Two reasons to worry about bubbles in the global markets

 
Allister Heath
IT'S MONDAY, dear readers, so here are two reasons to worry. Let's start with the least obvious: Britain's listed firms are doing far less well as a group, when assessed properly, than most people seem to think.

Forget about earnings per share in the FTSE 100, or any of the other adjusted and partial measures. If one looks at the purest measures of profitability, and extends that to the 350 largest firms, the picture is gloomy.

As we report on p1, net profits from the FTSE 350 plunged 29.7 per cent in 2012, to a level 14 per cent lower than in 2007, the Share Centre reveals, but better than in 2008-2009, the two really bad years. Gross profits (sales minus the cost of goods sold) fell 6.9 per cent; pre-tax profits declined by 24.6 per cent. Companies are failing to pass on rising costs to their customers.

Revenues rose just 2.1 per cent, much less than they have in recent years (total turnover is up by 44 per cent in nominal terms since 2007, but profit margins have collapsed). The largest 100 firms (which are more global than ever) grew sales by 2.3 per cent to £1.83 trillion, while the FTSE 250 eked out growth of 0.9 per cent to £238.2bn. After tax profits from the large cap firms fell to £104.0bn, down 30.8 per cent; for the mid-caps, profits were £10.5bn, 16.5 per cent lower.

The squeeze was spread across sectors - but the pain from banks, oil and gas and miners - which are massively over-represented among the very biggest London companies - is a major explanation for this bad news. Lower raw material and energy prices are now a disaster for UK Plc; we are in many ways a commodity market. But regardless of reason, it's clearly bad news for stock market bulls.

The other, even greater, reason to worry is the global bond bubble, to be seen in the context of the Bank for International Settlements' latest warning on the side-effects of QE. The bond bubble - fuelled in part by the authorities' massive buying of government securities - saw signs of popping last week and could take down other markets and entire economies in its wake. The global junk bond bonanza - issuance is up 53 per cent this year - could also be throttled.

Yields have been going up everywhere, including on gilts and in Japan, but the US action was especially noteworthy. US Treasuries suffered their worst month in two and a half years last week. Some attribute this to better economics news, and the possibility that the Fed could tighten money - but whatever the reason, watch the bond markets like a hawk this week.

RIGHT OF RECALL
It's time for voters to be given the power to recall their MPs and trigger fresh elections in the case of serious wrongdoing. That, more than any other reform, would be the way to tackle parliamentary sleaze.

Several Tory thinkers, led by Douglas Carswell and Daniel Hannan, have suggested how such a system might work without giving too much power to apparatchiks or allowing populists to hound MPs unreasonably.

There would be four stages in my favourite version. First, the Committee on Standards and Privileges would need to rule that an MP had behaved unethically. Second, 20 per cent of local people would have to sign an online petition to run a recall ballot. Third, a referendum would be held in the constituency; over half of voters would have to tick the "yes" box. Fourth, a by-election would be called. This sort of proposal would have teeth as well as safeguards. My fear is that the idea will be introduced in a diluted, corrupted fashion that merely reinforces the power of political parties and elites. We shall soon find out.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath