Vintage heaven; vintage hell

The transformation of Fine Wines

As you raise a glass of Chêne Bleu Rosé on a sizzling hot summer’s day, spare a thought for the wine industry, which is facing a perfect storm.

Global warming, increasing regulatory pressures, and disinvestment, are set to dent if not destroy what had seemed a simple story of emerging markets growth and increasing quality which would lead global wine consumption to reach $207bn in 2022.  

But the overall global wine and spirits market has slipped by -1.4% in the last five years, according to industry body IWSR, and disruption of the status quo is set to accelerate.  In the US, 54 per cent of the population chose to abstain from alcohol, driven largely by 21-34 year olds, according to a 2018 Nielsen Survey.

Parallels with the tobacco industry are not an exaggeration. Imagine a photograph of a liver riven by cirrhosis on a plainly packaged bottle of wine, along with a warning that alcohol can abet breast cancer. Inside, the magnum of Château Kirwan lies, un-drunk and unloved.

Demand for wine in developed markets is under pressure from older generations who are drinking less and younger generations who prefer cocktails and don’t buy into the elitist, obfuscating language used by connoisseurs. Millennials and Generation Z are in any case also drinking less, as evidenced by the drop in turnover at university bars and the increased availability of non-alcoholic cocktails and beers. Hashtags such as #sobersaturday are trending. The ever-widening legalisation of cannabis is another factor in wine substitution.

Health is on the global agenda, with the World Health Organisation (WHO) using increasingly alarmist language about the effects of alcohol, and cash-strapped governments looking more closely at the costs of ill-health from excess use and, in parallel, the benefits of increasing so-called sin taxes. This is affecting investor behaviour too.  KLP, Norway’s largest pension fund with $80bn under management, announced in May that it would divest from any company that made more than 5% of its revenues from alcohol. French champagne and wine house LVMH and beer giant Heineken are among those affected. It is likely that this policy will spread as Scandinavians generally lead the way on Environmental, Social and Governance (ESG) investing.

Meanwhile, climate change is harming crops, disrupting supply chains and eroding corporate profits. This summer’s European heatwave is likely to be the norm, not an exception, while global cooperation on climate change lies moribund amidst the wreckage of the post-Second World War order. Disorderly trade patterns – be it between China and the US or Britain and the EU – add to the confusion. The door to the fastest growing wine market in the world slammed shut in the face of the US wine industry when President Donald Trump imposed tariffs on China.

Can the industry adapt? Over two sun-drenched days in Bordeaux, 70 winemakers, technologists and reviewers from around the world, came together for a convivial brainstorming on Fine Wine’s evolution. Organised by ARENI, a wine institute, many of its conclusions were just as relevant for the broader wine industry and, potentially, for other consumer companies.

Navigating a future where sustainability and inclusiveness are among the paramount values is crucial to its survival. That means clarity on everything from the wine-growing process to the treatment of the seasonal labour who pick the grapes, along with an openness to sharing information via blogs and tech solutions like the Global Wine Database (GWDB).  Even information that may seem ridiculous. “Your millennials want to know the name of the wine maker’s dog - it’s true!” exclaimed a 27-year old sommelier from New York.

Websites like Wine Folly use straightforward language and by so doing are creating new enthusiasts, as are wine bars with top wines by the glass via the clever Coravin system, which doesn’t damage the cork, and apps like Palate Club. Champagne houses like Moët & Chandon are enlarging their offering to a younger clientele by offering a cocktail-like experience. Ice Impérial, a sweeter champagne poured over ice, is the result. Wine makers are exploring lowering the alcohol content without compromising on taste and signing up to wider industry campaigns to advise consumers on drinking responsibly.

China is set to become the second largest wine market after the US and by 2022 its value will be over $19.5bn, reports IWSR. Prestigious winemakers are taking the opportunity to make local wines to feed the increasing appetite of the growing middle class. Château Lafite is launching its first Chinese wine, Long Dai 2017, later this year. In India, private equity group Visvires Capital expects wine tourism to be a source of revenue. The business plan for its four vineyards includes an estimated 300,000 visitors over the next three years for wine tastings, restaurant meals, hotels stay, and wine buying.

 Global warming is an opportunity, as well as a challenge. English wine evoked sniggers when it started; wines like Chapel Down from Kent are now classified as Fine Wine and sell at premium prices. Spain’s Bodega Torres has been buying land at higher altitudes. Nordic wine could be the next discovery. 

On the back of an uncertain future, the Fine Wine industry is acclimatizing to a new world. Let’s raise a glass of Château Talbot to toast its journey. 

Six Triggers for the Next Financial Crisis

Banks are much safer now than before the financial crisis. Or are they? Certainly, if focusing simply on increased capital and liquidity requirements, and closer regulatory supervision. Yet close questioning of bankers, and regulators past and present, throws up six possible triggers for a crisis.

1. CYBER-SECURITY. Imagine this scenario. A cyber-attack closes down a bank for a week; panicked depositors unable to access their funds form queues on the streets; the regulator is forced to close the bank permanently in a bid to avoid contagion; the strategy fails as queues form at other banks on (fake) news of their vulnerabilities. A former member of the Basel Committee on Banking Supervision believes this could be the most likely spark to trigger the next financial crisis. Another scenario is a cyber-security attack into any part of the wholesale infrastructure, say the estimated $542 trillion derivatives market, which would cause widespread panic as the global system shut down.
   
   In the words of an investment banker with knowledge of the subject: “Of course banks spend lots but as their IT departments are full of contractors and senior management is clueless, the spend is wasted. Their systems are weak, they don’t talk to each other, and are very vulnerable.  It’s impossible to trace where an issue has happened and to fix it.”
   
   Only big banks will be able to afford the enormous amounts needed for proper cyber-security. “Banks need military grade cyber,” asserts the former regulator. New ratings will emerge for a financial institution’s cyber safety. Those with anything less than triple AAA could find themselves frozen out of the wholesale markets. The inevitable consequence is consolidation: small banks will be gobbled up.

1. TOO BIG TO FAIL. An ongoing theme in this column, on which I have been proved wrong. So far. Writing about The Precariousness of JP Morgan Chase in 2014 and suggesting readers should sell, was an abysmal stock recommendation. Yet further consolidation of the financial system in countries from Spain to the US – an outcome of the financial crisis and of the ensuing regulation – has concentrated the risk. The taxpayer will more likely have to bail out the giants, notwithstanding the tough regime for Global Systemically Important Banks (G-SIBs).

1. RISK CONCENTRATION. Risk is also more concentrated now due to “significantly greater harmonisation on, for instance, the risk weighting of assets, the prudential rulebook and accounting standards…it means if something goes wrong, it goes wrong for everybody!” notes the Non-Executive Director of a bank. She points out that in 2008 it was the diversity of standards which helped reduce the problem in some countries. France, for instance, did not apply mark to market accounting, and Canada applied heftier capital standards.
   
   In the 2018 harmonisation recipe, lending to the real economy for investment has generally fallen, while another mortgage bubble in residential property has been created.  There has been a sharp drop in the diversification of business models. Excessive to overvalued property could yet again be the catalyst. Even more so if interest rates increase, unplanned for and unaffordable for many owners. We have raised a generation who think that interest rates of 2% are customary, notes a Dutch former regulator.
   
   Geographic shrinkage is another element in risk concentration and the lack of diversification. Regulatory bias has promoted more domestic exposure: banks like Citigroup of the US, or Unicredito of Italy, sold many of their foreign businesses post-crisis.

1. GEOPOLITICAL JEOPARDY. Italy is a likely suspect. The country could blow up on the back of its bankrupt banks and the unstable government’s argument with Brussels, amid recent evidence that Italian households are no longer willing fools ready to finance government spending by buying its bonds. If Italy goes, so would the euro.
   
   There is also the more obvious imbroglio of Brexit and its unforeseen consequences, however much the Bank of England provides public reassurance on this front. Or China’s debt burden…The list is long.
   
   During the 2008 Beijing Olympics, at the height of the US financial instability, Russian officials made a top-level approach to the Chinese and suggested that together they might sell big chunks of their US Treasury holdings. The Chinese declined. The answer might be more nuanced today, amid heightened political tensions.

1. JUDICIARY RANDOMNESS. A term first heard at a meeting of the G-30, this refers to multimillion fines which fall on banks after scandals such as mortgage abuse in Spain and product mis-selling in the UK. Danske Bank’s recent €200bn money laundering disgrace forced the newly nominated Chairman to speedily reassure the markets that the bank was not facing “an existential crisis” – and that is even before the US Department of Justice’s criminal investigation has reached a conclusion and consequent fine.

1. REGULATORY MICRO-MANAGEMENT. The financial crisis put paid to the idea of principles-based regulation. However, the sharp pendulum swing to prescriptive rules-based regulation isn’t working either. To state the obvious, regulators are not bankers.
   
   “The jerks presume to tell us how to do our business, in extreme detail…you come to Treating Customers Fairly (TCF) – the man from the government has this 100% wrong, “complains an executive board member of a British bank. As he points out, “we are now obliged to treat disparate people the same – [despite the fact that] nature was not fair in how it handed out its gifts.”
   
   Form-filling and ever-larger compliance departments are the curse of the post-crisis world. “We have to write a ton of repetitive stuff for the regulator year after year which nobody can read, understand or apply usefully,” notes the banker. The real issue with “this stupid charade” is the resulting risk blindness – either complacency that every risk is covered or an inability to see the forest fire because measuring every inch of the trees is the new normal.

There are other possible catalysts to a financial crisis: from the pile up of debt; to shadow banking; to climate change; to the unimaginable. Two overarching factors could make the next crisis even worse than the last one.  The public’s trust in the financial system, high before the crash, is being continuously eroded from its low base with a repetitive litany of scandals, greed and technical incompetence – examples abound such as Goldman Sachs’s reported Malaysian corruption and TSB’s IT chaos.

Meanwhile, the international cooperation visible in the financial crisis, and ably described in former US Treasury Secretary Hank Paulson’s book On the Brink, is entirely absent. The idea that the Trump government would coordinate action to save the world is risible.

On this cheery note, Robinson Hambro wishes its readers very Happy Holidays

An anti-globalisation duet: Trump & Corbyn

Why domestic bank M&A is set for a boom

As Donald Trump and his toupee continue to ride high in the US presidential opinion polls, I find myself musing on his fellow jockey, UK Labour Party leader Jeremy Corbyn.

Mirror images of each other on the political spectrum, they will never lead their respective countries. Yet the unelectable duo are worth listening to, for they represent large elements of the population that are opposed to the globalised world we live in.

Take their attitude to free trade. Trump calls for a 15% tax for outsourcing jobs and a 20% tax for importing goods, and sees trade deals as “killing American jobs.” He believes trade negotiators are a bunch of “saps” and says he would appoint corporate leaders to do the job properly. Corbyn warns that TTIP, the prospective trade deal between the EU and the US, is nothing but a capitulation to “greedy bankers and multinationals.”

His refusal to campaign for Britain to stay in the EU has, ironically, withdrawn a major weapon from the Conservative government’s armoury for its future referendum. Corbyn and his allies, who embody the discarded remains of the Left’s 1970’s euro scepticism, see the EU as representing the interests of big capital. Rather paradoxical, given that big business sees the EU as excessively defensive of workers’ rights and the progenitor of too many regulatory burdens to protect citizens.

Trump and Corbyn, one 69 years old and the other 66, both fail John Maynard Keynes’s three imperatives for a balanced government. The economist and statesman wrote: ““The political problem of mankind is to combine three things: economic efficiency, social justice and individual liberty….the third needs, tolerance, breadth and appreciation of the excellencies of variety and independence, which prefers, above everything, to give unhindered opportunity to the exceptional and aspiring.”*

For Corbyn, social justice can be achieved without economic efficiency and individual excellence. This would result in a country with not enough profits to pay for a safety net for the disadvantaged. The reality for Trump, who would lay claim to both economic efficiency and individual liberty, is a country where protectionism kills efficiency and individual liberty applies to some, but not all. And certainly not to the roughly 11 million illegal immigrants who water his many lawns and serve in his many restaurants.

Just as surprising as their similarities, are their allies in the anti-globalisation movement. Joining them in the stop-the-world-I-want-to-get-off gang, are financial regulators on both sides of the Atlantic.

The European Central Bank’s post-crisis conventional wisdom is that geographical diversification of multinational banks does not protect against risk and adds a layer of complication. Long gone are the days when banks followed their corporate clients abroad and then proceeded to buy local entities and grow. The European Central Bank “comes out in a rash” when a Spanish bank mentions buying bank assets in emerging economies, affirms a bank CEO. The Federal Reserve in the US takes the same position, according to most accounts.

Regulators learned a lesson from the last financial crisis. It may, of course, not be the right lesson, for every crisis is different – the drying up of wholesale bank funding markets in 2007/2008 was very different from the run on the deposits of 37 banks in the Japanese Empire in 1927.

With foreign expansion off the cards, cost cutting reaching its finale, new digital entrants threatening the traditional business and financial supervisors breathing down their necks, banks will focus on local acquisitions to grow their profits. A domestic M&A boom is forecast for 2016.

Regional movements like those in Cataluña and Scotland are part of the anti-globalisation trend. Allied to the sense of alienation from their existing rulers is an almost blind belief that raising the barriers will lead to paradisiacal economies with full employment.

To these misguided idealists I would add proponents of Brexit, the exit of the UK from the European Union. The world is moving into ever larger trade groupings. Being outside is not a reasonable option for a major country – unless there is an appeal to being emailed instructions from Brussels without having a seat at the table. Norway pays a heavy price for its nominally freestanding position since it is forced to incorporate EU legislation into its own.

In 1944, Keynes warned in the House of Lords against “little Englandism” which pretended that “this small country” could survive by a system of bilateral and barter agreements or by keeping to itself in a harsh and unfriendly world. His words continue to ring true.*

Both Trump and Corbyn remind me of the rutting impalas I saw in Zambia this summer. A fresh male impala, the handsomest and most macho, fights off the others to breed with the herd of females. After around three weeks of non-stop sex, with no time to feed or groom himself, he is weak and easily taken out by a challenger, a young buck from the group of male impalas. If he’s lucky, the exhausted male impala might then re-join the all-male herd or, just as likely, be eaten by a herd of lions.

The only question about the future disappearance of fraternal twins Corbyn and Trump is whether they slip back into their old lives or are gobbled up by the forces of globalisation.

*Universal Man: The Seven Lives of John Maynard Keynes by Richard Davenport-Hines

Time to call a halt to regulatory overkill

…and why even Archbishop Welby agrees

None can disagree with the need for a regulatory transformation of the banking sector following the 2008 financial crisis. Yet after seven years the blitzkrieg of rules continues amidst a confusion of overlapping and contradictory requirements. It beggars belief that the rules on too big to fail were only agreed in principle in November last year by the G20, while the details have yet to be made final.

Speaking to bank CEOs and Chairs in the UK and Europe, who dare not complain publicly, the regulatory fatigue that Bank of England Governor Mark Carney spoke of is apparent, as are a number of the unintended, negative consequences.

Capital has become local as global banks withdraw to their home markets. Surpluses of capital are not being used, while demand lies unfilled. When you add in Anti Money Laundering and Counter Terrorism requirements, even long-standing, legitimate businesses in Africa are having their bank accounts closed down. Let alone HSBC’s strategically absurd decision to exit Brazil, still responsible for approximately 60% of South America’s GDP, and to do so at the worst time possible time, when the country is in the doldrums.

Secondly, loan capital has diminished substantially. The creation of credit is a problem. And which sector or instrument that credit goes to is determined by regulatory requirements rather than business sense. This can itself lead to a new crisis.

Competition has contracted, with banks either going bust or being absorbed by others, while regulatory requirements have increased the barriers to entry. As the latest results from the big US banks testify, only the large can absorb regulatory burdens and fines. JP Morgan has moved from being a big financial institution pre-2008 to bestriding the world like a colossus. There are some so-called challenger banks – new entrants unencumbered with the legacy of old systems and debts – while internet-only loan providers are growing at a dizzying pace, but it will take a very long time for them to fill the gap, if they manage to do so.

Fourthly, the myth that Brussels is responsible for myriad new rules is helping push the UK out of the EU. In fact, with regulatory equivalence, the UK would not escape more regulation even if it did leave the EU.

Lastly, even as banks cut down on front line staff, there is a vast increase in their recruitment of compliance specialists, as well as the information technology personnel needed to change systems to comply with new rules. Regulators are asking for the traceability of all credit decisions, even the smallest, all of which consumes management time. Top bank executives complain that they spend hours in meetings with junior, inexperienced supervisors who have never worked in banks and are more intent on protecting themselves from criticism by painfully ticking every box.

Complexity is not progress.

At board level the situation is no better. Bank board meetings are about the modelling of risk, rarely about strategy or how to grow the business, according to board members. One FTSE-100 financial services institution conducted 29,000 different simulations. The Non-Executive Director in charge of the Risk Committee was dismissive of the exercise. Meanwhile, potential NEDs with insight and experience say that you would have to be “reckless” to jeopardise a 30-year career by taking up an appointment on a bank board – even more so if criminal liability is extended to independent directors, as has been proposed in the UK.

The Bank for International Settlements, the so-called central banks’ bank, recently said the wave of regulation is coming to an end. Bankers disagree.

Seven years after the financial crisis, regulation needs to focus on being an enabler of financial services rather than an obstructer. To change the mind-set of the regulators – and the bankers – a system of secondment needs to be set up. Modelled on the very successful Takeover Panel, which has been ruling on mergers and acquisitions in the UK since 1968, bankers would be seconded to regulators for a pre-agreed period, with their salaries paid for by the banks. This is idea has been mooted before in the Salz Review of what went wrong at Barclays Bank, but sunk without trace.

On the macro front, the focus should shift to stimulating the capital markets so that the provision of credit does not lie mainly on bank balance sheets, as it does in Europe, while capital requirements should be lowered and the focus should shift to the leverage ratio.

Speaking to the Worshipful Company of International Bankers a couple of months ago, the Archbishop of Canterbury, Justin Welby said: “2008 continues to lurk around as an impediment, which undermines confidence. Creativity and confidence go hand in hand…Creative leadership that does more than manage is essential.”

It is time to move on.

This column is based on private conversations with bank CEOS, Chairs and board members in Europe, as well as knowledge gained in my prior career as Senior Editor of The Banker and a former banking columnist for the International Herald Tribune.

It will be published in the next issue of Dialogue Review.

Lands of Opportunity: China & the City

Osborne the hero

Readers suggested that the last column’s negativity deserved a positive riposte. Herewith 6 reasons to be cheerful.

China’s Chance China looks set to grow at between 7% to 8% annually, a drop from decades of higher growth stretching into double digits. As the Financial Times pointed out in an editorial a couple of weeks ago (and subsequently ignored in all its doom-laden articles that day), when the world’s second largest economy is projected to grow 7.5% a year this still implies an enormous addition of both capacity and demand.

While China reorients its economy towards consumption and away from investment and exports, increased opportunities arise for foreign firms to sell more goods into an expanding middle class. Gucci and other luxury brands have prospered, even with Chinese consumption growing at a slower pace than output over the last decades, The fact that the emphasis is set to change is an exciting prospect.

It is no coincidence that earlier this week China’s top legislature started studying draft amendments to the country’s 20-year old consumer rights law. The government is aware that providing urban jobs and a measure of rural growth is no longer enough to uphold social peace and with it the continuance of the Communist Party’s power. The Chinese consumer is a new constituency to be kept pacified. Consumer rights protection can now be added to the list of priorities, as was seen in the government-sponsored attack on Apple’s after-sales services a few weeks ago.

City Callings Perhaps it is an exaggeration to call a career in the City of London a calling, a word generally used for those who wish to follow a religious path. However, the City is still a preferred prospect for many despite the fact that around 100,000 jobs are said to have been cut since 2007. Continuing cuts will bring job levels to a 20-year low in 2014, according to the Centre for Economics and Business Research (CEBR).

Yet there is an area of great opportunity: compliance. Some banks have tripled the number of staff involved in that function. Financial firms will pay up to 24% more for the new regulatory bodies that take over from the now defunct Financial Services Authority. The Bank of England’s new Prudential Regulatory Authority (PRA), for instance, said its staff costs will rise 34%.

Meanwhile, the lack of global coordination in bank regulation – we have Volcker in the US, Liikanen in the EU and Vickers in the UK – means that a universal bank active in the UK, EU and US would be subject to all three regimes, notes Simon Hills from the British Bankers’ Association (BBA) in the magazine of the Worshipful Company of International Bankers’s (WCIB)

It is true that this epidemic of regulation is an unproductive use of funds; it is true that it raises the cost of capital; it is true that it does not necessarily make the world a safer place. But look on the bright side, dear reader: the compliance departments of banks and insurers are not likely to suffer from generalised and ongoing job cuts, lawyers and accountants involved in the sector are busy, and the sector is booming.

Cash for Claptrap There is still enough money around to fund a university professor’s study into whether bras are beneficial to women’s breasts. Professor Rouillon of Besançon University spent fifteen years on this topic. His conclusion: “Medically, physiologically, anatomically – breasts gain no benefit from being denied gravity.” The article was published on April 11, not April 1, so one presumes it was not an April Fool’s joke. In academia, as in life, there are always enough funds around to finance rubbish. Daily Telegraph

Dictator Deaths The era of Chavismo in Venezuela is drawing to a close. It matters little whether Henrique Capriles, the head of the Opposition who “lost” the general election by 235,000 votes manages to overturn the rigged result. Infighting within the ruling United Socialist Party of Venezuela will probably see it fragment into factions and no longer hold a monopoly on power.

Meanwhile, the centre-right elite which ruled for decades and never allowed the country’s oil riches to make it beyond the confines of the Caracas Country Club has morphed into an Opposition that looks to have learned enough over the last fourteen years to avoid the same mistakes. (For informed opinion on the Venezuelan Economy, see Veneconomy)

Fidel Castro will, at some point, follow Chavez. He turned Cuba into an island where, irony of ironies, the dollar is king and his much-vaunted educational drive counts for little. The most coveted jobs are those of a doorman at an international hotel in Havana, or a prostitute consorting with tourists. Both have access to dollars. Doctors and erudite officials don’t.

Obliged to Osborne The more one looks at the finance ministers in a number of European countries, the more grateful one is for UK Chancellor George Osborne. Keeping in mind that his austerity is not as austere as critics would have it, he thankfully has the guts to resist the siren calls of those who advocate spending money that is not there. It will take time for the UK economy to emerge from current circumstances. The short cuts proposed would be counterproductive. In the meantime, Osborne’s critics are growing at a quick pace – unlike the UK economy – with even the IMF joining the chorus.

(IMF Managing Director Christine Lagarde and Chief Economist Olivier Blanchard are now at the forefront of UK economic policy critics. A conspiracy theory has it that it is no coincidence that the two are French. The only way to save France, which is refusing to face up to its need for reform, is by having the German and the Northern European contingents loosen their purse strings. (See Why France will fall next).

Stanislav Petrov, a Russian military officer, saved the world two decades ago. One day in 1983 his computer screen indicated that a single missile had been launched from the US. Four more missile attacks subsequently appeared on his screen. He did not report directly to the USSR High Command that the country was under attack because his insight told him it made no sense. Petrov averted nuclear Armageddon by using his ability to think independently and thus override what to anyone else would have seemed clear evidence. In fact, the “attacks” were a series of computer errors.*

Comparing Osborne to Petrov is excessive. But one should never underestimate the guts it takes to stand up to conventional wisdom.

Reading Riot The last item on my gratefulness list is the existence of sublime reading material. I shall mention three.

The Financial Times continues to be the best source of news and comment in the West. We live in a world where the breadth of available expertise and opinion is mind-boggling – literally – and thus the continued existence of a coalescing centre of excellence on international economics and politics is to be welcomed.

Professor Christopher Coker’s Warrior Geeks is inaptly subtitled How 21st century technology is changing the way we fight and think about war. My former tutor’s book, published this year, encompasses infinitely more than that. Read it and you will be proud to be human. (*The anecdote about Petrov comes from this book).

Sheryl Sandberg’s Lean In is the book of the moment. Unlike others, it will last the course. Her analysis of the internal and external barriers to women advancing in their careers and what needs to be done to overcome these is masterful. The COO of Facebook has written a book that will truly help women, as long as all fathers and brothers and sons read it too.

A Tale of two Balls: UK vs PIMCO

Lessons from WWII as Russia conquers Crimea

Even assuming Ed B. makes it into power, his brother wins hands down. The UK government spends around £720 billion a year and most of it is already earmarked. Chancellors – pace all the kerfuffle around budget announcements – can only affect policy at the margin. Andrew B., on the other hand, is head of European bond markets with the capacity to strike fear in the hearts of Italian treasury ministers, among others.

Markets matter, which is why the ambitious and admirable management overhaul at the Bank of England, announced last week, is sorely lacking on that front. Creating a new Deputy Governor for markets and banking is right in acknowledging the importance of markets, plus it is a coup for the Bank of England to have appointed Nemat Shafik, an effective policy maker and global player, as Deputy Governor for banking. But appointing her Deputy Governor of markets as well is a mistake. What was needed for that part of the role was an investment banker with knowledge of markets and a wide network of acquaintances and colleagues.

Or at least for a former banker to be appointed to the role of Executive Director of Markets, reporting to Shafik. Instead, Chris Salmon, whose whole career has been at the Bank of England, will take over that role.

This column has long banged on about former Governor Mervyn King’s weakness in deifying academic economists and not valuing markets. The bank would have better understood and reacted faster to the seriousness of Lehman Brothers going under – let alone known about its fragility earlier.

Governor Mark Carney, a former Goldman Sachs banker, is fully aware that markets move mountains. But when he leaves the Bank of England at the end of his five year term, he looks to have failed to incorporate that knowledge into the executive.

For an indication of Russian thinking as the Crimean/Ukranian crisis escalates, one could do worse than turn to Max Hasting’s superb volume on WWII, All Hell Let Loose.

Our inbuilt bias assumes our opponents will react in the same way as we in the West do. In other words, hit Vladimir Putin where it hurts – his wallet – as the Russian stock exchange plummets and international sanctions loom. Yet this is Russia.

In 1944 as Stalin’s army crossed the Danube in their Hungarian invasion, indifferently losing soldiers to the enemy, a Hungarian hussar gazed on the corpses on the river bank and said to his officer in shocked wonder, ”Lieutenant, sir, if this is how they treat their own men, what would they do to their enemies?”

The Russians bore the brunt of the fighting against Hitler during the war, with it being fought mainly on Russian soil. Stalin was not bothered by the barbaric behaviour of his soldiers towards German civilians a few years later. As Hastings points out, the Soviets saw no shame, such as burdens Western societies, about the concept of revenge: “The price of having started and lost a war against a tyranny as ruthless as Stalin’s was that vengeance was exacted on terms almost as merciless as those Hitler’s minions had imposed on Europe since 1939.”

President Putin is not Stalin. But a paranoid historical memory lies at the heart of both men. Winston Churchill famously spoke about a “riddle wrapped in a mystery inside an enigma.” It is worth quoting the rest of his speech in 1939, “I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma; but perhaps there is a key. That key is Russian national interest. It cannot be in accordance with the interest of the safety of Russia that the West* should plant itself upon the shores of the Black Sea, or that it should overrun the Balkan States and subjugate the Slavonic peoples of south eastern Europe, That would be contrary to the historic life-interests of Russia.”

*In the original speech, it was Germany.

Motherhood, apple pie and transparency. All good things? English Poet Philip Larkin didn’t believe the first word qualified, with his most famous line being, “They **** you up, your mum and dad.”

As for apple pie, we are now aware of the rotten repercussions of all the sugar we have been eating.

The debunking of the God of Transparency, however, has yet to happen. This is despite the incalculable harm done to the US and the UK’s intelligence gathering by Edward Snowden. We are less safe than we were prior to his revelations, while the probability of recruiting spies will have plummeted, as they consider the extra danger involved in this ever-more translucent world.

Moreover, consider the harm done to the Bank of England’s market intelligence operation by the release of minutes from a meeting in 2006 where senior foreign exchange dealers from some of the world’s largest banks told a senior member of the central bank of “attempts to move the market.” Paul Fisher, who was head of its foreign exchange division at the time, insisted in Parliament that this was “traders’ whingeing about how difficult their life is.”

Understandably, the focus is now on whether the Bank of England failed to take action on market manipulation within the trillion dollar foreign exchange market, where $5.3 trillion changes hands every day and a number of investigations are taking place.

But the transparency from releasing those minutes comes at a cost. What trader will now raise an issue with the regulator if this can’t be done informally? Which regulator will want to be closely involved in markets, given that it is a career dead end – either you are not well informed on what is going on, or you are and are therefore suspect.

Fisher has lost his seat on the powerful Monetary Policy Committee. Meanwhile Paul Tucker, a former deputy governor who was a strong candidate to succeed Mervyn King, was booted out of the running when information was released showing his closeness to Bob Diamond, the former head of Barclays Capital.

Temperance in the application is the key to transparency. As it is for motherhood. And perhaps apple pie.

The CEO’s case for rocketing equity markets

Middle East and Korean peace in the offing

A year after writing about the unsustainability of the French economy, I found myself this August once again amidst the glory-on-earth that is inland Provence. The economy is in worse shape, even more of the profit-making elite have left the country and President Francois Hollande is beyond a blancmange.

Demand for places in the South Kensington Lycée is such that a new one is being built near Wembley football stadium. London’s gain is France’s loss.

And yet I join a select group of forecasters who have to date been proved wrong. We continue to hammer away at our theme of the bankruptcy of the French state while enjoying the delights of long lunches with saucissons de sanglier, the local rosé and the dream of owning our own estate. The head and the heart do not always move in sync. Why France will fall next.

The time to invest in equities is now. Ignore the pundits who declare them overpriced. Dismiss the majority view which emphasises these five certainties: anaemic world growth is set to persist for the foreseeable future; China is set to become a superpower; the North-South Korea stand-off is unlikely to change anytime soon; US supremacy is at an end; the Israel-Arab conflict will endure.

Instead, read the fascinatingly contrarian world vision that a well-known, cerebral CEO recently shared with me.

“China will struggle more than many investors expect, particularly in the context of what could be the Asian strategic surprise of the next few years: Japan. Chinese growth well under double digits at 7-8% will not be enough to sustain the socio-political compact which has kept it as a unitary state with a quiescent population. The subversive power of the internet, growing income inequality devoid of the hope that a rising tide will lift all boats, local corruption, Muslim extremism in some provinces and regional separatism, will lead to domestic problems which the Communist Party will not be able to contain. It could lose power while the country messily breaks up into smaller areas of influence, although it is worth keeping in mind that “smaller” in Chinese terms is still large by any other.

The Koreas will unify as the Chinese reconsider the cost of supporting the existing North Korean regime. South Korea will pay for re-unification, just like the West Germans paid for the East. After a decade or two of domestic integration focus, Korea will be born as an even more powerful economic entity, playing a much larger role on the world stage.

The US looks set to continue as a superpower. With the Republican Party in a mess, Hilary Rodham Clinton could be elected on a landslide at the next election, bringing the House along with her. The US will continue its upward trajectory, based on cheap shale gas and its flexible, innovative economy, with no one country able to challenge it.

Peace is due to break out in the Middle East within the next 3-5 years as the Shia axis surely will be broken when Bashar is ousted. He may not be out of power yet, but the prospects of continued Alawite domination of Syria (12% of the population) grow dimmer by the day as Sunni support for the rebels continues to grow. Syria’s fall would effectively defang Hezbollah and creates much improved prospects for peace with Israel. The new military government in Egypt may transition into a civilian government over time, but likely will continue to curtail arms trafficking across their border into Gaza, further weakening Hezbollah. Shia Iran, the main backer of Hezbollah, would end up being further isolated and surrounded by Sunni powers.

The Arab Spring has brought to the surface the main threat to existing regimes in the Arab world: a lack of growth and diversification with its consequent unemployment, especially youth unemployment – under 25’s being the largest (and growing) segment of the population in the Arab world. The monarchies and dictatorships have used the conflict with Israel as an excuse for their lack of progress, but this is no longer enough.

Peace with Israel will allow the focus to shift to growth. Informal approaches to Israel from the Saudis have already been made. For Israel, which does not have the military capacity to fully disable Iran’s nuclear capabilities, a comprehensive peace settlement may have allure. Not least because Arab Israelis are set to be a majority of the population within a decade.

The confluence of these unexpected factors, including the enhanced power of the US and the shock of a Middle East and Korean settlement, means equity markets will take off on the back of the boost to world growth.”

Hopefully, this radical vision will more likely happen than this Column’s dire French predictions.

Reputation loss: Rato, Mervyn and Dimon

The growth myth

If raw capitalism is about creative destruction, we have undoubtedly seen a lot of destruction. It is not yet clear how creative it will be.

On the back of the financial crisis there was a first wave of people such as Dick Fuld of Lehman Brothers and Sir Fred Goodwin of Royal Bank of Scotland.

We are now seeing the second wave. Mervyn King has lost his reputation as a competent governor, although he won’t lose his job. The Governor’s consistent refusal to commission a study of what went wrong at the Bank of England; a series of in-depth articles detailing his rejection of dissenting opinions; his antipathy towards the City; his obsession with monetary policy at a time when financial stability should have been high on the list; these have all massively eroded his credibility.

The much-criticised independent Court of Directors has now countenanced three separate studies on the issue, surely an embarasse de richesse. Those who argue the Governor ensured each study has a very limited brief are right, but the fact that they are taking place is itself a most vehement slap in the face.

The destruction of the stellar career of Rodrigo Rato, Spain’s much-lauded Finance Minister in better times and subsequently Managing Director of the International Monetary Fund, is further advanced. It has now imploded with Bankia’s effective bankruptcy. The third largest Spanish bank by deposits was effectively nationalised and its chairman fired. The bank spent many months without a ceo as no banker of note was willing to serve under a man who had never been a banker yet whose views reigned supreme.

Jamie Dimon, the embattled head of JP Morgan Chase, is still in his post following $2bn of declared trading losses at the chief investment office. Market and press estimates put the loss at a probable $7bn. More importantly, this raises doubts about the bank’s risk assessment. Dimon’s fate has yet to be decided, but calling the trades “an isolated event” is surely tempting fate.

Is there a common theme linking these three personalities? None of them have been felled by personal scandals. They are all intelligent and all acted and are acting with the best intentions. They have been justifiably acclaimed for years. But we are living in exceptional times. What they perhaps all lack is the capability to allow strong characters around them, the capacity to accept criticism and the flexibility to change behavior accordingly.

At least what happens to those who fall from grace these days is less violent than in ancient times. Julius Caesar, whose dictatorial tendencies were upsetting his peers in the Roman Republic, was assassinated by Brutus and others. He needed a jester, much beloved of later European monarchs, who was armed with permission to mock and thus keep the ego and ambitions of royalty and others within bounds.

According to Roman historian Suetonius, Caesar’s final words were not the famous “Et tu, Brute?” (And you, Brutus?); rather, he spoke his last words in Greek, the language he used for family and intimates: “Kai su, teknon?”(Even you, my son?).

Caesar was rumoured to be Brutus’s father as his long affair with Brutus’s mother was well-known.

The Financial Services Authority will exist for only a bit longer in its current form. It is now a source of destruction, liberally doling out fines and reputational damage as it seeks to cover its former laissez-faire sins with a tsunami of action.

At Robinson Hambro we quacked with fear at the return address on the envelope that came through the office door: “Unauthorised Business Department, Financial Services Authority”.

Our Board Search boutique looked set to bite the dust. All the hard work – be it finding Chairmen for companies, to hosting high-powered dinner parties, to dealing with Ambassadors and family offices – was to be in vain.

We quacked as we opened the letter. Had we mistakenly told a retailing Chairman that a few more women on his board would be a good thing? Had our Ambassador turned out to be a much-married fraudster with children scattered all over the world? Had the blue of our corporate logo infringed a new regulation?

Once the shaking of the hand that held the letter stopped, it turned out to be a warning that we were being targeted by fraudsters. As the FSA warned, in bold, “Remember: if it sounds too good to be true, it probably is!”

The new conventional wisdom, that growth can be easily combined with austerity is just that: too good to be true. There is worthy growth, based on structural reforms and investment and moderate spending, and bad growth.

Far be it from me to question the wisdom of the International Monetary Fund, which in this week’s report on the UK suggested a further lowering of interest rates from the base rate’s 0.5%. Nevertheless, when you are bumping along the bottom, shaving off half a percentage point makes little difference. Take a look at Japan.

As for its suggestion of infrastructure spending, anyone who has tried to move around London, where traffic is paralysed by road and building works, would think enough is being done. For future spending, with no money in state coffers, it will be tempting to finance increased infrastructure investment via private finance initiatives (PFI) or public private partnerships (PPP). These are often accounting gimmicks to keep government liabilities off-balance sheet. The UK has merrily exported these to the rest of the world.

Additionally, infrastructure spending takes quite a bit of time to make its way through the system.

There is, of course, a more radical solution. As proposed by the Institute of Directors and the Taxpayers’ Alliance, a single income tax rate of 30% would put money in consumer’s pockets. It would lead to a surge of spending. Combine that with another radical measure, the raising of interest rates, and savers would be rewarded after years of being the losers compared to borrowers. This would create enough confidence at a micro level for increased spending.

Simplistic, you say, gentle reader, with no thought for the other implications of such policies? Right you may be, but the IMF prescriptions are no less so. Pushing a cut in interest rates and more quantitative easing, when there is no evidence of what the medium term effects are, leaves a lot to be desired.

Perhaps, though, a new “growth” strategy from the government will be enough to boost confidence, just as perceived austerity took it away. Headlines on new spending are perfectly timed for mid-term. The coalition government’s management of public relations is looking good.I have my own jester, keeping my feet on the ground. My son’s Norfolk terrier, Sasha, a small golden bundle of fun, pines to be a source of destruction – with no creativity thrown in. He has now taken to dementedly barking at all and sundry, especially larger dogs who could eat him in two easy gulps.

Having tried everything from rolled up newspapers to shouting, it was suggested I try spraying his nose. Armed with a spray bought in Avignon a few summers ago, we set off on our walk. Encountering a German Shepherd, I maniacally spritzed Sasha’s button nose with lavender spray. The smell of many a Provencal summer wafted tranquillity onto me. The little dog continued his snarling and baying for blood. The German Shepherd disdainfully walked on by.