That was week ending 15th June 2012

Looking back on the week before this week there is one question that seems to run through many of the news stories and that is “what is going to happen”?

Eurozone debt crisis

We would all like to know what is going to happen with this one. Or rather we all want to know what someone (anyone) is going to do about it.  So let’s have a go at working out what is going on.
First we have Ireland, Portugal and Greece who receive bailouts of various sizes and implemented a range of austerity measures to put their public finances in order. Then Greece says it likes the money but not the austerity so holds a series of inconclusive elections in the hope this will achieve a different result. What this different result might be is not clear even to the Greeks so it’s no good asking them what is going to happen.
In the meantime the bailouts for Portugal and Ireland appeared to be working. Then suddenly they might not be working and then again they might be. So the Irish and Portuguese are confused as well.

Spain absolutely definitely did not need a bailout but wouldn’t mind a bit of help to sort its banks out. This “bit of help” turns into a €100bn loan with no new austerity strings attached according the Spanish Prime Minister. For a very brief moment it seemed as if the Eurozone had at last actually come up with a solution for one country at least.  However all this did was to move the problem off the Spanish banks’ balance sheets and on to the Spanish government, demonstrating once again that filling a black hole with thin air leaves you with … a black hole. So the Spanish still do not know what is going to happen, even with the €100bn!
Then we have Italy who can’t even understand why they might have a problem at all and finally France. They elected a socialist government mainly to punish previous President Sarkozy for agreeing to austerity measures which were not first thought of by the French. The French belief is that there is no crisis in France and even if there was then only French solutions can be contemplated. Last week these included lowering the retirement age from 62 to 60 “in the interests of social justice” and making it much more difficult and costly for businesses to shed employees. Quite how this is part of a solution is something only the French can understand so not helpful for the rest of us.
And then we come to Germany whose Chancellor Angela Merkel has the answer which is that everyone else should become more like the Germans. What she has overlooked is that one, everyone else is starting from a different place and two, its never going to happen!
All of which means that looking to the Eurozone to provide the answer to “what is going to happen” will get us and them nowhere.

Meanwhile … back in the UK

Our government’s approach is that it is much more important to hold an inquiry into press standards and relationships with politicians than to address the needs of the economy. Indeed politicians from all sides seem to support this, as last week we even had Alex Salmond and Ed Milliband in front of Leveson.  The PM spent 5 hours there which, with all the rehearsal time he would have had to put in must have pretty much wiped his week out.

It does connect to the question “what is going to happen”?  In the case of Leveson the questions are can anyone remember what the point was of setting up this enquiry and has anyone any idea of what will happen at the end of it all, if we ever get there? Or will it just go on and on until every man, woman and child in the land has been questioned?

However in the middle of the week George Osborne (who I think has not so far appeared before the Leveson Inquiry) popped up to announce £145bn of cheap money for the banks. Wow that’s a big number, eat your heart out Espana! If George had this amount stashed away somewhere you would think he might have mentioned it before now. I mean it’s not the sort sum you would find down the back of a sofa.

Initially headlined as a boost to growth it quickly became apparent that it was actually pre-emptive action to help the UK economy deal with whatever fall out from whatever eventually happens in the Eurozone whenever that may be. Whilst this might seem a sensible and even bold step to take when it comes to the debt crisis you can think of a number, any number and it will still not be enough. However it is at least a signal from the UK government that something is going to happen and maybe soon.

So …..?

So that is all we have. Something is going to happen and it might happen soon. Nobody knows what will actually happen so it’s pointless worrying about what is going to happen until something does.

Is there anything the rest of us can do? The evidence is that there will be little or no growth in the UK or the world economy overall for the foreseeable future. What I believe we must do is to ensure we are “moving our businesses forward”, deliberately and effectively. This means defining what “moving forward” would mean for any particular business. This is not the same as the simplistic concept of business growth, or though that might well be an outcome of “moving forward”.

So have a think about what “moving your business forward” would look like for your business and why this could be the best way to cope with “what is going to happen”.

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.

That was week ending 18th may 2012

Eurozone crunch

Greece and the Eurozone occupied so much of the business, economic and political headlines last week. As no one can possibly know what is going to happen this has allowed many learned and not so learned people to speculate on what might happen, so we feel entitled to join in.

Greece may or may not default and leave the euro. Either way this is not going to be Greece’s decision, much as some of their politicians might like to think so. Even pretending they haven’t got a government so there is no one to talk to for another month will now make little difference to the outcome. The election of François Hollande may or may not result in renegotiation of the fiscal pact. As it is entirely unclear who, apart from Germany has actually agreed with the existing pact this may or may not make much difference.

So basically no one will know what is going to happen till it happens. We advise businesses to prepare for a sharp post Lehman style tightening of credit. So if you are negotiating a facility with your bank right now it would be good idea to conclude those discussions now.  However there are two factors that don’t seem to feature yet in all this.

The first is that the banking system has a whole still has huge hidden liabilities, that they and the politicians have not owned up to yet. It may even be difficult to indentify exactly what some of these are. Either way this situation is a major drag on growth as it perpetuates the tightness of credit markets. One perverse benefit of a final crunch in the Eurozone is that it could finally force governments and central banks to turn on the money hoses and get to grips with fixing this problem. At least they would know where the fires actually were.

The second factor which is hardly mentioned in the austerity vs. growth debate is competitiveness. Unless the developed economies can regain their competitiveness to world class standards not only will fixing the debt problem be more difficult and prolonged but the decline will continue.

Which brings us to a bit of good news for the UK.

Three cheers for Ellesmere Port.

GM has confirmed new investment for Vauxhall's Ellesmere Port plant, including the creation of up to 700 new jobs. This also confirms that Ellesmere will be part of GM Europe’s future. The plant closures that GM needs to balance supply with demand will take place elsewhere.
Divisions of major international businesses have to compete just as hard internally for investment as they do externally to win sales and customers. Several commentators have pointed out that the Ellesmere project is a text book example of an “industrial growth strategy” in action and we agree. Make it clear that the sector is a key part of the UK’ economic future, back the key players in that sector, including the supply chain and the development of the skills required and you give confidence to the investors that you are serious.
This set the framework for unions and employers at Ellesmere Port to deliver what GM needed, including flexible working and a two year pay freeze and hey presto, you get the investment and the job security that goes with it.
UK Governments have been reluctant to be seen to be “picking winners”. This is mainly due to the disastrous track record of attempting this in the 1950s 60s and 70s. Ellesemere Port is one of the most productive automotive plants in the world. So this is about “backing winners” especially those who are already winners. Perhaps the government should try the same approach to other sectors, such as aviation where right now you would hardly have the confidence to land a plane in the UK much less run an airline service from here.

Facebook IPO – no surprises

Facebook’s IPO went much as predicted on Friday, resulting in a business that started just 10 years ago and making $1bn profit being valued at $100bn. What did not go as predicted was the expectation that the shares would pretty quickly trade at a premium.  Apart from a brief flurry by the end of trading they were back to the IPO price. This had the effect of lowering stock prices of other internet companies such as Groupon because the markets had expected a Facebook premium would benefit their share price.
It’s still pretty impressive but we have to say we are not impressed. Facebooks’s founder, CEO and still the majority shareholder says that making money doesn’t really interest him. Now he has a lot of other people’s money in the business is this really the right attitude to have?

One comment we noted was that “Facebook is a pretty new business and it is too much to expect brands and Facebook to have totally resolved what the new business model is”. Well at a valuation of 100 times annual pre tax profit we would have expected them to be pretty clear on this by now. GM seems to have made its mind up as they pulled their advertising off Facebook on the Tuesday before the IPO.

We are not saying that Facebook is not a good business now, or that it may not have potential to be a great business. However it is not there yet nor has it demonstrated its capability to be a great business so it is not worth $100bn. We see our old friends fear and greed at work here. The fear of missing out on the “next big thing” seems to be greater amongst the investment community than the fear of losing the money it has to bet on this company outperforming almost anything that has come before it.

But we shall see.


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.