tag:blogger.com,1999:blog-71218288606049650442024-03-12T19:13:55.610-07:00Pascal KonnehAnalysis of Global Political, Economic and Social Trends. Identification of long-term business opportunitiesPascal Konnehhttp://www.blogger.com/profile/06664412743056879641noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-7121828860604965044.post-60382216458324311892008-07-31T07:27:00.000-07:002008-07-31T08:24:17.744-07:00The Saga around the Pentagon Air Refuelling TankerThe government awards a $23bn contract for the provision of high-tech defence equipment by sole-sourcing to a single indigenous company. Then it emerges that the government Air Force procurement Officer and a Senior Executive at the defence firm had violated conflict-of-interest regulations, and both get convicted.<br /><br />Following convictions, parliament scraps the deal and forces the Air Force to proceed to an open tender. In addition, parliament requests that the Ministry of Defence should not issue sole-source contracts in future.<br /><br />An new, open tender is launched, and a foreign firm eventually wins the contract. The Air Force confirms the overwhelming technical capability of the foreign product, but the indigenous firm cries foul, and there is an uproar in the country - including parliament, which had recommended the open tender - about the implication of such a large contract in the hands of a foreign firm. The wrangling goes on for a few months, until then the MoD annuls the award to the foreign firm and calls for fresh tenders. In its justification, it states that the Government's Accountability Office (GAO) had audited the tender evaluation process at the MoD and found breaches of due process. The indigenous commpany rejoices at it its victory, and ratchets the lobbying for its equipment.<br /><br />Sounds like some corrupt developing country? This is the United States. Maybe the comparism is not quite fair, because in a corrupt developing country, parliament would not get very far in annuling the original sole-source award in the first place. But critics and sceptics of the procurement practices of the Pentagon are many, and their "gasps" as this current process were loud, according to the LA Times (Charles Horner, US Air Force General, ret., LA Times, July 23 2008).<br /><br />In 2004, the US Air force estimated that it would need about 400 new aircraft to replace its aging fleet of airborne refuelling tankers, worth an estimated $100bn. Its procurement strategy was to use a long-standing sole-source agreement with Boeing, and call off the new aircraft in stages. In defending its cancellation of the sole-source, the Pentagon cited not only the conflict of interest issues, but also higher costs for the government due to lack of competition.<br /><br />In March 2008, the Pentagon awarded the contract - with the scope increased to $34bn - to EADS, parent of Airbus and a European aerospace group, based in France and part-owned by the French and British governments. The award caused heated debates in the US congress (which had recommended an open tender). According to the Seattle PI: 'House Speaker Nancy Pelosi said in a statement that the award to the EADS team "raises serious questions that Congress must examine thoroughly." ' (<a href="http://seattlepi.nwsource.com/business/353534_tankerfallout04.html">http://seattlepi.nwsource.com/business/353534_tankerfallout04.html</a>)<br /><br />Some observers commented that the award, which followed a visit by the French president to the US - his first since being elected into office, was a sign of warming diplomatic relations with Europe. But military experts were more pragmatic: they saw the award as a shift in the military focus of the US towards the Pacific. opoerating in the Pacific would require longer range aircraft with increased carrying capacity, and the EADS carrier can provide these comfortably.<br /><br />Meanwhile, the Boeing aircraft are more suited for "traditional European, southwest Asia, South American and Middle Eastern missions that demand smaller, less-developed runways, as well as minimum footprint for accelerated through-put on less-developed forward airbases, and high-cycle rates for intense aerial combat. By contrast, the Pacific -- nearly 156 million square kilometers, according to the CIA's World FactBook -- embodies the "tyranny of distance" that U.S. forces face in trying to respond or deploy to worldwide events." (<a href="http://www.defensetech.org/archives/004046.html">http://www.defensetech.org/archives/004046.html</a>)<br /><br />In June 20008, the Pentagon announced that it had annuled the elections after an audit by the Government due process watch-dog found some irregularities. Boeing and EADS are currently preparing new bids, and the saga goes on.Pascal Konnehhttp://www.blogger.com/profile/06664412743056879641noreply@blogger.com0tag:blogger.com,1999:blog-7121828860604965044.post-52136639408666443922008-07-31T02:55:00.000-07:002008-07-31T03:15:26.228-07:00Brown's FutureThe Leadership crisis at the heart of Britain's ruling Labour Party has taken yet another intriguing turn when David Milliband, Foreign Minister, key Cabinet member and strong ally of the ousted former PM Tony Blair, called for a "change in the government’s style and policy", and refused to rule out a bid for the Party Leadership (Financial Times).<br /><br />Allies of Mr. Brown hit back at what they called the "disloyal" and "self-serving" minister, raising the tone in the increasingly bitter in-fighting that has dogged Mr Brown's government since Tony Blair was forced out of Office.Pascal Konnehhttp://www.blogger.com/profile/06664412743056879641noreply@blogger.com1tag:blogger.com,1999:blog-7121828860604965044.post-78673874144702988602008-07-31T02:27:00.001-07:002008-07-31T02:53:06.520-07:00Did Government Intervention Help create a UK Housing Bubble?In May 2005, the UK Government announced a cooperation scheme between mortgage lenders and government to "help first time buyers onto the property ladder. At the time, Gordon Brown, then Finance Minister (Chancellor of the Exchequer), said the plans were designed to "offer young <span style="color:#000000;">people </span><a href="http://www.mortgages.co.uk/results/index.asp?q=financial&client=google-csbe&cx=003417313490444700985:ru5rp1kr73k&cof=FORID:11"><span style="color:#000000;">financial</span></a><span style="color:#000000;"> help in buying their </span><a href="http://www.mortgages.co.uk/results/index.asp?q=first+home&client=google-csbe&cx=003417313490444700985:ru5rp1kr73k&cof=FORID:11"><span style="color:#000000;">first home</span></a><span style="color:#000000;">, [and would] benefit thousands of first time </span><a href="http://www.mortgages.co.uk/results/index.asp?q=buyers&client=google-csbe&cx=003417313490444700985:ru5rp1kr73k&cof=FORID:11"><span style="color:#000000;">buyers</span></a><span style="color:#000000;">. </span><br /><br />Under the five-year <a href="http://www.mortgages.co.uk/results/index.asp?q=part%2Downership&client=google-csbe&cx=003417313490444700985:ru5rp1kr73k&cof=FORID:11">part-ownership</a> plan, buyers were expected to raise at least half the cost of homes sold on the open market, with the remaining <a href="http://www.mortgages.co.uk/results/index.asp?q=equity+shared&client=google-csbe&cx=003417313490444700985:ru5rp1kr73k&cof=FORID:11">equity shared</a> by the government and the mortgage lender.<br /><br />At the time, the Chancellor said: "It means that people who couldn't afford the full price of a home can afford the partial price, and they can gradually ramp up their stake.<br /><br />"It's putting <a href="http://www.mortgages.co.uk/results/index.asp?q=home+ownership&client=google-csbe&cx=003417313490444700985:ru5rp1kr73k&cof=FORID:11">home ownership</a> within the reach of thousands of people who would not be able to do so.<br /><span style="color:#000000;"></span><br />The Chancellor may have been taking well-intended steps to attend to the problems of a disadvantaged sector of population. His expectation probably was, that house prices would increase, and hence create equity for buyers. But his intervention might have exacerbated the problem in the long run. How?<br /><br />The mere fact that young professionals in the first few years of their careers cannot even afford a mortgage for a small home is unreal, and should have acted as an alarm bell that there were severe structural problems in the housing market. In a non-interventionist world, home builders and mortgage lenders would eventually see an economic incentive to offer affordable housing to this demographic group. Alternatively, the market would have been allowed to auto-correct back to a "normal" state where housing becomes affordable for young professionals.<br /><br />If anything, the government should have taken a closer at the buy-to-let market to see whether or not it was introducing pricing distortions into the market, and taken prompt measures to regulate it and stem the the rampant escalation. But this development appears to have been tolerated or even encouraged, as long as it was proving to be supportive for the economy.<br /><br />The government's May 2005 initiative was essentially a subvention to the housing sector, since it represented a cash injection from the government, which was intended to generate material new demand for the sector.<br /><br />On the 31st of January 2007, Housing Minister Yvette Cooper unveiled the first homes of the scheme in the South East region. Only nine months on, the market would peak and start falling. In my opinion, the market was due for a correction in 2005 and was already showing signs of weakness. Without the cash injection from the government, it would have suffered a smaller correction, brought back some reason into the sector, and the fall-out from the US effects in 2007 would have had a much smaller effect on the UK.<br /><br />References:<br />1. Mortgages.co.uk<br /><a href="http://www.mortgages.co.uk/news/2005/May/Mortgage-lenders-and-government-help-first-time-buyers.html">http://www.mortgages.co.uk/news/2005/May/Mortgage-lenders-and-government-help-first-time-buyers.html</a><br /><br />2. UK government Office for the South East<br /><a href="http://www.go-se.gov.uk/gose/news/newsarchive/affordableHomeFirst/">http://www.go-se.gov.uk/gose/news/newsarchive/affordableHomeFirst/</a>Pascal Konnehhttp://www.blogger.com/profile/06664412743056879641noreply@blogger.com0tag:blogger.com,1999:blog-7121828860604965044.post-83763478229682705042008-07-31T01:18:00.000-07:002008-07-31T01:38:44.397-07:00IMF sees no end in sight to credit crisisOn Monday, July 28th 2008, one year after the Subprime crash in the US, the International Monetary fund issued a Bleak assessment of the global credit crisis. In its <em>Global Financial Stability Report Market Update</em>, the Fund warned that:<br /><ul><li>"Banks under renewed stress, making raising capital hard"</li><li>"Increased likelihood of spillovers into real economy "</li><li>"Resilience of emerging markets now being tested"</li></ul><p>"Credit quality across many loan classes has begun to deteriorate with declining house prices and slowing economic growth. Although banks have succeeded in raising additional capital, balance sheets are under renewed stress and bank equity prices have fallen sharply".</p><p>Further comments from the Bank appear to indicate that measures taken by banks so far to raise equity might not only be insufficient, but actually lead to negative consequences in the longer term. According to IMF Sources, "The Update notes that banks have been fairly successful in raising equity so far, amounting to about three-fourths of the writedowns to date.... However, the renewed stress has made raising additional capital more difficult <strong>and increased the likelihood of a negative interaction between banking system adjustment and the real economy</strong>". </p><p>We have already bee experiencing a growing de-coupling of financial instruments from consumer behaviours, and the Fund predicts that governments and central banks are going to find it increasingly difficult to strike a balance between inflation, growth and financial stability. </p><p>The report predicts a further weakening of the US housing market, and also sees a weakness in a number of European countries.</p><p>Overall, it expects global economic growth to drop 20% from 5% in 2007 to 4.1% in 2008, with only 3% growth predicted in 2009. By Q1 2009, I expected that 2008 numbers will have been revised downwards to about 3.8%. This is based on historical prediction trends, where growth forecasts in a slowing economy always turn out to be lower than the estimates six months earlier.</p><p> </p>Pascal Konnehhttp://www.blogger.com/profile/06664412743056879641noreply@blogger.com0tag:blogger.com,1999:blog-7121828860604965044.post-2391658132536775992008-07-31T01:10:00.000-07:002008-12-09T07:05:14.176-08:00Fall in [UK] house prices acceleratesFinancial Times<br />By Chris Giles, Economics Editor<br />Published: July 31 2008 07:51<br /><br />House prices took another lurch lower in July, with the ninth consecutive monthly fall in house prices, leading to the largest year-on- year drop in property values since the early 1990s, the Nationwide Building Society reported on Thursday.<br />House prices in July were 8.1 per cent lower than a year ago, the lowest annual rate of inflation since the lender started producing monthly figures in 1991.<br /><br />With demand for housing low, increasingly stringent conditions being applied to mortgage applicants and lenders finding wholesale funding scarce and expensive, a bottom to the housing decline remains far out of sight.<br /><br />... the fall in house prices is accelerating, according to the Nationwide’s figures. The annual drop in house prices was steeper at 8.1 per cent in July than 6.3 per cent in June. On a three month annualised basis, prices were falling at a rate of 19 per cent compared with 15.6 per cent in June.<br /><br />... “There are around 41 per cent fewer first time buyers now than at the same time last year. This may be due to their own desire to delay purchase because they expect prices to continue to fall, or frustration in obtaining finance, but the impact on the market is likely to be the same. That is that chains become longer and have a greater propensity to break down”<br />She added that the average house price had fallen £15,000 in the past year and was now only £11,000 higher than three years ago. The average UK house price was £169,316 in July compared with £172,415 in June and £186,044 last October, the Nationwide said.<br /><br />According to a report by Standard & Poors, house prices are going to fall another 17% from current levels, increasing the number of households with negative equity on their homes from just 70,000 today to 1.7 million, or 14% of mortgage holders (Chris Giles, FT Economics Editor; Financial Times, July 31 2008). Graphics courtesy of The Financial Times.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTMkBOdsB6-P1bwovDR-ysJZVycjWyPLU185Xlw7qSEasJ2FYI1LXhvw3fhRagsdReR8asQ2htulJVDF0zRn5uKmqNPCmIC1iipCVnBecfe8LQ-AsxyLn3CZMLo1uNJFzYFtizwObwW5E/s1600-h/UK+Negative+Home+Equity+Trends.gif"><img id="BLOGGER_PHOTO_ID_5229098263049872898" style="FLOAT: left; MARGIN: 0px 10px 10px 0px; CURSOR: hand" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTMkBOdsB6-P1bwovDR-ysJZVycjWyPLU185Xlw7qSEasJ2FYI1LXhvw3fhRagsdReR8asQ2htulJVDF0zRn5uKmqNPCmIC1iipCVnBecfe8LQ-AsxyLn3CZMLo1uNJFzYFtizwObwW5E/s400/UK+Negative+Home+Equity+Trends.gif" border="0" /></a><br />According to the FT, these trends contain both good and bad news for policy makers. Good news in that the market apears to be resilient in terms of the number of households predicted to be in negative equity at the bottom of the market (1.7 million) is less than the number at the bottom of the house prices crash in the early 1990s, when 1.8 million households owed more mortgage than their homes were worth.<br />The bad news is that in cash terms, house prices apppear to be falling faster than in the early 1990s crisis, which suggests that a similar proportion could end up in negative equity.<br /><br />The S&P data is authoritative because it looks at a large sample of about 2 million mortgages in securitisation vehicles thhat they were asked to provide credit ratins on. Most other recent estimates are based on data for mortgages at the time of origination (whichi is all the data the institutions issuing the mortgages would have, as they typically then package the mortgages into securitisation vehicles and sell them on), rather than on a sample of outstanding loans.<br /><br />The data shows that most homeowners are extremely safe as the average loan to book ratio of most households' mortgages is only 54%. This is great news. Buy-to-let mortgages are at a greater risk due to higher leverage. With loan to book ratios of around 80%, S&P's Andy South expects that a 20% drop (from peak) of house prices will suddenly plunge many BtL mortgages into negative equity. I expect that most investors will be aware of this risk, and should have taken steps to ensure that they can weather this degree of negative period for a while.<br /><br />Some analysts forecast a bigger overall drop in house prices from their peak in October 2008. According to the FT, "Capital Economics, a consultancy with a record of pessimistic predictions, on Wednesday forecast that house prices would drop 35 per cent from peak to trough. Their prediction came as consumer confidence on the GfK researchers measure dropped to an all-time low".<br /><br />Meanwhile, a task force led by HBOS CEO Sir James Crosby, commissioned by the Treasury to "lead a review into improving wholesale mortgage financing (FT)", is expected to recommend that the UK government and the Bank of England should not try and intervene to provide funding to support mortgage lenders, but should leave long-term funding of mortgages in to the market. The Crosby report will not be received very well by mortgage lenders, who have been lobbying intensely for govenment support.Pascal Konnehhttp://www.blogger.com/profile/06664412743056879641noreply@blogger.com0