Archive for September, 2004

In an unusual departure, BBC News’ Evan Davies shows his colours in a deliberately biased piece online. He explains why he wants a fall in house prices. The bias might upset some, but he explains why, as a homeowner of a certain age (like most of us), falling prices are better than rising ones. This is counter-intuitive. But of course, if your intention is to trade up, or buy for the first time, rising prices make it worse. That is not always the way people think. They see their house/flat rise in value (along with the market) and it reassures: they feel richer, indeed cleverer, and often ready to borrow against the increased value. Older people looking to trade down, and people emigrating benefit more from houses rising, as the proportion of their equity has increased. That bigger or more desireable houses are more expensive is academic. Davies, as per my previous post on the volume of house price measures, provides a shorter term reflection on the impact on this proliferation of information. When there were just two measures, it was much harder to determine if the market direction was shifting. Now, he points out, with so many measures indicating the market has cooled and may be falling, the information is a bit more statistically robust. Davies is one of the smartest people the BBC has, and makes business and economics accessible to all with his entertaining style, which never quite patronises. In contrast, I can’t accord the same respect to prize business editor, Jeff Randall, hired by Greg Dyke at great expense and with much pomp. A sensible head of news would make Davies the onscreen head of business and economics, not least because I sense that Davies understands behavioural finance implicitly, if not even explicitly.

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Companies that promise to grow profits by more than 10 pct each year worry me, because, as Phillip Coggan has pointed out (to me at least in the FT some years ago) if economies are growing in low single-digits, it is indeed a confident (perhaps foolish) CEO who declares s/he and his/her firm are going to be so way above the average. It may be a simple understanding how to satisfy investors’ behavioural instincts i.e. to promise regular above average gains, and then smooth the results until circumstances insist on a regression to the mean, when all the bad news gets bound up in a one-off profits shock. (Remember it is the frequency not the scale of losses/ gains that disappoints/makes us happy.) Perhaps Unilever’s announcement that it will fail to reach its double-digit earnings target reflects the culmination of such a strategy.http://www.economist.com/business/displayStory.cfm?story_id=3222955&tranMode=none I supsect that what has happened with Unilever since 2000, when their path to growth strategy was formalised, was the strategy was created on the basis of what result they wanted to achieve (ie the growth target) rather than evolving a company that was capable of sustained above-average performance. You could argue that setting a high target focuses staff minds, but it can also create a moral hazard by distort redruitment and promotion dynamics and the flow of information when things start going wrong. In any event, the fast moving consumer goods business does not get any less competitive, so suggesting you are going to carve out excess profits may also be a greater invitation to competitors to attack. Unilever’s problems can probably only get worse as the food companies start to come under attack in the same way as big tobacco. Banning smoking in public places is an interesting case study in how quickly public tolerance for a particular vice can reverse. When Mike Bloomberg (more on him later) banned smoking in public places in New York, there was some outrage and ridicule, but now recently Ireland banned it in pubs and there is talk of similar bans in the UK. With two thirds of UK citizens either overweight or obese, it does not take a conspiracy theorist to determine that the profitability of the food companies correlates with the calorie consumption of the population. The companies are under pressure for their use of salt and sugar, both appetite stimulants. Obsesity will increasingly be seen as an issue impacting the public purse through spending on health services and long-term disability allowances. It will only be natural for the government to look to increase regulation and tax on the source of the problem (the foods.) The public pressure on the food companies is already noticeable, and they are trying very hard to slow the progress to defend profitability. You will only need a few studies to show the real quasi-addictive impact of sugar and salt and some connection back to the food technicians’ implicit understanding of this (particularly in relation to children) to have enough public outcry to turn the food companies into the bete noires the tobacco companies have become. Less sugar and salt will ultimately mean less calories consumed. Hiking prices does not seem to be possible.

Unilever retiring co-chairman and strategist Niall Fitzgerald attracts interest because he was heralded as the safe pair of hands to save Reuters. He replaces chairman Christopher Hogg, who presided over the appointment of troubled CEO Tom Glocer (with unprecedented remuneration package), and a collapse in share price from more than £16 to less than £1. (Hogg is also Chairman at GSK, source of similar shareholder consternation in relation to CEO pay.) Fitzgerald is touted as a man who clearly understands marketing, something which definitely needs improving at Reuters. However, it may be wise to remember the cautionary words of his antecedent at Unilever Lord Leverhulme who was famously quoted saying “I know that half of my advertising budget is wasted. The problem is that I don’t know which half.” For myself, I am not sure if there are that many similarities between FMCG and financial information. Having looked at it the other way academically, the marketing concepts of the FMCG world felt alien coming from the financial information world. That said, by far the most successful of the data vendor and news services in recent years has been Bloomberg, whose marketing has probably outstripped the technical excellence of its products. Bloomberg was very focussed on the user/consumer of the information rather than the buyer (IT manager), and made sure his name was everywhere. It was also successful enough to get him elected mayor of New York. Reuters took for granted both the end user and the buyer. The Reuters brand has deep roots so there is quite a bit to play with there. Interestingly, Glocer when he announced his strategy after appointment, also promised double-digit earnings growth, a promise that appeared (sensibly) to have been removed last time I looked.

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The decision to read the Economist from head to tail each week 10 days ago has been a partial success. The two blights were lack of time/discipline and the failure of the Royal Mail to deliver this week’s copy. No matter, there is an online version, but that is so much the harder. However, I did chance across their story on Unilever, which I would only have read this week if I had started from the back if the copy had arrived. More on that in another post. The first observation I would make is that a good number of articles I would not normally have read I heard the BBC following up, often up to a week later. This is not empirical, but I suspect the Economist is setting a lot of editorial agenda at the BBC. Given their respective scale and audience reach, this does strike me as rather odd. My suspicion, based on limited knowledge of working cultures, is that the Economist, though small, is highly collaborative, while the BBC, despite Greg Dyke, is definitely not. This was one of the observations of the Lambert Report into the BBC’s round the clock news channel News 24, and seemed to be writ large in the Hutton examination of the Kelly affair. Sacked Today editor Rod Liddle (now disgraced by his extra-marital activities), who hired Gilligan, also has given a description of a very emotional and immature culture of editorial decision making under his own tenure. I’ll return to the theme of Economist agenda setting with examples as the test continues. I think it is not just the BBC that pores over each new issue.

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John Kay, FT columnist and renowned economist, is someone I tend to follow. Having read so many of his columns over the years, he must have had quite a profound although unquantifiable impact on my own thinking. However, in today’s FT I have to differ with his rather complacent point of view about demographic change, namely the impact of the ageing baby boomers http://news.ft.com/cms/s/b5ea6e52-10b8-11d9-a73b-00000e2511c8.html. When US Federal Reserve Board member Edward Gramlich addressed the Euromoney Bond Congress in February he remarked how few commentators were saying much about the fact that the first of the baby boomers would start retiring in 2008, and that they would become eligible for state medical benefits four years after that. The impact on US government spending would start to escalate with an inevitable impact on taxation and thus economic activity. If top central bankers start pointing to problems ahead it is a little complacent for Kay, months later, to suggest that such demographic shifts will take care of themselves. The doom mongers can be ignored, he says. If I recall correctly, Gramlich was pointing some fingers at the politicians, and not least because of concerns about the government deficit. Since then there has been a bit more in the press, and clearly the UK pensions crisis is generating awareness of the issue, but as far as I am aware, these are not central issues in the US election campaign. For society to respond to such challenges, it must be aware of them. It’s just not good enough to say it will sort itself out. It will be someone’s job eventually to sort it out. And as individuals, it pays us to be forewarned so that we can at least start to make the right judgements about how to prepare. We also need to highlight this issue for it represents business opportunity. Kay is a resource and capabilities man. These cannot be sensibly developed without a keen eye on the “far environment,” as busines strategists and marketers like to describe it. Meanwhile, the problem of baby boomer retirement has been made worse by the asset-based view of the world that the boomers have promoted, so that we have all become convinced that it is through the accumulation of speculative investments (tech shares and now housing), rather than through income and risk-free savings that our futures will be assured. The unravelling of this cultural conceit will be necessarily painful. The sooner the collective mind is focussed on it, the shorter will be the period of pain. Then, as Kay points out, the change will be absorbed.

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Blogs and bias

24Sep04

A bit of a homerun in the FT today http://news.ft.com/cms/s/d70a0844-0d94-11d9-a3e1-00000e2511c8.html talking of weblogs and bias in the US, how this is affecting politics and the reporting of news. Essentially this is a story about the fragmentation of the media and the pressure on network TV journalism to retain the attention of the public. But there is a more worrying side in relation to the observation by John Allen Paulos about social dysfunctions and the mass media and the phenomenon of phase transitions–the point that something will come into existence once sufficient connections have been made, and then its appearance, once unpredictable, becomes routine. The internet, through blogs, but also through bulletin boards and chat rooms, provides active destinations for people with particular prejudices to find constant confirmation and reinforcement for their possibly erroneous views. This is the confirmation bias that my own experiment with the Economist is designed to challenge, admittedly though the Economist itself may be just such a location for me. (I think they challenge my biases often enough for this not to be a big worry, and using one publication once a week provides something that feels a bit empirical.)

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