Archive for October, 2011

Debt crisis solved (hopefully), now deal with the demand crisis please!

Posted in business, economics with tags , , , , , , on October 27, 2011 by Tom Leatherbarrow

European leaders are busy slapping themselves on the back today, but they shouldn’t get too carried away – there is an even bigger job still to be done.

As ever the past can give us a clue to the future. When Franklin Delano Roosevelt FDR) became the 32nd President of the United States at the height of a banking panic in 1932 he dealt with the immediate problems with a torrent of legislation designed to stabilise the situation. The Emergency Banking Act gave banks vital breathing space against foreclosure. The Federal Deposit Insurance Corporation effectively guaranteed all deposits which stopped the run in its tracks. The Glass Steagall Act separated commercial and investment banking thereby controlling the rampant speculation which had undermined efforts to bring America out of the Great Depression.

All of this should sound familiar to European policymakers, but crucially Roosevelt did not stop there. In between his election victory in November 1931 and his inauguration in March 1932 he attended a meeting at the White House with outgoing President Herbert Hoover and the British economist John Maynard Keynes. Hoover talked passionately about why it was not the government’s place to stimulate demand. Keynes retorted with his belief that fiscal and monetary measures can mitigate the adverse effects of economic recessions . The story is that FDR did not understand a word that either said, but he instinctively knew that something had to be done, and if that didn’t work he’d “try something else.”

The result was a monumental kick-start to the American economy. He expanded a Hoover agency, the Reconstruction Finance Corporation, making it a major source of financing for railroads and industry. The National Industrial Recovery Act established rules of operation for all firms to stop cut-throat competition, such as predatory pricing, and also increased wages.

Crucially, the recovery was pursued via pump priming with Federal money. $3.3 billion of spending via the Public Works Administration for example created the largest government-owned industrial enterprise in American history, the Tennessee Valley Authority (TVA), which built dams and power stations, controlled floods, modernised agriculture and homes in the Tennessee Valley. In simple terms, FDR put people back to work and gave them money to spend which in turn created demand.

All of this is very much counter-intuitive. Our instincts in times of financial crisis are to retrench and hoard what we have got. In actual fact we need to be spending and Government has to give the lead, in order to rebuild confidence.

The sense I have is that our policymakers know what has to be done even though it goes against many of their instincts. Our current Chancellor of the Exchequer has talked in vague terms about “big capital projects”. This is going to need more than words though.

Murdoch shareholders should vote with their feet!

Posted in business, Media with tags , , , on October 24, 2011 by Tom Leatherbarrow

The News Corporation AGM in Los Angeles went off with barely a hitch on Friday. Rupert was apparently his normal combative self. There was the usual words of contrition in relation to phone hacking and everything was voted through on the nod.

Rupert reigns supreme. The most compliant board of directors in corporate history remains in place. The façade of proper governance continues.

All this despite various institutional shareholders sabre rattling in advance and attempting to vote down the re-election of various directors. Christian Brothers Investment Services (CBIS) for example, tabled a resolution to separate the roles of chairman and chief executive, positions currently held by Rupert, and instead replace them with an independent chairman. It was rejected.

In fact, some of the world’s largest investors voted against his re-election, and that of his sons, to the News Corp board. They also did not approve of the $33m (£21m) he was paid as chairman and chief executive this year.

None of this matters one jot. Murdoch owns 12 per cent of the company but controls about 40 per cent the votes because of News Corp’s two classes of shares which ensure that the Murdoch family can vote down anything it doesn’t like. Pity the poor institutional shareholder.

Well no not really, in fact it is difficult to have any real sympathy for the institutions on this one because they are trying to have it both ways. They want to have their cake and eat it (I’ve never understood that phrase, I mean what else are you supposed to do with cake?). The institutions want influence, but they also want the money ie. dividend and capital growth.

The problem is they all knew what News Corp was like when they signed up and they knew that influence and proper corporate governance were not on offer. It’s all a bit late to start bleating now!

Of course if they really feel strongly about this they could vote with their feet and sell their shares en masse, but that would mean they wouldn’t get the money – oh damn!

For #$%*@’s sake Merv’, lighten up a bit!

Posted in business, economics with tags , , , on October 21, 2011 by Tom Leatherbarrow

The Governor of the Bank of England, Mervyn King, has been a little ray of sunshine recently. Two weeks ago he told us that the current economic crisis was the “worst ever” which is quite something considering what the world went through after the 1930 Crash. Today I notice he is telling us that “time is running out to save the world from economic crisis.”I’ve no doubt that what Merv’ is actually doing is trying to coax Messrs Merkel, Sarkozy and Lagarde to pull their finger out and sort the Eurozone crisis but the message he is sending to the High Street and to business confidence is highly negative.

I am not for a moment suggesting that Merv’ shouldn’t tell it like it is but we must not lose sight of the fact that his opinions can move markets and consumer sentiment. Yes there is a sovereign debt crisis in the Eurozone but we also have a demand crisis at home. In other words business and consumers in the UK are so worried about economic apocalypse that they are holding onto every bit of spare cash they have and not spending.

To be fair, our current Prime Minister tried to talk it up during his speech at the Conservative Party Conference a few weeks ago although his oratory never reached the heights of Franklin Delano Roosevelt’s call to arms during the Great Depression (“we have nothing to fear but fear itself”).

I seriously doubt whether Merv’s new found fondness for a soundbite is helping. At the moment he is talking it down when he needs to be talking it up. His problem is that his every utterance is amplified by the media and the most negative spin possible is put on any economic story.

Take yesterday’s retail sales figures for example which showed an unexpectedly good September for the High Street. The Guardian headline summed up the current problem, “Retail sales bounce in September but summer slowdown alarms experts.”

So come on Merv’ lighten up a bit!

TV football rights spat exposes bigger issues for the Premier League

Posted in business, Sport with tags , , , , on October 13, 2011 by Tom Leatherbarrow

Liverpool Football Club, my team, have been hammered in the last 24 hours for suggesting that it deserves a bigger slice of the rights for foreign TV coverage of the Premier League. Words like greed, anti-competitive and disgraceful have been freely bandied around by an unholy alliance including the Daily Mail’s Martin Samuel and Dave Whelan of Wigan Athletic.

My own view is that this row is a negotiating ploy and a shot across the bows of UEFA and the Premier League to properly implement the Financial Fair Play rules which Manchester City seem intent on driving a coach and horses through. The Liverpool position appears to be, “implement the rules and allow us to be competitive or we’ll raise revenue any way we can, in order to be competitive.”

However, the danger is that this spat obscures bigger issues which ultimately the Premier League is going to have to grapple with, like it or not. Taking off my football hat and putting on my marketing hat for a moment, it has been clear for some time that there is a vast untapped audience for Premier League football, an audience which is currently locked out of the Sky Sports monopoly.

Who are these people? I refer to them as the ‘occasional fan’ who wants to, half a dozen times a year, watch his or her team but does not want, or cannot afford, to shell out for a Sky Sports subscription which includes films, news and all sorts of stuff they neither have the time or the inclination to watch. Those locked out include pensioners, students and those like me who just don’t have the time because of family commitments to sit down every week and watch football on TV.

“Get yourself off to the match then and watch it live” I hear you cry. Only I can’t because Liverpool matches are all sold out in advance and the season ticket waiting list was closed when it reached fifteen years!

But, there is a ready-made solution. In American baseball, the rules allow that once a match is sold out it can be streamed live for fans who couldn’t get in to watch. Most clubs now have their own TV stations or broadband streams which do everything except show live matches. Only we can’t have that here because of the Premier League deal with Sky Sports which gives exclusivity for all matches in the UK.

We currently therefore have the absurd situation in which an individual in Hong Kong, Singapore or India can watch a Premier League match live from Anfield, but someone living half a mile from the ground on Breck Road cannot. The revenue potential from this ‘occasional fan’ grouping is enormous and I’m just talking about UK viewers, I haven’t even got into streaming matches across Asia!

The newspaper industry spent the best part of a decade denying that the web would have any impact on its business strategy. It was wrong. My guess is that, at some stage, the Sky Sports deal will be pulled apart by the same pressures and antagonisms. Don’t believe me? How many football fans out there have used Iraq Goals or some other illegal streaming to watch their team I wonder?

The dam is breaking. I look forward to the day when I can pop upstairs, turn the computer on and pay a tenner to my club to watch a home match without tying myself down to a year’s Sky subscription. Bring it on!

Another round of QE but will it work?

Posted in business, economics with tags , , , on October 6, 2011 by Tom Leatherbarrow

Very quick take on the Bank of England’s shock decision to order another £75bn of Quantitative Easing – a full month earlier than originally expected!

For the uninitiated (I envy you!) QE, as it is known, is the process of the Bank of England buying back Government bonds from the banks. In turn, this gives money back to the banks which should in theory ease the credit crisis as they use this money to lend to business and to consumers.

The big question now is, will it work? My own gut feeling is that it won’t. Regardless of what happens to the extra money given to the banks, and many people believe that too much of it goes on rebuilding their balance sheets or speculative trading abroad, you can’t help feeling that the Bank of England is giving drugs to the doctor rather than the patient.

What is clear is that certain sectors of the economy, such as the High Street, are suffering from a demand crisis. In other words, you and I are not buying anything because we are too busy tightening our belts. It may be simplistic, but the likes of Simon Jenkins in The Guardian have been arguing for some time that the banks cannot be trusted to lend and we should be using the old helicopter theory of economics in order to stimulate demand ie. take a helicopter up with sackloads of money and tip it out.

That should be fun to watch if nothing else, but at the moment I suspect many on the High Street will settle for a VAT cut!

Credit easing plan should be music to business’ ears!

Posted in business, economics, Politics with tags , , , on October 4, 2011 by Tom Leatherbarrow

Has George been listening? Yesterday’s announcement by the Chancellor that the Government is considering some “credit easing” appears to be a clear acknowledgement that he wants to get money going directly to companies because they can’t trust the banks to do it for them!

In case you missed it, the Chancellor announced that he was considering ways of getting credit flowing to business either by buying corporate bonds directly or by offering overdraft facilities and short term credit lines. He said: “I have set the Treasury to work on ways to inject money directly into parts of the economy that need it such as small business. It is known as credit easing. It is another form of monetary activism. It is similar to the national loan guarantee scheme we talked about in opposition.”

A couple of points. Firstly, this is very good news for business and is an acknowledgement by the Government that we cannot go on much longer without access to credit. I have detailed in past blogs the difficulties companies are having buying capital equipment for example which is stopping them winning contracts and fulfilling orders. If the economy is to get moving again this is a very welcome step.

Secondly, it is a damning indictment of the banking sector that only seven months after the signing of the Project Merlin agreement which made banks promise to lend to business in return for allowing them to pay bonuses, the Government is being forced to step in. As Bob Peston on the BBC put it: “It’s proof the Treasury has given up hope that – in the absence of structural reform of the credit market – small businesses will find it any cheaper or easier to borrow, even in the longer term.”

There were plenty of people (and I was among them) who had deep concerns at the time that the fine print of Project Merlin had too many get-out clauses which would allow the banks to wriggle out of their commitments. Unfortunately it gives me no pleasure to say we were right!

My only question to the Chancellor is why did this take so long?

PMI Index says manufacturing is in growth!

Posted in business, economics with tags , , , , on October 3, 2011 by Tom Leatherbarrow

A very quick take on the UK’s Purchasing Managers’ Index for the manufacturing sector which was released this morning. The good news is that it’s good news, with the PMI unexpectedly up due to September manufacturing headlining at 51.1 points, compared to 49.4 in August (a Reuters poll had only forecast 48.6!).

All of this of course means that manufacturing has grown over the last month, which considering all that is going on around us is pretty remarkable!

However, export orders have slipped which was probably to be expected on the back of the Eurozone crisis and continuing problems with the American economy. Orders slid at their fastest rate since May 09 – dropping to 45 from 46.9 – due to lower demand in key markets.

Of course any good news nowadays is as usual followed by the doom-mongers who attempt to paint the blackest possible interpretation on even the most positive figures (and the media lap it up of course).

Here’s Rob Dobson an economist at Markit: “The modest return to growth of UK manufacturing to growth of UK manufacturing output in September is a positive, but it is hard to escape the fact that the sector’s performance has weakened substantially since the opening quarter’s growth surge.”

Thank you Rob you are beacon of positivity!