Archive for November, 2004

Given the comments here about the general press complacency toward the future interest rate environment, comments reported today from the Bank of England’s chief economist Charles Bean offer further pause for thought. There is more than a faint echo of Greenspan’s warning last weekend, and the BBC’s Evan Davies woke us this morning reporting on the subject.

The story, if there was one, was not whether house prices would drop and by how much, or what would be the impact on consumer spending, and where would interest rates go. The key phrase, from this vantage point, was the emphasis on “considerable uncertainty.” I take this as a sign of a very worried Bank of England.

The dance of pundits, which allows no one to sit it out, is clearly arranging itself to show fairly uniform expectation of trouble ahead in UK housing. Between the lines now this “great uncertainty” indicates a general knowledge that things have turned, and are moving quickly. Thus everyone must get their ducks in a row to reflect the emerging reality.

Many who might have tried to predict a turn, in the way Capital Economics boss Roger Bootle did over a year ago, prefer to hug the neutral consensus rather than be proved wrong consecutively on timing. They know the risk has gone now, and are prepared to tell us what will happen in the future, because it has already started to happen.

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Ruminating on a willow tree he had planted as a younger man, its explosive growth over his lifetime and now its demise, playwright Arthur Miller observed on Wednesday in interview with the BBC’s Alan Yentob that things that grow very quickly also tend to die sooner. This is perhaps a good lesson for business.

Fast growth, particularly in our breathless high tech, winner-takes-all economy is what we are all looking for.

Miller’s experience spans the century. He saw his own father, a factory owner, have the life sucked out of him by the 1929 Wall Street crash and subsequent depression. Interestingly he observed that it was not simply the financial loss that characterised the pain of the era, but the generalised loss of hope.

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Alex Ferguson, the controversial Manchester Utd football manager, celebrated 1000 matches at the club yesterday with a notable win in Europe. But the interesting observation from some pundits was that, but one for one goal in 1990, he might have been sacked and the legend would not have been created, at least not at ManU. Ferguson arrived at the club in 1986, but like his two predecessors initially failed to deliver the particular success the board and fans expected.

The goal turned the tables and allowed United to win the FA Cup that year. As the official history on the Man United website puts it: “Fergie’s first FA Cup, achieved after a replay against Crystal Palace, seemed at the time to be a stand-alone success, one that possibly saved his job after another poor season in the League. But nine years later, it seemed that Lee Martin’s winning goal against Palace lit the fuse for an explosion of unprecedented success.”

Ferguson had already demonstrated considerable success as a manager in Scottish club Aberdeen from 1978. These long tenures are worth noting. But perhaps the most difficult issue for any board or manager is to determine whether short to medium term losses are a result of faulty process and whether to ride out the storm. Ferguson’s case is clearly one where the future success was generally not predicted, although his previous track record might have given some reasons for hope.

Football is particularly difficult as the simple scoring system lends itself to more lucky outcomes than say tennis, and yet of course it is a game requiring consummate skill. You can see this written in the faces of all football managers and a good many fans. The possibility for euphoric, against the odds reversal perhaps explains its enduring appeal across the social spectrum, in contrast to games like tennis and rugby where mismatches in talent more rarely produce unexpected outcomes and are more appealing to those higher up the pecking order.

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Expect no mercy from central bankers, who may themselves have played a considerable part in messing up the world economy. Alan Greenspan, the man who decides US interest rates (and by implication those of the rest of the world) caused dollar instability last week with warnings of interest rates rises to come, which should send shivers down the spine of anyone a little overextended financially with a mortgage, let alone a vulnerable job or business.

The Financial Times on Saturday said “Mr Greenspan was unequivocal about world interest rates, saying rises “have been advertised for so long in so many places that anyone who has not appropriately hedged his position by now is obviously desirous of losing money.”

This is a roundabout way of saying that a fool and his money are soon parted. True, if you pay attention, there has been plenty of indication that rates could rise. However, it is in the nature of national news that short-term editorial weight is given to domestic factors and much less emphasis on the uncertainties of international economic prediction. So the currently subdued UK inflationary environment and the turn in the housing market that the Bank of England wanted to engineer have been enough to create a broad press consensus that interest rates have now peaked, and that the economic future is benign enough. Indeed, there’s a general hope that housing will pick up in the spring. The steady rates outlook was priced into the professional credit markets.

At best, this is what consumer borrowers will hear if they listen. The people who sell credit, which in effect includes the likes of estate agents, have no interest except in presenting the absolute normality of large purchases like houses, even though each prospective buyer is involved in an asset purchase as risky as any stock. This is the problem for the private house buyer. They cannot be expected to have the sophistication of an investment banker, or will their jobs, education or life responsibilities make them aware of the importance of Greenspan’s and Mervyn King’s utterings. The press could be expected to do better, but they won’t.

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