Steve Hemingway

This is from David Cameron's supposedly triumphant conference speech yesterday.

"My values are Conservative values. Many people wrongly believe that the Conservative Party is all about freedom. Of course we care passionately about freedom from oppression and state control. That’s why we stood up for Georgia and wasn’t it great to have the Georgian Prime Minister with us here, speaking today? But freedom can too easily turn into the idea that we all have the right to do whatever we want, regardless of the effect on others. That is libertarian, not Conservative - and it is certainly not me.

For me, the most important word is responsibility. Personal responsibility. Professional responsibility. Civic responsibility. Corporate responsibility. Our responsibility to our family, to our neighbourhood, our country. Our responsibility to behave in a decent and civilised way. To help others. That is what this Party is all about. Every big decision; every big judgment I make: I ask myself some simple questions. Does this encourage responsibility and discourage irresponsibility? Does this make us a more or less responsible society? Social responsibility, not state control. Because we know that we will only be a strong society if we are a responsible society. "

You can read the full speech here.

It is very sad that David Cameron creates a aunt sally of Libertarianism. Libertarianism is based on not causing harming to others and to describe it as some kind of anarchistic free for all is a travesty.

The speech is big on identifying problems - too many quangos, too many (five million) working age adults living on benefits, a dysfunctional NHS, rubbish schools. But it really only talks about a single solution: the Swedish solution. Infinitely light on details, I somehow think that the independence of these new schools is not something that the headmaster of David's old school would recognise as meaningful freedom from the interference of the state.

Conspicuous by its absence is the EU. The elephant in the room, the body responsible for 84% of new legislation in the UK is not mentioned on a single occasion. And the environment, David's initial choice of fluffy policy area with which to rehabilitate the Tories with the electorate was on this occasion also totally absent.

I saw a quote recently about liquidity. An old hand was saying that it was a slippery (!) concept that even smart new traders didn't readily grasp until they didn't have any and then it became frighteningly clear.

I think the same realisation is dawning on me and a lot of other 'sophisticated' investors concerning equities. There is a widely held view that equities are solid, 'real' assets. I even heard a guy who worked for the equities division at UBS once make the comment that he worked for the bit that traded solid shares in blue-chip companies, not flakey bonds and risky fixed-interest products. The essence of equities is that they are a residual claim on the cash flows of a company after all the other claims have been met in full. They are, thus, more junior than the most junior subordinated deferrable preference shares, and certainly more junior than the most unsecured debt.

I think that part of the problem of understanding the nature of equity comes from the idea that the shareholders 'own' the company, as evidenced by the fact that they alone have a say in who the directors are, whether a takeover offer should be accepted, and whether they wish to be first in the queue to provide more capital through a rights issue. The success of the company is evidenced principally by the share price going up, without much attention being paid to the other creditors.

The alternative view, as discussed in books like Brearley and Myers, is that, in fact, the equity holders have a call option on the assets of the company, and that the strike price of this option is the value of all the other more senior obligations of the enterprise. This is clearly the case: if bonds issued by a company cannot be redeemed, then the bondholders are given all the assets of the company instead. Of course creditors form a queue and it may be that other creditor rank ahead of the bond holders, but clearly the people at the very backmost position in the queue are the shareholders.

This explains why shares are not always a good investment in times of high inflation. The idea that shares represent 'real assets' suggests that a good purging dose of inflation, as we are probably facing right now, should be good for shares. For a company with real assets - say a large manufacturer with extensive factories it owns itself - this is probably true. The problem is that other forms of credit tend to get expensive and risky in times of high inflation, so that the head of the queue are taking more of the gross cashflow. Certainly once inflation gets a hold, creditors need to be protected against the macroeconomic uncertainty of real returns and will, overall, make their credit more expensive.

In a rising market in an environment of rapid economic growth, gearing, both financial and operational, have been sought after. The amplification of profits 'attributable to shareholders' have been welcomed by boards and investors. The fact that the variance of returns, i.e. the risk of the investment, has been amplified too has been brushed aside as an of purely academic interest. The fact that Modigliani and Miller pointed out that risk-adjusted returns to equity holders were not enhanced by gearing is never mentioned by corporate financiers or boards of directors. This is no trivial observation - the pair were given a Nobel Prize in Economics in 1985 for discovering it.

Now of course we all see how clear sighted these gentlemen were. We understand that capital adequacy ratios for banks are not there just to give structured finance experts an incentive for devising more and more Byzantine off-balance-sheet ways of holding assets. We are beginning to understand why Mssrs Glass and Steagall were not simply spoilsports. We understand that it is not an unalloyed Good Thing for companies to use all of their net cashflow in buying back shares rather than paying dividends no matter how tax-efficient and EPS flattering it might be.

We have enjoyed the party while it lasted. The hangover is going to be a severe one.

I bank with many banks. Some are tolerable. Some are appalling. HBOS definitely comes into the latter category. My personal mortgage is with them, and I have a Repo Rate Tracker, which is a very good way of getting house finance at the moment, so can't afford to go somewhere else.

They have the world's worst banking website (although I admit that there is a lot of competition: Lloyds TSB's and Abbey's both come to mind). The CHAPS and BACS options randomly work and are (experiment reveals) according to such factor as how much you are trying to transfer.

I had a slightly unusual requirement, which was to transfer same-day funds to a UK correspondent bank of Citigroup in the USA with some routing instructions attached. This is impossible through the website, perhaps not surprisingly, but, I was surprised to hear, impossible through the call centre too.

My fallback was to transfer the funds by CHAPS to Cater Allen and then use them to do the next leg of the transfer, thereby doubling the fees I incur for doing the transfer, and doubling the time taken. At least the operative at Cater Allen could understand my request, and confirmed that it was completely possible (and in particular understood that a SWIFT transfer to a UK bank goes through the UK domestic payments system and therefore the latter was bound to be capable of transmitting routing instructions together with the actual funds. HBOS seems to specially recruit operatives to have a spectacular lack of understanding of anything to do with international payments and, generally, to do with basic finance principle.

I have banked with Intelligent Finance for more than ten years. I was drawn to them because they offered an offset mortgage which for me was by far the best way of financing my house purchase. Virgin, who pioneered the concept, predictably ruined it by offering an uncompetitive borrowing rate.

The payments mechanics all seem to work, the website is usually up, and the interest rate is very competitive. That's where the good stuff stops. The worst thing for me is a complete inability to process CHAPS, BACS and SWIFT transfers efficiently. The website is practically useless for the first two of these. There is no pretence of offering SWIFT transfers from the website. The website seems designed to lead you up a garden path, refuse your instructions, so that you are forced to go back to square one and try to get through to the call centre.

Calling the website is like banging your head against a particularly hard and knobbly flint wall. It is absolute agony. Scottish staff with thick accents invariably fail to have a clue and are fantastically unhelpful, seemingly delighting in the fact that their bank offers so few services.

My advice would be to get an IF offset mortgage, linked to the BoE repo rate, stuff you liquid savings into an offset current account and keep all proper banking transactions well away from IF. Personally I use Cater Allen, but I would guess that any branchless bank would be far better than IF. For SWIFT transfers, one of the many Forex transfer specialists are likely to be far more efficient and will certainly give a much better spot rate than IF or any of the high-street banks.

Having got that off my chest, I'm off back to work. Sometimes getting into a grumpy rage can be quite cathartic.

The recent meltdown in equity and other asset markets recently has left me shell shocked. I have been bearish since before Alan Greenspan made that speech about 'irrational exuberance' and have the scars to show it.

Maybe now is the time to take some short positions. The most liquid and efficient way of doing this is through the futures market. I strongly recommend Options Xpress. Their customer service is astonishing. I contacted them today to complain that it was not possible to trade the Long Gilt future on their platform. Within a matter of minutes I had received an email which I reproduce below:

Hello Mr. Hemingway,

Thank you for taking the time to contact optionsXpress today. I have good news. We are able to add you to a small batch accounts that have access to international futures. The update will be made available later today.

If you have any other questions you are quite welcome to email me directly and I would be happy to help, or you can call us at (888) 280-8020 Mon-Fri, 9:00am-10:00pm ET or click the Live Help link found on the top right corner of our site for immediate assistance. Thank you again for contacting optionsXpress and have a great day.

Angela Ortiz

Customer Service Specialist

www.optionsXpress.com

I wonder how long a UK bank would take to add me to a small batch of accounts that have access to trade futures that trade on - lets say for example - the Italian futures exchange.

I haven't made this kind of blog entry for a while, thank goodness.

My router failed the other day, and I decided to replace it. I have a couple of Grandstream Buge Tone 200 VoIP phones on the LAN, which work very well, in that they allow high-quality phone calls to be made to national and international destinations at low costs. I use Sipgate as the SIP gateway. They are very good.

The problem comes from having devices that really ought not to be hidden behind a NATS firewall. The problems are elegantly summed up on this page.

As the page quotes: "This protocol is not a cure-all for the problems associated with NAT. "

Stun seems a magic bullet, but really the magic bullet is to ban NAT routers and move to IP v6. Will this happen in my lifetime? I fear not.

There is a lot of port forwarding that Sipgate says is needed to run a VoIP phone behind a NAT firewall. See this page for details. Running two phones behind the same NAT router is virtually impossible. I seem to have managed it for the time being by making one of the devices a DMZ, and the other one configured as in the above page. Both are registered and working right now, but my experience in the past is that one tends to become deregistered.

I used this page as a starting point but of course this article doesn't describe which ports need to be forwarded to allow the second device to communicate with the STUN server. What is clear is that RTP and SIP ports for each device need to be unique otherwise there's no chance of those packets getting to the right phone!! I assume that the magic of STUN tells the server how to route them to the right machines, given that their externally-visible IP addresses are, because of the design of NAT, identical.

VoIP is lovely, and Sipgate is good. But running these things behind a NAT firewall is really not for the fainthearted.

I've gone from MT 3.35 to MT 4.2. It is a dramatic improvement. Pair handled the upgrade expertly. Once again I am forced to acknowledge their professionalism.

Quick update on what I've been doing recently:

• I've changed around the routers in my house and generally spent ages tracking down bad network behaviour. I think the root of the problem is setting up a phone as a DMZ. I really don't know the exact cause of the problem, but it seems to be solved now.
• I have had my mother to stay. She was very ill in the first half of the year and is still very frail, but much better now. She is very lucky to be alive.
• it's half term, and Tom and Alice are here. Both are getting on with their work rather better than I am getting on with mine.
• I saw my brother and Neil Moffatt in Cardiff over the weekend. I have just read Neil's short story 'Balancing Acts'. Maybe it's just because I feel an empathy with the author, but I found the work really quite good.

The markets continue to tank, and it looks more and more certain that we're falling into a deep recession. This is very worrying.

At about the time I was born, two US professors looked at how gearing affects the value of a firm. They discovered that like a lot of "businessman's economics" the idea that shareholder value could be improved by the firm taking on any particular amount of debt was flawed. This is a blindingly simple insight as the discussion in Wikipedia makes clear. The two professors' names were Miller and Modigliani. Imagine two firms, identical except in respect of their capital structure. One geared, the other one not. The returns to an investor will be the same given that an investor can choose to gear his own investment in the ungeared firm by forming a portfolio composed of the equity combined with the appropriate number of bonds.

Of course governments continue to incentivise firms to gear by giving special tax advantages to debt finance relative to equity finance for reasons which are quite incomprehensible to me and clearly didn't help in creating the current fine mess we've gotten ourselves into. In principle an investing company (e.g. an investment trust) could itself benefit from the interest payments it makes on debt finance so presumably the theory actually may be valid in the presence of taxes.

The idea that risk is a knob that can be twiddled by the investor is one of the key insights which go into Modern Portfolio Theory which concludes that the market portfolio gives the best tradeoff of risk and return, and that any desired level of risk can be obtained by simply gearing it up.

The funny thing is that both these theorems, which seem pretty watertight to me, are dismissed by most real world practitioners of investment, because if market professionals behaved as if both of them were true there would be a lot less in the way of fees paid to the financial sector, both for those who arrange debt finance for companies and those who manage investments for clients.

To my mind this shows that the insights of Public Choice Theory are applicable to the financial sector. The sector behaves the way it does because of the strong incentives felt by the relatively small number of practitioners in it, even those incentives result in a net cost to the large number of savers and borrowers that the financial sector intermediates between. It seems clear that these perverse incentives have resulted in major misallocations of capital in the economy, e.g. from savers to unbankable US and UK housebuyers.

Politicians talk about new regulations so that this crisis will never happen again. I think it is pretty clear that they will miss the true cause of the crisis, because the lobbying group that benefits from the current structure of the industry is much better financed and organised than any group that ordinary providers and consumers of capital could possibly be. Committees will be set up which employ the very professionals who caused this crisis, do not understand why it arose, and who will propose the kind of detailed procedural regulation that creates large barriers to entry (and therefore ensures large economic rents to the financial sector) just like the mass or financial sector regulation that has been enacted in the past.

John Kay understands all these things and has recently written about Miller and Modigliani in the FT: Surplus Capital Not for Wimps After All. So does his former co-author Mervyn King, I'm sure. Kay also understands that regulation will simply not work, so he's definitely not going to get a call from Alistair Darling.

This Advert is on the Cardiff Craigslist. Something similar is on the Cardiff Gumtree (I don't know whether it is just me, but I get the impression that Gumtree is pulling ahead of Craig's List, even though I much prefer the design of the latter.

Anyway, if you follow the link you will get the idea of what is required. If you personally know me you will realise that I will be very fair with anyone who is taken on.

This article explains how it came to pass that we know what Rupert and Elizabeth Murdoch, Oleg Deripaska, George Osborne, Peter Mandelson, David Cameron and Nat Rothschild were doing on and in the sea around Corfu during the summer.

It's interesting that the press gave the impression of David Cameron enjoying a rain-drenched and wind-blown holiday in Cornwall for his summer break, but more importantly it shows whose company our leading politicians choose to keep. It could hardly be otherwise. The population now takes very little interest in politics. They accept what they are told in The Sun and The Times, and what the various press offices of the main parties choose to communicate to the press. This all requires them to be on good terms with the media and with people who can give them money. No longer is it sufficient to get your wife to drive you around the village halls of England to get your message across. You must now, at the very least, set up WebCameron.

It's quite clear why politicians behave like this. People imagined that Tony Blair was some kind of aberration for being so obsessed with raising money for his party and himself, but really he, like the rest, is a creature of his environment. The unhappy thing is that it will inevitably lead to what we see in the USA: that is the systematic skewing of policies in favour of the selectorate - the people who actually choose the leaders. This selectorate is not exclusively wealthy businessmen. Certainly the unions remain powerful in the USA and in the UK. We will never see any kind of voucher system or realistic choice of schools because the teaching unions are opposed to it and they give a lot of money to the Democrats and to the Labour Party in their respective countries.

I am not a socialist, but do look for a level playing field in society. There will always be a conflict of interest between the haves and have nots (or maybe it is now the 'haves and have yachts'). Generally, a liberal economic agenda will result in a better outcome for everyone in society, but if the wealthy are seen to hijack decision making and tilt the playing field to their short-term advantage we will forever be bound into an economically inefficient organised society. It doesn't seem to me that there is a natural 'thermodynamic equilibrium' to which societies tend. If we allow the likes of Deripaska to exert the political influence they seek we will end in the UK like most of the pseudo-democracies of South East Asia or Latin America or, indeed, Deripaska's own Russia. I am not entirely sure that America, where democracy is more worshipped than practised is safe from going down this route.