Terry Smith Straight Talking

Welcome to Straight Talking

Hello and welcome to my new blog site, Straight Talking.

I am best known as a businessman in the City of London, and have worked in finance my entire 35-year career. Today, as Chief Executive of Tullett Prebon, one of the world’s leading inter-dealer broking firms, and as Deputy Chairman of Collins Stewart, the United Kingdom’s leading independent financial advisory group, it's fair to say that I have some insight into the workings of business, banking and the financial services sector.

I intend to blog about business issues, and the aftermath of the credit crisis which has engulfed us. I have included in my blog, as context, some back-dated articles that I have written for national newspapers in the United Kingdom. I also intend to write on issues about which I am particularly passionate – current affairs, history, culture, our society – things that affect our day-to-day lives. I, not a ghost writer, will write my posts, and they will be what this blog is all about: straight talking.

I have a reputation for straight talking. I'm often described as "outspoken". I don't view this as a criticism. I believe that one of the reasons we have got into the difficult and dangerous situation which afflicts our economy and society is that too many people followed the herd. There was too little high quality independent analysis, and we have been and still are too dominated by "spin" rather than reality. This blog is intended to make a contribution to breaking down that situation for the good of us all.

From time to time, I may also invite guest contributors to comment or blog on key subjects. I welcome your comments and will respond as best and whenever I can.

My blog also deals with my wider interests and I hope that those of you who have an affinity with these will also contribute.

Newsnight appearance on 23 July

I appeared as a guest on BBC 2’s Newsnight programme on 23 July, in which Linda Yeuh, Max Wolff, Gavin Esler, and I discussed the European bank stress tests.

To view the clip go to the 'In the media' page.

Here is what I had to say:

• “I don’t think the tests were credible. I wouldn’t agree that the 0.4% reduction in GDP, which they looked at as an economic downturn, as a double-dip, is the worst that you could realistically envision and when you look at what we’ve already had that’s a small fraction of what could occur frankly.”
• On the stress tests: “This looks like an exercise in firing an arrow and then drawing a target around it.”
• “One of the great differences between American stress tests and the European stress tests is that clearly in the United States it’s not necessary to apply a sovereign default as being a likely outcome.”
• On the absence of stress tests for a sovereign default: “ Do I regard it as something that you can take as an assumption that because the European Central Bank says it will do anything to prevent a default that there won’t be one? No.”
• “Nothing has changed of any significance in the structure of banking in Europe or the United States in terms of those parts of the structure which contributed to the crisis – nothing whatsoever.”

BBC News at Ten appearance on 23 July

I appeared on the BBC News at Ten on 23 July, in which Robert Peston interviewed me regarding the European bank stress tests.

Here is what I had to say:

• “I think there is a realistic possibility of another banking crisis.”
• “The stress tests don’t really look at the realistic possibility of more severe downsides, so I don’t feel comforted by that.”
• On a second banking crisis: “The difference is it would be more worrying this time because the governments are essentially out of ammunition; we’re in a sovereign debt crisis now as well.”

Financial Times, Letter to the Editor - A frank exchange over cocoa beans

 Today's Financial Times runs my letter to the Editor regarding cocoa derivatives, here is the letter in full.

From Mr T.C. Smith.

Sir, I refer to your fine editorial "'Chocfinger' is no Bond supervillain (July 21)".

Many commentators maintain that one lesson of the financial crisis is that all over the counter derivatives should be traded on exchanges.

I wonder how the revelation in your editorial, that the cocoa consumers who attempted to hedge their powder and butter through the imperfect mechanism of the Liffe futures in cocoa beans would have suffered much less if they had taken out OTC contracts with banks which precisely hedged their risk, fits their theory.

They can file your editorial with the reports on the as yet unexplained "Flash Crash" of May 6, in which Apple's shares traded at one cent per share and $100,000 a share within 20 minutes.

But then, why let the facts get in the way of their theory? It will all be safer and more transparent when everything is on exchange.

T.C. Smith,

Chief Executive, Tullett Prebon,

Deputy Chairman, Collins Stewart

 

Suppose it were true?

Guest contribution from Nicholas Carn, Odey Asset Management

Governments are talking about reducing spending – some are even doing it. Naturally most people are sceptical. Turkeys don’t vote for Christmas, vested interests are well entrenched,  in the past reductions have been short lived - strong arguments that the current efforts will eventually run into the sand.

But what if it were true? With hindsight it is clear that the first salvo in the war on inflation was fired at the FOMC meeting of September 1979. Markets then spent years refusing to believe that Volcker was serious or that he had a strong enough mandate. Gorbachev’s “Perestroika”  told the world that the Soviet Union had ceased exporting revolution. The future was clear to see if one chose to see it. Sometimes the catch is that things actually are as they appear to be.

Everyone knows that governments do a lot of things that their citizens would be happy for them to stop doing. They do even more things which are, in theory, desirable but do them extremely badly and expensively. Everyone knows what food or clothing would be like if it was supplied by the State. Every developed country is on a journey of discovery about the privileges and work practises of their public servants. Their citizens will not like what they see.

Globalisation has transformed work practises and productivity in the private sector. To a large extent the public sector has been insulated. The disinflationary trend enjoyed by the developed world has largely consisted of falling prices in internationally traded goods and services combined with inflation in administered prices and state provided services. There is no good reason why this should have been the case. A large part of what governments do is data processing. In the private sector, data processing dependent  businesses, retail banking for example, have seen a big fall in headcount and a step change in productivity over the last fifteen years. Nor is it universally true that the public sector has seen poor productivity growth. The German state sector has seen headcount fall by 20% and has lowered prices of a number of State provided services.

The effect of restructuring the state sector is not in anyone’s model. How could it be ? It hasn’t happened before. Nevertheless it is possible to make some informed guesses. It would be a second disinflationary wave at least comparable to the corporate restructuring which began in the wake of the  credit collapse of the early 1990s. Firstly, poor labour productivity in the state sector represents a lot of spare resources potentially available to the economy. Secondly, a lot of the costs are borne directly by the private sector and reducing prices [and bureaucracy] would raise private sector productivity further.
 
There is no doubt that, even if victory is secured , the battle will be bitterly fought. The reduction in UK public spending after WW1, the so called “Geddes axe” achieved only about half of its objectives. However the state sector was very much smaller then and the scope for reducing its activities correspondingly less. The UK government is currently running an extensive  TV advertising campaign encouraging its citizens to use handkerchiefs. Even a decision to cease transmitting the message would improve welfare as advertising breaks would be shorter.

The G20 summit

Well, that's everything sorted then, aye?

'Leaders at the G20 summit in Canada have agreed to cut national budget deficits without stunting economic growth.'

In other news, Our New Coalition Overlords have agreed targets to release unicorns into the wild, the USA has announced that it can't stop the oil gushing out but the oil won't pollute anything, and the Saudis have announced that women will walk around in bikinis whilst obeying sharia law.

OK, I might be exaggerating but- seriously- do any of these morons have any idea of how they are going to achieve any of this?

After all, Our New Coalition OverlordsTM, for instance, have announced savage cash cuts of precisely naff all.

'So the cuts are going to be long and deep, which nobody can deny.'
Well, nobody that is, except extremely naive people who simply look at the government's spending projections. People like John Redwood, who at the TPA's budget briefing today, drew attention to the plain fact that under the Osborne plan, total public spending is not facing any cut at all. In fact, it is projected to increase from £697bn this year to £758bn in 2015-16, a rise of 9%.

So, when anyone talks of these "savage cuts", I can but utter a hollow laugh. Because, in truth, this government is going to carry on spending more and more of our money, and racking up more and more debt.

The simple fact is that there are no cuts; the government has simply said that they will increase the rate at which they spend our money by a smaller amount than the previous government wanted to. And the other simple fact is that the government is still overspending by far more than £100 billion per annum.

So, according to this BBC story, the G13 governments have agreed to "halve their deficits within three years" but- given that they seem unwilling or unable to sack hundreds of thousands of pointless bureaucrats and to cut hundreds of millions of pounds worth of pointless projects- our own government is not going to achieve anything like that.

Unless, of course, they massively increase taxes.

Of course, our government is already spending about 50% of the entire economic output of the country and so, if they raise taxes, you can be damn sure that they will increase the 'stunting [of] economic growth'.

So, you'll excuse me for thinking that this pointless posturing (at our expense) is going to achieve precisely nothing, apart from making our leaders feel that they have "arrived" on the world stage...