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What’s the rate of inflation? Measured by the Consumer Prices Index, it’s an uncomfortable 2.9 per cent. Measured by the Retail Prices Index, it’s a rather hotter, but not widely reported, 3.9 per cent.

This is the number that matters for holders of index-linkers, those government stocks where today’s high prices guarantee that the repayment proceeds will buy less than the money does now. The index also matters for the clients of the Student Loans Company, whose debts accumulate at RPI plus 3 per cent. At today’s rate of inflation, this debt would take just over 10 years to double, a penalty on learning that is blatantly unfair.

Yet even those few students who can understand compound interest are taking the cash, pushing the outstanding debt towards £100bn, or more than the nation’s credit card borrowing. Some of them have no choice if they want to go to university, some do not expect to earn the £21,000 needed to start repayments, but many others take the money and the view that the whole structure is unstable.

One day, they suspect, it will collapse and their debt will be written off. Even under the current rules, an analysis from the Institute for Fiscal Studies concluded that three-quarters of graduates will never pay off their loans. Meanwhile, the government is so unpopular with freshly-enfranchised youth that the chancellor has signalled changes to the scheme, and there’s another Budget coming up.

Writing off the entire £100bn would destroy the fantasy that the chancellor can ever balance the books. More likely is some variant on “extend and pretend” where the student’s liability continues to grow, but the date when it’s actually due recedes into the distant future. It would amount to a sort of Quantatitive Easing for students, rather as PPI mis-selling became QE for poorer borrowers, and the the real thing helped the rich. Taking what looks like expensive money may not be so silly after all.

That’s Superinnovation for you!

When asked to speak at the Centre for the Study of Financial Innovation, the redoubtable American commentator James Grant told them he was against it. He might have the same view of the innovative scheme by the founders of the Superdry brand to reward the workers in the company.

Supergroup has lived up to its name for Julian Dunkerton and James Holder, the founders of the chain whose clothes are distinguished by the cod Japanese script scattered over them. With the shares at £15.60, the business is valued at £1.27bn, and they still own 37 per cent of it.

Now they want to share their success; they will put 20 per cent of their profit if the shares rise above £18 into a fund for the workers. Should the price hit £23 when the scheme closes three years hence, there would be £30m in the pot. This is all very fine, and the staff may be suitably grateful. However, should the price hit £23, the value of the duo’s holding will have risen by £220m, so the £30m is only a rather modest slice of their gain.

Getting the share price from here to there needs a 47 per cent gain in three years, described by retail analyst Nick Bubb as ” a big ask”. The oddity is that the founders will not be doing much of the asking, since Mr Dunkerton is no longer in charge, and Mr Holder left the business last year.

With the shares costing twice last year’s sales and 20 times earnings, the market is already asking quite a bit from the employees. They could well work their little Superdry socks off for three years, only to find that the share price is far short of the magic £23. Still, that’s financial innovation for you.

If only they hadn’t done it

Another month, another decision to leave Bank Rate at its crisis level of 0.25 per cent. The Monetary Policy Committee is gradually changing its tone, towards a rate rise, but the real blunder was made last year when it panicked and cut from 0.5 per cent after the Brexit vote. Had it not done so, would anyone be arguing now that 0.25 per cent was a more appropriate rate?

This is my FT column from Saturday

 

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The government’s Help to Buy housing scheme has helped lots of people. They are buying estates, yachts, divorces and almost anything their little hearts desire. They are the top executives at the 10 housebuilders which dominate this industry. The scheme has also been a goldmine for their shareholders.

Last week it was the turn of Redrow, Berkeley and Barratt Developments to throw cash at them, following Persimmon’s pledge to return “surplus capital” last month. This is Britain’s housing problem in microcosm: prices are high and there’s a shortage, so economic theory says the money should be flowing to fund construction to meet the demand, rather than out of the industry.

The big builders are not in some sort of cartel or conspiracy against the wannabe homeowner, but then they don’t need to be. Their financial firepower, their understanding of the planning laws, and the increasing complexity of labour and construction regulations have done for the small local housebuilder.

It is not in the big companies’ interests to “solve” the housing problem. To produce these returns to shareholders they aim for a steady supply that runs just behind demand, and Help to Buy could hardly have been better tailored to their needs. One executive claimed recently that the scheme had allowed him to raise selling prices by 10 per cent, which would almost double the profit margin for most builders.

Help to Buy was a cynical crowd-pleaser from George Osborne’s reign at the Treasury. To make houses more “affordable”, he stimulated demand when the need was for more supply. As for the buyers paying 10 per cent more with the help of their 5 per cent deposits, they can only hope that house price inflation continues. The cost of the scheme rises sharply after five years, and there is no help to buy the nearly-new homes they will want to sell.

Not a job for a yes-man, then

Do you have undisputed integrity, authority and discretion? Intellectual strength? Resilience in the face of resistance? An ability to think strategically? Then you could be the next chairman of the Financial Conduct Authority. HM Treasury would like you to apply for an application pack (sic) because John Griffith-Jones steps down next year. He honed all those heroic qualities in 37 years at KPMG, which just shows how far accountancy can take you.

Actually doing the work of regulating Britain’s 56,000 financial businesses is down to the chief executive, so a major task for Mr Griffith-Jones’s successor will be to ensure Andrew Bailey stays on track to become Governor of the Bank of England when Mark Carney leaves in 2019.

Candidates may be asked about the FCA splashing £5m on Arnie Schwarzenegger’s mug, urging still more of us to go for PPI mis-selling. Do not point out that there cannot be a phone anywhere which has not rung off the hook by the ambulance-chasing compensation hunters, or that encouraging still more claims is hardly sensible financial conduct.

Assuming the job ad was not merely for show, the successful candidate should organise for his (or her) gong before agreeing terms and leaking the appointment to the Sunday Times, as tradition dictates.

Guess who’s paying the bill

Tricky business, pensions. Sally Hunt, general secretary of the University and College Union, believes that the Universities Superannuation Scheme is “a healthy scheme which makes more money than it pays out and is forecast to continue to do so.”

Some of this statement is true. More money is currently coming into the USS than is going out, but accounting for the cost of promises made to today’s contributors, the shortfall is £17.5bn. This requires at least another 6 per cent a year in contributions to bridge.

State employees contribute to what are, in practice, giant Ponzi schemes, where today’s contributions go to today’s pensioners, leaving the problems to tomorrow’s taxpayers. The USS is Britain’s biggest private scheme which, in theory, must finance itself, but universities are intimately entwined in the state sector, as Ms Hunt knows. She is promising to fight both cuts in benefits and rises in contributions. Perhaps she has a pretty good idea of where the bill will end up.

 

So here’s the choice for the CEO: suffer a day of outraged headlines in the decreasingly popular press, or go without bonuses big enough to ensure that after a year or three you can decide whether to work ever again. Tough choice, eh?

Oddly enough, few find it hard to make, especially when the board’s rem. com. has raised a 10-page smokescreen in the annual report. The committee itself can shelter behind the remuneration consultants engaged for the purpose, whose mantra seems to be that the more expensive the new CEO, the better he (or even she) must be.

This is the background to the widespread resentment felt towards those at the top of big companies, as their remuneration has leapt ahead of the crowd, despite the lack of evidence of increasing competence. Theresa May tapped into this feeling in her leadership bid, and now her government has produced actual proposals.

They are a demonstration of the old saw that there is no situation so bad that government intervention cannot it make worse. The proposals promise even fatter and more vacuous annual reports, while private companies are to suffer a sort of equality of misery by being brought into into the corporate governance quagmire.

The idea of workers’ representatives always looked awkward; under UK company law, boards are unitary, with all directors sharing the same obligations. Designating one director or nominating a worker for a special responsibility gets round this, but is a feeble gesture.

As for the runaway remuneration train, the proposal to hang out a few flags in the hope they will slow it down is risible. Producing a ratio between the best paid and the rest is more misleading than illuminating, and however convenient it may be for journalists to have all the information in one place, a register of revolting shareholders will have no impact on outcomes.

One simple measure would reinforce the fact that it is the shareholders’ capital that is being spent on the CEO; no contract with a director should be enforcable until it has been ratified by shareholders in general meeting. This would oblige the board to explain an appointment, act as a chill factor on the most egregious deals, and ensure that the candidate really wanted the job. If the contract was simple enough for the shareholders to understand, that would be a bonus for them, as well as for the CEO.

Hospital pass

NMC Health has been a sensational investment; the share price has multiplied 10 times in the five years since flotation, doubling in the last year. Never heard of it? Well, healthcare services in the United Arab Emirates may not be an obvious investment opportunity, but NMC’s market value is now £5.5bn.

At £27, the shares trade on 44 times earnings and yield just 0.4 per cent, but many buyers at this price have no choice, since NMC joins the FTSE100 index this month. The founder still owns 24 per cent, and the “free float” is only 40 per cent of the shares, exacerbating the usual squeeze on tracker funds scrambling for stock.

It may be that NMC will become even more valuable, but this price is already discounting a wonderful future, rather as those long-forgotten stars of the dot-com boom once did. Given that the likes of NMC get the trackers buying only after they have risen, and that the likes of Provident Financial are sold only after the price has fallen, it does not say much for the investment managers’ expertise that a majority of them fail to beat the index.

No time to Relx

The cynics claim that the success of Relx, Reed Elsevier as was, is built on getting scientists to pay subscriptions for journals full of papers that they themselves have written. This is not quite fair, but keeping information behind paywalls is getting harder everywhere, and research shows that almost every academic paper can now be accessed for free. The site may not be legal, the formatting imperfect, and pixels may be harder to read than paper, but the process is inexorable. You can access the research on the (definitely legal) Science magazine website. Free, of course.

This is my FT column from Saturday. If you know anyone who would like to receive this blog, point out that they can sign up, free, at https://neilcollinsxxx.wordpress.com/

“I don’t know what your company is worth, but here’s a down payment, and I might pay more after we see what happens.” This, in essence, was the offer from GVC to Ladbrokes Coral, as these beasts circle each other to see who’s predator and who’s prey.

Gambling is a shockingly big business in Britain, and even for a possible £3.6bn, Ladbrokes resisted the deal. The “what happens” here is the government review of fixed-odds terminals in betting shops, which currently allow a maximum £100 to be staked every 20 seconds.

Citicorp’s analyst sees little correlation between the machines and problem gambling, but many others do, and the terminals are screamingly profitable. Barclays concludes that a cut to a £2 maximum, which common sense suggests is quite enough, would cost Ladbrokes £450m in lost revenues next year.

This is why GVC’s numbers assign a quarter of Ladbroke’s value to the conclusion of the review. It’s been grinding on for months, and is not expected soon. This suits the industry fine, while the threat to employment in betting shops helps make the politicians nervous of radical action.

The GVC two-part approach is an attempt to deal with the uncertainty, but would spawn a whole new set of problems. Should the top-up payment be a listed security, it would require a prospectus. In any case, the £900m stub would need a sllding scale of value depending on the outcome of the review, while still leaving plenty to argue about.

The obvious solution for GVC would be to wait for the review, and hope every other beast does the same. That’s forgetting one thing: it’s the gambling industry.

Greene about the gills

The chief executive was glowing: “another set of record results….successfully integrated acquisition…targetting further market outperformance…” rounded off with another increase in the dividend, which has risen at a compound rate of 8.6 per cent over more than half a century.

This picture of a business in rude health is surely enough to get the share price moving in only one direction. The company in question is Britain’s biggest pub company, Greene King. It aspires to be the best as well, and chief executive Rooney Anand is the excited CEO. Yet something odd is happening. Despite the dividend record and the glowing prospects he sees, the shares are at a four year low. The yield, 5 per cent at 660p, is signalling that the past may not be a good guide to the future.

It’s easy to see problems for pubs: the minimum wage, increased hygiene demands, supermarket competition, the smoking ban, fewer drinkers, new business rates and, as food becomes more important than beer, competition from other eatouteries. This week’s approval for Heineken to buy 1900 Punch Taverns will step up the pace of competition.

Greene King’s problems date back to its “strategic” £774m takeover of Spirit Pub Co in 2014. The industrial logic made sense, but as so often, strategic was a euphemism for overpriced. Despite the cost savings being achieved, some industry experts worry whether Greene King is really earning the cost of its capital. Finance director Kirk Davis is shortly to depart after three years to join a much smaller company.

Greene King has at least outperformed Marston’s, whose shares have not recovered from the credit crisis. Unfortunately for the ebullient Mr Rooney, JD Wetherspoon under Tim Martin has shown every other pub landlord how to do it – and hardly a takeover in sight.

Intensive Care Capital

Not the best of weeks for Neil Woodford, who has shown that transplants are hazardous, even in the fund management business. Since moving from Invesco to run his own operation, his magic touch has deserted him, and the plunging value of his funds’ holdings in Provident Financial, Allied Minds and AstraZeneca have caused much schadenfreude from his less successful competitors.

The test for shareholders after nasty surprises is, essentially, whether a company’s business case is irreparably damaged. If so, cut the losses and don’t pretend that it can invent a profitable new one while you wait. If not, Mr Woodford’s Patient Capital should survive its time in intensive care.

This is my FT column from Saturday.

The worst reason for persisting with a botched or ill-advised construction project is the familiar one: if we stop now, all the money we’ve spent is wasted. The proponents of London’s “garden bridge”, which has finally been scrapped, have managed to get through £46m before actually building anything, which rather puts their published estimate of a £200m construction cost into perspective.

Mervyn Davies, the former banker who chairs the bridge trust, promises to “account for every line” of this impressive spending. That should at least provide an insight into how this doomed venture managed to eat so much public money with so little to show for it. The analysis might tell us why the construction contracts were let in March last year when it was already obvious that the financing was in trouble, and despite the continuing uncertainty about landing rights – a rather important consideration for a span over a river.

This bridge was a vanity project from the start. As the FT’s Edwin Heathcote pointed out, the fashion for abundant foliage in artists’ impressions of buildings can also disguise design flaws. The empty promise of a “public garden” which persuaded the City planners to allow the walkie-talkie, surely London’s ugliest recent building, is not a good precedent.

We should be grateful to Margaret Hodge for her cold-eyed analysis of the bridge, and to London mayor Sadiq Khan for spotting that the construction cost was only the down payment. Once built, the bridge would leave taxpayers on the hook for the inevitable substantial maintenance costs. Its demise should encourage another river crossing downstream, out of sight of the celebs behind the project, but where one is actually needed.

One of Denis Healey’s first acts as Chancellor was to scrap Edward Heath’s vainglorious trio of projects – Concorde, the channel tunnel and the estuary airport – with a much-needed beneficial impact on the public finances. Philip Hammond’s trio is HS2, Hinkley Point and so-called smart meters. Stopping these ill-starred projects now would be painful, but money well spent.

Severe weather warning

During the era of privatisation under Margaret Thatcher, the pension obligations of the newly-spawned companies were clouds no bigger than a man’s hand on the distant horizon. The potential liability of the new shareholders was too far away to worry about, or in the case of water and electricity, the smaller workforces made any problem manageable.

A generation on, and the rain has arrived. This week the Tata group concluded a painful year of negotiations for the 130,000 members of the £15bn British Steel pension fund by giving it a third of the UK company and £550m. Even this would not meet the previous promises, and has been agreed only because the alternative was worse.

Over at British Telecom and IAG, British Airways’ owner, the deficits on the obligations inherited from the state are threatening the dividends, if not quite the viability of the enterprises. The more recently-privatised Royal Mail is in bruising talks to find a compromise between punishing posties and sustainability.

The numbers are large, but look small compared to those for the University Superannuation Scheme. Its £17.5bn actuarial deficit is an unwelcome record, overwhelming the 2014 plan to fix it, which itself demanded total contributions of 25 per cent of salary from members and employers.

The problems at all these funds are manifestations of public sector pension promises made decades ago, and are harbingers of what we can expect for those still employed by the state and its arms. Any threat of bankruptcy here looks distinctly unconvincing, so the taxpayer will pay, and we should at least be grateful for shareholders in the privatised industries saving us their part of the bill.

You owe it to yourself

The world’s central banks now own a fifth of their respective countries’ national debt, after seven years of quantatitive easing. The central banks are owned by the states whose paper they are holding, so the ultimate owners of all the government debt are the governments themselves. If you owe something to yourself, in what sense do you owe it? Answers, please, to M Carney c/o Bank of England, EC2R 8AH.

 

This is my FT column from Saturday

The Infrastructure and Projects Authority has kindly brought us up to speed with the government’s major projects portfolio, worth a handy £455bn. The annual report is a cheery, upbeat document, with encouraging examples of things that are going well, like the Super Connected Cities Programme (who knew?). It’s not until you reach the pretty colour-coded summary of all the projects that the uncomfortable truth emerges.

The authority shades these from dark green (textbook) through green (OK) to amber (significant problems) amber/red (it’s all going wrong) and red (no realistic chance of success). Few projects are red. They include new reactor cores for nuclear submarines, the perennial problem of the A303 at Stonehenge, and the M20 lorry area.

None of these moves the dial on public spending. One that does in the amber/red category is the HS2 rail link, that vanity project to connect Birmingham faster for the few at the expense of the many. It’s particularly rich that the authority’s latest verdict should coincide with transport secretary Chris Grayling scrapping three modest rail electrification plans (all also amber/red). As Private Eye has been warning for years, Network Rail never had a hope of meeting its commitments, so Mr Grayling is punishing it by restricting the state-backed company to maintenance rather than capital projects.

The money sink that is HS2 goes ahead, apparently, despite generous payoffs to executives before a rail sleeper has been laid. Should this project obey the definition of a builder’s estimate – a sum equal to half the final cost – as one rail expert expects, the bill will be over £100bn.

Surely not, says Mr Grayling, just look at the London Olympics, which shows that at least the transport secretary has a sense of humour. The final cost there was almost four times the initial estimate. The award of a major HS2 construction contract to Carillion, a company whose liabilities exceed its assets, suggests ominously that if the company’s bondholders do not rescue it, the taxpayer will.

Then there is Hinkley Point. Did you know that it’s all going swimmingly? It’s rated dark green, meaning “Successful delivery of the project on time, budget and quality appears highly likely.” This is the nuclear power station that nobody wants, and the subject of (another) damning report from the National Audit Office.

Hinkley Point promises financial misery for the owner, the contractors and finally to every British business and household through higher costs for electricity. The owner, EDF of France, is in poor shape financially and struggling to make its home-built prototype comply with escalating safety regulations. It has just added two years and £1.5bn to the estimated Hinkley start-up date.

Britain’s nuclear policy dates back to 2008, an age when the oil price was only going to rise. Nine years on, the world has changed. The combination of abundant oil and gas and rising regulatory costs have sounded the death knell for big nuclear fission plants.

The NAO now estimates the Hinkley Point subsidy at £60bn, locking Britain into high energy costs at a time of world abundance, with a devastating impact on competitiveness. The calculation, on the government’s estimates of fossil fuel prices, that a three year delay will actually save consumers money is a demonstration of how barmy this whole fiasco has become.

Thanks to the sleight-of-hand, otherwise known as a “contract for differences” with EDF, this financially radioactive project does not appear as a liability in the public accounts. The pain will appear in electricity bills. It’s a pretty brutal way to persuade us to use less energy.

 

 

The analysts at RBC Markets were quick out of the blocks last week, to explain why the Fevertree results were even better than they anticipated. This mixer drinks company is a wonder of the age, and RBC reckons it is worth its current £2.2bn price tag, or over 20 times its last 12 months’ revenues. So much sexier than boring old Britvic, currently valued at £1.8bn, or about 1.3 times its 2016 sales.

Holders might be comforted by RBC’s research, especially if they didn’t have to pay directly for it. Well, not for much longer. The leviathan lumbering down the track is the Markets in Financial Instruments Directive, Mifid ll, 1.4m (and counting) paragraphs of Brussels-borne consumer protection.

Seven years in the drafting, Mifid ll is supposed to make markets more transparent. From the reasonable premise that you should pay separately for dealing and research (for example) comes complexity that from next January will add more costs, and which threatens to make the markets more opaque, rather than less.

Today’s sellside research from banks and brokers is like advertising: half is wasted, but you don’t know which half. Much analysis is available free (the best of it on FTAlphaville) but from next year only the fund managers who have paid will see it. The banks want to charge up to $1m a year for their output, which looks ambitious given that much of it is today simply binned unread. Doubtless the economics stuff will remain free, but it’s little better than guesswork anyway.

Still, all is not lost. The analysts may have access to a company’s CEO, but this is much less useful that it used to be. Executives are so nervous of the insider trading rules, fearing that anything new said to an analyst might need a public statement, that conversations can yield little insight.

Besides, much brokers’ research is lightly disguised marketing material, designed to keep the company happy and to ensure access. At the same time, corporate information is freely available through company websites and Investegate. Research paid for by the company, through the likes of Morningstar and Edison, is obviously not objective, but it’s better than nothing.

Many buyers of Fevertree shares will not have consulted sell-side research before trading. It’s listed on AIM, with inheritance tax breaks for investors, so buying at any price makes sense as long as it holds up longer than you do. You might note that Tim Warrilow, one of the founders, has sold a slug of his stake.

The road to Mifid ll was paved with good intentions. Yet as with other financial directives from Brussels, its authors had no real interest in learning whether their proposals would help the London market. The result is complexity almost beyond human grasp, and compliance costs that outweigh any gain for the customers. Lest we forget, it’s one reason why we voted to leave the European Union last year.

Repent at leisure

In politics, if you make a sweeping promise, make sure you’re gone before it’s due. George Osborne’s promise to balance the Budget by 2015 always looked like a fantasy, even though he had not expected to be gone before the reckoning arrived. Philip Hammond has kicked that can as far down the road as he dare. He has no idea how his latest balancing feat will be achieved, but can take comfort from knowing he will be gone before it becomes obvious that the latest target of 2025 will also be missed.

This week saw another fine example, in the promise to stop the sale of petrol and diesel cars by 2040. This shameless toadying to the green lobby threatens upheaval and economic destruction, but nobody in power today will be answerable when the bill arrives. As John Dizard argued eloquently in the FT, battery technology advances incrementally. Unlike microchips or antibiotics, there are no “breakthroughs”. Range anxiety will hang over electric cars for years to come.

The mother of all feel-good promises remains the Climate Change Act. This commits Britain to cutting carbon emissions by 80 per cent by 2050, and in the nine years since it became law, passed almost unanimously by parliament, only trivial progress has been made, while the assumptions behind it look ever more unconvincing. Not their problem, though.

This is my FT column from Saturday