Monday, 27 October 2014


Put the pillow over your head! Christine Lagarde, head of the International Monetary Fund (IMF) set the scene for financial markets. World’s growth is disappointing, the pace of recovery is uneven and many people are beginning to have concerns about Germany, the Eurozone’s anchor. Have we concluded that France might undermine revival in continental Europe?  The IMF predicts world growth at 3.3% this year, rising to 3.8 in 2015. Some influential economists are more pessimistic. This is partial explanation of the fall in trade and commodity prices.  The absence of inflation is an international factor. So. Managers must sustain strict controls on costs.  Borrowing by UK’s government over the first half of this financial year was higher than for the same period in 2013.  The drop in receipts from income tax and national insurance contributions is with us again.

A political and commercial myth? Is it the assertion that capitalism and businesses do better without government?  There has been much talk about benefits to those of working age who are not in a job. We know the amount of expenditure and press for stricter criteria for who receive payments. The other form of ‘welfare’ is grants and subsidies to corporations.  On this, there is silence and a paucity of data, which is comfortable for government and recipients.  Aditya Chakrabortty has unearthed the research of Kevin Farnsworth, who has spent nearly ten years studying ‘welfare’ for companies.  In the financial year 2011 – 12, over £14 billion was paid directly to businesses – three times the amount handed to jobseekers.  Add the tax breaks and more indirect aid and the total sum comes to an annual £85 billion.  All this is before outgoings on support for ‘too-big-to-fail’ banks and topping up the wages of those in work but on the minimum wage.  A spokesperson in Whitehall said, ‘There is no definitive source of data about spending on subsidies to businesses in the UK’.  We are told snippets every now and again; almost £170 million to Disney since 2007 to make films here;  last year Amazon paid less in corporation tax than it received in grants.  There is a long list.  Some investment of this kind is inevitable, even desirable.  However, we will hear often in the forthcoming months the question – ‘what would you cut?’  Maybe, these expenditures ought to be in the discussion?

Central Planning?  Boris Johnson has pointed out in The Daily Telegraph that there are more than 39,000 pension funds for employees in the public sector.  Each has it s own trustees, managers, advisers and accountants.  He goes on to say, ‘The waste is extraordinary’.  Other countries have spotted this opportunity and created ‘gigantic sovereign wealth funds, which they are using to invest in high-yield assets’.  Sometimes in the UK.  Britain would be wise to follow suit.  If we amalgamated pension funds for local authorities, the ‘war chest’ would be £180 billion.  Add funds covering all of the public sector and it would be hundreds of billions.  These monies could be used to support power stations, new houses, railways and airports.  Assets of this kind typically have a higher yield,  would help us in meeting obligations to the increasing ranks of pensioners/members and save around £5 billion of administration.  The idea deserves further scrutiny.

Managerial excellence needs effective processes.  The Chartered Institute of Personnel and Development (CIPD) has pointed to major reputational risks.  Recent information reveals that chief executives often go through fewer interviews and tests than graduates when applying for a new job.  One in three does not undergo any due diligence in the selection process.  There is evidence that in a quarter of companies there are board members who may not have had checks on their qualifications, work experience or criminal record.  In recent years, there has been a string of high-profile cases where senior executives were found to have a chequered history or inadequate qualifications, or, both.  One observer said, ‘An entire organisation’s reputation can be damaged with a mobile ‘phone image or an inaccurate cv, followed by the click of a mouse’.

Problems.  ‘Nothing will ever be attempted, if all possible objections must be first overcome.’  Samuel Johnson (1709-84).  English lexicographer, essayist and poet.

Do you recall?  ‘Comparison is the thief of joy.’  Theodore Roosevelt; 26th president of the United States (1901-09).

Monday, 13 October 2014


Something has to give.  Bad news from the retail sector is becoming a daily experience.  We do not have signs yet of the recovery in spending by households going away.  Nonetheless, there have been several poor results or ‘profit warnings’.  Investors are getting jittery.  Tate and Lyle and Tesco have issued profit warnings.  Next has told the City the unusually warm weather hit growth in sales.  The news wiped 4% off the shares and unnerved shareholders elsewhere, notably Debenhams and Marks and Spencer.  Sainsbury’s has reported a third successive quarter with falling sales.  There are some rational explanations, but the rickety high streets must reconsider the priorities for their future.

Wither China .... and America?  There is beginning to be clarity that the big economic confrontation this century will be between China and the United States.  The first is a growing empire, the second a declining one.  The emergent Transatlantic Trade and Investment Partnership (TTIP) has characteristics of the US and Europe trying to devise a new set of global trading standards that China will, eventually, have to accept. Right now, China ignores many international regulations relating to, for example, safety, environment and consumers.  America is establishing a parallel ‘Transatlantic Partnership’ that includes Australia, Japan and Singapore.   China, the world’s second largest economy, is excluded pointedly from these talks.  This arrangement might suit the US and Europe at the moment, but it omits many developing countries.  It is possible they will miss out on the new plans for trade.  A recent forecast shows that European trade with the poorest countries will fall by 3% under the TTIP.  There are dangers.

Glimpse of the future.  That knowledge is power is an old adage.  This is why people who had it in the past tried to keep it to themselves.  Success now comes from transmitting information to make it productive, not from hiding it.  Productivity of knowledge has both a qualitative and quantitative dimension.  We are beginning to realise that executives must be both managers of specialists and synthesisers of different fields of knowledge.  The traditional manager feels threatened by highfaluting highbrows.  The intellectual worries about being too commercial to earn respect in her or his discipline.  A primary managerial task is to get highbrows and lowbrows to play in the same team.  Organisations are moving beyond senior – junior polarities.  They are unlikely to be a blend of sponsor and mentor relations.  A structure will be founded on mutual understanding and responsibilities.

The next referendum.  Soon, the arguments for and against the European Union (EU) will enter conversations, agendas and speeches more often.  There are plenty of good reasons for remaining a member.  It is likely to give the UK more influence around the world.  It strengthens bonds between countries.  It underpins the free movement of people and goods.  What happens in continental Europe matters, so there is sense in affecting direction.  But we must get the facts straight.  Investment from the EU will count for far less in the future.  The reality is that the economics do not have much impact one way or the other.  Keeping the EU’s companies on board will not be a conclusive contention.  There are not enough of them and the number is declining each year.

Makes sense.  ‘Name the greatest of all the inventors.  Accident.’  Mark Twain (1835-1910) in Notebook.

That’s experience.  ‘Like all weak men, he laid an exaggerated stress on not changing one’s mind.’  W Somerset Maugham (1874-1965) in chapter 37, Of Human Bondage.

Monday, 29 September 2014


Banks, fines and trust.  The fallout from the financial crisis is still around.  Roger McCormick (London School of Economics) has started to look at the escalating penalties imposed by regulators.  For the five years to end-2012 the ‘conduct costs’ for ten major banks where nearly £150 billion.  For the same period to December 2013, this figure rose to £160 billion.  It is reasonable to expect a rapid increase to 2014.  Bank of America, BNP Paribas, Citigroup, Lloyds Group, Standard Chartered and UBS will assure higher total payments.  There is beginning to be acceptance of the link between conduct and culture.  Investors and other stakeholders are starting to understand it can be beneficial to have a transparent approach to costs.  Banks are lagging behind and do not seem to share experiences, use available intelligence and trends from their own data, or share experiences.  Building trust and confidence is now beyond competitive edge.

Taxation is a popular subject.  There will be more words as we move towards next year’s general election.  Economists, politicians and others will continue complaints that:  structures are unsatisfactory, budgetary constrains look complicated, and policy is uncertain. These protests will not make much difference.  The government has to raise tax revenues.  This is an expensive task.  And the cost of doing it this way is unlikely to be much greater than the outlay on a system which would satisfy the demands from professional commentators.  The Institute for Fiscal Studies points out what really matters is the capacity to collect taxation, and the current process, despite its faults, brings in large sums of money with acquiescence of the payers.  A finance minister to Louis XIV of France said, ‘The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest volume of hissing.’  We all know that: council tax should be updated and reformed, National Insurance is a tax and ought to be treated as such, environmental taxes are incoherent and deserve attention.  Governments are reluctant to risk killing that big bird of taxpayers’ acceptance which lays the golden egg of £600 billion a year.  Of course, there are big benefits to be had from a well-designed procedure for taxing us.  Government collects £4 of every £10 in the economy.  Research shows the serious disadvantages of ignoring the issues.  However, do not expect action soon.

Productivity is a mandatory problem for managers.  The Office for National Statistics released worrying information in June.  Output per hour worked in the UK is now 30% lower than France, Germany and the United States.  Back in 1993, Peter Drucker said, ‘ ... the greatest challenge facing employers in the 21st century will be improving the productivity of knowledge workers’.  Businesses which buck the current trend in their own performances win an advantage over domestic competitors.  They will have recognised that productivity has three inter-related components: the knowledge and skills to perform well (capability), the motivation to do so (engagement) and a conducive context (effective management).  This is an urgent problem.  There are no quick-fixes.

Do they make things?  The Jobs Economist has revealed that there have been dramatic increases over the last three years in the number people in particular jobs.  The top ten included : specialists in taxation (up 88%); advertising managers and creative directors (75%); paramedics (62%), debt collectors and credit agents (59%); psychologists (59%); town planners (55%); bakers (54%).

Deliverability.  ‘I’ll tell you what happens with impossible promises.  You start with far-fetched resolutions.  They are then pickled into a rigid dogmas, a code, and you go through the years sticking to that, out-dated, mis-placed, irrelevant to the real needs.’  Neil (now Lord) Kinnock in 1985.  Quoted by Michael Taylor.

He ought to know.  ‘There are decades when nothing happens and there are weeks when decades happen.’  V I Lenin (1908).

Friday, 19 September 2014


Why the upturn?  A major question is whether the recent economic upturn is due to the austerity measures.  Or is it a happy coincidence of falling energy prices, low-cost loans and stimulants to build houses?  Is our government repeating the mistakes of the past – a recovery led by the housing market, generated by supply constraints, fuelled by cheap borrowing, and aided and abetted by the Help to Buy scheme?  How vulnerable is this to rises in interest rates – quite possibly and for some, unhelpfully, before the next election?  It is thought often to be a no-brainer that cutting the government’s deficit reduces the national debt.

However, cutting expenditure reduces demand, particularly by the poor, who spend a larger proportion of their income.  This adversely affects GDP and employment.  This in turn lowers tax revenues, worsening the deficit.  The conclusion is that a government’s investment plans play a key part in increasing demand and hence reducing the national debt.

This may explain why, despite the tough talk, the UK government has still run the deficit throughout the post-recession period.  The bottom line is that there has been a lot less austerity than we were led to believe, and austerity is unlikely to have been responsible for the first signs of recovery.  Arguably, the fact that government’s outgoings were not cut as aggressively as some would have liked has allowed the restorations to begin.  All the same, it is still too fragile and unimpressive to be worth shouting about; and possibly assisted by unsustainable interventions in the housing market.  With reductions in benefits and rises in interest rates likely to have an impact down the line, then even this recovery may be in jeopardy before long.

Financial services is a strange industry.  This is the opinion of Morgan Housel.  There’s nothing else like it.  Is there another sector in which customers have so little knowledge of costs?  Most people have no idea what they are paying managers of their monies.  Yet if you are moderately wealthy, this might be your biggest outgoing.  These practitioners can do much harm, but do not need credentials.  Results do not seem to matter a lot.  Not many well-paid managers beat what could be achieved in a low-price index fund, but remain in business for decades.  Finance is an important service/activity for everyone, yet so few of us care about it.  Maybe each of us has a moral obligation to have a basic understanding of how saving, investing and debt work?

Interest rates up?  Anyone expecting a rise in interest rates in 2014 is facing disappointment.  Mark Carney, governor of the Bank of England, said in the last quarterly report on inflation that Britain’s economy has returned to ‘a semblance of normality’.  However, the Bank reckons there is more weakness in the labour market than suggested in earlier comments.  It suggests growth in wages will be 1.25% this year, rather than previous estimate at 2.5%.  Mr Carney indicated also that even if we eliminated spare capacity overnight in the economy, the appropriate interest rates would be close to the present situation.  This is because of high indebtedness of households and the low recovery in the eurozone.  Some informed observers have thought for a long time that the Bank is in the dark about the true state of the economy.  Moreover, the Bank‘s report said, ‘ .... there is a wide range of views’ in the Monetary Policy Committee about the slack in the system.  Measurement in this context is an imprecise skill.  We should have learnt from the failure of central banks to do anything about the global financial crisis that they are as clueless as the rest of us.

Experience.  ‘There are no solutions, only trade-offs.’   Thomas Sowell, a US scholar on democratic politics, quoted in the Financial Times.
And more.  ‘You can’t learn too soon that the most useful thing about a principle is that it can be sacrificed always to expediency.’  W Somerset Maugham, quoted in The Times.