8 Reasons An Internet Sales Tax Will Hurt Online Retailers: Part 2

Quick Facts About The Proposed Internet Sales Tax Bill:

* The tax is supposed to generate $22 Billion to $24 Billion in annual revenues to state and local governments, although not all states want it.

* It's a tax that online retailers were supposed to be collecting anyway.

* Online retailers with annual sales below $1 million would not have to collect these taxes.

* States must provide free computer software to help retailers calculate sales taxes, based on where shoppers live.

* States are supposed to establish a single entity to receive Internet sales tax revenue, so retailers don't have to send it to individual counties or cities.

If this legislation goes through, here are some of the ramifications for online retailers:

1. Fight For Customers And $$$ Will Intensify. Despite the convenience, customers no longer benefiting from not paying online sales tax could lose their incentive to shop online; and when they do (shop online) they may not buy as much.

* There'll be discount and loyalty battles between Internet and Brick and Mortar retailers to woo, win and keep customers.

* Brick & Mortar retailers will emphasize the advantages of actually touching, feeling, and seeing the products in their stores.

2. Pricing Competition Will Be A Major Factor. As this bill levels the playing field between Brick & Mortar and online collection of taxes, online retailers must watch costs and pricing more carefully than ever. Places to make up costs could be in inventory, marketing, or shipping.

3. Existing Online Businesses Will Be Squeezed. Low-profit-margin online businesses will have the biggest problem. Those selling high cost goods in high sales tax states will feel big effect. And low-profit-margin businesses which sell expensive products will also be hit. 

4. Internet Business Development Will Be Dampened. The Internet sales tax will deter online growth. New business will be discouraged at a time when our economy is so anxious for entrepreneurs to create jobs and economic activity.

5. Bigger Businesses Will Stifle Competition. Big retailers will have big advantage in being able to spread the cost of compliance over their larger sales base, while smaller retailers (those making just over $1 Million and up) will struggle.

6. It Will Be Complicated. Although supporters say the bill makes it relatively easy for Internet retailers to comply, the tax bill is complex. If the system isn't simplified across the board, businesses will be forced to wade through potentially hundreds of tax rates and a host of different tax codes and definitions.

7. It Will Cost Online Retailers Time And Money. The states are supposed to provide tax-tracking systems for collecting the taxes, but launching, administering and maintaining these systems will be expensive and time consuming for online retailers.

8. Federal And State Governments Could Abuse Their Powers. Opponents point out that it gives the federal government and state government too much power over this issue and could subject online retailers to a slew of state and local audits.

Why Brick & Mortar Stores Are Happy About The Internet Sales Tax Bill:

As far as Brick & Mortar stores are concerned, this sales tax will level the playing field, give them new life, help them get over the showrooming effect; focus on expanding their brand, product offerings, and service; and force more fair competition.

http://upstreamcommerce.com/blog/2013/05/13/8-reasons-internet-sales-tax-hurt-online-retailers-part-2

How The Internet Sales Tax Bill Will Affect Online Competitive Pricing: Part 1

On Monday May 6, 2013, the US Senate passed a bill requiring online retailers to collect sales tax just like their brick and mortar cousins. Although the bill has to pass the House, The Marketplace Fairness Act (also called The Internet Sales Tax Bill), if passed, will seriously affect the way business is done on the internet in the future, including competitive pricing. First, it's important for everyone, retailers and public alike, to know the bill's contents and potential. (It's complicated). I found the best possible explanation of The Marketplace Fairness Act in an article in the UK's The Guardian, by their US Correspondent Dominic Rushe.

Marketplace Fairness Act: What does the Internet sales tax bill mean for you? By Dominic Rushe, The Guardian, May 8, 2013

For years retailers have complained that their online rivals in the US have an unfair tax advantage because they do not always collect sales tax. On Monday, amid intensive lobbying from retailers including Walmart, the Senate took a step closer to "leveling the playing field" by voting through the Marketplace Fairness Act. The act is supposed to simplify the byzantine sales tax system across the US. But critics charge it's unfair and have vowed to fight on.

What is the Marketplace Fairness Act?

At its basic level the act grants states the authority to compel online and catalog retailers ("remote sellers") with gross sales over $1m a year to collect sales tax at the time of a transaction - just as local retailers are already required to do. A version needs to pass in the House for it to become law.

Who pays sales tax and how much?

Sales tax rates vary widely and range from less than 1% to over 10%. There are myriad exemptions and exceptions and rates vary across types of goods and services as well as cities and even counties. Clothing and footwear under $110 is tax free in New York City, for example. But buy something worth more than $110 in Manhattan and the item is subject to a 4.5% city sales tax and a 4% state sales tax. Sales taxes are collected in 45 states, the District of Columbia and Guam. Five states, including Alaska and Montana, do not collect sales taxes.

How much money is at stake?

States depend on sales and use taxes for an average of 20% of their annual revenue. According to the bill's backers states were unable to collect as much as $2bn in revenue for the 2012 tax year alone.

But I already pay tax on online purchases

Sometimes. If an online retailer has a physical presence in your state, they already have to charge the local sales tax as if you had bought it in the store. Buy a pair of pants from Gap.com, for example, and the chances are they have a store in your state and you will be charged sales tax. Similarly if an online-only retailer has a physical presence in a state, e.g. a distribution center, the same rule applies. Amazon, the largest online retailer, has "fulfillment centers" in 14 states and "customer service centers" in another three.

Also you are supposed to declare the fact that you have not paid tax on goods bought out of state or online and then pay that tax with your state taxes. A lot of people either don't know this or don't do it which is why the bill's backers want to pass the tax collecting duties on to the retailer.

This sounds complicated

It's worse than it looks. If the burden of collecting the tax is passed to online retailers, they would have to deal with more than 9,600 tax-collecting jurisdictions, including state and local governments. The act says states will only be granted this authority after they have simplified their sales tax laws. At the moment 24 states have signed up for the streamlined sales and use tax agreement (SSUTA) - an attempt to simplify sales tax for retailers, especially those operating in multiple states, whether they sell on or offline.

States who are part of SSUTA, including New Jersey, Ohio and Wyoming, would have the authority to collect online sales taxes under the new act shortly after implementation.

States that have not signed up for SSUTA would have to meet five "simplification mandates" including the provision of free software for retailers to manage compliance with the new system.

Why is it so complicated?

The sales tax regime was built when interstate commerce was less common and internet shopping didn't exist. The US supreme court has ruled twice on the issue, once in 1967 and once in 1992, and concluded that out-of-state retailers should be protected from the obligation to collect local sales tax because it would place too much of a burden on their businesses.

The bill's proponents argue that technology has superseded that view. Shoppers now cross state lines at the click of a mouse. At the same time cheap, readily available technology exists to allow retailers to deal with the tax consequences of that change.

So who's in favor?

President Barack Obama for one. Also Republicans including Senator John McCain. Brick-and-mortar retailers, including Walmart, who have complained the internet has been getting a free ride, have been pushing hard for the bill. As has Amazon, once a fierce critic of online sales taxes and now the bill's most active online proponent.

And who's against?

You are. A recent Quinnipiac University poll found 56% of voters were against the tax and only 37% were for it. Senior Republicans including senator Marco Rubio, potential presidential hopeful, are also against it as are the usual anti-tax groups including Americans for Tax Reform. Smaller online retailers are against the bill, as is eBay, which argues the complexity of implementing the bill will unfairly penalize its sellers.

What happens next?

The Senate passed the bill, but it is likely to face stiffer opposition in the House where anti-tax Republicans are likely to take a tougher stance against the bill. The bill does, however, have the backing of many cash-strapped states – even Republican ones. No date has been set for a hearing or vote yet but expect a lot of shouting from both sides before this bill becomes law.

END OF GUARDIAN ARTICLE

Tax Authorities Playing Games

After being distracted by UKIP last week, I am happy to return to the subject of taxation and the way in which developed countries appear to be more aggressively pursuing tax owed by citizens and residents.  Firstly I would start with FATCA.  By way of background, the Foreign Account Tax Compliance Act (FATCA), which is being phased in from this year, is part of the effort by the US government to prevent money laundering, and reduce tax evasion.  Under FATCA, Foreign Financial Institutions (FFIs could be any financial institution based outside of the US) can either report on the activity of American account holders directly to the IRS or to their own government who will in turn collate and pass on the data to the IRS under the terms of an Inter-Governmental Agreement (or IGA). 

In principle, the real advantage of the IGA is with territories where Data Protection legislation prevents FFIs from remitting data directly to the IRS.  Furthermore, the IGA route can reduce the complexity and the cost faced by FFIs in remitting data to the IRS.  Otherwise, it may be just as easy for FFIs to remit data directly to the IRS.  Failure to comply means that FFIs face up to 30% withholding fines on their US source income, so either way, FFIs are very motivated to comply. 

In December last year, a committee of MPs here in the UK accused Amazon, Google and Starbucks of an “immoral” use of secretive jurisdictions, royalties and complex company structures  to avoid paying tax on British profits.  The Commons Public Accounts Committee also criticized HM Revenue & Customs for being "way too lenient" in negotiations with corporations which pay little or no corporation tax.  It called on the government to draw up laws to close loopholes and name and shame companies that fail to pay their fair share.

The UK press was all over Amazon which uses a Luxembourg based unit to pay a rate of less than 12% on foreign profit (less than half the average corporate income tax rate in its major markets).  Starbucks was also attacked for its practice of paying fees (such as royalties) to other parts of its global business which allows it to declare that it lost money for the 15 years it has operated in the UK.  Google was also targeted for avoiding UK tax by channeling non US sales via Ireland and Bermuda allows it a tax rate of 3.2% on non-profits.

At first when I saw the extent of the backlash here in the UK, against the aggressive but very legal tax avoidance strategies of large American companies, I wondered if this betrayed some tension in the ‘special’ relationship between the US and the UK.  Was the UK responding to the onerous FATCA-driven reporting requirements which may threaten the attractiveness of Britain and its overseas dependencies as off shore centers?

My hypothesis was disproven when, over the past couple weeks, the news began to report that a UK-led G7 agreement was being thrashed out to promote a FATCA like sharing of information among its members.  In the run up to this G7 meeting, a subgroup calling itself the G5 (the UK, France, Germany, Italy, Spain) signed an agreement on automatic banking information exchange to identify individuals and companies who may be avoiding tax using overseas accounts.  To cement this deal, the UK has got its overseas territories to agree to share information on all confidential banking information. 

Could the answer to this sudden preoccupation with tax transparency be nothing more than cash strapped nations hoping to collect as much of the tax revenue owed as possible?  Maybe it’s as obvious as that?  It would be interesting to see what happens to the leaked 2.5 million documents (including 1000 British names) on off shore financial activities leaked to the tax authorities in the UK, the UK and Australia. 

As I was telling a friend this week, this industry is bigger than most people recognize.  The best talent from any tax authority is attracted by higher wages in the private sector.  The private sector advises the government on tax policy.  So the tax avoidance industry is designed to be a step ahead of any law.  Remember the 2010 50p tax rate introduced by Gordon Brown?  A very strange thing happened.  In 2009-2010, more than 16 000 individuals in the UK declared more than £1 million in income.  After the 50p tax rate was introduced, that number fell to 6 000.  After the tax rate was cut to 45p, the number of people declaring an annual income of more than £1 million rose to 10 000.

Seems to me that the real winner in this never-ending game of cat and mouse is the tax planning industry.

Read more on DerrenJoseph.blogspot.com

Game Changers

It was my intention to write about FATCA and taxes today but it is hard to ignore the results of recent local government elections here in England.  I’ve previously written about UKIP in the context of the Eastleigh by-election but last week went on to win over 140 seats and average 25% of the vote in council wards they contested.  UKIP leader Nigel Farage now talks about these gains representing a “game changer”.

Friday night I met up with some former work colleagues and politics came up.  One of my friends is actually a UKIP supporter and as I said to him, I have nothing against UKIP in principle and their focus on their twin pillars of anti-EU and anti-immigration.  What concerns me is the way in which the debate is being framed as an emotional one as opposed to a data driven one.  As long as this is allowed to happen, populism and poli-tricks may be allowed to trump logic and pragmatism.

Firstly there is the anti-EU stance.  Not that I am a defender of the EU as presently constructed but my questions are what about the economic studies that speak to the potential impact leaving the EU?  Brussels has made it clear that the Swiss option will not be on the table and assuming that one is not deluded into thinking that the UK can thrive without aligning herself with a trading bloc, with whom should she align herself?  The Obama administration has made it undiplomatically clear that it wants the UK to remain engaged with the EU to help influence its evolution from the inside. Prime Minister Cameron has been to the far-east twice and the Indian business leaders (Indian employers are by far the largest industrial employers in the UK!) who now control what little remains of the British industrial base have made it clear that they need the UK to remain in the EU to ensure duty-free access for their goods.    

Secondly there is the anti-immigrant stance.  Last week I wrote about the productivity puzzle.  The UK barely avoided the dreaded triple dip and productivity continues to decline especially when compared to the US where even those to the right are advocating relatively liberal immigration policies.  Why? It’s pure numbers.  According to the pressure group - Partnership for a New American Economy, about 40% of Fortune 500 firms were founded by immigrants or their children.  More specifically, this represents the firms behind seven of the ten most valuable brands in the world!  Even though foreign-borns are only an eighth of America’s population, a quarter of high-tech start-ups have an immigrant founder.  That’s a key part of why productivity in the US is climbing while the UK has been declining in my opinion.

High-tech firms such as Google (whose co-founder Sergey Brin moved to America from Russia as a child) haven’t just created jobs for their own workers. They have also inspired the creation of entirely new categories of job.  An article in April’s Economist noted that a few years ago no one earned a living as a mobile-app developer.  Now they are everywhere.  It is not just full-time workers who benefit: firms such as oDesk, a Silicon Valley outfit founded by two Greeks, are nurturing an online freelance economy that is in its infancy.  Last year Americans using oDesk’s platform found over 2m hours of freelance work.      

So returning to UKIP, again I have nothing against an open debate on the EU nor on immigration.  I just get concerned when discussions are framed by emotive sound bites by power hungry politicians who see economic data as a distraction to be avoided.

Perhaps next week I will have the opportunity to focus on FATCA compliance in the Caribbean.  Based on the FATCA model, the UK, France, Germany, Italy and Spain have entered in an agreement for the multilateral automatic exchange of tax information.  What’s also interesting is that all British Overseas Territories in the Caribbean are also included in this agreement. 

As if to emphasize the perception that transparency and compliance in independent Caribbean territories lag behind that of British Overseas Territories, last week U.S. District Court Judge Thelton E. Henderson of the Northern District of California granted a Department of Justice petition to serve a John Doe summons in an “ex parte” proceeding—meaning the government was able to keep the summons secret until it was served. The summons requires Wells Fargo Bank to turn over records that could identify any U.S. taxpayers who held accounts from 2004 through 2012 at CIBC / First Caribbean International Bank Limited (FCIB), which operates in 18 Caribbean countries.

   

In previous commentaries, I made the point that compared to the British Overseas Territories and the Bahamas, both governments and indigenous financial institutions in independent Caribbean territories were not giving FATCA the level of attention it needed.  In this game changer, it appears as if the US authorities are making an example of FCIB.  Let us see how the rest of the region responds to this wake-up call now.

Read more on DerrenJoseph.blogspot.com

The Great Age of Decoupling

On April 23^rd, the Pew Research Center released its analysis of recent US Census Bureau data. It supported with data, what the rhetoric was already suggesting.  During the first two years of the “US economic recovery”, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%.  This is in the context of overall wealth increasing.   

This should come as no surprise to anyone who has been following the trends.  In that great documentary on the financial crisis called “The Flaw”, the point was made that the last time income inequality was this high was in the run up to the Great Depression.  Aside from the overall level of income inequality is the fact that the trend shows that the gap has been widening for a while.  Recent Gini coefficients that measure inequality demonstrate that it has been rising in the US and here in the UK.

        

This whole phenomenon becomes stark when you look at youth unemployment numbers.  This week’s Economist does a good job of highlighting the issue. But it’s not just a problem in the US or here in Europe but in Africa,Latin America and parts of Asia as well. For many, this is the first generation in a while that believes that it will be worse off than their parents.  No longer is a degree a guarantor of a job and the concept of underemployment is becoming a part of the reality of so many.

So we have a decoupling or a disconnect between production and wealth creation on one hand, and employment on the other.  Another manifestation of this disconnect is what some commentators have called - the productivity puzzle.  Unlike other recessions where we saw productivity gains, we have actually been seeing productivity declining in the UK, Germany and Italy.  The UK productivity puzzle is complicated by increasing employment numbers (particularly in the private sector) amidst falling productivity.  The US stands out as it showing the characteristic productivity gains post 2008. The US productivity puzzle is complicated by falling private sector employment amidst rising productivity.

For me it is clear that our Western economies are in the midst of a major paradigm shift.  What is driving this great decoupling of production from employment?  It is more than just the impact of inflation,tax policy or international trade.  To me a key driver that must be incorporated into any explanation is the extent to which technological change is driving this decoupling.

I found this December 11^th 2012 article in the NYT that speaks to this very point.  The authors note that as digital devices like computers and robots get more capable thanks to Moore’s Law (the proposition that the number of transistors on a semiconductor can be inexpensively doubled about every two years), they can do more of the work that people used to do.

This substitution of technology for labor happens first with more routine tasks, which is a big part of the reason why less-educated workers have seen their wages fall the most as we moved deeper into the computer age. 

The authors go on to say that the Great Decoupling will only accelerate, for two reasons.  Firstly,computers will keep getting cheaper over time.  Digital labor will become cheaper than human labor not only in the United States and other rich countries, but also in places like China and India.  Off-shoring is only a way station on the road to automation.  Secondly, technologies are going to continue to become more powerful, and to acquire more advanced skills and abilities.  They can already drive cars, understand and produce natural human speech, write clean prose, and beat the best chess players.

So we live in the age of the great decoupling.  The decoupling of productivity from employment.  The decoupling of wealth from work.  The key to it all is technology.  Technology is racing ahead and leaving more and more people behind. In my everyday life I look at the impact tax preparation software is having on the tax preparation industry. I look at the impact file sharing technology is having on the music industry.  I look at the impact that the internet is having on the travel industry. As symbolized in so many movies, the race against the machines is already here.  Those that learn to race with the machines are winning.  Those that try to race against the machines are being left behind.

I end with a quote from venture capitalist Marc Andreessen, who says: “The spread of computers and the Internet will put jobs in two categories: People who tell computers what to do, and people who are told by computers what to do.” Only one of these two job categories will be well paid.

Read more on DerrenJoseph.blogspot.com 

Beware of the Currency War

So last week, the Financial Times reported that the UK Exchequer Secretary, David Gauke, held a number of high level meetings with U.S. businesses to assure them that the UK remains a respectable low tax country and that the Government had stuck to its plans in spite of public anger over corporate tax planning.  "Since the controversy about large corporations and tax broke last year, we have twice further announced further cuts in corporation tax," he said.  He told West Coast businesses that their ideas and intellectual property would be lightly taxed in the UK.  But he said that Britain was not a tax haven and had a "stronger reputation for respectability that some of our competitors" because it did not strike preferential deals with individual taxpayers.  

In a previous blog I mentioned that the UK was at a crossroad.  Is it in her best interest to get closer to the EU (aka Germany), disengage from the EU and pivot to the Pacific (as Obama is clearly doing in this second administration) or even more closely align herself with the United States.

A radical change is needed as clearly the present direction does not seem to be helping the UK. Business Insider recently noted that the “Biggest Economic Experiment Of The Last 5 Years Has Ended In Disaster”.  It goes on to say that the U.K.'s economic story for the past five years has been bleak.  Since then there have been two recessions.  Last week again saw the labor situation deteriorate.  This week we'll find out if the U.K. has entered its first ever triple-dip recession.  Economists project the economy will post a tiny 0.1% - 0.2% growth in the first quarter.  Even if the country does manage to grow a little,it would still be clear that the economy is underperforming. 

Contrast this to what appears to be happening in the US.  One particularly optimistic analyst notes that compared with other major powers, America's future is looking brighter than before the financial crisis.  In a March report, Goldman Sachs found that foreign investors owned a larger percentage of the U.S. equity market than at any time in the 68-year history of the study.  The housing market is picking up, and dependence on foreign energy is falling. Congressional gridlock does not appear to be standing in the way of America's energy revolution. The Keystone XL pipeline will likely be approved.  The pipeline, along with the Obama administration's emphasis on energy independence, helps strengthen the domestic economy.

The Ian Bremmer commentary points out that on trade, the US administration has managed to convince Japan to join Trans-Pacific Partnership talks.  Should the trade consortium of countries ranging from the United States and Chile to Canada and Mexico to Singapore and Vietnam get off the ground, it will liberalize trade between members that represent nearly 40 percent of global GDP — and boost American trade and manufacturing.

Reuter’s Bremmer goes on to say another policy positive is the forward movement in Washington on immigration reform.  If that effort is successful, it could entice millions of illegal immigrants to pay U.S. taxes for the first time — and it could provide the labor force, skilled and unskilled, that many companies desperately need to ensure growth.  A recent study by the Center for American Progress found that immigration reform could inject more than a trillion dollars into the U.S. economy.  So at a time when recession-riddled Europe is muddling through, and major developing economies like China have huge looming question marks, the United States is looking pretty good from the top down.

So going back to the above mentioned options facing the UK,the answer probably lies in a policy that combines all 3, but by far the superior choice has to be strengthening the bond with the US.  It is no coincidence that UK economy seems to be further fracturing into two with the decline in regions north of the M25 becoming more pronounced.  The south east is being kept afloat only by the financial services sector. 

To a large extent, London gets to play an “offshore” role to the US.  As financial regulations tighten stateside (welcome to the post Dodd-Frank era), London becomes an even more attractive option for American institutions.  Gordon Brown understood this as Chancellor. Remember his “light touch” with regards to regulation?  Regardless of the actual trade balance,American financial institutions continue to be awash with QE liquidity and petrodollars which benefit London.  The role of the City of London in the 2011 MF Global collapse is an incredible case study for the interested observer (pay special attention to Reg T).

The biggest threat to this cozy financial relationship and therefore the economy of the south east UK, would be the looming currency war.  I am not talking about competitive devaluations but rather the move of certain countries in Latin America, the Pacific rim together with South Africa and Russia to settle bilateral trade deals with gold or currencies other than US dollars.  If this trend continues to the extent that the role of the US as the world’s reserve currency is threatened, then both the US and the UK would be in serious trouble.

Read more on DerrenJoseph.blogspot.com 

Beware of the Alchemists

A Mark Buchanan article in Bloomberg last week was called “Beware of Economists Peddling Elegant Models”.  In it, the theoretical physicist proposesthat – 

“Mathematics can be beguilingly elegant. It can also be dangerous when people mistake its elegance for truth.   Albert Einstein's theory of general relativity might be the best example of elegant math, capturing a wide range of subtle and surprising phenomena with remarkable simplicity.  Step toward the practical, though, and physics moves quickly away from elegance to makeshift usefulness.  There's no pretty expression for the operation of a nuclear reactor, or for how air flows past the swept wings of an aircraft.  Understanding demands ugly approximations or brute-force simulation on a large computer“.

A friend recently pointed out that there is also a book and YouTube video called the Alchemists of Wall Street which makes a similar point.  The point is that we cannot place all our trust in mathematics to model the real world in general or the real economy in particular. 

Needless to say, I agree with this view.  My study of Economics started at O Levels in the late 1980s, continued to post graduate level in the late 1990s and the early part of the last decade and continues to this day.  One thing that I never learnt in classrooms is that the markets are not ‘free’ but subject to extensive manipulation by agents hidden from everyday view.

    

At one time, this view was frowned upon as a fringe view held by weird conspiracy theorists.  Today, it seems that this is common knowledge and one of the most recent and more popular examples has to be the London Interbank Offered Rate (LIBOR) scandal.  LIBOR is a number used in the pricing of trillions in securities and was manipulated for years. Careers have been ruined, while RBS, UBS and Barclays have been fined because of this scandal yet no single person has been found to have been in violation of a law. 

The reason is that, according to a recent ruling by a federal judge in the southern district of New York, although banks conspired to manipulate rates, competition laws did not apply as it was already a cooperative process.  Feel free to Google more details on this story but to me this stands as a perfect reminder of the dangers of over-reliance in econometric modeling given the vagaries of human behavior.

A recent article in the Economist discussed findings from academics at the Oxford-Man Institute of Quantitative Finance.  They tracked the monthly submissions of 12,128 hedge funds to industry databases between 2007 and 2011, and found that just under half the managers subsequently modified their data.  While some tweaks were tiny, many were material.  Without getting too technical,it appears as if hedge fund managers routinely revise their performance data in a way that seems designed to fool outsiders.

So what do I see as the take away from this?  For me it is simple.  Forget theories and accept reality for what it is.  Human nature is an indistinguishable part of any econometric equation.  In November 2008, during a briefing by academics at the London School of Economics on the turmoil on the international markets, the Queen famously asked:"Why did nobody notice it?" The university’s Professor Luis Garicano, explained the origins and effects of the credit crisis. He told the Queen: "At every stage, someone was relying on somebody else and everyone thought they were doing the right thing."

The markets seem destined to forever follow the cycle of boom and bust.  The trick must therefore be to be detached enough from the euphoria to gauge where we are along the cycle.  Think about the present rally in US equities, the US housing recovery and bond market performance?  I say no more. 

In April 2008, Her Majesty's private wealth was estimated by Forbes magazine to be around £320 million.  This included a personal investment portfolio valued at £100 million.  By November 2008, London's Stock market had lost almost 25% of its value.  The Queen's investments, largely in British blue chip companies, have broadly tracked the market, resulting in a 25% decline. So she was right to ask tough questions. Like you and me, I am sure she was dissatisfied with the answers.  I am sure she does not trust mathematical models as much as she once did.

Readmore on DerrenJoseph.blogspot.com