13 May 2012

That was week ending 11th May 2012

Queen speaks – government creaks

It is difficult to find much inspiration in this year’s Queen’s Speech. It contained only one piece of proposed legislation – overhaul of employment tribunals – that had anything to do with encouraging economic growth. Yet just the day before the PM and Deputy PM had declared that economic growth was the coalition’s first priority. We keep hearing this ambitious talk about growth from this government but this is not matched by ambitious action for growth.
The deficit reduction policy and programme has been clear and decisive and consequently has been supported by UK business and the financial markets. By contrast economic growth policy is muddled, piece meal at best and there is a growing suspicion that the government does not actually know what to do. There are also signs that concern about the UK economy in financial markets is shifting from the deficit to lack of growth. Waiting to see what happens and a reluctance to take risks is the way many businesses are thinking and government is feeding this rather than taking action to change it.
The budget did deliver some welcome measures.  However if economic growth is the first priority then what does taxing grannies and putting VAT on takeaway pasties have to do with it?  We are all in favour of “tax simplification” but the right now only simplification measures that are directly connected to economic growth should be considered.
As we have said before we would like to see three things – more spending on infrastructure – a significant reduction in employers national insurance for firms that take on more people – more generous tax relief on capital investment. On the latter the government argues that reductions in corporation tax have made up for the reduction in tax relief on investment. We would argue that right now that is putting too much of the incentive at the wrong end.
These three measures or something like them would be seen as bold and decisive action to boost the economy. This would show that the government is as serious about economic growth as it is about deficit reduction and it knows how to make it happen.

Deficit – what is that really all about?

Last week saw another day of strikes and protest by public sector workers. Feelings are clearly running high which is understandable given that much of the fallout from reducing government expenditure will affect public sector workers.
However there is a bigger challenge to come and that challenge is the reform of public services themselves. British Industry in the 1970’s was over manned, badly managed, in thrall to the unions and just hopelessly uncompetitive on just about any measure you cared to use. Our public sector looks very like this now. For example Steve Hilton, David Cameron’s director of implementation who is leaving to take up a university post in America has told the Prime Minister that the Civil Service could function effectively with just 10 per cent of the current staff.
It would be easy to dismiss this opinion as the scale of change it implies is almost unbelievable. However it is a similar scale of change to that which was needed to make British businesses competitive again and the process is still going on.  Current public sector cuts are simply reducing expenditure. The job of reforming our public sector to deliver affordable public services has hardly begun.

JP Morgan – fear and greed in action

In our last article we wrote about those two powerful human emotions, fear and greed and the need to understand how they influenced the behaviour that led to the financial crisis. Now JP Morgan has given us a classic demonstration of how these emotions led to a $2bn trading loss.
The Chief Investment Office (CIO) was supposed to be hedging or de- risking the bank’s exposure to credit. Then the greed kicked in and they began to push the trades further towards proprietary trading. This produced what looked like really attractive returns, doing great things for bank profits and for individuals’ reward packages. Then the fear kicked in. No one wanted to lose those profits and rewards so they kept the game going even though the bank’s senior executives were warned that the CIO was “an accident waiting to happen”.
Another characteristic of these disasters is that at least one of the key players has been given a silly nickname.  A senior trader at the CIO collected two of these. Bruno Iksil was known as the “London whale” and “Lord Voldemort”. This really is a sign of that both the individual and the organisation he works for have lost all touch with reality.

Holywell springs eternal

Finally a great David & Goliath story. Two years ago CocaCola closed down Malvern Water and refused to sell the Malvern brand to any other buyers. Now tiny (just 6 employees) Holywell Spring Water have registered the trademark Holywell Malvern Spring Water and they have got away with it. Holywell spring in Malvern Wells was deemed to be the original source of Malvern water so EU trademark law allows Holywell to use the Malvern branding on its products.
Ironically the company tried for two years to buy the Malvern trade name from CocaCola, but were refused. CocaCola just don’t seem to be able to get this bottled water business right do they?

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

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