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Bull and Bear – an optimistic and pessimistic view of investment news: Today’s stories:  Eurozone in recession, Never fear, King still optimist about 2014, China goes against reform, Has Obama put on a poker face, or does he mean it? Obama’s olive branch. Corporate tax controversy hits John Lewis and Germany


Eurozone in recession

The data came in literally seconds before this article was published. The Eurozone is now in recession with the economy contracting by 0.1 per cent in Q3, after a 0.2 per cent contraction in Q2.

Italy saw 0.2 per cent contraction in Q2, Spain 0.3 and the Netherlands a staggering 1.1 per cent drop. Greece and Portugal are in a very deep recession, but both Germany and France saw 0.2 per cent growth.

Don’t forget, however, that October’s Purchasing Managers’ Indices covering Germany and France showed a sharp deterioration, meaning contraction is likely to follow even for these two countries in Q4.

Never fear, King still optimist about 2014

If you want to know what the weather is gonging to be like, do you a) listen to the weather forecast, or b) stick a pin in a piece of paper listing average temperatures at this time of the year over the past decade? Not sure if anyone has tried that, but it would be interesting to see which technique is more accurate.

What about economic forecasting (or indeed picking shares): do you listen to experts, or go for the pin method?

JK Galbraith once said: “The only function of economic forecasting is to make astrology look respectable.” He may have had a point.

Yesterday, the Bank of England issued its latest inflation report, and guess what – it appears that its forecasts for 2012 and 2013 were wrong. Still it’s sticking with is predictions for 2014 – one assumes we will have to wait six months or so, before it turns out that 2014 won’t be quite as good as we were expecting.

When last the Bank of England made its forecasts (and that was just three months ago), it forecast growth of around 1.8 per cent next year. Now it’s saying expansion will be 1.2 per cent. And no doubt it will stick to this forecast right up until the moment when it makes another forecast.

As for 2012, here there was good news. The last inflation report forecast zero growth, but now the bank is saying 0.2 per cent. Frankly, we probably won’t have an accurate forecast for 2012 until 2014 – if we are lucky.

Talking of 2014, the bank still thinks the economy will expand at 2 per cent. But then, as has been pointed out here once or twice, forecasters always do seem to think the year after next will be better. Maybe they need a new pin.

But woe, the Bank of England now reckons inflation won’t fall back to target until the end of next year. In fact it is suggesting it will be above 2.5 per cent for most of next year. Who just said déjà vu?

What are the implications? Well, if you agree with the idea that recovery will occur once average wages rise at a faster pace than inflation that will mean a longer wait for recovery. Many economists are now talking about the bank lowering interest rates even further and more QE early next year.

China goes against reform

Seven into nine doesn’t go. Nine men in dark suits were in the running to sit on China’s Standing Committee of the Communist Party’s Politburo, but there were only seven places.

Just missing out was the dark suit belonging to Li Yuanchao – he was perceived to back political reform (not sure what his suit thought) – and Wang Yan, again a supporter of political reform and who had a track record of encouraging private investment.

In the new committee will sit Zhang Gaoli, who studied economics in North Korea, and the head of propaganda will be Liu Yunshan, who up to now has been known for his resistance to the idea of losing state control of media.

We don’t know much about the new party general secretary Xi Jinping, who will become President in March. All we really know is that in this morning’s inauguration he came across as being more relaxed, maybe even more flamboyant than the current incumbent President Hu. And in his acceptance speech Mr Xi talked about fighting corruption, and supporting “the people’s desire for better lives.” We know a little bit more about Li Keqiang, who will replace Wen Jiabao as Premier. Mr Li is believed to have co-written a World Bank report calling for wide ranging reforms.

Frankly, it is too early to write-off these men as conservatives and anti-reform. This first impression may point that way, but power changes people.

Power also corrupts, but the war against corruption has become a theme of late. Too many party officials have got fat off awarding contracts. It may seem like a radical idea, but some reckon the criteria upon which contracts awarded should be based on merit, rather than the size of bribes.

Of course, absolute power corrupts absolutely, but it is possible to overstate how much power the seven men have. China is a complex country – not to mention huge – and what central government says is not always followed. This limitation on power may be a good thing, but in terms of the war against corruption, it may not be.

PS: Incidentally, another person who did not make the committee was Liu Yandong. It’s shame because if this particular politician had been appointed China would have had its first woman member of the Standing Committee.

Has Obama put on a poker face, or does he mean it?

“I hope and intend to be a better president in the second term than I was in the first,” said Barack Obama yesterday. Well, those are laudable aims, but then let’s face it, all Presidents have similar ambitious for their second term.

But this time Obama says he is sticking to his guns on taxes. As you know, under George Dubya the taxes paid by America’s richest were reduced. If Democrats and Republicans are unable to agree some kind of compromise by the end of this year, then US taxes will rise, and US spending will fall. Obama wants higher taxes for the rich. Republicans, who control the House of Representatives, want lower spending.

President Obama says he won’t budge, and yesterday après conference when asked if he was bluffing, he replied: “What I said…I meant. Which is: this was a one-time proposition. What I have told leaders privately as well as publicly is that we cannot afford to extend the Bush tax cuts for the wealthy.”

So that is just about as black and white as you can get – no ambiguity whatsoever. So in order for the US to avoid falling over the fiscal cliff, either Republicans must agree, or Obama go back on what he just said. There is no middle ground.

Obama’s olive branch

President Obama also hinted yesterday that there might be a role for Mitt Romney in his government. Wouldn’t that be a breakthrough?  It feels as though both US (and indeed UK) politics is dominated by spoilt children rather than highly educated men and women. Politicians just have to disagree with each other, even if they secretly have sympathy for the other’s point of view.

The tragedy of the Liberal Democrats is that they have shown what they long maintained: that coalition governments are possible, and in the process have alienated themselves from many of their voters. See yesterday’s bull and bear for some pretty interesting comments on these lines by Google co-founder Sergey Brin. See: Google founder puts his penny’s worth in 

Corporate tax controversy hits John Lewis and Germany

It’s always good to get a different perspective. So bosses of UK subsidiaries of the likes of Starbucks and Amazon were made to parade in front of MPs. We know UK politicians weren’t impressed. And we know most of the UK media are up in arms.

But what does John Lewis think? If nothing else, this is surely the biggest UK company that shareholders just wish they could own a chunk of.

Yesterday, Managing Director at John Lewis Andy Street  was talking to Jeff Randall on ‘Sky News’ and he let us into his views on the matter.

He said: “You have got less money to invest if you’re giving 27 per cent of your profits to the exchequer than, clearly, if you’re domiciled in a tax haven and you’ve got much more.” So comparing UK retailers such as John Lewis with US companies operating in the UK, such as Amazon, he said: “They will out-invest and ultimately out-trade us and that means there will not be the tax base in the UK. So I do think it’s an issue that needs to be examined.”

Meanwhile German magazine ‘Spiegel’ took a look at the issue, but, naturally enough, from a German point of view.

“This is how the Google system works,” stated Spiegal, “All earnings achieved in Europe are posted to Google Ireland Ltd, headquartered in the Irish capital Dublin. German fiscal authorities have no access to these revenues and profits, because the company does not maintain any places of business in the classic sense in Germany.”

It then went on to cite the views of German Finance Minister Schäuble. ‘Spiegal’ stated: “In a recent letter to US Treasury Secretary Geithner, Schäuble proposed increasing the pressure on tax havens around the world. It is an ‘unacceptable state of affairs’ that places like Bermuda levy no corporate income taxes, Schäuble wrote. ‘The non-taxation distorts international competition and reduces government revenues.’ For this reason, Schäuble noted, industrialized countries must cooperate more effectively, especially with regard to the taxation of intangible assets like patents and licenses.”

For more see: Multinationals Find Loopholes Galore in Europe

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


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