a different story.

At the altar of the story and the storyteller we unconsciously sacrifice the uncertainty of human existence, what Nobel prize-winner Daniel Kahneman calls the “illusion of understanding.”

When I worked as a reporter at Bloomberg News, we were forced to find reasons for stocks going up or down. We called up analysts and traders, found the most convincing explanations, and banged them out on the screen. Those stock reports read well. Similar ones are being churned out by the media and pundits today. They are examples of narrative fallacy. Beware believing them…although sometimes, only sometimes, they may have more than a smidgen of truth about them. As does the Putin story.

This column first appeared in The Dialogue Review

Lands of Opportunity: China & the City

Osborne the hero

Readers suggested that the last column’s negativity deserved a positive riposte. Herewith 6 reasons to be cheerful.

China’s Chance China looks set to grow at between 7% to 8% annually, a drop from decades of higher growth stretching into double digits. As the Financial Times pointed out in an editorial a couple of weeks ago (and subsequently ignored in all its doom-laden articles that day), when the world’s second largest economy is projected to grow 7.5% a year this still implies an enormous addition of both capacity and demand.

While China reorients its economy towards consumption and away from investment and exports, increased opportunities arise for foreign firms to sell more goods into an expanding middle class. Gucci and other luxury brands have prospered, even with Chinese consumption growing at a slower pace than output over the last decades, The fact that the emphasis is set to change is an exciting prospect.

It is no coincidence that earlier this week China’s top legislature started studying draft amendments to the country’s 20-year old consumer rights law. The government is aware that providing urban jobs and a measure of rural growth is no longer enough to uphold social peace and with it the continuance of the Communist Party’s power. The Chinese consumer is a new constituency to be kept pacified. Consumer rights protection can now be added to the list of priorities, as was seen in the government-sponsored attack on Apple’s after-sales services a few weeks ago.

City Callings Perhaps it is an exaggeration to call a career in the City of London a calling, a word generally used for those who wish to follow a religious path. However, the City is still a preferred prospect for many despite the fact that around 100,000 jobs are said to have been cut since 2007. Continuing cuts will bring job levels to a 20-year low in 2014, according to the Centre for Economics and Business Research (CEBR).

Yet there is an area of great opportunity: compliance. Some banks have tripled the number of staff involved in that function. Financial firms will pay up to 24% more for the new regulatory bodies that take over from the now defunct Financial Services Authority. The Bank of England’s new Prudential Regulatory Authority (PRA), for instance, said its staff costs will rise 34%.

Meanwhile, the lack of global coordination in bank regulation – we have Volcker in the US, Liikanen in the EU and Vickers in the UK – means that a universal bank active in the UK, EU and US would be subject to all three regimes, notes Simon Hills from the British Bankers’ Association (BBA) in the magazine of the Worshipful Company of International Bankers’s (WCIB)

It is true that this epidemic of regulation is an unproductive use of funds; it is true that it raises the cost of capital; it is true that it does not necessarily make the world a safer place. But look on the bright side, dear reader: the compliance departments of banks and insurers are not likely to suffer from generalised and ongoing job cuts, lawyers and accountants involved in the sector are busy, and the sector is booming.

Cash for Claptrap There is still enough money around to fund a university professor’s study into whether bras are beneficial to women’s breasts. Professor Rouillon of Besançon University spent fifteen years on this topic. His conclusion: “Medically, physiologically, anatomically – breasts gain no benefit from being denied gravity.” The article was published on April 11, not April 1, so one presumes it was not an April Fool’s joke. In academia, as in life, there are always enough funds around to finance rubbish. Daily Telegraph

Dictator Deaths The era of Chavismo in Venezuela is drawing to a close. It matters little whether Henrique Capriles, the head of the Opposition who “lost” the general election by 235,000 votes manages to overturn the rigged result. Infighting within the ruling United Socialist Party of Venezuela will probably see it fragment into factions and no longer hold a monopoly on power.

Meanwhile, the centre-right elite which ruled for decades and never allowed the country’s oil riches to make it beyond the confines of the Caracas Country Club has morphed into an Opposition that looks to have learned enough over the last fourteen years to avoid the same mistakes. (For informed opinion on the Venezuelan Economy, see Veneconomy)

Fidel Castro will, at some point, follow Chavez. He turned Cuba into an island where, irony of ironies, the dollar is king and his much-vaunted educational drive counts for little. The most coveted jobs are those of a doorman at an international hotel in Havana, or a prostitute consorting with tourists. Both have access to dollars. Doctors and erudite officials don’t.

Obliged to Osborne The more one looks at the finance ministers in a number of European countries, the more grateful one is for UK Chancellor George Osborne. Keeping in mind that his austerity is not as austere as critics would have it, he thankfully has the guts to resist the siren calls of those who advocate spending money that is not there. It will take time for the UK economy to emerge from current circumstances. The short cuts proposed would be counterproductive. In the meantime, Osborne’s critics are growing at a quick pace – unlike the UK economy – with even the IMF joining the chorus.

(IMF Managing Director Christine Lagarde and Chief Economist Olivier Blanchard are now at the forefront of UK economic policy critics. A conspiracy theory has it that it is no coincidence that the two are French. The only way to save France, which is refusing to face up to its need for reform, is by having the German and the Northern European contingents loosen their purse strings. (See Why France will fall next).

Stanislav Petrov, a Russian military officer, saved the world two decades ago. One day in 1983 his computer screen indicated that a single missile had been launched from the US. Four more missile attacks subsequently appeared on his screen. He did not report directly to the USSR High Command that the country was under attack because his insight told him it made no sense. Petrov averted nuclear Armageddon by using his ability to think independently and thus override what to anyone else would have seemed clear evidence. In fact, the “attacks” were a series of computer errors.*

Comparing Osborne to Petrov is excessive. But one should never underestimate the guts it takes to stand up to conventional wisdom.

Reading Riot The last item on my gratefulness list is the existence of sublime reading material. I shall mention three.

The Financial Times continues to be the best source of news and comment in the West. We live in a world where the breadth of available expertise and opinion is mind-boggling – literally – and thus the continued existence of a coalescing centre of excellence on international economics and politics is to be welcomed.

Professor Christopher Coker’s Warrior Geeks is inaptly subtitled How 21st century technology is changing the way we fight and think about war. My former tutor’s book, published this year, encompasses infinitely more than that. Read it and you will be proud to be human. (*The anecdote about Petrov comes from this book).

Sheryl Sandberg’s Lean In is the book of the moment. Unlike others, it will last the course. Her analysis of the internal and external barriers to women advancing in their careers and what needs to be done to overcome these is masterful. The COO of Facebook has written a book that will truly help women, as long as all fathers and brothers and sons read it too.

A Tale of two Balls: UK vs PIMCO

Lessons from WWII as Russia conquers Crimea

Even assuming Ed B. makes it into power, his brother wins hands down. The UK government spends around £720 billion a year and most of it is already earmarked. Chancellors – pace all the kerfuffle around budget announcements – can only affect policy at the margin. Andrew B., on the other hand, is head of European bond markets with the capacity to strike fear in the hearts of Italian treasury ministers, among others.

Markets matter, which is why the ambitious and admirable management overhaul at the Bank of England, announced last week, is sorely lacking on that front. Creating a new Deputy Governor for markets and banking is right in acknowledging the importance of markets, plus it is a coup for the Bank of England to have appointed Nemat Shafik, an effective policy maker and global player, as Deputy Governor for banking. But appointing her Deputy Governor of markets as well is a mistake. What was needed for that part of the role was an investment banker with knowledge of markets and a wide network of acquaintances and colleagues.

Or at least for a former banker to be appointed to the role of Executive Director of Markets, reporting to Shafik. Instead, Chris Salmon, whose whole career has been at the Bank of England, will take over that role.

This column has long banged on about former Governor Mervyn King’s weakness in deifying academic economists and not valuing markets. The bank would have better understood and reacted faster to the seriousness of Lehman Brothers going under – let alone known about its fragility earlier.

Governor Mark Carney, a former Goldman Sachs banker, is fully aware that markets move mountains. But when he leaves the Bank of England at the end of his five year term, he looks to have failed to incorporate that knowledge into the executive.

For an indication of Russian thinking as the Crimean/Ukranian crisis escalates, one could do worse than turn to Max Hasting’s superb volume on WWII, All Hell Let Loose.

Our inbuilt bias assumes our opponents will react in the same way as we in the West do. In other words, hit Vladimir Putin where it hurts – his wallet – as the Russian stock exchange plummets and international sanctions loom. Yet this is Russia.

In 1944 as Stalin’s army crossed the Danube in their Hungarian invasion, indifferently losing soldiers to the enemy, a Hungarian hussar gazed on the corpses on the river bank and said to his officer in shocked wonder, ”Lieutenant, sir, if this is how they treat their own men, what would they do to their enemies?”

The Russians bore the brunt of the fighting against Hitler during the war, with it being fought mainly on Russian soil. Stalin was not bothered by the barbaric behaviour of his soldiers towards German civilians a few years later. As Hastings points out, the Soviets saw no shame, such as burdens Western societies, about the concept of revenge: “The price of having started and lost a war against a tyranny as ruthless as Stalin’s was that vengeance was exacted on terms almost as merciless as those Hitler’s minions had imposed on Europe since 1939.”

President Putin is not Stalin. But a paranoid historical memory lies at the heart of both men. Winston Churchill famously spoke about a “riddle wrapped in a mystery inside an enigma.” It is worth quoting the rest of his speech in 1939, “I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma; but perhaps there is a key. That key is Russian national interest. It cannot be in accordance with the interest of the safety of Russia that the West* should plant itself upon the shores of the Black Sea, or that it should overrun the Balkan States and subjugate the Slavonic peoples of south eastern Europe, That would be contrary to the historic life-interests of Russia.”

*In the original speech, it was Germany.

Motherhood, apple pie and transparency. All good things? English Poet Philip Larkin didn’t believe the first word qualified, with his most famous line being, “They **** you up, your mum and dad.”

As for apple pie, we are now aware of the rotten repercussions of all the sugar we have been eating.

The debunking of the God of Transparency, however, has yet to happen. This is despite the incalculable harm done to the US and the UK’s intelligence gathering by Edward Snowden. We are less safe than we were prior to his revelations, while the probability of recruiting spies will have plummeted, as they consider the extra danger involved in this ever-more translucent world.

Moreover, consider the harm done to the Bank of England’s market intelligence operation by the release of minutes from a meeting in 2006 where senior foreign exchange dealers from some of the world’s largest banks told a senior member of the central bank of “attempts to move the market.” Paul Fisher, who was head of its foreign exchange division at the time, insisted in Parliament that this was “traders’ whingeing about how difficult their life is.”

Understandably, the focus is now on whether the Bank of England failed to take action on market manipulation within the trillion dollar foreign exchange market, where $5.3 trillion changes hands every day and a number of investigations are taking place.

But the transparency from releasing those minutes comes at a cost. What trader will now raise an issue with the regulator if this can’t be done informally? Which regulator will want to be closely involved in markets, given that it is a career dead end – either you are not well informed on what is going on, or you are and are therefore suspect.

Fisher has lost his seat on the powerful Monetary Policy Committee. Meanwhile Paul Tucker, a former deputy governor who was a strong candidate to succeed Mervyn King, was booted out of the running when information was released showing his closeness to Bob Diamond, the former head of Barclays Capital.

Temperance in the application is the key to transparency. As it is for motherhood. And perhaps apple pie.

The Tale of a Whale

The precariousness of JP Morgan Chase

The New York tourist sitting next to me with the map of London spread out on his lap asked where he could find the London Whale. Seriously. Unlike the London Eye, I told him, the London Whale was a human being, albeit a metaphorical landmark.

The London-based JP Morgan Chase trader’s nickname derived from his large positions in the credit market, which in the summer of 2012 resulted in the bank declaring a $5.8bn loss. It subsequently faced major fines from both the UK and US regulators for, among other things, its lax supervision and for not “adequately updating” its audit committee on the findings of an internal review, in the words of the Securities and Investment Board (SEC). The bank agreed to around $20 billion in legal settlements in 2013, almost equal to a typical year’s profit, for a range of misdemeanours.

Bereft of its gobbledygook, SEC’s phrase can be translated as “deceitful behaviour.” In other words, culture.

A recent survey highlighted that two thirds of global banks agree that a big part of the financial crisis was due to culture but only one third of banks thought there was anything wrong with their culture (my italics).

Transforming an institution’s culture is a lengthy journey, rather like chasing Moby Dick, the symbolism-laden whale in Nathaniel Hawthorne’s classic book of that name. As well as obvious factors like overhauling compensation, banks need to exercise integrity through sound judgement and rewarding decision-makers who have the guts to say no.

A very sensible suggestion on culture put forward in the Salz Review (an assessment of what went wrong at Barclays Bank pre and post the financial crisis ) was for bankers to spend two years on secondment to the financial regulator and vice versa. It appears to have sunk without a trace, despite the fact that there is a model for how to do it in the Takeover Panel, the UK’s M&A regulator, which regularly hosts top bankers and lawyers who then return to their firms.

Box-ticking is not the way forward. Unfortunately, though, the plethora of rules spewing forth from different regulators, like water from a whale’s blowhole, makes it overwhelmingly necessary. How else can universal banks active in a number of countries deal with the US’s Volcker Rule, the UK’s Vickers, the EU’s Liikanen, let alone Basel III, which appears to already be disintegrating? In fact, each country seems to be setting its own rules and banks are retreating home, capital in tow.

To add insult to injury, no sooner have banks complied with a rule that the regulator changes it. The Basel Committee admitted this autumn that perhaps securitisations per se were not “bad.” Without saying it in so many words, the implication was that forcing banks in 2009 to post higher capital requirements against them – as though all securitisations were similar to sub-prime mortgages – was wrong. The Committee is set to review the issue sometimes in 2014.

Meanwhile, the absurdity of zero or very low capital requirements on holding sovereign debt has steered banks to load up on it. This may be very useful for over-indebted governments, but as Jens Weidmann, President of the Bundesbank noted late last year, “the current regulation’s assumption that government bonds are risk-free has been dismissed by current experience.”

In truth, it doesn’t take familiarity with the last few years to realise that ‘risk-free government bonds’ has always been an oxymoron. In the best of cases their value has been damaged by inflation or currency devaluation; at the worst it has been destroyed by restructuring or default.

Moby Dick evaded his pursuers, but most of the crew of the Pequod, the whaling ship, met their death because they dared not stand up to Captain Ahab and his lack of judgment.

JP Morgan Chase’s Chairman cum President cum CEO Jamie Dimon – yes, truly three titles – admitted a few weeks ago that some investigations into the bank were just beginning, which does not bode well for 2014 results.

In May Mr Dimon fought off a shareholder revolt that would have seen him lose his position as chairman by letting it be known he would walk from the bank if this happened. The blackmail worked. He kept his triumvirate of titles and continues to lead the largest bank in the US.

This is a sell notice. It has the same whiff of omnipotence that marks the reigns of presidents who succeed in changing constitutions to allow them yet another, and another, and another term in office.

The Pequod had a problem of culture. We shall see how the tale unfolds for some of the banks, not least JP Morgan Chase. But the omens are not good: absolute power really does corrupt absolutely.*

*This column originally appeared in The Dialogue Review, an academic journal.

Christmas reading: Churchill & Huxley

Consumerism, compassion and resolve

As we forcibly surf into the holiday season on a wave of consumerism, spare a thought for Aldous Huxley’s Brave New World, which has somehow been overshadowed by another futuristic novel, George Orwell’s 1984.

Yet the parallels with our society are more insidious. In Huxley’s 1931 book, genetically-modified babies born from test tubes are brainwashed in special centres to believe that the old is bad, the new is good and thus buying things is central to their lives. Electric shocks turn them off from simple – and free – natural objects like flowers. Instead, they are conditioned to love anything that will keep them on the consumerist running track and keep the factories busy, such as certain country sports that involve the use of elaborate apparatus. Under-consumption is a crime against society.

It is worth noting that the current UK recovery is consumer-driven, while the world as a whole still relies hugely on the US consumer. And, at a micro-level, I confess to a little thrill when I buy something fresh and glossy. Our brainwashing may not be as organised as in Huxley’s Brave New World but it is extremely effective.

Having said that, it is true that the phrase “Big Brother is watching you,” is more than relevant, given recent revelations of US spying on all global communications. The dictator of Oceania in Orwell’s novel, known as Big Brother, is alive and well in a number of countries.

Spain’s tax inspectors have announced they will now be monitoring weddings, christenings and First Communions to help determine wealth and tax avoidance tendencies. Spaniards are braced to see a man in a mac and a trilby fingering the bride’s dress in the back of all wedding photos.

Think that doesn’t happen in the UK? Her Majesty’s Revenue & Customs (HMRC) has in the past years stepped up its recruitment of inspectors. Meanwhile, a UK private bank earlier this year sent out letters to clients mentioning that the tax authorities are pressuring it about the large cash amounts taken out by customers. HMRC asks for their “help” in diminishing cash withdrawals.

This does bring home the fact that money in a bank is not really ours – how soon before we have to justify large cash withdrawals? We are not at the point of having 47.5% of the money in our accounts stolen by the authorities, as happened to those with over €100,000 in Cypriot banks earlier this year, but one should beware highly indebted governments – right now, most of those in the developed world.

Of course this rather desperate scrabbling around for tax suffers from the persistent sidelining of Laffer’s Curve, which shows that when tax rates rise too far, tax revenues will not rise as people work less, or cheat the system because they perceive it as unfair. If after the financial crisis governments had dropped tax rates substantially, in essence putting money into people’s pockets, consumption would not have fallen off a cliff.

If VAT in the UK was 7% as it currently is in Singapore, we would all be spending more, the incentive for cash payments would decrease substantially, and the tax intake could well be larger. VAT at 20% turns everyone into a criminal.

The presence of so many world leaders at Nelson Mandela’s 2013 memorial was last matched at Winston Churchill’s 1965 funeral. Both men shared a dogged determination in pursuit of their aims and a super-human capacity for compassion towards the erstwhile enemy. Mandela saved South Africa, which appeared destined for a civil war of epic bloodiness. Churchill saved the Western World.

In The Gathering Storm, which analyses the causes of the Second World War, Churchill lambasts the Treaty of Versailles, whose economic clauses demanding huge reparations from Germany were “malignant and silly to an extent that made them obviously futile…. Germany only paid the indemnities later extorted because the United States was profusely lending money to Europe, and especially to her…. All this is a sad story of complicated idiocy in the making of which much toil and virtue was consumed.”

I wish my readers a consumerist high and a compassionate heart for Christmas. They are not mutually exclusive.

Investor opportunities: Spain and China

The 686th Lord Mayor & Women in the City

If I were a man, I would spend my money on women and wine and wandering.

I am, however, most definitely a woman and one who had occasion to feel immensely proud of her sex last Saturday, as fifty City women marched in the Lord Mayor’s annual parade, amid the driving rain and horse poo left by a mounted regiment. (The attached photo has little to do with reality). Perhaps the circumstances were a metaphor for what it takes to succeed in the City as a woman. But that was all forgotten as we waved at the half a million people lining the route and then passed by the Mansion House to salute Fiona Woolf, the second woman in 800 years to be elected Lord Mayor of the City of London.

The historic role for Lord Mayor number 686 involves being the Ambassador for the City (in fact, the whole of the UK’s financial services sector), giving more than 100 speeches and travelling nearly 100 days to promote the City in over 25 countries in the year in office. For the current Lord Mayor, a partner at Cameron McKenna, this may well represent a diminution of her usual travel schedule, given that she is the head of the law firm’s global energy practice and a renowned expert on privatisation and the environment.

Unlike some other women at the top, she is willing to stand tall (literally, at 5 feet and 12 inches) and be counted on to push for more women to join the City and make it to board level. “The City’s diversity and openness is one of the keys to long-term success so it is vital we work hard to move to a new normal by freeing up the talent pipeline. Businesses need to capture the innovation and ideas that difference within the talent pool generate,” she says.

The Lord Mayor speaking next to Prime Minister David Cameron at the Lord Mayor’s Banquet

Our group was as diverse as could be in the Lord Mayor’s Show that Saturday, with women who were born in India, Sri Lanka, Rumania, the US, China and Latin America. No better proof exists of the global nature of the City. As we ate our sodden sandwiches during the lunch break, we inspected some of the 130 vehicles in the parade, including 20 carriages, a tank and 50 horses, while beaming with pride at being involved in a ceremony that dates back to 1215.

Only 6% of managing directors in the City are women, when at university graduate level the division can be almost equal between men and women. Conscious bias has become less of a problem; unconscious bias more of one, which is why the Lord Mayor’s Diversity Advisory Panel, to which I belong, has a 12-month programme (www.fionawoolf.com) to bolster the position of women in the City.

It was not just our faces and languages that evidenced the City’s global medley. So did the handbags we wore as we marched, courtesy of a Chinese retailer. In 1996 entrepreneur Shunyuan Guo bought Powerland an Italian brand, and took it to China. There are now more than 200 stores on the mainland, plus 2 in Hong Kong. The luxury handbags are designed by a former Chief Designer from Gucci. 

Chairman and Ceo Guo listed the shares in Frankfurt a few years ago, raising €95m to finance the continued expansion of the retail network. He is now exploring locations for a shop in London and Paris, albeit he is adamant that “the price and opportunity has to be right.”

Powerland AG may be a good investment. So is Spain. A few weeks ago Bill Gates took a punt by buying a 6% stake in construction company FCC, making him the second largest shareholder. He is not alone in seeing value in Spain and its battered sectors like banking and construction. The IBEX 35 main stock market index is up 25% in the year to date. The country came out of recession officially in the third quarter with a return to growth, albeit a measly 0.1% increase.

On a visit to Madrid last week you could smell the first whiff of optimism. You could also smell the rubbish strewn on the streets due to a rubbish collector strike. Private companies were planning to lay off up to 20% of all sweepers. After 12 days a compromise was agreed whereby there would be no redundancies, but workers agreed to take 6 weeks of unpaid leave every year through 2017.

This is indicative of the drop in internal wages that is making the country competitive again. It has recovered 65% of the competitiveness lost during the credit bubble, while its strength in world class infrastructure and a large and skilled labour force make it the 35th most competitive economy in the world, according to the World Economic Forum. Spain is held back mainly by the bureaucracy and corruption of its unimpressive governing class.

Additionally, the government has been ineffectual, if not inept, in marketing to investors its new fund of funds, FOND-ICO. Launched in March with €1.2bn, the state’s anchor investor will invest in foreign and national private funds over a four year period to help with the non-bank financing of existing and new SMEs.

Ramon Betolaza, a London-based financier who returned to Spain this year, is raising a €500m fund via Black Toro Capital and Trea Capital to leverage FOND-ICO funds and invest in medium sized companies alongside existing management. He notes that although some companies are facing strategic challenges, others are solely suffering from cash flow problems on the back of a country-wide liquidity squeeze.

If FOND-ICO doesn’t tempt you to Spain, gentle reader, then what might do so are revelations this week that sofrito, a special tomato sauce used as a base in Mediterranean cooking, is the secret to longevity and a healthy heart. The women and the wine aren’t bad either. Nor are the boys and the bullfights.