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Saturday, 21 June 2008

The good news is that things are predictably bad

By Damian Reece
Last Updated: 12:18am BST 19/06/2008

Life might seem uncertain and unpredictable at the moment but in reality it's proving quite the opposite. The bursting of the property bubble was widely predicted, albeit the nationalisation of a major high street lender was not.

Since then, warnings from various sources of mounting losses amongst the banks have been realised, even though the banks themselves have seemed in denial.

The warnings about consumers being left high and dry by their debt binge have come to pass while the tired old cliché about inflation being like toothpaste - once it's out of the tube it's hard to get it back in - has been in use by the Telegraph since the summer of 2006.

We may have offended some by resorting to the simile a little too much but we, like others, have been trying to make a point on prices for some time.

Yesterday's letter from Mervyn King to Alistair Darling about inflation revealed more about a UK economy that is behaving in line with expectations and therefore posing a set of problems that are fixable with the tools at our disposal.

However, while it's good news that this slowdown is proceeding in fairly predictable fashion, the bad news is that this inevitably means people are going to lose their jobs.

Unemployment will have to rise in order to help deliver the "spare capacity" in the economy that members of the Monetary Policy Committee so euphemistically call redundancies, closures and cancellations. Without these the MPC can't deliver the relatively soft landing it's hoping for and get us back to 2pc inflation by this time in 2010.

The tone of the King letter was relatively dovish. Given the economic slowdown already in train and which will get worse, interest rates are far from certain to rise in order to choke off inflation.

There is a warning, however, from the MPC in its letter. If pay growth does not remain subdued, and evidence suggests it may already be showing signs of taking off, then the economy will have to slow to compensate.

Either this will be delivered by inflation itself squeezing income and consumption, or rates will have to rise. With market interest rates charged by lenders already having risen, even though the base rate has been cut to 5pc, the economy is enduring a period of monetary tightening anyway.

My admittedly contrarian call at the beginning of June that rates might actually fall in August still looks a possibility after yesterday's letter.

Looking at the way the MPC meetings occur, the committee may leave it until September 4 once the next Inflation Report is out on August 13.

One of the reasons I originally gave for an August cut holds truer than ever and that's the rapidly falling growth in money supply - specifically the M4 measure of money supply. King even made specific mention of falling money supply growth in his letter giving us hawks-turned-doves further hope.

So, the good news is that things are predictably bad and getting worse as expected which, given some of the apocalyptic coverage, is a perfectly good reason to be cheerful.

UBM's merger of 'equals' always looked weak

UBM pulls out of £3bn Informa merger talks
"There are no such things as mergers, only takeovers. Mergers are mythical beasts - they prance round the wooded glade, horned foreheads and all, waiting to be shot down. That's what will happen to United Business Media's (UBM's) all-share proposal to merge with Informa." This prediction, which appeared, here on June 10, has taken only seven days to come to pass.

A new bidder, thought to be a financial buyer, has crashed the party holding out the prospect of paying a premium for Informa shares, something that David Levin, the chief executive of UBM, was unwilling to do. His proposal of a nil-premium merger between the two with existing management sharing control always looked weak.

The problem with this deal was that Informa's shareholders were going to have to accept the "jam tomorrow" method of creating shareholder value. This idea of great riches in the future in return for other people running your company has a patchy record in corporate activity of any sort, never mind nil-premium mergers.

Informa shareholders are better off pursuing a potential takeover bid, albeit one that might fail, rather than a flimsy-looking merger of supposed equals.

Sharing delivery trucks is a good way to go

Retail giants share trucks to cut costs and emissions
Today's news that a large part of the food and consumer goods industries have joined forces to collaborate on logistics ought to set every other industry thinking. Clothing retailers ought to consider if they can copy the likes of Nestlé and Tesco in pairing off and making their delivery trucks more efficient.

The drinks industry is another obvious candidate which maintains numerous logistics companies that run their own routes, regardless of their rivals, which results in delivery trucks travelling empty. In these days of high fuel costs, regardless of environmental concerns, that's got to be a scandal as far as shareholders are concerned.

The one shadow over today's truckers' initiative is the risk to competition but I'm sure we can rely on the Office of Fair Trading to be monitoring events with interest, its antennae twitching at the prospect of a new probe.

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