Saturday, 25 April 2009

The markets this week

Despite what has been described as a historic budget, the markets were fairly unmoved this week. This tells you that they more-or-less predicted what happened, undermining Tory claims that this budget is despicable and will bring the end of the world (or words to that effect).

Below are the movements over the past week:
FTSE: 4155.99 (up 63.19 or 1.54%)
DOW: 8076.29 (down 55.04 or 0.68%)
£: $1.4672 (down 1.25¢ or 0.84%)
£: €1.1083 (down 2.62¢ or 2.31%)
Oil: $51.66 (down $1.64 or 3.1%)
Oil: £35.21* (down 81p or 2.25%)
Oil: €39.02* (down €1.84 or 4.51%)
Gold: $907.50 (up $37 or 4.25%)
Gold: £618.53 (up £30.24 or 5.14%)
Gold: €685.51 (up €18.09 or 2.71%)

Since budget week has brought out the doom-mongers, I'll just list the prices 13 weeks ago (3 months) and the % change since.
FTSE: 4052.47 (now 2.55% higher)
DOW: 8077.56 (now 0.02% lower)
£: $1.3806 (now 2.67% higher)
£: €1.0626 (now 4.30% higher - although that week was exceptional €1.11 and €1.13 were the figures for the week before and after)
Oil: $43.18 (up 19.6% in $, 12.6% in £ or 17.4% in €)
Gold: $875.75 (up 3.6% in $, down 2.5% in £, up 1.7% in €)

All of which goes to support the notion that you should ignore the daily shifts in valuation, unless you are a professional trader. If even weekly shifts are greater in degree than quarterly ones, then a longer view is surely better

Quick reminder: My Formula 1 blog is up and running, and will feature articles about the Bahrain GP this weekend. It can be found here

Wednesday, 22 April 2009

Why 50%?

New Labour specifically promised not to raise the top rate of income tax in this parliament. The November announcement (of a 45% rate on earners of more then £150k) circumvented this by kicking in only in 2011, which must be after a general election. Now, however they have both increased and brought forward this rate rise (to 50% from April 2010). Why?

Reasons in favour:
1. Revenue. Increasing tax raises revenue (ignoring largely discredited Laffer theories about discouraging or scaring away high earners). However, even the Treasury only expects this tax to raise £2.4bn (compare to the budget DEFICIT of £175bn this year and next).
2. Symbol. There is a widespread feeling that the rich caused this crisis, and that whilst they may have lost more financially (stocks, housing and offshore banking having collapsed), they aren't the ones living hand-to-mouth as a result, and so it is very satisfying for the public to see the rich stung (especially since the personal allowance and base rate have both been made more generous for most people over the past couple of years). See "poorly targeted" in reasons against.
3. Angry mob. Related to symbol, this is a very effective way of drawing a little ire out of people's belief that politicians are representing the rich, and that everything possible must be done to punish both groups for this crisis.
4. Diversion. The deficit numbers are spectacular and so something must be done to draw attention away from the £350bn net public borrowing over the next 24 months. The Tories, to their credit, although entirely self-interestedly are focusing more on the deficit. It is my view that an 8-12% deficit was necessary this year and next, although I also feel that it should quickly return to surplus.
5. Putting the Tories on the spot. Not now, that is, but when they take over. How easy will it be for a Labour Shadow Chancellor to exclaim and fulminate about the Tories helping the few, the élite, at the expense of the many, whenever the next Chancellor tries to remove this tax (and try they will).

Reasons against:
1. Symbol. To those of means, this is a sign that Britain intends to tax them heavily for the forseeable future. Whislt taxes are rising everywhere, they are not equal everywhere, and this will encourage some rich people to shop around for a better country in which to live. They might even be heartily welcomed by countries desperate for their money.
2. Poorly targeted. Most of those who caused this crisis are no longer earning as much as they used to. Those still earning £150k work in countless fields, most of which have little to do with banking and many of which will be the same industries helping Britain (or any other economy) out of the recession.
3. Broken promise. Whilst Labour have (to me) a perfect force majeur defense for this charge, the Tories will use it to declaim any Labour election pledge.
4. It was proposed by the Lib Dems ages ago. Surely someone has pointed this out, but the Lib Dems had this in their manifesto for 2005, so surely the government is only acknowledging the superiority of the 3rd party.

Having said all of that, it was STILL the right thing to do. The symbol of hitting the rich (whilst not hitting them 85-98% as in the 70s) will help the party a lot, especially since it affects so few people (how likely are YOU to be earning £150k in the next 3 years?)

Budget 2009

Budget day and there are some key headlines:

1. Top rate of income tax to be 50%
2. £2000 incentive to scrap 10 year old cars
3. Borrowing to hit £175bn
4. Return of the fuel escalator
5. Changes to ISAs and pensions
6. Lots of other changes

I'll address each in turn below:

50% income tax - In 1988, Nigel Lawson (now Lord Lawson) cut the top rate of income tax to 40%. New Labour have always mentioned in campaigns that they wouldn't increase the top rate of tax. Last November, however, Alistair Darling announced a new top rate of tax for people earning over £150k per annum. This was to be 45% and to take effect in April 2011. It is this tax that has risen, and been brought forward. Now it will be 50% from April 2010. Several other adjustments, to minimise deductions for high earners mean that anyone earning in 6 figures will lose (however this is not many people).

Scrapping incentive - This is not a £2000 subsidy, as implied. Nor should it be confused with the £5000 incentive to buy green cars from 2011, that was announced last week. The government will only put up £1000, with the rest coming from the automobile industry, and will only apply to new cars. So not as generous as it sounded.

Borrowing - The largest peacetime deficit ever, even as a percentage of GDP. In fact only the Second World War sent the budget deficit higher. What is more, 2010/11 will be almost as bad as 2009/10. Over the 5 years whose deficits were announced a whopping £703bn. Which is more than a few. Realistically, the interest on that debt (given yields of 4% over the long term) amounts to £28bn per year forever, unless of course surpluses are run for the forseeable future (recent events have shown that period to be nil, but I speak figuratively). I still think this is the right thing to do, although I'd plan for lesser deficits in 2012-15 than Darling does. Having said that, it won't realistically be Labour in charge by then, so it is someone else's decsion to make.

Fuel escalator - 2p per litre come September, then 1p per litre ABOVE INFLATION every April for the next 5 years, subject to "keeping an eye on fuel prices". Empty promise of green policy, in other words.

ISAs - currently the allowance is £7,200, of which only £3,600 can go into a cash ISA (cash ISAs are lower-risk and lower-reward, except when things go like they have recently). These limits will be increased to £10,200 and £5,100 from next year (unless you are aged over 50, in which case they increase come October - if you turn 50 this winter, your allowance increases on your birthday). This will encourage saving, at a time when people were increasing their savings anyway. At some point I may explain in detail my view on taxing savings interest, but in principle I oppose it, so welcome this increased allowance.

Pensions - For the so-called super-rich, pension credits have been cut. If you earn over £100k you will face a higher marginal tax rate, until your average pension credit drops to 20%, where it remains (rather than the 40% it used to be, and remains for incomes in the £40-100k range).

Other - ask the Beeb. It has a personal budget calculator. Apparently I'll be slightly better off, although that comes mostly from increases in the allowances in line with inflation.

Market response: FTSE up 1%, pound down 1.1% against the dollar and 1.7% against the Euro. That implies that "the markets" believe Darling is doing the right thing, but that those debts must be paid for somehow (hence the drop in the £s value). Most importantly those changes are no greater in scale than usual daily changes, so the Budget was in line with expectations.

Final note: This blog will now focus on Economics. All new F1 related posts can be found on my new blog, the power of 15000 horses.

Sunday, 19 April 2009

Team assesments

Brawn (1st: 36 points): Outdone today, but this was largely due to a key characteristic of their car. It is very gentle with tyres, which means that in the wet, it struggles to keep them warm enough. This will provide them with an advantage in changeable conditions (such as a track drying out) and when it is very hot (or more generally, when the super-soft is in use). They still look good for the title, probably both titles. Prediction: CHAMPIONS
Red Bull (2nd: 19.5): Clearly the best car to have in the wet. When conditions were at or near their worst, the Red Bull was 2s per lap faster than anyone else (even Webber, whose visibility wasn't great behind his teammate). Also quick in the dry, which is usually more important for championships, but not as quick as Brawn. I'm unconvinced that they'll make the same progress as others with the rear diffuser, due to their exisiting system not being as suited to its introduction. Prediction: 2nd
Toyota (3rd: 18.5): A poor weekend for them, but Glock showed his strength in the wet, fighting throuhg to 7th. Will certainly win at some point this year, but may get overtaken by the more traditionally leading teams, later in the season. Prediction: 5th
McLaren (4th: 8): Crisis? What crisis? Today's performance will ease the pressure on the team, ahead of their FIA summons next week. Unless the FIA throw the book at them (which would be ridiculous, but not out of character) they are well placed to improve further. Strong development team can probably get them fighting for wins in the second half of the season. Prediction: 3rd
BMW (5th: 4): Should have had a podium in Melbourne, had a podium in Sepang and yet they were nowhere to be seen here in China. Heidfeld's strategy probably didn't help him out - his wet tyres were thoroughly worn out by the end of the race, having gone on during the safety car period at 1/3 distance. Will need to improve, and aren't due to release their new diffuser for a while, yet. Prediction: 6th
Renault (6th: 4): Alonso looked good this weekend, but Piquet was a disaster waiting to happen in the race. Admittedly he didn't have the upgrades that were on Fernando's car, but he must improve, a lot, quickly to keep his seat for the remainder of the season. The team have upgrades coming over the next few races, which should bring them into the fight for podiums. Prediction: 4th
Toro Rosso (7th: 4): Buemi keeps picking up points through great Sunday performances. However, as the other teams improve, that will become harder and harder. Buemi might manage 10 points this season, but Bourdais won't. Prediction: 9th
Williams (8th: 3.5): Having the second or third fastest car at the opening rounds and scoring only 3.5 points shows that it is what you achieve on the day that counts. Now that their rivals will be catching them up, they will struggle to improve on 8th in the table. Nakajima (like Piquet and the Force Indias) has yet to reach the top 8 in any qualifying session (Q1, Q2 or Q3) or the fastest lap rankings, or score a point in a race. His job will come under pressure mid-season, if that doesn't change. Prediction: 8th
Force India (9th: 0): A great shame for Sutil, that he couldn't bring home that 6th place. He'll have other chances, but not many. Unless of course, their Bahrain upgrade is as good as hoped. The team WILL score points this year, but not many and not enough to come 9th. Prediction: 10th
Ferrari (10th: 0): Another weekend and yet again they leave empty hooved. Massa's pace was strong, but reliability is clearly a problem, even without KERS. Raikkonen was fairly anonymous, after his second stop, ending the race 10th. They will come good eventually, but it will amount to damage limitation for the season. Their 2010 cars will carry numbers in double figures. Prediction: 7th

Prediction assesment

Well the BBC made the best weather prediction. I hadn't believed the rain forecast (assuming it to be an outside chance). The Red Bull is the best car in the wet, that much was clear in Malaysia. The rain, starting under the safety car and the re-emergence of the same on lap 18 scuppered all predictions. It meant that James Allen's predictions were closer to the mark (all about 1-2 laps later than mine) and the BBC's further away (about 2 laps earlier). Perhaps in Bahrain we can get an idea whose methodolgy works best.

My prediction results (same rules as always, 1pt if named driver finishes in top 8, extra point if it is in position predicted):
Thursday: 6/16 (5 drivers, Jenson correctly placed 3rd)
Friday: 6/16 (6 drivers, none in the right place)
Saturday: 8/16 (5 drivers, Webber, Button and Hamilton all correctly placed).
In total I listed 13 different drivers, 6 of whom scored points and 3 in the positions I gave. Shows how predictable this sport is, I suppose. Yesterday's prediction was the best I've managed all year.

Driver reports

How did everyone's race go?
The field started behind a safety car, due to treacherous conditions at the start. The safety car came in after 8 laps, ruining some strategies. The track never dried out, although time did drop from 1min 59s to 1min53s at one point. Congratulations to the 16 drivers who finished, judging by the amount of spins, aquaplaning was a major problem. Any one of them could have been taken out entirely, throuhg no fault of their own, at more or less any point.

Here are my reports, in race finish order:
Vettel - Faultless performance. Helped by good visibility, more or less throughout. Also had the best car in the conditions (this was also apparent in Malaysia where they could almost match Glock on the wrong tyres). Congratulations, thoroughly deserved.
Webber - No hard luck story, merely the second best driver/car on the day. Good fight with Jenson in the middle of the race.
Button - Disadvantaged by the safety car, coming out a few laps before he would have stopped anyway. Outpaced his teammate for 3 periods - overtaking him early on, when Rubens was stuck in traffic and at the end when on newer tyres.
Barrichello - Shouldn't have let Button slip past him. Was hugely disadvantaged by safety car, as he slipped behind Raikkonen, Hamilton and a couple of others - the poor visibility and traffic cost him 2secs a lap. Unlucky that conditions deteriorated after he'd kept his existing wet tyres on (had conditions continued improving he'd have been on Jenson's tail, not having the McLarens on his).
Kovaleinen - Finished a lap, finished a race, beat his world champion teammate. A fairly anonymous race, without errors. Strategy worked well for him, staying out very long and 1 stopping.
Hamilton - Overtook many, many cars, but fell off the road far too often. Still, realisitically he wasn't going to get a much better result.
Glock - Started from pit-lane, enabling him to change strategy. Took his only pit stop after damaging his front wing, but had the pace to fight through to 7th. Well done.
Buemi - It seems that Toro Rosso have got another star-in-the-making. Was running in the top 4 at times, due to strategy. Only mistake came where he didn't see Vettel slowing down as the SC came out. A mistake similar to that made by Vettel in Fuji '07.
Alonso - Made a mistake stopping early under the safety car. He probably had enoguh fuel for 3 racing laps. Went from last and 20s behind Vettel to last and 37s behind within 3 laps of restart - had he waited, he oculd have emerged from the pits mid-pack, and might well have scored points.
Raikkonen - Another race without points for Ferrari. What's worse is that he just wasn't quick enough in the conditions (much like Melbourne in the dry).
Bourdais - Overshadowed by his teammate, but racy at times. I wasn't paying him much attention, but I think he got a little unlucky on strategy calls, but only really deserved 11th.
Heidfeld - One stopped, but too early. His car was fuelled as long as Hamilton, and had he followed McLaren's strategy he wouldn't have faded from 9th to 12th (despite Sutil dropping out) at the end on worn out wet tyres.
Kubica - Anonymous except for the moment where he climbed over the back of a slow moving Trulli. This brought out the safety car, minimising his losses. Car not quick enough, in short.
Fisichella - Overshadowed by his much younger teammate. An anonymous race at the back of the pack - perhaps his car wasn't well balanced on fuel/wet tyres.
Rosberg - Disappointing. Made the same mistake as Alonso, without having the excuse of being as short-fuelled. Never got far through the traffic before risking intermediates as conditions reached their best with 16 laps to go. Rain returned which forced him to change back 8 laps later.
Piquet - Not as fast as his team-mate, but he didn't have the upgrades to the car. Must do better soon, though.
Sutil - Great race, until his car escaped him near the end. 6th place would have been a great reward for his strong wet-weather performances over the past 2 years. He'll mange it next time.
Nakajima - Terrible. Eventually retired towards the end after leaving the track several times, and getting overtaken by his teammate.
Massa - Was on the pace with the McLaren until his car gave up the ghost under the safety car. Shame for Ferrari, as they might have got some points.
Trulli - Worst driver of the day. He had already been overtaken by his teammate (who started from the pits, whilst Trulli started 6th) before Kubica mounted the back of his car. Nothing he could do, thereafter.