Fasten seatbelts and adopt the brace position

Crying wolf is an occupational hazard for business journalists. We are apt to see financial horrors beyond every dip in the markets: rightly challenging complacency, but wrongly assuming that each shadow will turn into a monster.

The best example of this is reporting of the debt markets and their crucial link with the rest of the economy. Many commentators have been warning of the dangers of a global credit crunch ever since a freakish period of low interest rates began coming to an end in 2003.

But just as sceptics underestimated the longevity of the bull market in the 1990s by missing the impact of new computer technology, anyone who thought the sky was going to fall in during 2004 has missed out on three years of another productivity miracle - this time in the financial services industry.

Whatever you might think about the fortunes made by hedge funds and investment banks, they have revolutionised the financial world with more sophisticated pricing of risk. This has allowed long-term interest rates in the bond market to stay low despite repeated ratcheting up of base rates by central banks.

Like all good things, it must come to an end, but merely saying so adds little. What matters is timing. Well, I'm sticking my neck out and saying that the time has come. The writing is on the wall - on Wall Street, in fact.

A two-week rout in the US Treasury market has ended what Alan Greenspan, the former Federal Reserve chairman, famously called the "conundrum" of the long-term bond market. The market rallied slightly in the past couple of days, but what is noticeable is that it has not bounced back significantly: the elastic has snapped.

What follows next may turn out to be mild turbulence or the start of a steeper nosedive. Either way, it seems a prudent time to adopt the brace position. This does not mean running for the woods to stockpile baked beans and Kalashnikovs, but, as I explain on page 17 of this weekend's news section, there is a worrying circularity in today's economy. Cheap money underpins everything: from the housing market and high street spending to private equity buyouts and the stock market boom.

Of course, we all need to get on with our lives. Perhaps recklessly, the family Roberts is hoping to press ahead with a house purchase this week. On these pages, we will also continue to provide investors with useful share tips where we see value, particularly in big-cap shares.

But the most extreme manifestations of cheap money are already showing the effects. The commercial property market is coming off the boil rapidly. Hedge fund performance has slipped sharply, underperforming ordinary stock markets so far this year, even before those colossal fees. And the best days of the private equity industry look to be behind it.

Private equity, public shame
# Private equity to give in over tax

Pride usually comes before a fall. In the case of the masters of the universe in private equity, there will be humble pie to eat first.

The big hitters from KKR, 3i, Permira, Blackstone and Carlyle are due to prostrate themselves before a hostile committee of MPs this week - hoping to improve on the calamitous performance of their industry lobby group at a similar hearing last week. All indications point to a climbdown on the symbolic issue of tax relief for their share of the gains.

Introduced to encourage entrepreneurship, the 10pc rate has become a rallying point for critics of the industry. Curiously, it now also looks to be a rallying point for its defenders, who hope that in making a concession on this point they can avoid a more damaging backlash elsewhere.

Opinions are divided on the real relevance of this so-called taper relief. Some, like Jon Moulton, have pointed out that it does not matter as much as we think because many of the super rich partners at the biggest firms are domiciled overseas for tax purposes and therefore do not pay capital gains tax to begin with.

But this is not the whole story. Neil Goulden, the boss of private equity owned Gala Coral, whom we profile on page 10, estimates that 1,000 of his staff also benefit from the taper relief. Once we start differentiating between different classes of entrepreneurs, the whole point of dedicated tax breaks starts to unravel. For this reason, I agree with Moulton that the best answer would be a simplified, reduced, flat tax for all.

The more interesting question is whether concessions on this point by the industry will be enough. MPs are likely to be readily swayed by the argument that if the biggest beneficiaries will continue to escape tax anyway, more stringent rebalancing is needed.

Their time would be more productively spent looking at the market failures. Why has competition among private equity firms not driven down fees? Why are public companies and investors so willing to sell out? Answering these mysteries would be a more constructive way of tackling a problem that many are still not convinced exists. But don't expect such subtleties to get in the way of Wednesday's show trial.

Echoes of Pearson

Marjorie Scardino and Jeffrey Immelt go way back. The chief executive of Pearson and the chairman of General Electric might inhabit different levels of the corporate stratosphere but for the boss of a mid-size British media group, Dame Marjorie has pretty good connections at the highest level of corporate America.

News that the owner of the Financial Times has turned to Immelt for ideas on how to see off Rupert Murdoch's bid for Dow Jones, the US newspaper group, is therefore not surprising. What is surprising is that anyone thinks a joint bid seriously offers the answer. Just because GE and Pearson are both challenged by Murdoch does not mean they need a common response.

Immelt, for one, has made it pretty clear he does not want to own a newspaper. What then would he contribute to a joint Dow Jones bid? Ownership of its newswire business? Some air time for reporters in his TV studios? Or just the cash?

GE does not do charity at the best of times, and Immelt is under pressure from his own shareholders to rationalise an underperforming conglomerate - not ride to the rescue of friends in need. It is true that his business TV channel CNBC is threatened by Murdoch, but not to this extent.

Pearson too is finally beginning to convince investors that its best future lies in education, not financial media. A $5bn bid for an even more challenged rival, with or without friendly US backing, would set relations with its own shareholders back years.

What the talks do reveal, however, is how concerned Pearson must be feeling. The prospect of a resurgent Dow Jones giving the Financial Times a run for its money in Europe and Asia comes at a frustrating time.

Circulation and profits at the Pink 'Un are up, but still far from the scale needed to prove that the global newspaper model really works. A renewed challenge from the Wall Street Journal and Murdoch's News Corporation would only underline just how isolated the FT still looks in the global media game.

Ironically, Pearson has been a seller of global business newspapers more often than a buyer. It pulled out of Spain and is now under pressure to do likewise in France, where it owns Les Echos. If it fails to find a way of getting someone else to pay for a takeover of Dow Jones, pressure is bound to return to find a more suitable partner for the FT.

Immelt was probably just being polite.
Source : http://www.telegraph.co.uk