Week ending 16th May 2014

INTERESTing Times

With the Bank of England delivering its latest quarterly Inflation Report last week it was no surprise that the business and political media was focused on what it would say about interest rates.  The level of unemployment had already dipped below the 7% point that BoE Governor Mark Carney had previously indicated could be a trigger for a rise in rates.

In the event Mr. Carney effectively quashed speculation that rates could rise before the end of this year.  He conceded that the day Bank Rate would start to rise is getting nearer but now was not the time to raise rates and when they did start to rise they would only do so gradually.  In the BoE’s judgement that there is still enough slack in the economy to enable it expand further without triggering inflation.  This is based on information from the network of BoE agents based all over the UK who talk to local business people about the prospects for their business and the sector they operate in.  The feedback is that generally most sectors are still highly competitive with capacity to fill and little prospect of being able to raise prices.

The exception seems to be the housing market.  Much has been written and said about this in recent weeks and what this could mean for interest rates and what the authorities should/can/can’t/want to do about it.  The British have national obsession with house ownership and consequently the prospect of even a small increase in interest rates is portrayed as apparent personal and national financial Armageddon.  In spite of all the speculation and bright ideas Mr. Carney repeated what should by now be the “bleeding obvious”.  Whatever the BoE can or can’t do about interest rates to influence the housing market, the core problem is that we are just not building enough houses to meet demand.

We have not been building enough for 30+ years and we know we haven’t.  This has not been for want of trying, or at least for want of target setting for house building by successive governments.  Whatever they said and whatever they intended, it just didn’t happen.  Yet still we have the Labour Party announcing it has the answer because if elected they will build 200,000 houses a year to 2020.  Well, what a brilliant idea, and thank God we have the Eds Milliband and Balls to think of these things for us!

The truth is that they have no more idea than their predecessors on how to actually achieve this.  There was a time when we could build houses at that sort of rate, so the conclusion is that we should be able to do it again.  However so much has changed since those times that the same approach will not deliver today.  And that is the real problem.  After so many years of repeated and almost continuous failure in this area there is only one possible conclusion.  As a nation we simply don’t know how to deliver enough houses to meet demand.  We did once but we clearly don’t now.  Now all is not lost because it is possible to find out.  However that is not going to happen until our political leadership actually recognises and crucially admits that it doesn’t know but that it has a plan to find out.

Sadly, with an election coming up next year finding a politician who will admit to not knowing how to do anything is about as likely as finding the Holy Grail.  In the meantime though for the rest of us, when we come up against a problem we just don’t seem able to solve, however hard and often we try, then maybe it’s time to ask ourselves if we actually know how to do what needs to be done.  If we can identify what we don’t know how to do then we can start the process of finding out.  Even the most complex problems and challenges can be tackled effectively if we start by admitting and identifying what we don’t know.  Try it sometime!

ONS on us

On the subject of house prices, last week the Office of National Statistics (ONS) informed us that twenty percent of adults who hold at least one university degree now have wealth totalling at least £1m.  Apparently the number of millionaires has risen by fifty percent in four years despite the recent financial crisis and almost a tenth of British adults own assets worth more than £1m.  The flipside of this is a stark gap in wealth between people with different levels of education, with only three percent of people with no formal education qualifications worth more than £1m.  This gap is widening.

David Willets the universities minister seized on this as justification for coalition policies to charge higher university fees and to push more school leavers to go to university.  They also seem to be pushing more people into apprenticeships which is a bit contradictory.  But as long as they are pushing the rest of us somewhere they seem to be happy.  The Labour party were a bit slow off the mark to pick up on the increasing gap between the wealthy and poor, but don’t worry they will!

Strangely the figures from the ONS take no account of liabilities, mortgages and other loans and debts.  This renders the figures meaningless.  A pensioner living in Middlesborough who has paid off their mortgage and with no other debt could actually have greater net wealth than someone living in London with their house mortgaged up to the hilt and in danger of paying a mansion tax.  They don’t FEEL like millionaires whatever the ONS says and that is what really matters for real people.

The ONS has a record of publishing statistics that are either late or wrong or both.  It has now added meaningless to its track record, except of course for politicians.  As we are paying for the ONS to do its work, we should expect something useful to come of it.

Pfizer - all pfizzle?

By the time you read this Pfizer’s bid for AstraZeneca may well have petered out, at least for the time being.  Last week both companies’ top management appeared in front of the Business Select Committee.  Pfizer boss Ian Read was vague on detail about potential job cuts and reductions in R&D investment, though he admitted there would be some.  His main argument appeared to centre on the combined businesses being “bigger” and therefore by definition “better”. He justified the unquantified cuts to jobs and R&D as “part of being efficient”.  As with “bigger” he appears to view the word “efficient” as a "good thing" so no need to spell out what it might actually mean.  He also insisted that Pfizer was a “company of high integrity focused on patients and delivering drugs to patients”.  He seemed oblivious to a track record that gives the perception of exactly the opposite.  His 36 years at Pfizer were definitely showing.

If I was an AstraZeneca shareholder that performance would be enough for me to say “no way”.  Of course that is not the only consideration.  AstraZeneca’s insistence that they would be better off as an independent company is founded on their claims for their research pipeline of products in development.  If a reasonable proportion of these reach the market then the future would look good for AstraZeneca.  The problem is that it is very difficult with pharmaceutical companies to predict whether this will happen.


However there is one party involved that must believe that these developments will be successful and that party is Pfizer.  Why would they be bidding to buy AstraZeneca now if they did not?  If they can buy them now before the pipeline is proven then they would win handsomely and put off the evil day when their own under investment in new product development catches up with them.  It means if Pfizer can buy AstraZeneca at or around their current offer they will either win, or not lose because they could hack out enough savings to redress any shortfall from the product pipeline.  All the more reason for AstraZeneca shareholders to say no, or at least to hold out for a substantially improved offer.

Meanwhile

The French government has moved quickly to block the GE bid for Alstom by creating new powers to stop foreign takeovers of “strategic” industrial groups.  In fact they moved so fast I wonder if they are using some sort of “app”.  Something called “Legislation a Grande Vitesse” (LGV) perhaps.  You just put in what you don’t like the look of and then the app searches through the legal statutes to come up with the necessary legislation for you to put it right.  It also dates everything at around 1849 so it is very difficult for the EU commission to argue against.

Industry Minister Arnaud Montebourg stated “With this reform, France will have a clear and efficient legal framework comparable to other open economies within and outside Europe”.  Whilst our government talks about what they should/can/shouldn’t/can’t do the French just do it and then issue statements like this with a straight face!  As I said last week it helps if you know clearly what you want.

You heard it here first

In my previous article I said I did not like the look of the proposed Dixons Carphone Warehouse merger.  Well it seems I was not alone because when they officially announced the proposal for the merger last week, Dixon’s shares fell more than 10 percent and Carphone Warehouse 8 percent.  David Alexander, retail analyst at Conlumino acknowledged that “Although there are plenty of reasons to view the merger in a positive light, the history of M&A is littered with the corpses of failed unions”.  Says it all for me.

So that was some of the week before this week. I hope you found some of the above thought provoking and useful for you and your business. I trust you had a good weekend and hope you have a great week this week.