Dear Mum

I’m sorry this letter is so long. I didn’t have time to write a short one.

This is the essential paradox of productivity, and why it is so hard to measure. It’s easy to count the output of widgets per man-hour, if widget-making is what you do. It’s less easy when your new, super-widget is dearer to make but lasts twice as long. When it comes to the productivity of, say, a sales assistant in John Lewis, it’s getting quite hard.

That assistant’s chairman, Charlie Mayfield, has launched a productivity crusade far beyond the widely-admired group of stores he heads. British workers are only four-fifths as productive as German ones, and Sir Charlie’s government-backed campaign calculates that better practice could add £130bn to the UK economy.

This is quite a prize, but to win it, we’re told, requires “better quality leadership”, a motherhood-and-apple-pie aspiration which takes us no nearer to the line. It’s another slippery concept, like productivity itself. More rules may comfort the regulators of life assurance companies, but the cost is borne by shareholders and savers. That sounds less productive.

Expanding banks’ compliance department may improve the quality of leadership, but they have been a drag on national competitiveness since the crisis. Fortunately, as Patrick Jenkins argued here, that may be starting to change.

On the other hand, where once it may have taken a day in a library to discover something useful, or a struggle round the shops to find an unusual product, now it just takes a couple of clicks. That certainly feels a lot more productive, whether or not it’s in the statistics.

If measuring productivity in services is tricky, measuring it in the public sector has hardly begun. Free services give no pricing signals, and while there is plenty of diagnosis of the problem, the few attempts to measure it suggest it is falling.

Convention dictates that improved productivity is the only way the population can become richer, as opposed to growing the economy by more people working. Employees are understandably nervous that improving productivity means they must work harder, or that a business reckons it can do without some of them. Britain’s impressively low level of unemployment looks uncomfortably like the other side of the productivity coin.

It’s not easy. Unlike the webloggers, newspaper writers are constrained by space. Does that make me more productive, or less?

Never learning

The survival of John Fallon as CEO of Pearson is one of the wonders of the City. His policy of throwing everything overboard to prevent the ship marked USS Education sinking gives a rather different meaning to the company’s slogan of “always learning.” The list of disposals is long (including the FT and another slice of Penguin) and, judging by the prices he gets, he’s a fine salesman.

Unfortunately, his focus on selling textbooks to American students looks ever more like a high-stakes gamble where the odds are stacked against him.  The pesky students have discovered the internet, and those who prefer hard copies are buying them second-hand off the web. Who’d have thought it?

The result is a share price at its worst since the financial crash, and a dividend that is unsustainable. A muddled presentation announcing the Penguin deal left analysts trying to work out how much might be sustainable, and coming up with around 16p, against last year’s 52p.

Surveying the dwindling stock of businesses left to sell, Salesman Fallon might conclude that trying to get a good price for the whole thing is his last option. Perhaps we will find out with the results next month.

Oiling the wheels with fudge

The Financial Conduct Authority is getting it in the neck over its decision to bend the listing rules to accommodate the world’s biggest-ever new issue, Saudi Aramco. Fortunately, it can point to its creation back in February of an “international” class of listing which the domestic tracker funds would not be obliged to buy. Honour is satisfied all round, and London retains its international relevance. Best not to call these listings the “fudge” class, though.

This is my FT column from last Saturday (with apologies to both readers for the delay in posting).

 

 

 

 

 

Ah, electric cars. Just imagine. Quieter cities, cleaner air, and motorway service stations even more ghastly as bored drivers mooch about waiting for their car to charge. Volvo drivers can look forward to being super-smug after Geely, the marque’s owner, announced that it would stop making non-electric models in 2019. The idealistic Macroniste government in France wants to go all-electric by 2030.

By 2025, we are told, a third of car sales in Europe will be electric, with world sales totalling 13m, according to one of those exponential graphs which forecasters love. All-electric cars are inherently simpler, and thus cheaper to build than today’s internal combustion vehicles. Batteries are improving, always assuming there’s enough lithium and cobalt to meet demand.

It’s a pretty picture, but there are a few stones in the road. For a start, UK fuel tax on those beastly petrol and diesel cars raises £28bn a year, about the same as council tax, and is projected to rise to £40bn by 2030.

Electric cars, by contrast, depend on government help. Miraculously, it seems they do not cause congestion, which is why Toyota’s Prius hybrid is the Uber driver’s car of choice in London. In Denmark the removal of grants to buyers has seen a sharp fall in sales.

The subsidies don’t stop there. Wind farms and solar power generators also attract taxpayers’ money, while electricity from nuclear fission will never make a commercial return.

Even if all the incentives are phased out, the challenge of remaking the national grid to cope with demand from charging points has hardly been considered. The energy transfer at a busy filling station is about equivalent to the output of a mid-sized power station.

Electric cars are nowhere near as green as they are painted. The process of turning a primary fuel into electricity, transporting it to the power point, charging the battery and finally turning the wheels, uses much more energy than refining and burning oil. Electric cars are clearly gathering speed, but it is thanks to politics, rather than economics. Their arrival as a mass consumer item promises a severe pain in the wallet for all those who are not actually driving them.

When is a loan not a loan?

Public Finance #1: You are the UK Chancellor, and you replace student grants with loans. Does this a) cut government spending b) store up big trouble for your successors or c) ensure that students will suddenly decide to vote (against you)? Candidates answering a) will fail, while those answering c) are invited to consider switching to Politics.

It seems obvious that replacing a grant with a loan must help the public finances. A grant is money gone, while a loan should come back. Thanks to a little care in structuring them, the loans wipe £5.7bn a year from Britain’s public sector deficit, while the cash has boosted university finances and allowed vice-chancellors to pay themselves like business executives.

The Institute for Fiscal Studies has been picking these loans apart. The debt now stands at over £100bn, rising at £17bn a year, of which less than £1bn counts as government spending. The average graduate sets out for employment with a debt of £50,000 bearing an interest rate that beats inflation. Repayments are structured so that the lowest-earning graduates will see the debt written off provided they stay poor for 30 years.

The IFS reckons that only a quarter of graduates will ever pay off their loans in full. The rest will struggle to qualify for a mortgage, while finding ever more ingenious ways to avoid payment, including voting for a party that promises to scrap them, at a cost of £11bn a year. Full marks, then, for Answer b).

Psst…there’s a takeover coming

Four-fifths of last year’s takeover announcements caught the market by surprise, with no suspicious trades ahead of the news. That is the PR spin the Financial Conduct Authority might put on its findings that 19 per cent of deals were preceded by activity which smelled of insider trading. Everybody believes that this business still goes on, despite the FCA’s efforts at “market cleanliness”. Sadly, there are no statistics for suspicious trades which moved prices in anticipation of takeover stories which turned out to be untrue.

This is my FT column from Saturday

Did you notice White Elephant Week? There was a veritable parade of these unendangered animals over the last seven days, all displaying the common characteristic of an appetite for cash that befits their size, and an inability to produce anything worthwhile.

First came the wonderful salute to a lost empire that is the Queen Elizabeth aircraft carrier. Conceived as a job-creation exercise for his Scottish homeland by Gordon Brown,  this magnificent ship may one day boast some aircraft, if they are not needed for the air show industry. Given the cost over-runs and the plunging pound, it’s unlikely the UK would be able to afford more than a couple of the 42 F35s on order. That would be one for the Queen, and another for the Prince of Wales, her sister ship promised for 2020. But chin up. Mark Cox calls them “a cause for celebration”.

Next comes the dear old jumbo that is Hinkley Point C, at this very moment desperately trashing some Somerset countryside in the hope that we’ve started so we’ll finish, even though finish will be sometime or never. Once upon a time, this nuclear power station was going to be generating this year, but this week the operator, EDF, admitted that 2027 is its current best guess. Oh, and it will have to replace the top of its prototype in France quite soon after starting it up. Best of luck with that.

Finally, bringing up the rear comes the baby, the satirically-named Smart Meter. Even when it’s offered for free, one in five of British consumers say they don’t want one. Understandably, they fear cybersecurity risks from devices that transmit their data over the airwaves.

Alas, the meters are neither free nor smart. The cost, between £200 and £300 a pop, will be sneaked into bills in the manner pioneered by green subsidies, in the hope that the electricity companies will be blamed. The meters are almost as smart as the old night storage system, since all they do is tell you how much juice you are using. The experience with water meters, which produce an initial drop in consumption before it returns to the previous pattern, has been ignored.

All these fine animals come with eleven-digit price tags. What a circus!

Off track

Active fund managers are a rip-off. Put your money into an index fund. This is not quite a fair summary of the Financial Conduct Authority’s final report into the fund management industry, but the theme runs through it. Margins are too high, there is no price competition and the real level of charges is impossible to see. Oh, and don’t even think about performance.

Most of this is fair comment but trackers, currently multiplying like viruses, are hardly any better. They cover ever more exotic sub-sections of the markets, making consumer choice almost as hard as picking shares. They must churn their portfolios to balance buyers and sellers and changes to the index they are tracking. Underperformance is inevitable.

The index constituents are themselves selected by an arbitrary, and sometimes opaque, process like that which embarrassingly propelled ENRC into the FTSE 100. That the industry needs reform is clear from the two pages of funds listed in the FT, many of them chasing the same occupants of the preceding half page of our share service.

The FCA report has summarised the problem, as if we didn’t know. It has also exposed the murky world of investment consultants, which richly deserve to be despatched to the Competition and Markets Authority. The whole industry would work better for its customers with disclosure of real costs and better governance inside the funds, but encouraging investors into trackers is merely a counsel of despair.

 

Floored

Philip Harris, 57 years in the business, retired from Carpetright in 2014. His son, Martin, followed him into carpets in 2015 with Tapi, opening next to the most profitable Carpetright stores. Its current chief executive, Wilf Walsh, reported some grim figures this week, explaining: “They’ve not opened against the stores that don’t make any money.” Wilf, you haven’t quite got the hang of this, have you?

This is my FT column from Saturday.

 

 

It’s not much of an endorsement when a major shareholder announces a sale of your shares with the price at a five-year low. It’s even worse when your company takes half the stock itself. The company here is BT, the vendor is Orange and the shares the leftovers from the purchase of EE, itself a shove-together of T-Mobile and Orange UK.

These are unhappy days for Gavin Patterson, the man who looks like Hollywood’s idea of a CEO. Indeed, short of the regulator forcing the company to divest Openreach, its wires business, almost everything else is going wrong.

Following an accounting scandal in Italy and troubles with BT’s public sector business, there is our growing reluctance to pay more to speed up superslow broadband. Even the footie is not what it was. The great British couch potato had seemed impervious to price rises, encouraging Mr Patterson into a bidding war with Sky for the rights. Now, it seems, our appetite is not insatiable after all, as Sky reported a 14 per cent drop in the average number of viewers per game.

Saeed Baradar, of brokers Louis Capital, concluded last year that BT had no chance of recouping its investment and urged shareholders to sell. This month’s departure of BT’s head of TV, Delia Bushell, three months after spending £1.2bn on football rights, suggests he was right.

BT still hopes to raise its dividend by 10 per cent a year, but even maintaining it is starting to look like a stretch. And looming over everything is the vast pension liability from BT’s days as a public sector business.

Mr Patterson has already forfeited his bonus. Jan du Plessis joined the board this month, slated to become chairman in November. The first line of his official biography issued by BT notes that Mr du Plessis “oversaw the appointment of a new CEO in 2013, as a consequence of Rio Tinto’s first-ever annual loss”. Mr Patterson may soon be calling a Hollywood agent.

Argentina to default (but not yet)

If investors want to lend you money for 100 years, it looks rude not to take it, even at a yield of 7.9 per cent. After all, everyone on both sides will be long gone well before the stock is due for repayment. Argentina desperately needs the money, while the lenders are gambling that  things there will keep improving enough over the next few years to keep the stock up to par, or even better.

And yet…if ever there was a triumph of financial hope over experience, this is surely it. Two centuries ago Argentina offered Britain the Falkland Islands in return for debt forgiveness (the offer was turned down on the grounds that Britain already owned them) and the last century has seen debt crises in 1930, 1955, 1976, 1989, 2001 and 2014.

Those in charge of the sovereign wealth, private portfolio, pension and bond funds who constitute the buyers of such bonds nowadays will hardly care about history. The banks will collect their commissions and move on, while the fund managers will point to a lucrative income stream and Argentina’s improving economic management.

Say, for the sake of argument, that this time it really is different, and the next default is 12 years away. By then, the holders will have received $95 in interest payments on each $100 invested. A buyer of 12-year US Treasury stock will have received $30. So the Argentinian debt would have to be worth less than 35 cents on the dollar for the buyer to have done worse, even ignoring the time value of the higher interest payments. Not such a bad bet, after all.

More forward guidance

If Mark Carney and the Monetary Policy Committee had not halved Bank Rate in his post-referendum panic, would they be contemplating a cut now? The answer is obvious,  but Mr Carney is stuck with the political reality that to raise it back to 0.5 per cent is dynamite in this month of disasters. His chief economist Andy Haldane can take a more objective view. Put it down to continuing the process of softening us up for the inevitable rise. But if, as his boss says, now is not the time, when is?

 

This is my FT column from Saturday

 

Ah, those were the days. Here’s the chief executive of Mitie two years ago. We are “well positioned for growth.” And last year: The “business model is flexible, resilient, low risk”. It turns out that none of this was true. Risks were higher and profits much lower, and now the numbers need restating “to correct material errors“.

The CEO has taken her growth and resilience elsewhere, and the man from British Gas has come in, scrapping the final dividend to fix the leak in the p&l. Mitie is one of these frightfully modern businesses which grew fat on the back of government outsourcing, “managing and maintaining some of the nation’s most recognised landmarks” (and detention centres).

Winning the contract is one thing: trying to work out when, or whether, it is really profitable is something else. The accountants are having another stab at setting the rules here (IFRS15, if you want to show off) to discourage undue optimism from CEOs. With contracts that last several years, the temptation to take a rosy view so as not to disappoint investors can be irresistible.

No big outsourcer has resisted. Their published figures are deeply suspect, and the analysts are struggling to interpret them. Shares in rival Capita jumped 17 per cent last week (but are still half their peak) on relief that things are no worse than expected. Besides, as Morgan Stanley points out: “IFRS15 enables the writing off of accrued income (i.e. revenue recognised but not billed) from the balance sheet through reserves (so no prior year adjustment to the p&l). This revenue can then be recognised effectively under IFRS15 again.”

Neat, huh? Take the hit to reserves, and book future profits (assuming there are some) through the p&l. This should help Capita in its long search for a CEO, although he or she may still be unable to kick the outsourcers’ habit of booking profits before they are earned.

No Green legacy

Owen Green, who has died aged 92, was one of the two takeover kings who dominated the stock market in the 1980s. Less flamboyant than James Hanson, he was just as deadly, as he built BTR into an industrial giant, at its height the fourth most valuable company in the FTSE100. Victories included Thomas Tilling (then the biggest-ever UK takeover) and an ailing Dunlop, although glass-maker Pilkington managed to escape.

Running it with a small staff from a dreary 1960s block in Westminster, Sir Owen eschewed non-executive directors and corporate codes. His appetite for buying diverse businesses made it hard for outsiders to describe exactly what BTR did, and the sprawl of hundreds of individual companies reporting back compounded the pressure on his executive colleagues.

His fans saw him as a badly-needed champion of British manufacturing industry, while his detractors suspected BTR was an accounting confection, sustained by under-investment and rules which allowed takeover provisions to be recycled into profits. The group did not long survive his retirement, after 37 years, in 1993. More recently, he savaged the culture of corporate greed that had infected big companies while wages were being squeezed. There’s no sign of that changing.

Forward guidance: raise interest rates

At last, the folly of the Bank of England’s panicky halving of Bank Rate to 0.25 per cent following the referendum may be starting to sink in. The governor, Mark “forward guidance” Carney, may still be complacent, but three of the eight members of his Monetary Policy Committee voted for a rise last week. Perhaps they spotted that the Retail Prices Index, that measure the authorities would like us to forget, signals that inflation was up to 3.7 per cent in May.

Meanwhile the housing market is buoyed up on the toxic combination of the help-to-buy subsidy and the unsustainably low mortgage rates that flowed from last year’s cut. The longer this goes on, the greater the risk of a crisis for borrowers who lack the resilience to deal with an increase in mortgage costs. A return to “normal” conditions may still be a long way off, but one small step in the right direction by the MPC would be a good start.

This is my my FT column from Saturday

 

Sometimes, when a company comes to the market asking for money, you wonder how on earth it manages to find willing investors. The enterprise seems absurdly overpriced, or requires suspension of disbelief that defies rational analysis, so when AO World went public three years ago, the FT was not alone in musing how a distributor of washing machines could justify a glamour rating.

Such was the fight to get aboard that most investors were turned away, helping to create a scramble for stock, and a 40 per cent premium on the first day of trading, valuing the business at six times sales. It all looked very odd, from the £20m in fees (£12m to Rothschilds) it cost to raise £60m, the hefty share sales by the founder, and the highly unusual share register unearthed by FT Alphaville.

Reality, with a profit warning less than a year after the float, big sales of shares by directors, management changes and a £50m fund raising, is arriving. The bulls say that with the shares down by two-thirds, it has arrived. The bears still cannot see a case for just another durables retailer even now, and suspect that the sale of extended warranties on appliances which hardly need them is propping up the business.

Compared with last week’s other new issue disaster, AO looks like a success. The 2011 document describing the “value opportunity”  that became Genel Energy now reads like a parody of the South Sea Company prospectus. Perhaps it was not designed to confuse, although calling the company Vallares, and explaining that it was “modelled on Vallar, the cash shell” hardly helped, considering the labyrinthine structure of Nat Rothschild’s other vehicle.

This triumph of the dealmaker’s art extracted £1.33bn from supposedly sophisticated investors like Schroders, Blackrock and Scottish Widows. The founders, Mr Rothschild and BP’s former boss Tony Hayward, were awarded £164m in shares.

Genel has certainly been unlucky. The collapse in the oil price, war’s impact on its Iraqi concessions, and the failure of its major asset to live up to expectations have not helped. The woes have been compounded by internecine strife on the board, and from the £10 issue price the shares have collapsed to 89p today. Both men have now gone, and a third of the shareholders voted against the remuneration report.

The moral of these two sad stories of new issues is clear. If something looks absurdly overpriced, it probably is. And avoid any business with a structure that cannot be explained in a (shortish) sentence.

…and still on new issues

There’s quite a head of steam building up to stop Saudi Aramco floating in London. The company might struggle to comply with the Slavery or Bribery Acts, it might baulk at boardroom diversity, its governance might be suspect, its connection to London is tenuous, but the real problem is its sheer size.

Even if it is worth only (only!) £900bn, a float of the 25 per cent minimum needed for a “premium listing” and inclusion in the FTSE 100 index would make it the biggest constituent by a country mile. Even the mooted sale of just 5 per cent would test the depth of London’s markets.

The UK Investment Association argues that this too small a slice for inclusion, but this is a canard. The rule was designed to discourage companies of dubious parentage and poor liquidity, while Aramco is a well-established, properly-run business. There would be no practical difference between 5 per cent and 25 per cent from a governance viewpoint.

Nobody has to buy this share – except, of course, the tracker funds, if it’s in the index. To which the obvious response is: tough. Tracker funds are supposed to follow the market, not to lead it down the cul-de-sac of passive investment. Nobody has to buy a tracker, either, while Lex calculates Aramco’s weighting at a 5 per cent float as about the same as National Grid.

Besides, there is much more at stake here. Aramco could be the first major premium listing since the Brexit letter. The decision will be interpreted either as a symbol that Britain is open for business, or that one of the world’s most important stock markets is inflexible and turning inwards, just as the remainers always feared.

This is my FT column from Saturday.

 

British Airways strands 75,000 passengers, produces an explanation as solid as a paper aeroplane, and sees its reputation trashed. This triple whammy was surely enough to poleaxe the share price of IAG, BA’s parent. Except it did nothing of the sort.

The morning markdown last Tuesday quickly produced buyers, and by Wednesday lunchtime the price was back to the previous Friday’s close. Even with the company wading in for its buy-back programme, this looks a curious response by the market. After all, compensation claims could top £100m, while the damage to a reputation already dented by irritating cost-cutting measures will take years to restore.

Yet the market’s response is not irrational. The conclusion traders drew was that the misery inflicted and the incompetence shown doesn’t really matter. The world’s major airlines have a powerful position in a growing industry. If it is not quite an oligopoly on long-haul, there is at least an argument that they are not competing so hard as to damage the bottom line.

Bloomberg’s Matt Levine has a theory that since the major US airlines are largely owned by the biggest fund management groups, it’s in their interest to see all carriers’ earnings improve. “An airline that cuts fares or spends money on better service to win market share isn’t necessarily doing its shareholders any favours.” He quotes airline analyst Jamie Baker at JP Morgan Chase that competition nowadays has more to do with winning an investment grade rating, or entry into the S&P 500, than with serving customers.

This would help explain why flying on American airlines is so ghastly. It does not take into account the growing, subsidised Middle Eastern carriers on long haul, or the thorough drubbing inflicted on BA by the low-cost carriers in Europe. As Alitalia has proved, the so-called flag carriers are still struggling to find a convincing response to this problem. However, the stock market’s response to BA’s little local difficulty suggests that inflicting misery on the passengers is not something that bothers investors unduly.

Don’t cry for me, Venezuela

When it comes to beating up Goldman Sachs, any stick will do. Last week’s, wielded by Ricardo Hausmann, a former Venezuelan government minister, accuses the bank of buying “hunger bonds” a melodramatic description of the purchase of some distressed debt, described by the country’s opposition lawmaker as “making a quick buck off the backs of the Venezuelan people.”

This is a bit rich. Goldman’s asset management arm reportedly paid 31 cents on the dollar for 6 per cent bonds issued in 2014 by the Venezuelan state oil company and which, bizarrely, had been held by its central bank. Given the parlous state of the country’s economy, a quick buck is not the most likely outcome. Crudely, the purchase price says default is twice as likely as repayment.

Venezuela is a shocking example of how bad and corrupt government can ruin a country regardless of its natural wealth, but other attempts to force change in repressive regimes by cutting off access to international markets have not ended well. If and when Venezuela’s nightmare ends, agreement with the bondholders will be part of the solution. Goldman, like Tom Lehrer’s old dope pedlar, will then have the chance to be doing well by doing good.

Not just one way, after all

Warning: the value of your investment can go down as well as up, and past performance is not a guide to the future. This familiar rubric is not usually associated with house purchase, but after three straight months of decline, it should be. The ingredients for a bear market, starting in the buy-to-let flats sector, are all there: a worsening tax position, waning interest from overseas and a dramatic increase in supply.

Nowhere is this more apparent than along the south bank of the Thames near Battersea Power Station. Its four chimneys have been brilliantly rebuilt, Apple is moving in and the American embassy adds cachet to the area, but the sheer volume of 20,000 new flats is putting downward pressure on rents. Buyers who paid a deposit to buy off plan, looking to flip the purchase before the bill arrives for the balance, face a painful back flip instead.