Aquascutum: shielding a brand from financial storms

Aquascutum scarf, showing its club check
Image via Wikipedia

Aquascutum, venerable maker of stylish raincoats for over 150 years, is in administration. As this is the second time in almost as many years that it is in stormy financial waters, it may be said that they are better at shielding you from water than they are at protecting themselves. At time of typing, YGM, the Hong Kong based owners of Aquascutum’s Asian rights are exploring the possibility of buying the entire brand.

Sadly, one suspects this may result in downward pressure on quality in order to restore margins, and a general exploitation of the brand. As an owner of Aquascutum raincoats and overcoats, I would personally regret such an outcome. But are there any other possibilities? And why has Aquascutum been unable to be profitable?

The latter issue is fairly easy to understand. Aquascutum has always been an mid-to-upper market player, heavily focused on the rainwear segment. That is the model that kept in business for so many decades but it is no longer sustainable for two very simple reasons; fewer men wear raincoats regularly and the middle-market in general has been squeezed in favour of a polarisation of sales towards either niche high-end luxury brands or bargain basement low-cost retailers. This reflects the current development path of our societies in general. Aquascutum has been stuck in a no-man’s land.

It has tried various strategies to escape this trap, but they have been highly contradictory and poorly followed through. For instance, it spent a lot of money developing non-rainwear lines, but never marketed them aggressively. And it attempted to position itself as a luxury brand while having more discount outlets in its portfolio than it has proper shops, not to mention the less-than-stellar concessions it has in too many middling department stores.

It has never been able to decide what it really wants to be, diluting the brand’s identify in the eyes of consumers across the world.

A rescue strategy will have to make some fundamental decisions: do they want to take Aquascutum upmarket? Or do they want to make it a mass market brand?

In my opinion, it would find life as a mass market brand impossible. Theoretically, production could be aggressively offshored, more lines added and an attempt made to milk any latent value in the brand to the general consumer by having a small halo line of top quality products above a large range of far less impressive merchandise. This is the Burberry school of brand development. It has worked for them (more or less), but it is expensive and risky, especially with Burberry already a large presence in the same marketplace. I fear Aquascutum has simply left it too late to compete with them in this arena.

It would be better served by shrinking and focusing on a pure luxury identity. Keep production in England, focus on rainwear/outerwear/related items, drastically reduce the number of discount outlets & department store concessions, and ensure the one or two full retail locations that remain exude quality, brand pedigree and personalised service. Turnover would be a lot lower, but margins could be restored and the brand might have a fighting chance. Aquascutum now needs to be aspirational luxury to survive.

Are there any other options? Has Aquascutum simply left it too late? And is there life left in the middle class, mid-market segment generally?

A Panglossian Perspective on the EU summit

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In our turbulent times, it it reassuring to know that certain things remain unwaveringly true. One of those things is that regardless of any grand statements, national interests override supranational ones. Nowhere was this more in evidence than at the European Summit overnight. Interestingly enough, despite that, most of the major countries got their way and will not walk away unhappy.

Purists Germany stopped the ECB from actually solving the Eurozone debt crisis by letting it act as a proper central bank and prevented the ESM/EFSF from getting banking licenses of their own. The UK protected itself from a heavy extra burden of financial regulation in the City, a key driver of our economy, while not preventing the Eurozone from beginning the process of integrating into a more meaningful fiscal union with the real and necessary restrictions of national sovereignty required for a currency union to work. And the French got to maintain the pretence that they are the key diplomatic player in the EU, the power behind Germany’s economic throne, by loading the proposed treaty with so much of that financial regulation as to force the UK to veto an EU-wide treaty. And on an EU level, at least the Eurozone debt crisis has a bigger temporary sticking plaster to kick the can down the road a bit longer.

Let us be clear: Germany holds the Eurozone’s pursestrings and if any nation can be said to have got its way more fully than the rest, it is Germany. They have imposed their economic model on the rest of the Eurozone. It may not quite be an iron hand yet, but the velvet glove is certainly off. In the meantime, the EFSF will run concurrently with the ESM for about a year, which together with other resources pledged, brings the total amount of money in the EU bailout pot for profligate PIIGS to a bit over a trillion euros. That’s still not enough, really. Two would be nicer. But it’s not a bad sticking plaster – certainly better than the ones we’ve had so far – and might just be enough to calm the situation. Time will tell; it’s a little too early to judge that today.

The UK was forced to wield its veto. The usual suspects have begun hand-wringing about “isolation”, but as Terry Smith of brokers Tullet Prebon amusingly suggested this morning: “the UK as isolated as somebody who refused to join the Titanic just before it sailed”. To have signed the treaty would have subjected the City to a huge potential increase in regulation. Like it or not, the City contributes about 10% to our national wealth, a far greater percentage than any other EU country’s financial intermediation services. Add in financial services more generally, and the figure rises to about 1/3 of GDP. Even just considering the taxes it pays (yes, it does actually pay a lot of tax, despite what some would have you believe), that’s an important cash-cow for the UK government to preserve. Subjecting it to a new swathe of regulation is hardly conducive to profit, especially in such fragile times.

The French are very aware of this of course, which is why they insisted on including so much financial regulation in the proposed treaty. Unable to persuade the Germans to give the ECB proper banking powers, they were at risk of appearing impotent in the EU. And if there’s one thing that a French President with a looming re-election campaign can’t afford to appear, it’s impotent. As no other EU nation has as large a financial sector as Britain, it was easy for them to ensure that the other countries would not object; the impact of the regulations would be negligible to them. This ensured that either Britain would capitulate (handicapping one of its traditional strengths, benefiting France) or it would have to veto the treaty (allowing Sarkozy to frame the outcome as British isolation, boosting his domestic prospects).

The UK’s relationship with the EU will certainly now be very different to before. A veto, once wielded, is no longer a frightening spectre to either British PMs or our EU colleagues, but merely a tool. It will likely be used more frequently. I suspect the likely outcome will be a multi-speed EU, with the eurozone (and its likely future members) moving towards a more integrated political and economic union, and the UK and any other permanent non-eurozone members remaining in a looser alliance with the eurozone. The key thing the UK has to negotiate is the maintenance of a single market when it comes to no cross-border tariffs, minimising internal national subsidies, and the other key free trade tenets currently enshrined at an EU-level. Everything else can gradually be allowed to drift apart, which in the medium term will make it easier to begin cutting back on some of the more intrusive bits of current EU social and regulatory legislation.

It is undoubtedly in the UK’s long-term economic interests to remain part of the free-market aspects of the EU (although Channel 4′s relatively impartial FactCheck suggests its benefits may often be overstated). The challenge will be maintaining the UK’s free market relationship with the EU while the Eurozone members integrate further politically. Given the free market aspects are already in place, this should not be an impossible challenge. A delicated balancing act, certainly. But not impossible.

In the longer term, the UK can develop into a low-tax offshore gateway to the rest of the EU, with less regulation than the mainland, attracting global investment precisely because of that lower regulatory burden. A jumbo-sized Hong Kong, if you like. This would not be possible if the UK were part of a more integrated political, fiscal and monetary union with it. In the very long term, the balance may shift again. We cannot predict what the EU or the World will look like in 50 or 100 years. But for today, and for the short and medium terms, David Cameron did the right thing for Britain.

And funnily enough, leaving aside the relative sideshow of financial services regulation, the Eurozone may just have done enough to stave off imminent disaster too. Well, as the title suggests, I am an optimist.

The Fetishisation of Perfection

Head of a Nymph, Sophie Anderson

I must confess a penchant for complex systems.

There is little more pleasant than the intricacy of checks & balances, although I only enjoy them if my understanding of them arrives through noting the overall patterns that result, rather than through crude mechanistic analysis. Appreciating the underlying ebb & flow of emergent phenomena speaks to what Jung would have termed my intuitive rational nature.

My fondness and aptitude for noticing these mechanisms is at least part of what attracted me to psychiatry. The mind is doubly complex, consisting as it does of both physical and psychic constructs. The physical is the complexity of our neuroanatomical wiring and the neurochemical connections within that network. While some argue that theoretically the psychic world can be entirely understood through the physical, even such reductionist evangelists would admit that our current understanding is a long way from complete.

The psychic world is the more intriguing. It consists of our modes of thought: how we view ourselves, others, and the interplay between these entities. We create an internal construct of both ourselves & others, often built upon rather dubious foundations, and our entire understanding of the world in predicated upon these constructs. Some of the constructs emerge through experience, some are models formally taught to us, and some are probably rooted in a genetic hard-wiring. Even more amusingly, we are only generally aware of a small minority of the conceptual filters through which we view the world, which gives rise to what Freud would term the unconscious mind and perhaps also to what the spiritual would call the soul.

Regular readers know I enjoy a variety of complex systems; not just psychiatry & psychology but also clothes, economics, philosophy and some kinds of art. The common thread linking these interests are the delightful emergent patterns that are created through expression & exploration these systems. Different schools of art & philosophy, different conceptual models of the mind & human behaviour, different fashions & economic systems… they are all best considered not as absolutes with pros & cons relative to some theoretical gold standard, but as different sensory modalities. No-one would ever claim that smell is better than sound, or sight is better than touch.

Of course, this very relativist and individualist intellectual position of mine is itself derived from a set of preconceptions. In the end, everything anyone can attempt to say really is nonsense, if Wittgenstein will pardon the liberty of my paraphrasing. But this is to miss the point entirely: it’s rather delightful to play the game anyway.

The title of this post is a lament at how much of the world either cannot play, or refuses to play. Instead, they focus on improving things in an endless search for perfection. While superficially a laudable goal, the problem is that in order to improve a situation, you must understand the system well enough to know what improvement means. Simply having one specific goal in mind frequently – possibly, inevitably – leads to problems in other important areas. Imagine a fat woman being squeezed into a too-small corset: the narrow waist comes at the high price of either fat spilling over as visible unsightliness elsewhere, or internal distress. Similarly, targets and outcome measures can lead to many more negative issues in unexpected areas even if the target is achieved. Better to appreciate the system for what it is, and harmonise your existence within it, which can mean insulating yourself from its excesses by detaching yourself from its impact through rising above it.

Naturally, I am extremely grateful that most people prefer to seek perfection. It has led to tremendous improvements in material comforts, and grants me the luxury of not having to live a purely subsistence lifestyle myself. Nonetheless, those capable of broader perspective will be happier for indulging that aloofness rather than chasing the flitting faerie nymph of perfection. The nymph, you will recall, generally doomed her lover.

The Wisdom of Walter Bagehot

Readers of The Economist will already be familar with the name Bagehot, it being the title for their UK-focused regular column. I suspect fewer will have read anything by the man after whom it is named.

I recently had cause to browse Lombard Street: A Description of the Money Market (a free online copy can be found at Project Gutenberg). Written in 1873, in the aftermath of a banking crisis (Lombard Street is in the City of London, and used in this context to refer to the global banking system), it’s a remarkably prescient view of our current situation, and one worth citing from directly. I will not provide much further commentary as his quoted words are self-explanatory both in their description of the problem and the least-worst solution. I’ve also kept any modifications to the absolute minimum required to retain comprehension on stitching the quotes together.

The briefest and truest way of describing Lombard Street is to say that it is by far the greatest combination of economical power and economical delicacy that the world has even seen. Of the greatness of the power there will be no doubt. Money is economical power. But very few persons are aware how much greater than the ready balance is the floating loan-fund which can be lent to anyone or for any purpose.

A million in the hands of a single banker is a great power; he can at once lend it where he will, and borrowers can come to him, because they know or believe that he has it. But the same sum scattered in tens and fifties through a whole nation is no power at all: no one knows where to find it or whom to ask for it. Concentration of money in banks, though not the sole cause, is the principal cause which has made the Money Market so exceedingly rich.

It is a luxury which has never been enjoyed with even comparable equality before.

But in exact proportion to the power of this system is its delicacy. Only our familiarity blinds us to the marvellous nature of the system. There never was so much borrowed money collected in the world. If any large fraction of that money really was demanded, our banking system and our industrial system too would be in great danger. The amount of cash-in-hand is so exceedingly small that a bystander almost trembles when he compares its minuteness with the immensity of the credit which rests upon it.

We do not always manage it with discretion. There is the astounding instance of Overend, Gurney, and Co. to the contrary. Ten years ago that house stood next to the Bank of England in the City of London; it was better known abroad than any similar firm known, perhaps, better than any purely English firm. The partners had great estates, which had mostly been made in the business. They still derived an immense income from it. Yet in six years they lost all their own wealth, sold the business to the company, and then lost a large part of the company’s capital. And these losses were made in a manner so reckless and so foolish, that one would think a child who had lent money in the City of London would have lent it better. After this example, we must not confide too surely in long-established credit, or in firmly-rooted traditions of business. We must examine the system on which these great masses of money are manipulated, and assure ourselves that it is safe and right.

Ordinarily discredit does not at first settle on any particular bank, still less does it at first concentrate itself on the bank or banks holding the principal cash reserve. These banks are almost sure to be those in best credit, or they would not be in that position, and, having the reserve, they are likely to look stronger and seem stronger than any others. At first, incipient panic amounts to a kind of vague conversation: Is A. B. as good as he used to be? Has not C. D. lost money? and a thousand such questions. And every day, as a panic grows, this floating suspicion becomes both more intense and more diffused; it attacks more persons; and attacks them all more virulently than at first. All men of experience, therefore, try to strengthen themselves in the early stage of a panic [by limiting credit].

A panic, in a word, is a species of neuralgia; you must not starve it. The holders of the cash reserve must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others. They must lend to merchants, to minor bankers, to ‘this man and that man,’ whenever the security is good. In wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them.

There should be a clear understanding between the Central Bank and the public that, since the Bank hold out ultimate banking reserve, they will recognise and act on the obligations which this implies; that they will replenish it in times of foreign demand as fully, and lend it in times of internal panic as freely and readily, as plain principles of banking require.

We should also look at the rest of our banking system and try to reduce the demands on the Bank as much as we can. The central machinery being inevitably frail, we should carefully and as much as possible diminish the strain upon it.

It may be said that the reserve in the central bank will not be enough for all such loans. If that be so, it must fail. But lending is, nevertheless, its best expedient. This is the method of making its money go the farthest, and of enabling it to get through the panic if anything will so enable it. Making no loans as we have seen will ruin the country; making large loans and stopping, as we have also seen, will ruin it. The only safe plan for the Bank is the brave plan, to lend in a panic on every kind of current security, or every sort on which money is ordinarily and usually lent. This policy may not save the Bank [and the country]; but if it do not, nothing will save it.

Bagehot went on to describe the importance of central bank lending at a premium to the pre-crisis rate & to lend against collateral, both to ensure moral hazard remained. The US Federal Reserve, The Bank of England, the Bank of Japan and even China’s central bank have all read & understood Bagehot and turned on the money tap to keep the global system from seizing up entirely and so utterly destroying the quality of life of billions of people. The European Central Bank likely also understands it, given its participation in the 30th November 2011 central bank agreement to increase dollar liquidity. Unfortunately, it is currently prevented from acting further due the legal limitations placed on it by, primarily, the Germans in terms of using one of a central bank’s greatest assets: printing money to permit that liquidity flow and devalue currency, even at the cost of inflation.

As we begin to see the cautious outlines of a potential “grand bargain” on lending involving the IMF, the world’s major central banks, the BRICS, and Eurozone fiscal policy union, let’s hope they haven’t left it too late…

Italy. Or, How Markets Got Their Groove Back.

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Two Eurozone governments toppled in almost as many days. First Prime Minister Papandreou of Greece was forced to resign, and at time of typing we hear that Prime Minister Berlusconi of Italy is finally throwing in the towel. The common factor? Despite bluster, both eventually kow-towed to capital markets.

Markets are much misunderstood & maligned. They are either perceived as Machiavellian, plotting complex geopolitical outcomes from the shadows, or as irrational, disregarding long-term economic fundamentals in favour of short-term risk-taking. Markets are a reflection of the sum of a large number of disparate actions. As such, they are subject to the emotional temperature of those making deals. Fearful traders make for volatile markets.

Since the global financial crisis first hit in late 2007, those traders realised en-masse that something had gone dreadfully wrong. The complexity of some of the financial vehicles, especially in securities markets, led to an inability to accurately price risks. Accurate pricing of risk is an essential of any market, from the man on the street choosing how much a used car is worth, to an investment bank deciding what a trillion-dollar collateralised debt is worth.

That inability to price risk shook confidence in the entire financial system, with results we’re all familiar with. Far from being Machiavellian geniuses, traders are all too human. They became extremely fearful to trade with, well, anyone. They lost the ability to gauge what was worth investing in and what was not, and in their fear desperately turned to politicians and governments to solve the problem.

There is something subtly different in the air this week. The repeated failure of those politicians to restore confidence, most especially in the eurozone but also in the USA, has caused something to snap. Market have gone from childlike fear to doing their basic job: pricing in risk. The cost of Italian government debt rose to near-unsustainable levels on the back of prolonged shilly-shallying by the Berlusconi government, prompting his slow-motion fall.

This is a restoration of moral hazard in markets for which we should all be very grateful, as it is the first sign in over four years of a return to some degree of normality in how markets are supposed to work, as abnormal and dramatic as the events themselves are. Unpopular as they currently are, markets are our least-worst way of judging monetary value. There is something potentially cathartic and empowering about their net actions this past week, which may encourage sustainability and further progress in the months to come.

Governments, beware.

Honey, I couldn’t be happier than if they were based on real grades

Hand-drawn (by one of the negotiators) diagram of the eurozone deal, via Reuters. Note the many question marks...

We have an eurozone deal. The huge sense of relief felt by worldwide markets was almost palpable in its intensity, with global indices soaring in unison.

Of course, it’s a massive temporary fudge with large blank spaces that need filling in over the next few weeks. And in itself it does nothing to address the underlying structural problems of the eurozone (more on that later).

But it’s a lot more than I expected last week, so I’m pleased that enough heads could be banged together to at least come up with something. More importantly, it really felt like some tough decisions had been made.

Which brings me onto the difference between substance and appearance, and the vital importance of psychology in bridging the gap.

The title of this post is taken from the grossly underrated mid-90s movie Clueless. For the uninitiated, Clueless follows Cher (Alicia Silverstone), a Californian high school girl with a talent for manipulation and a fondness for matchmaking. The plot is loosely based on Jane Austen’s Emma but is shrewd enough in its updating to stand strongly as a work on its own.

The title quote is spoken by her father, proclaiming his delight at her ability to deftly manipulate her way into getting higher grades than her academic ability deserved, by pairing up two of her hard-grading but lonely teachers, improving their mood, thus making them more lenient graders. Reality becomes be a malleable function of applied psychology.

The movie has a lot more of these satirical, bitingly-accurate little asides. For instance, when Cher is asked her opinion of violence on TV, she replies, “Until mankind is peaceful enough not to have violence on the news, there’s no point in taking it out of shows that need it for entertainment value”. If you’ve never seen the movie, perhaps dismissing it as fluffy/superficial rom-com, you should definitely watch it. It neatly dissects the 90s as Heathers did the 80s, except it does so with affection rather than disdain.

The eurozone deal is currently based on ephemera. It has little real substance to it, as the details of the bank recapitalisations, haircuts and EFSF expansions are yet to be fleshed out. But what it achieves is psychological; it draws a line in the sand around the problem. To paraphrase Churchill, it feels like the end of the beginning. And that may be enough of a psychological sleight-of-hand to persuade markets to react accordingly, which will then translate perception and appearance into reality.

The American investor Benjamin Graham is famous for saying, “In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine”. What he meant was that day-to-day fluctuations are based on volatile emotion & appearances but over the years, profitable businesses with a future will outperform unprofitable businesses.

For the eurozone to profit from the breathing space granted by the psychological drama of today’s deal, they must turn around their core business: they need to remedy the structural problems of monetary union without fiscal union. There are signs this will happen. EU President Barroso is pushing for deeper fiscal integration within the eurozone. Essentially, the richer countries will gain some control over the poorer countries’ budgets in return for helping them fund their economic deficits. This would certainly help mitigate the structural problems, though of course no-one really wants to talk about the potential democratic deficit created by such a move.

On a more parochial level, the UK may potentially be able to get the best of both worlds, benefiting from a more stable eurozone while remaining outside it, and retaining relative economic independence while still being part of the EU single market. It’s an exciting, if unpredictable, situation. There is a saying, popularly though inaccurately attributed to an ancient Chinese curse, “May you live in interesting times”.

We are certainly doing that. Better try to enjoy it.

7 billion souls – blessing or curse?

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Within about a week, you’ll be sharing the Earth with 7 billion other people. For those demanding neurotic precision at the inevitable cost of a little accuracy, there’s a running total available at Worldometers.

The one billion mark was only passed about 200 years ago, and there is little doubt that industrialisation has helped support the massive subsequent expansion of the world’s population. Some still advocate a Malthusian view to population growth, suggesting an optimum level around which the population will eventually end up fluctuating. This concept has historically always been proven wrong, as there is only an optimum population level if how society consumes materials and alters its living conditions does not change. The story of mankind is one of moulding his world to enable a higher population level to subsist upon it.

While current projections suggestion a demographic levelling-off of the rate of population growth towards a stable total around the middle of this century, those are liable to alter if something changed in the underlying assumptions of the model. For instance, a globally destructive virus or a globally positive new technology, would both break the assumptions about how different groups and societies will behave in the future.

The more modern interpretation of Malthusian theory takes on a green hue. Discussions around carbon footprints and how many “Earths-worth” of natural resources we’re currently using essentially make the same core assumption that technological advancement cannot increase efficiency of life, and thus allow more consumption safely and sustainably. A more subtle – and to me more convincing – argument is that while efficiency can be increased, this results in increased fragility of the complex system that underpins those efficiency gains.

Logistics chains become extended, requiring increasing refinement of every step of the chain in order to maintain supply to markets around the world. Our daily lives operate on the gossamer-thin surface of an ever more tautly-stretched bubble of complexity, ready to pop at the slightest disturbance. Of course, many around the world already live in sections of societies or even entire countries where the bubble has already been popped. In those cases, quality of life suffers, and eventually the population will also reduce.

The wider question is how to manage this problem. Top-down solutions cannot work on such a complex interwoven patchwork of systems. It is impossible to understand the system in its totality, therefore any change imposed on the system from a central authority is unlikely to achieve its aims; unpredictable and sometimes counter-intuitive results will emerge, possibly leading to a worse eventual scenario than if a diktat had not been imposed.

Similarly, a widespread concrete bottom-up consensus between individuals on how to manage resources and advance societal progression cannot be achieved. Individuals will never subsume themselves entirely in a wider entity, and any “gaming the system” for personal benefit will disrupt the social equilibrium being targeted, once you multiply up the effect of 7 billion individuals each manipulating the situation for their own benefit.

Personally, while acknowledging the fragility of our current model, I must admit to be more concerned with outcomes than projections. Our system for living may be dependent on an intricate hidden machinery, but it does work. The human race has never had it so good.

Glance through this lecture by Harvard Professor Steven Pinker. By almost every metric, we live in a better world than ever before. And yet, we don’t realise it unless we choose to step back and appreciate what we’ve managed to achieve. That to me is a more important lesson than worrying about an abstract population figure.

And the dangerous fragility of our modern world?

However fragile it becomes, there is an enormous broad-based financial incentive to securitise it against disaster. I’m willing to take a chance, and to trust in the ingenuity of current and future generations to keep doing what mankind has always done: improve his existence.

Rebuilding Greece

As global markets rise on the hope that the Eurozone may finally be mustering the courage to grasp the political nettle of the problems generated by a single monetary policy but multiple fiscal polices, it seems appropriate to post this photograph of the Parthenon being rebuilt. Taken during a recent break I enjoyed in Athens & the Ionian island of Kefalonia, the imagery of the Parthenon gradually being reconstructed, reversing the damage caused by years of neglect, resonates neatly with the wider challenge faced by the Greeks.

This was my first visit to Greece in many decades, and much has changed. Despite its current woes, it is undoubtedly a richer and more sophisticated country than I remembered. It has benefited from the influx of funds brought about by EU membership and the cheap borrowing costs it initially experienced as a Eurozone member. The debt has caught up with it and my personal opinion is that all the current austerity measures & bailouts are simply buying time to manage a more definitive restructing of the debt in due course. Call it a default if you prefer, for that is what it will be in effect, but it will be done in a contained way once the rest of the Eurozone has finally erected sufficient economic defences to calm any subsequent financial concern.

Greece itself faces a long period of reconstruction. It is a proud country, with a glorious past (some aspects of which I intend to blog about soon) but it must realise that many of its current problems are of its own making. Poor tax collection, profligate spending and overgenerous public sector conditions are an unsustainable and toxic mix.

I witnessed first-hand the anger and sorrow that the population are feeling. From large protest marches watched over by riot police, to individual stories of woe such as the young museum worker who hadn’t been paid in four months, Greece is struggling to transition. The risk is of an increasingly angry population causing severe unrest requiring military intervention, and a subsequent coup. This may seem outlandish speculation but it is only a few decades since Greece was under military rule. With the current political class widely reviled, it may not take much more pressure for the public to permit a coup.

The following images of the Parthenon show more of the restoration work taking place. I hope the Greeks can manage to rebuild their country with equal care.

Stock Markets lost among the waves

FTSE stock market stagnation since 1998, data from Yahoo Finance

As world stock markets take another cold plunge again today, even the most rational and fundamental-focused investor takes a sharp intake of breath and wonders when a corner will be turned. Obviously, if the eurozone got a grip of its debt problem, things would begin to improve. But leaving such common sense to one side, this is precisely the kind of febrile climate that encourages one to explore stranger waters.

One step removed from goldbug hysteria and palmistry is economic wave theory. The more comprehensible end of the spectrum focuses on the logical and simple fact that businesses will leverage themselves more when things are going well, and then have to deleverage and contract when economic times sour. This is all sensible enough, and accounts for the basic cycle of boom and bust.

A more subtle variation of this is the Kitchin cycle, which is the manifestation of an information lag. It takes time for businesses to both recognise and act on fresh market information, for example by expanding & buying new stock or converselylaying workers off & restricting inventory. The Kitchen cycle is therefore thought to operate over about a 4 year term.

A slightly slower wave is the Juglar cycle, which operates over about an 8 year cycle. This measures not how business use the resources they already have available to them, but how the invest in creating new resources, for example building a new factory or power plant. These things take longer, so the Juglar cycle is a longer than the Kitchen one.

Beyond this territory, we enter more speculative economic wave theory. At a 20 year cycle level, some believe a Kuznets cycle operates, reflecting world movements in migrant populations and the effects they have on GDP. Kuznets applied a mathematical filter to economic data to reveal his cycle. Unfortunately, application of the same filter on white noise (random data) also reveals this cycle, suggesting it is an artifact of the filter rather than a real event, although arguments continue to this day whether it is real.

If the Kuznets cycle is controversial, the Kondratieff (or Kondratiev) wave is in the realm of the fabulous. It suggest an even longer 40 year cycle and suggests that the economy has relatively quiescent (though possibly volatile) periods alternating with more steady booms in activity. The theoretical basis to the Kondratieff wave is that it reflects the emergence of revolutionary new technologies and their impact on the economy. Some have gone so far as to suggest that the period between about 1983 and 1999 was one of the booming phases (reflecting the microchip revolution), implying we’re now in the middle of one of those volatile but stagnant intervening times.

While it all sounds fantastical, if one projects backwards it’s tempting to selectively choose facts to fit the theory. For example, the period of 1965 – 1983 was equally stagnant and volatile as the past 12 years, in terms of stock market fluctuation. And before that, 1950 – 1965 showed marked increases in valuations. Further back in time, 1929 – 1945 coincided with the Great Depression and WWII, whereas before that were the Roaring Twenties. If Kondratieff wave theory has a kernel of truth, then the current volatile stagnation will stretch until about 2016, although the last two years before then should show signs of steady growth too. So only a few more years of trouble left…

To finish on a more optimistic (although probably even less well-founded) note, I must mention the Elliott Wave Supercycle (or Grand Supercycle Theory). This speculates that there is a 250+ year broader supercycle of oscillating economic activity. The most recent one is thought to have begun in the early part of the 19th century, beginning with the Industrial Revolution. If true, we still have another 50+ years of boom, before the world economy drifts into between two and three centuries of relative waning.

See, it’s not all bad!

Euro Farce

The Eurozone remains en route to implosion. But it’s a slow-motion train wreck.

I first blogged about this almost exactly one year ago, and again last November; I doubt today’s post will be my last. I won’t rehash the detail from those posts, but reading them in light of ongoing events proves their points.

Eurozone central bankers and politicians have consistently failed to definitively address the fundamental structural economic flaw generated by a unified monetary policy and nationally disparate fiscal policies.

That’s because there is no way to address this mismatch, short of unifying fiscal policy to a much greater degree than stronger countries’ economies (and voters) are prepared to accept. Or breaking up the monetary union, which Euro politicians and central bankers refuse to accept.

Paul Mason, BBC Newsnight’s economics editor, is just one of many journalists now publicly discussing scenarios previously considered verboten. His idea of Euro bonds would be one way of addressing the structural problem, but fails the litmus test, as I doubt it would be palatable to German voters. His final point, quoted below, paraphrases one I made in my earlier articles:

Whether we hit the barriers of political unacceptability or a market attempt to take down the ECB first is a question everybody hopes we never have to answer, but markets have staged attacks on central banks before.

Where I differ from his perspective, is that I hope the question is answered, and soon.

What is needed is clarity and finality, not ongoing slow-motion crisis and farce. Euro currency fragmentation will be intensely painful, but as with a sticking plaster, it’s best to act decisively to limit the overall agony. It’s been over a year since this crisis started, and the hope then was that temporising measures would buy enough time for economies to recover, and that growth would be enough to disguise the underlying problem. If it had happened, it would have worked.

It hasn’t happened, because what Greece, Ireland, Portugal (and Spain and Italy) desperately need in order to grow is rapid and major currency devaluation relative to other world currencies, to make their economies competitive again. They cannot get sufficient devaluation within the Euro, as the relative economic strength of the northern Eurozone countries keeps the currency as a whole moderately attractive internationally. It is falling in value somewhat, despite that, but not nearly enough to save the periphery. The ECB’s recent interest rate hike simply underlines how monumentally destructive the Euro is proving to the peripheral economies, not to mention their citizens.

Solving the problem demands decisive political action to either break up the Euro, or drive the Eurozone significantly towards  fiscal union. Forgive my scepticism but I doubt we’ll get either. Just more muddling through with temporary bailouts and other weak measures. In short, keeping fingers crossed, hoping it buys enough time for natural growth to kick in, and praying the market is too stupid to see what’s going on in the meantime.

Hmm, good luck with that…!