Who's been swimming naked?

It's hedge funds.

With apologies to Warren Buffett, who first coined the pithy aphorism, "You never know who's swimming naked until the tide goes out", but we may just be about to discover who has been; again.

Not only has the US Federal Reserve recently told us that the party is about to finish, with a projection that they will probably terminate their bond buying program of Quantitative Easing by this time next year, but last week, the People’s Bank of China, in a tactic no doubt sanctioned by government, administered a sharp "smack on the wrist" for domestic banks, allowing the overnight bond collateral repo rate to hit 13.8 per cent on 20th June, up from 2 or 3 per cent last month. This was designed to teach banks that unlimited liquidity was no longer going to be on tap-especially not to fund property lending. The PBOC has since injected a little more cash, but rates still remain elevated. Reports have filtered out that the PBOC has told banks it will provide them with liquidity if required, but only to fund "real" lending to the economy, rather than for property speculation.

Coupled with the Fed’s actions, this development is doubly significant, and spooked markets globally. The end of an era of unlimited, cheap liquidity seems to be drawing closer, and the implications of China’s move may be felt across many parts of the globe, perhaps nowhere more acutely than in Australia and Africa. It appears China’s administration is finally getting serious about promoting a much-needed re-balancing of its economy; away from property development, and investment generally, and towards personal consumption. To me that sounds like a recipe for less demand for the type of commodities which Australia and Africa produce.

Following the Fed’s announcements, we had already seen emerging markets suffer, as fast money raced out and headed back to the States. Suddenly the easy game of chasing yield around the world, while borrowing US Dollars to fund the practice, didn’t seem quite so rewarding or risk free. China’s policy changes add another layer of uncertainty and fragile emerging markets may be embarrassed swimmers, but many have learnt the lessons of the 1998 Asian crisis and have diligently built large foreign exchange reserves in recent years, so I’d say hedge funds are more likely to be the "‘exposed" this time, as they have been hunting voraciously for yield, whilst banks’ proprietary trading has been seriously curtailed since the onset of the crisis.

Photograph: Getty Images

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

Photo: Getty Images
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Autumn Statement 2015: George Osborne abandons his target

How will George Osborne close the deficit after his U-Turns? Answer: he won't, of course. 

“Good governments U-Turn, and U-Turn frequently.” That’s Andrew Adonis’ maxim, and George Osborne borrowed heavily from him today, delivering two big U-Turns, on tax credits and on police funding. There will be no cuts to tax credits or to the police.

The Office for Budget Responsibility estimates that, in total, the government gave away £6.2 billion next year, more than half of which is the reverse to tax credits.

Osborne claims that he will still deliver his planned £12bn reduction in welfare. But, as I’ve written before, without cutting tax credits, it’s difficult to see how you can get £12bn out of the welfare bill. Here’s the OBR’s chart of welfare spending:

The government has already promised to protect child benefit and pension spending – in fact, it actually increased pensioner spending today. So all that’s left is tax credits. If the government is not going to cut them, where’s the £12bn come from?

A bit of clever accounting today got Osborne out of his hole. The Universal Credit, once it comes in in full, will replace tax credits anyway, allowing him to describe his U-Turn as a delay, not a full retreat. But the reality – as the Treasury has admitted privately for some time – is that the Universal Credit will never be wholly implemented. The pilot schemes – one of which, in Hammersmith, I have visited myself – are little more than Potemkin set-ups. Iain Duncan Smith’s Universal Credit will never be rolled out in full. The savings from switching from tax credits to Universal Credit will never materialise.

The £12bn is smaller, too, than it was this time last week. Instead of cutting £12bn from the welfare budget by 2017-8, the government will instead cut £12bn by the end of the parliament – a much smaller task.

That’s not to say that the cuts to departmental spending and welfare will be painless – far from it. Employment Support Allowance – what used to be called incapacity benefit and severe disablement benefit – will be cut down to the level of Jobseekers’ Allowance, while the government will erect further hurdles to claimants. Cuts to departmental spending will mean a further reduction in the numbers of public sector workers.  But it will be some way short of the reductions in welfare spending required to hit Osborne’s deficit reduction timetable.

So, where’s the money coming from? The answer is nowhere. What we'll instead get is five more years of the same: increasing household debt, austerity largely concentrated on the poorest, and yet more borrowing. As the last five years proved, the Conservatives don’t need to close the deficit to be re-elected. In fact, it may be that having the need to “finish the job” as a stick to beat Labour with actually helped the Tories in May. They have neither an economic imperative nor a political one to close the deficit. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.