pro manchester CEO

www.johnashcroft.co.uk - we have moved - join us there.

 

 

The move to the new web site consolidates two blog sites into one, combining four years of history in the economics blog into one big better site: Join us at johnashcroft.co.uk. Thanks to the eword for all of the help. JKA

Sunday Times and Croissants - CEO's weekly update 20th November

There is something special about Sunday morning, the Sunday Times, hot croissants with honey and butter, excellent. Headlines, the Duke of Edinburgh blasts wind farms as useless, Chris Huhne, the energy secretary dubs him a “curmudgeon” (ex ante) describing turbines as elegant and beautiful. Concerning!

David Smith is concerned about employment “jobs carnage as firms lose hope on recovery” the headline, DS admits he was shocked by latest data from the ONS. He must have spent some time with John Cridland the CBI Director General, according to the latest CBI survey one third of firms are looking to cut staff numbers. The eurozone crisis, a possible second banking crisis and the imminent autumn statement to blame for the strident views from Centre Point. 

UK economics news this week, inflation CPI falls to 5%, unemployment figures increase but the claimant count data suggest the rate is slowing. Retail sales are flat, up just 1% year on year. Bad news from Mothercare and The Game group illustrate problems in retail as household incomes remain under pressure and more activity swings on line.

The Bank of England Inflation report confirms the economy is flatlining but CPI inflation is expected to fall below target by the end of next year. The Governor does not answer questions about problems in Europe. He is not in the forecasting business after all.

The UK banking crisis must be over, four years ago Northern Rock experienced a run on the bank, this week, Virgin, ran off with the bank, leaving HMT with the bad bits and a near half billion pound loss on the deal. By Saturday morning, it emerged Branson had paid half the price with the Northern Rock balance sheet. So this is vendor finance?

Back to the day job and on Monday, the day begins with a 7:30 appearance on Radio Manchester with Alan Beswick. We are talking about the Manchester riots, I make reference to the Riot Damages Act of 1896. Beswick “remembers that” - big mistake, I can never resist an open goal. Interview closes, will I ever be invited back? Hopefully not, at that time in the morning.

Also to be interviewed was John Morris, an ex soldier on Christmas Island at the time of the Atomic Bomb tests. One of the few survivors of the tests, the old soldier has been denied compensation from HMG for exposure to radiation. His search for compensation from the BBC suffers a similar fate. We do not pay expenses says the production manager. His taxi ride from Oldham remains unpaid. “Sorry” - “you don’t look sorry” - the pensioners riposte. 

Later, internal meetings, then off to MBS for a panel session - restoring faith in our cities, a reference to the August riots. Sir Howard is on the panel along with Mike Luger (MBS), Andy Bounds (FT) and Damian Wild from Estates Gazette. In the chair is Gordon Burns. An enjoyable session and good exchange of views. I get to talk about the ground breaking I Love MCR campaign.

Wednesday morning, an early start at Shoosmiths for a corporate finance event involving the NorthWest Fund Managers. Slick presentations from the managers ensures my role in the chair is limited. 

In the office during the day, then off to dinner at Deloitte, Mike Blackburn is the main presenter talking about the LEP. Graham Hallworth and I form the supporting act in a question and answer session which follows. For once I get to speak as much as GH in one of those eatstalks and leaves evenings. Am reminded it is my turn to buy lunch for Hallworth and Currie. 

Thursday and in the afternoon off to the Manchester Conference for growth incorporating the launch of the business growth hub. Lord Heseltine the guest speaker breaks Faulty Towers protocol and talks about the war, slips off message and argues for an elected Lord Mayor, then declares war on the enemy within - the Civil Service. It is like an extract from Yes Minister. No mention of return of the matrons but problems in schools, sack the headmasters is the battle cry.

Mike Blackburn chairs and explains the role of the LEP, Richard Guy covers the business growth hub strategy. Moneeb Awan has a protracted advertising slot for eSay and David Benstead begins his presentation with the story of Ferranti in 1888. Excellent. The Business Growth Hub is a great development for our city. We have to get this right. The real test will be in execution, so far so good.

Friday a day off, (of sorts) I meet with ex Coloroll colleagues for lunch and begin work on the model for my FPS 2020 employment paper for the New Economy and AGMA. The Manchester forecasting model suggests 70,000 jobs will be created in the Business, FInancial and Professional sector over the next ten years. In the current climate, this has to be at the top end of expectations, a lost decade (of growth) would produce just half that number according to my own model. 

Saturday, working in the morning, the day starts as usual with tea, the Telegraph (on line) and the excellent Economist app. An article on Chinese jewellers - Beijing Bling - grabs attention together with the piece on Italy’s new PM - the full Monti. The future of Russia - Putin his place - demonstrates still further the wit of the sub editors on the erudite weekly, probably my favourite app for the iPad 2. 

Yes, I now have the new iPad 2 and the iPhone 4s for that matter. Let the e-team weep, my day has come. 

Afternoon, it is off to play tennis with Mary as usual. It is a close run thing - a set each!

Hope all is well with all, more news next week, 

John

Check out the new site, www.johnashcroft.co.uk

Follow on Twitter @jkaonline, or join me on LinkedIn or Google+.

 

Sunday Times and Croissants - CEO's update 13th November

There is something special about Sunday morning, the Sunday Times, hot croissants with honey and butter, excellent. Headlines, the Chancellor has a £50 billion plan for growth which appears to involve other people’s money in an off balance sheet vehicle. Thus do we learn lessons from the financial crisis. It is plan A plus in a 1930s style new deal for infrastructure and housing.

David Smith writes of the Euro crisis with lyrics from the Neil Sedaka classic, breaking up is hard to do, ending with a challenge to the Perry Como ditty - it is impossible. Not only is it possible, according to the DS song sheet, it is probably desirable.

UK economics news this week, producer prices in October suggest the inflation peak has passed, retail prices are expected to fall significantly next year. Manufacturing output (September) increased by just 2%, so much for the march of the makers rebuilding the workshop of the world. One bright spot capital goods increased by 7% stimulated by export growth. It would appear workshops are being built but in other parts of the world.

Constructions stats are flat and the trade figures will disappoint those in search of a rebalancing to net export growth. It just is not going to happen. Revise the models. The J curve is just a slippery downward slope with no bend in sight.

The UK economy is flatlining, at least we know where we are for the moment. If employment holds and the debt reduction targets can be met, then accept a few years of flat growth as a base case, until the election beckons.

Back to the day job and on Monday, the day begins with internal meetings followed by a presentation to the Colliers senior management team. Then follows my MBS lecture on valuing high tech stocks, Groupon, Facebook, LinkedIn, Twitter and Zynga.

Tuesday, it is the Business Leadership Council meeting led by John Early. The BLC is a good group of business leaders with lots of hot topics around the table. Always enjoyable.

Later in the day Mark Fahy from the London Stock Exchange is in the office to brief me on the panel session the following day.

Wednesday, it is the LSE access to finance session led by Shore Capital Partners. Easy role to chair. with excellent presentations with Simon Caunt from the Bank of England, Mark from the LSE, Gerard Lane from Shore, Gervais Williams from MAM funds, David Smith from AXM, and Steve Smith from Daisy Communications wrapping up proceedings. All is finished by 11:40.

Back to the office then off to lunch with Yorkshire Bank. I am asked to lead the conversation on quantatitive easing and the asset purchase facility. The conversation soon moves on to other topics. What is it about economics?

Back to the office to finalise my lecture, then off to MBS to deliver on the new macro prudential regulatory environment. I cover, Basel III, G-SIFIS, the Vickers Report and the new approach to financial regulation.

I explain the FSA is scrapped to be replaced by the FPC, the PRA, the FCA (not the CPMA as first thought). It is the end of boom and bust.

Regulators must think that HSBC stands for the Hornchurch and Shoreditch Banking Corporation. It does not. Much more regulation and a relocation is on the cards for all but the state owned.

Thursday, early meeting with the Chairman for the pre board meeting meeting. All is well but Paul is hobbling with a tight achilles tendon. I am sympathetic. Richard Bertram from TSK is in the office later to discuss a conference planned for next year.

After lunch I have a briefing meeting with Sir Howard. Father Christmas is guarding City Hall resting on a structure which must have been specified by Thomas Telford or developed from bits left over from the Forth Bridge. The free climbing option has been canned by health and safety several years ago. A now sedentary Santa is safe in our city.

In the evening I call in to the Business Desk birthday celebration at Epernay. Lots of good people around and Chris Barry is in good form. Simon Allport sorts out a lunch date. David Allanson asks if he can sponsor the Business conference again as part of the banking group. Least I think that is what he said. It was a bit noisy. Must call next week.

Friday the day starts with a panel session on the Future of Professional Services at the Hive. I am on a panel with Jonathan Hurst from KPMG, David Partridge from Argent and Mike Reeves from Clearwater. Mike opens with a challenging presentation. Michael Taylor is in the chair. 7:30 start but I make it. I do not have a bacon sandwich, my body is a temple. I am a slave to my tennis.

Later in the day, Nick Boden confirms sponsorship of the Andrew Sentance lunch in December. Andrew is now senior economic advisor at PwC and has just called for the resignation of two deputy governors from the MPC. Lunch at the Yang Sing on the 8th December, the theme is fire crackers and fortune cookies at the Bank of England. Not one to miss - book early for this and the Business Conference in March.

Saturday, working in the morning, then off to play tennis in the afternoon with Mary as usual. It is a close run thing!

Hope all is well with all, more news next week,
John
Check out the new site, www.johnashcroft.co.uk
Follow on Twitter @jkaonline, or join me on LinkedIn or Google+.

Sunday Times and Croissants - CEO's update 6th November

There is something special about Sunday morning, the Sunday Times, hot croissants with honey and butter, excellent. Headlines, the Euro crisis could set the UK back six years according to the Ernst and Young Item club. This gloomy projection is based on Greece being forced out of the Euro along with Portugal and Ireland.

David Smith has been in China all week but warns their is no such thing as an irrevocable monetary union. An orderly reduction in Euro membership with a Greek exit the best outcome he says. Jim O’Neill from Goldman Sachs, interviewed in another place, suggests the euro could split apart with Finland joining the PIGs in flight. Who would want to stick around as Merkel suggests it will take ten years to sort out the turmoil.
 
History repeats, peace in Europe last week, followed by cold war between the allies. The Eurozone travails continue. No one wants to back the bail out or form a coalition in Greece, the Italians begin to look vulnerable, the Merkosy alliance looks flaky and the Prime Minister is impatient about progress. Ah well...

UK Economics news this week, all eyes on the ONS for the Q3 growth figure. GDP is up by 0.5% in the quarter. This is growth but not as it should be for this stage in recovery. The crisis in Europe the explanation. Depreciation, inflation, the squeeze on real incomes,  a VAT rise and the tight fiscal stance largely ignored.

Back to the day job and on Monday a series of internal meetings for most of the day. Overall it is a quiet week for meetings out of the office. Preparation of the business plan for 2012 begins together with further discussions on a relocation strategy.

Tuesday evening - the MPEG private equity group dinner hosted by Deloitte. Always a great evening with some of the major corporate finance players in the city. As much as £5 billion of investment funds around the table, such is the size of activity in Manchester.

Wednesday a snap visit to London for a visit to HM Treasury. A meeting with Dave Ramsden head of macro economic policy is on the cards. I arrive to discover the Chancellor has taken priority and summoned DR to number eleven. I meet with Andy King, deputy director responsible for co-ordination of macro economic policy. It is a good meeting as we discuss QE accounting and latest developments in the plans for credit easing. The Chancellor statement is due in just a few weeks and the revisions to the OBR forecasts will also be presented at the same time.

Lots of research and prep, as next week, I am lecturing twice at MBS. Wednesday Banking Regulation, the G20 resolutions, the Vickers Report and the new UK macro prudential financial regulatory structure. Sounds pretty unexciting but students get to watch a film - The Inside Job, before my presentation. The theme is stable financial management - barn doors, bolts and horses, that sort of thing.

The first lecture is on Monday - investing in high tech stocks, Apple, Microsoft, Yahoo, Amazon and Google. The pricing of the new generation of high techs, LinkedIn, Facebook, Groupon, Twitter and Zynga will also be examined. I well explain how Groupon, yet to make a profit has just IPOd with a market cap forty times last years revenue! Challenging. Goldman Sachs are on the ticket, no cause for alarm.


Saturday, working in the morning, finish the presentations, then off to play tennis in the afternoon as usual. Hope all is well with all, more news next week,

Check out the new site, www.johnashcroft.co.uk
Follow on Twitter @jkaonline, or join me on LinkedIn or Google+.

Steve Jobs an exclusive biography by Walter Isaacson

This week a great chance to burn through the six hundred page Steve Jobs biography by Walter Isaacson. It is a great read and provides some detail to my Apple corporate strategy case study.

Jobs was a great visionary and product champion. To work with he could be an ungrateful, ungracious character. It is best this is outed early in life post Jobs. One of the US online journals this week outlined the 16 really bad things Steve Jobs did. Yeah he did them all, storming out of a hotel, chastising suppliers. He could be really heavy on non performing staff. Jobs was not overly strong on people skills yet the close group of Jonathan Ive, Phil Schiller and Tim Cook stayed with him. They lived within his reality distortion field, a field in which time and tasks were folded into a new ever demanding dimension.

Jobs was a great product champion with a fanatical obsession with detail. Shades of colour, degrees of angle, density of material were his every day commitment. One would be exhausted to maintain the pace. He and his wife would spend two weeks in which every night included a debate about US versus European washing machines prior to purchase. In the end opting for Miele, for me it has always been ten minutes begrudgingly spent in Comet to buy anything in white.

Even in great pain, Jobs tore off his oxygen mask complaining of the design, asking for five options from which to choose before taking relief. The doctors should have been told to present all, saving the best until last, just as Jonathan Ive had done with the iPod mock ups ten years earlier.

Jobs was not infallible. It is important to realise our corporate heroes are now without failings or failure. Apple III, Lisa, the Macintosh, the  Fremont factory, the Next computer and even the early endeavours with Pixar were failures. A series of lucky breaks with animation led to the success of Toy Story even as the threat of bankruptcy for Pixar neared.

Each of the failures became a building block for later success, not least the failures in integrated manufacturing, which led to the supplier syndication, of itself an essential component in the success of the iPod. The iPod, one thousand songs in your pocket, it was so cool, we should never forget.

Jobs was a product genius and a visionary. Without him, the iTunes store could not have been a success. It would need the power of his personality to convince the record moguls to get on the web page. So too with some of the music stars like Bono, Dylan and the Beatles he got them to sign up and sing on line.

To move towards the end of the book, is to move towards the end of his life. it is sad. To lose one friend to cancer is a tragedy. We watch them emaciate and lose energy, the very hallmark of life and soul. Radiation yields, to emission of a finite resource. It is too much. To lose a hero to cancer, is a great tragedy. In the latter stages, Jobs was grateful to see his son’s graduation. That was the deal with his maker. He probably added a sub clause to get to launch the iPad 2. He could never resist a good negotiation.

Steve Jobs is a fascinating character, a zen loving vegan, wealthy but with no real interest in wealth. Offering to work for a dollar a year on his return to Apple, he refuses fourteen million share options but then asks for twenty million. A visionary and product champion, Jobs realised the potential of the digital hub before anyone. The hub begat the iPod, the iTouch, the iPhone and the iPad. Now all maybe lost in cloud. Rumour has it, he had cracked the Apple television and no doubt he was working on the Apple washing machine.  It would have been a cool wash. This is a great book about a great man who will be missed.

Steve Jobs by Walter Isaacson is published by Simon and Schuster USA and Little, Brown, Great Britain.

Sunday Times and Croissants - CEO's update 23rd October

There is something special about Sunday morning, the Sunday Times, hot croissants with honey and butter, excellent. Headlines, university entries are in record fall as prospect of fee hikes bite. A possible ten per cent drop in entrants across the board will challenge HEI business models significantly. Oh for the days when education was state funded as a key ingredient for economic growth and development.

David Smith, suggests we can learn lessons from the Irish in managing inflation and growth. Critical of monetary policy and the benign neglect of sterling, UK retail spending is exhausted, he explains, by price inflation exacerbated by low interest rates and QE.  On this, he is right. Unfortunately, with Irish unemployment almost twice the levels of UK, this is a comparison one would not wish to pursue with QE zealots and Adam Posen in particular.  More later.

Economics news this week, despite low growth, the borrowing figures suggest the deficit targets will be met this year. Just another five years of austerity and we can put the heating back on. The retail sales figures are out, volumes are flat but values are up by over 5%. No surprise as inflation CPI basis hits 5.2%. The headline rate is expected to peak in Q4 then fall rapidly in 2012 as the VAT increase and energy costs unwind.

Back to the day job, Monday, internal meetings in the morning, then out in the afternoon to look at property options should we decide to move next year.

Tuesday, Chris Melia and Rebecca Firth from Colliers, are in the office to discuss a research project. In the afternoon I record a piece for Radio 5, challenging the second round QE asset purchase programme. Sir Alan Budd is on air supporting the MPC move and challenging my views. Shock.

In the evening, it is the IOD - Bank of England dinner in Liverpool, the Governor delivers a keynote speech. I am a guest of the MPC but as QE sceptic, I am placed next to Adam Posen for assimilation into the QE collective. Posen has been calling for more asset purchases since October last year. He is a formidable character, an intellectual bulldozer when it comes to QE. I receive a one on one tutorial which develops into stern lecture, to disagree - to be dismissed as a Patrick Minford acolyte. Ouch! It is a great evening, I return home head spinning, I have been Posened but am unmoved!

Wednesday, I am before the Manchester City Council scrutiny committee (economy, employment and skills) together with Rob Pailin from RBS and Paul Breen from Business Finance Solutions. The discussion is about access to finance and funding for SMEs. An interesting exchange, Rob coping well with some light flak.

Thursday morning, Charlie Bean the deputy governor of the Bank of England is with us for breakfast at the Lowry hotel. Charlie is on the MPC, the FPC, the G7 and the G20 finance ministers group. He speaks well, giving his off the record views on the economy and QE. It is a good pro.manchester event, thanks to John Young and Simon Caunt for arranging this (and the seating plan on Tuesday!).

Later, Tom Glass from the e-word is in to hand over my new blog and web site. It looks really cool, we will make the switch next week.

Friday, a good session with Martin Turner, excellent macro economist at MBS. Together with Brian Sloan, Chief Economist at the Chamber of Commerce, we discuss the preliminary numbers for the pro.manchester Q4 Economics Review, out in two weeks. NIESR will also provide some forecast input into the Q4 review. Interesting.

Saturday, working in the morning, then off to play tennis with Mary in the afternoon. I lose 6-8. Mary has a new racquet, my strings are too old.

As an MPC twitcher, it has been a great week, the MPC have been out en masse in the North West, dinner with the Governor, an evening with Adam Posen and breakfast with Charlie Bean. Excellent.

Hope all is well with all, more news next week,
John
John Ashcroft
Follow on Twitter @jkaonline, or join me on LinkedIn or Google+.
Check out the pro.manchester blog post for regular updates, moving soon to a new site, johnashcroft.co.uk thanks to Tom Glass and the eword.

Sunday Times and Croissants - CEO's update 16th October

There is something special about Sunday morning, the Sunday Times, hot croissants with honey and butter, excellent. Headlines, China has made a secret offer to save the euro with an offer to purchase sovereign debt and infrastructure assets. With three trillion dollars at risk, a strong euro land is a prerequisite of a good asset spread. Euro fans relax.

Inflation is heading to 5% adding further mystery to the Bank asset purchase programme. Oliver Letwin made the news, the minister reads his papers in the park, then adds a new dimension to the freedom of information act by dumping them in the nearest waste bin.

Sad to see Liam Fox resign this week, not sure the if-you-fire-me-it-shows-you-are-weak challenge to the Prime Minister was a great tactic. Hopefully the Strategic Defense Review included a little more guile. Not sure about that.

David Smith, discusses the merits of digging holes and building houses as a way of stimulating growth. Jobs can be built with bricks and mortar the headline and they can.

Economics news this week, production figures are flat, unemployment is rising, the trade figures for August suggest a modest improvement in the trade deficit. Fans of the J curve get excited but imports are down, as the suffocated take less oxygen.

The NIESR preliminary estimate for Q3 GDP suggests growth of just 0.5% year on year. The unemployment figures suggest this is too optimistic. We are in a liquidity trap, the economy is flatlining. To offer more QE, is to throw more water on the drowning. The markets resist the banks offer to buy more gilts this week. They know something the bank does not.

Tuesday next week I am a guest of the Bank of England at the IOD dinner in Liverpool. I will be sitting next to Adam Posen, he has been calling for more QE since Noah landed at Ararat. I decide to read his book - Restoring Japans Economic Growth [1998] by way of preparation. He also wrote on inflation targetting with Bernanke. Have read this also, (not this week), now that is devotion.

Back to the day job, Monday, internal meetings in the morning, then a meeting with Colliers International to welcome them into membership. Colliers together with Ask Developments will strengthen the property group significantly, Colliers complete our property agents set.

Tuesday, Gateway breakfast followed by a pre board briefing meeting with Paul Johnson as the Deputy Chairman, standing in for Paul Lupton this month. Good turnout for Gateway, I surrender my seat to John Young from the Bank of England. It is only fair, John did the seating plan for next week. Lunch, it is Sir Howard and the annual address to pro.manchester members, nearly 200 at Stocks. Sir Howard is on great form and very upbeat about the prospects for our city.

Wednesday, coffee with Jeff Jones from BDO in the morning as we chat about the market and prospects, then off to look at possible property options for a move next year. My office is enormous but the team are worried about delusions of grandeur, as if.

In the afternoon a presentation of the Greater Manchester Forecasting model. Neil Gibson of Oxford Economics is very impressive talking about the Manchester economy. The detail of the Manchester data is excellent. Who would have thought pie makers would offer revealed comparative advantage in Bolton and Wigan?

Thursday, early start for the board meeting, it is over within the hour. The last for Robert Sheffrin, Treasurer and Finance Director. Robert is setting up a new VC advisory business in Belgrade and Sarajevo. Good luck to him, Robert was good to work with and we all wish him well.

Later a meeting with Angela Harrington from Manchester City Council. We discuss the project to assess the future demands of the business and professional services sector in Greater Manchester over the next ten years. A project we will undertake with the New Economy over the coming months. Angela is the regeneration manager for employment and skills.

Friday, the morning is devoted to the Greater Manchester Chamber of Commerce Council meeting. Martin Douglas is in the chair and Clive Memmott on the desk. Dr Brian Sloan Chief Economist, gives a presentation on the latest quarterly survey. Good session.

In the afternoon a meeting with Barry Robinson from Pheonix Venture Partners. Pheonix opened an office in Manchester this year and will be a great addition to the MPEG group.

Saturday, decide not to watch France versus Wales but finish off the Michael Lewis Boomerang book. It is his collection of articles from Vanity Fair about Iceland, Ireland, Greece and sub prime USA. Exploding Range Rovers in Reykjavik, empty building blocks in Dublin and news of the rail system in Greece. The rail losses are so great it would be cheaper to put every Greek rail user in a taxi. It is a sad read about the price populations pay for the failure of leadership, especially in lands of ice and ire.

Saturday afternoon, off to play tennis with Mary, it is a draw eight all. Later today, we are off to a birthday party for Rachel, deputy CEO and head of operations at pro.manchester. Good chance for Mary to meet the team and compare notes. Oops!

Hope all is well with all, more news next week,
John
John Ashcroft
Follow on Twitter @jkaonline, or join me on LinkedIn or Google+.
Check out the pro.manchester blog post for regular updates, moving soon to a new site, johnashcroft.co.uk thanks to Tom Glass and the eword.

The wrong option : In a liquidity trap - say no to more QE on planet ZIRP

Last week, the Governor of the Bank of England said This is the most serious financial crisis we have seen since the 1930s, if not ever. Well is it? Just like the 1930s the UK is in what we call a liquidity trap, a situation where monetary policy is unable to stimulate the economy either through lowering of interest rates or increasing money supply.   

Liquidity traps occur when rates are reduced to the zero bound or thereabouts and cannot be reduced further. In real terms UK rates (base rate minus inflation) are negative 4% plus.

The liquidity trap is compounded when expectations of adverse events, either deflation or in the current situation, a lack of aggregate demand, are manifest. Firms are loathe to invest, households are constrained to spend, government spending is limited by a desire to resolve a fiscal debt crisis.

In the UK, the first round of Quantatitive Easing or asset purchases was essential to improve liquidity in the banking system at a time of crisis. 

Inter bank lending was dessicated, LIBOR spreads were extending. The central bank was becoming not just the last lendor of resort but the only lender of resort. Action had to be taken to inject cash into the economy by undertaking a series of asset purchases predominantly gilts. The programme of some £200 billion was equal to 14% of GDP it had to be done.

This is not an argument for more asset purchases, for the exercise came at a price. QE forces up bond prices, pushes yields lower, punishes savers, places more pressure on sterling, increases import prices, leads to higher inflation, greater pressure on real incomes, a reduction in household spending, actually reduces demand and leads to lower growth.

Ten year gilt yields have fallen to 2.4% and thirty year gilt yields have fallen to 3.4%. But what does that mean? Gilts are mis priced, the real risk return on ten year gilts is negative. Effectively investors are paying the government to hold bonds.

Policy makers assume that lower interest rates at the longer end of the curve will lead to a higher level of investment. This is not the case. Any return on investment or payback calculation is a function of cash flows from a determined demand horizon. 

Cost of capital does not feature in the basic investment model. Until the uncertainty about the forward level of demand and growth is cleared, investment plans will remain on the shelf. 

The Bank of England suggests that QE increased GDP by between 1.5% - 2.0% but also led to an increase in inflation of between 0.75% and 1.5%. [Joyce M et al in the September Bank of England Quarterly Bulletin.] This is a highly speculative analysis.

If it were right, this would mean, that at best, the QE2 round of £75 billion would kick growth by just over 0.5% but increase inflation by over 1% on a pro rata basis according to the banks own figures.

One cannot be entirely confident in the bank’s hypothesis. QE led to a fall in gilt yields as a first round effect but thereafter the relationship between QE and the effect on growth and inflation is tenuous. The argument for further QE is intellectually weak and at best the potential economic impact minimal. The risks outweigh the return.

In fact I would argue that a further round of asset purchases merely oils the liquidity trap, digging a deeper hole, increasing the inflationary impact and reducing growth as investment plans are reigned back and household incomes are placed under greater strain. Sometimes the correct action is to do nothing, especially when it is more of the same toxic solution.

In 2008, writing about a zero interest rate policy, I wrote “Welcome to planet ZIRP. Unfortunately, we do not have a handbook, or fully understand the terrain. Our process of quantatitive easing, the plan to helicopter money may work but as a fire fighting option, it may be like dropping water into a desert, such are the fissures in the financial system." We just don’t really know what is achieved. So in the meantime we should say no to more QE and or asset purchases.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

 

Sunday Times and Croissants - CEO's weekly update 9th October

There is something special about Sunday morning, the Sunday Times, hot croissants with honey and butter, excellent. Headlines, am shocked by news of a UK Saudi bribery scandal in the defence industry, of all places! Surely, this should by subject to a D notice and kept off the front page. 

No such notice for Doctor Fox, who will be called into the headmasters office on Monday for conduct unbecoming. His best man had printed some joke cards which suggested he was an advisor to the defence secretary. Even more shocked. 

David Smith writes on QE and credit easing. Both David and the Sunday Times leader speak against more asset purchases at this time. We are in agreement but DS is slightly more positive about the possibilities for credit easing. Of this more later. 

Economics news this week, the GDP figures are revised down for the second quarter, the good news - the downturn in 2009 was 4.5% not 4.9% and 2007 was even better than anyone realised. Comforting. 

Producer prices head in the wrong direction as September output prices increase to 6.2% and input prices increase to 17.5%. Very strange, concerned about deflation, the Bank of England announced a further round of Asset Purchases as much as 75 billion sterling. What is going on?

Last week, Andrew Tyrie, the Chairman of the Treasury Select committee claimed he was unimpressed by the Big Society and the lack of a growth strategy, saying economic policy was inconsistent, incoherent, contradictory and at times irrelevant. 

At the party conference, Tyrie was mugged by Steve Hilton, and given the hair dryer treatment in a side room. Tyrie emerged claiming, Big Society is the best thing since Bread Sliced and feeling a lot more positive about the growth strategy. As for the Osborne speech, Tyrie exuded praise. It is a huge step forward, a speech focussed on growth for one of the best economies in the world. What did Hilton say - if only he had been in the England dressing room at half time. 

Watching the Osborne speech, at times the Chancellor appeared to stare at the auto cue with a fair degree of incredulity. Such is the danger of auto cue when ideas can be added at the last minute, even the Chancellor appeared bemused by some of the material. 

This must have been the case with the  idea of credit easing. This is a new idea which no one, including the Chancellor, knows anything about. The project appears to suggest SMEs will issue long term bonds with a low coupon, packaged into a series of CDOs, AAA rated by Standard and Poors, bought by the Treasury, sold to the Bank of England and placed off balance sheet in a structured investment vehicle backed by a RMBS (Rumours of Monetary Backing Somewhere) then written off over thirty years.

As one excited delegate explained on Newsnight, there is a company in my constituency that has been turned down ninety times for funding, I am so pleased - now they will be able to get some money, thanks to the new initiative from the Chancellor of the Exchequer. Excellent.

Latest : The Treasury is studying the proposal to see how best to morph into Goldman Sachs or reverse into the Lehman corpse. Credit easing - call it credit fantasy. How can this feature in the November statement? 

Back to the day job, Monday, internal meetings in the morning, across town, bumped into Simon Walker, the new director general of the IOD. It is his first day in the job. I am on my way to meet with Mike Emmerich, Mike is very pleased with the 50 million pound Graphene funding announced by the Chancellor, in which the New Economy had a guiding hand. Mike explains the Graphene manufacturing process involving a food blender, four pencils and two dodgy acids. It seems straightforward. Did not realise Mike was a potential nobel prize winning physicist but he obviously is.

Tuesday, a meeting with Paul Johnson from the Institute of Fiscal Studies, Paul will join the list of great speakers for the business conference in March. In the afternoon, filming with the KPMG team as part of a senior partners presentation. I am asked what does K P M G stand for. It is a trick question, I reply KPMG is a global network of professional firms providing Audit, Tax and Advisory services. 138,000 outstanding professionals many in Manchester working together to deliver value in 150 countries worldwide. Exactly.

Wednesday, I have a Business Leadership Council Transport sub group meeting, at Manchester Airport, then a meeting with Rob Pailin from RBS. Rob and I will appear before

the AGMA employment, economy and skills scrutiny committee later this month. Tom Dempster is in from the council later that day. Tom is preparing an access to finance briefing paper to be presented to the scrutiny committee.

Thursday, Paul Smith from MCR is in for coffee to discuss a series of events. Richard Jeffery calls in to talk about the Business Growth Hub. It is a huge project for Business Solutions and for the city. 

In the evening, the Institute of Directors awards dinner. Simon makes a brief speech as the new DG. I am on a great table with Clive Memmott, Geoffrey Piper, David Highams and others. Fifteen awards and a crooner later, I am heading home around midnight. Clive and I have discussed the merits of a change in title from CEO to Director General. It has legs.

Friday, I am guest speaker at the Manchester Insurance Institute Awards lunch at the Hilton hotel.  I talk about economics and QE2. It is a once in a lifetime to chance to appear more boring than the insurance underwriters group. I succeed. 

Finally, to close the working week, a quick check on Google Earth, to see if Greece, Portugal and Italy are still there, they are. I relax.

Saturday, up early for the rugby, England are out. Gloom. Tennis in the afternoon. I lose 6-3, check the biorhythms, I am on a physical high but Mary has played too well.   

Hope all is well with all, more news next week, 

John

Follow on Twitter @jkaonline, or join me on LinkedIn or Google+. Check out the pro.manchester blog post for regular updates. 

 

Sunday Times and Croissants - CEO's update 2nd October

There is something special about Sunday morning, the Sunday Times, hot croissants with honey and butter, excellent. Headlines, Cameron says sorry to women following a series of gaffes at PMQs. I am not some sexist beery bloke who goes down the pub, says the prime minister. Next week an apology to beery blokes who go down the pub, in the pursuit of the ever elusive marginal vote. 

David Smith suggests Osborne seeks solace in lessons from history. A reference to the austerity package delivered in the 1981 budget and others. The Chancellor is sticking to his guns, the lad is not for turning. This is no time to be pulling faces at my economic strategy, a sort of you gurn if you want to headline!

Economics news this week - very thin on the ground. Nothing from the Office of National Statistics for ten days, sulking over a reprimand, presumably, for messing up the construction stats release. Apparently the second quarter figures included March, April, May as opposed to the more conventional, second quarter analysis. It is easily done but no wonder there are so many post hoc adjustments to the data sets.

The Labour party conference came and went. Ed Milliband launched the latest in the Predator film series with a new blockbuster - Predators and Producers. Producers good, predators bad. So much for competition theory, he should be told, we are all predators, fast becoming scavengers, in evaporating markets. Editor Note - asset strippers - those in pursuit of undervalued under leveraged assets - those were the days.

The Labour attacks on government policy were so thin that Andrew Tyrie, the formidable Chairman of the Treasury Select committee decided to help out. Tyrie is unimpressed by the Big Society and the lack of a growth strategy, suggesting economic policy is inconsistent, incoherent, contradictory and at times irrelevant. Who would have thought?

Tyrie has a point, why spend billions on a Libyan adventure and then try to save millions making 1000 sailors redundant?

In an interview for the Telegraph, Osborne claims “We CAN lead our country out of this”. I am shocked. Up until now number eleven had been maintaining we WERE out of it. Apparently, the problem is not in the UK but in Europe. A deadline has been set by the Chancellor to sort it, or the Europeans, can not join the November G20 meeting in Cannes.

Something did happen in Europe this week. The Germans voted to extend the size and scope of the bail out fund to 440 billion euros. So far so good, just another trillion or two to complete the job. Despite the sceptics, the world needs the euro and euroland. No one gets in or out. The problem with the Germans, they do not have a word for fait accompli.

In the 1960s, the world shuddered as the super powers moved to nuclear war allegedly over Cuba. Contrarians, believe the real Krushchev objective was to remove US missiles from Turkey. International strategy was dominated by a MAD strategy. The concept of Mutually Assured Destruction, in which conflict between opposing sides would effectively result in the complete, utter and irrevocable annihilation of both the attacker and the defender. A MAD strategy hovers over Europe, as the only option to resolution of the current crisis.

Back to the day job, Monday, internal meetings in the morning and in the evening the  Insider Leaders Dinner at the Lowry Hotel. Fred Dunn interviewed by Michael Taylor - great session. On a good table with Richard Hughes from Zeus Capital and Jennie Johnson from Kids Allowed.

Tuesday, I am published in The Times - Business Insight. My article on why regeneration is more than a phase leads the front page. For those who missed it, check it out on the blog. Check also - Why more QE is the wrong policy option - also on the blog.

Later, preparation of the Business Conditions Survey report published later in the week. Then, write up of of a research proposal for AGMA on the shape of the financial and professional services sector in 2020. Head hurting, escape to play tennis with Mary in the afternoon.

Wednesday, planning meeting for the pro.manchester Business Conference 2012. We have a great line up of speakers again. The formal launch begins in October but Kirsty Wark and Gavin Esler return to the Point on the 1st March 2012, reserve the date now.

Thursday I am in Bolton for a meeting with Rob Campbell Pro Vice Chancellor of Bolton University. Rob describes the challenge of developing a higher education financial strategy in the current climate, as rebuilding a boat, in which one is sailing, through stormy seas. Excellent!

This is followed by a Marketing Manchester board meeting in Bolton Town Hall - the artillery suite. Despite the venue, no explosions in the meeting, all passes well, a great team, doing a great job, a solid board report and financial analysis.

Friday, an editorial meeting for SME club and lunch with Chris Barry from Business Desk North West. Chris has always been a staunch ally of pro.manchester and it was great to have a chance for an informal catch up. Rosso again, forty quid for two. Cool.

Finally, to close the working week, a quick check on Google Earth, to see if Greece and Germany are still there, they are. I relax.

Saturday, up early to watch the England Scotland game. It is a win, bring on the French. In the afternoon - tennis, it is a draw, six all, singles with Mary. I point out my biorhythms are rock bottom, all at once. (I know because there is an app for that).

Hope all is well with all, more news next week,
John
Follow on Twitter @jkaonline, or join me on LinkedIn or Google+.
The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

Why more QE is the wrong policy option..

The UK is in a liquidity trap, a situation where monetary policy is unable to stimulate the economy either through lowering of interest rates or increasing money supply.  Liquidity traps occur when rates are reduced to the zero bound or thereabouts and cannot be reduced further. In real terms UK rates (base rate minus inflation) are negative 4%.

The liquidity trap is compounded when expectations of adverse events, either deflation or in the current situation, a lack of aggregate demand, are manifest. Firms are loathe to invest, households are constrained to spend, government spending is limited by a desire to resolve the debt crisis.

The first round of Quantatitive Easing was essential to improve liquidity in the banking system at a time of crisis. Inter bank lending was dessicated, LIBOR spreads were extending. The central bank was becoming not just the last lendor of resort but the only lender of resort. Action had to be taken to inject cash into the economy by undertaking a series of asset purchases predominantly gilts. The programme of some £200 billion almost 14% of GDP had to be done.

This is not an argument for more asset purchases, for the exercise came at a price. QE forces up bond prices, pushes yields lower, punishes savers, places more pressure on sterling, increases import prices, leads to higher inflation, greater pressure on real incomes, a reduction in household spending, reduces demand and leads to lower growth.

Ten year gilt yields have fallen to 2.4% and thirty year gilt yields have fallen to 3.5%. Policy makers assume that lower interest rates at the longer end of the curve will lead to a higher level of investment. This is not the case. Any return on investment or payback calculation is a function of cash flows from a determined demand horizon. Cost of capital does not feature in the basic model. Until the uncertainty about the forward level of demand and growth is cleared, investment plans will remain on the shelf.

In 2008, I wrote :  Welcome to planet ZIRP. Unfortunately, we do not have a handbook, or fully understand the terrain. Our process of quantative easing, the plan to helicopter money may work but as a fire fighting option, it may be like dropping water into a desert, such are the fissures in the financial system."

In 2004 a Bernanke paper  “Monetary Policy Alternatives at the zero bound” concluded :
“Despite our evidence that alternative policy measures [QE} have some effect, we remain cautious about relying on such approaches. We believe that our findings go some way to refuting the strong hypothesis that nonstandard policy actions, including quantitative easing and targeted asset purchases, cannot be successful in a modern industrial economy.  The effects of such policies remain quantitatively quite uncertain”.

The Bank of England suggests that QE increased GDP by between 1.5% - 2.0% but also led to an increase in inflation of between 0.75% and 1.5%. [Joyce M et al in the September Bank of England Quarterly Bulletin.]

At best, QE2 round of £50 billion would kick growth by just 0.4% and inflation by over 1% on a pro rata basis according to the banks own figures.

One cannot be entirely confident in the bank’s hypothesis. QE led to a fall in gilt yields as a first round effect but thereafter the relationship betwen QE and the effect on growth and inflation is tenuous. The argument for further QE is intellectually weak and at best the potential economic impact minimal. The risks outweigh the return.

In fact we would argue that a further round of asset purchases would merely oil the liquidity trap, digging a deeper hole, increasing the inflationary impact and reducing growth as investment plans are reigned back and household incomes are placed under greater strain. Sometimes the correct action is to do nothing, especially when it is more of the same toxic solution.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.