Osborne is all out of excuses

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Someone said to me recently that “an excuse is a skin of a reason stuffed with a lie”. I forget why, but it was probably for some white lie I had told to excuse myself from some social event I had no interest in attending. No harm done at the end of the day. Excuses are common enough in today’s world with politicians being the worst offenders.

George Osborne wrote an article in the Sunday papers, blaming the Eurozone crisis for “killing off the UK’s economic recovery”. He argues that our recovery, “already facing powerful headwinds from high oil prices and the debt burden left behind by the boom years – is being killed off by the crisis on our doorstep.”

While there is nothing fundamentally wrong with this statement it is slightly disingenuous to say that Europe is the driving factor behind the UK’s weakness. Over 50% of the UK’s exports are bound for the Eurozone. This government has expressly called for a refocusing of the UK economy towards the export sector safe in the knowledge that government spending will have to be cut, domestic consumption is weak and investment difficult.

Of course, if a country’s most valuable export market is taken away then it will naturally see a falloff in output. Countries, or groups of them, have symbiotic relationships through geography primarily; ours happens to be with the EU much like the US’s is with Canada and Mexico.

Much like the idea of charity ‘beginning at home’, it is important to recognise that the reasons for economic strife and remedies towards them are also found within our domestic realm. Consumer spending is the primary driver of growth in the UK; you and I spending wages in shops and such. Our ability spend our way out of recession has been eroded by inflation and, in particular, the inability for wages to keep up with rises in the cost of living.

Oil prices have retreated in recent weeks, following their beginning of the year march higher over Western sabre rattling towards Iran’s nuclear program. Even so, the cost of petrol is still a huge impediment to further growth and this government plans on making it worse by introducing a 3p tax increase on a litre of fuel in the autumn.

I also believe that the government should immediately cut business rates and, should further asset purchases be used by the Bank of England, pass an emergency law to make sure that the extra liquidity is passed on to SMEs and not kept on the balance sheets of large commercial banks. There’s more that the UK can do to help itself here.

The Chancellor hasn’t used all the tricks at his disposal just yet. And until he has tried out all of these options he can’t legitimately lay the full blame for our stunted growth on the European situation. I’m sorry George but you can’t excuse yourself just yet.

Trade of the Week

This week’s trade of the week is a 1.5x Leveraged Convertible Plus. This differs from the usual Convertible Forward in that, for an increased risk, the client’s strike improved by 1.5 cents while if the higher barrier is touched the rate at which he must buy on a forward is a further 1.5 cents higher as well. The client decided to hedge his exposure from now until the end of the year with this trade. He imports goods from China and his supplier requires payment in US dollars.

The client was able to achieve a strike rate of 1.5400 on his option which allows the client to benefit all the way up to a rate of 1.6150. This barrier increases by 50pips every month so month 2’s is at 1.6200 and et cetera. Should the rate touch the barrier level during the window period (1 month before the expiry date) then that month’s structure reverts to a forward at 1.54 in 1.5 times the amount needed. i.e. if you originally hedged a monthly exposure of USD200k then you would need to buy USD300k. If the barrier is not touched then he can of course trade in the spot market. One additional risk is that should GBPUSD be below 1.4750 on expiry then for every basis point below 1.4750 you lose the same from your protected rate of 1.54

This strategy requires no premium, and gives the ability to match the forward price. As sterling has remained range bound for a fair time this structure allows you to gain upside should prices gain in the direction we believe they will move whilst allowing you to match forward in the interim

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Osborne is all out of excuses

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