Posts Tagged ‘Business’

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There is good and bad side to a currency falling in value. A cheaper currency is bad news for importers. It is bad news for consumers who want to pay as little as possible for the goods they buy, and for their holidays abroad. A falling currency can be bad news for inflation. But there is a flipside. It can at least hand exporters a massive terms of trade advantage. A country that needs to see exporters drive growth surely needs a cheaper currency. So why is it that the UK seems to have the bad side, but very little of the good side? A new report seems to provide an answer.

Between Q3 2007 and Q1 2009 the effective exchange rate of the pound fell 25 per cent. Inflation rose. Wage inflation didn’t, which left workers worse off. But the UK’s balance of trade in goods and services was largely unchanged. Why didn’t exports rise?

The Office of National Statistics has come up with four possible explanations.

Number one: Global supply chains. The argument runs like this: global trade has become so integrated, with supply chains being so closely in alignment, that it is very hard for a country that sits in a supply chain to suddenly start selling more goods just because prices have fallen. The ONS put it this way: “If multinational companies have an international supply chain structure, which involves moving goods and services between a number of countries before a final product is produced, it is difficult to change this structure in the short term in response to an exchange rate movement.”

Number two: Financial shock and composition of trade. This is a nice simple argument. The UK relies on financial services. In the aftermath of the 2008 crisis, financial services took the biggest hit, therefore UK imports were adversely affected.

Number three: Price effects. The ONS put it this way: “Domestic exporters – whose goods are relatively less expensive as a result of the depreciation – may choose to increase profit margins on sales to overseas customers, rather than passing on the full benefits of the exchange rate change.” There was another factor: oil. As the pound fell, the price of oil hit UK exporters.

Number four: Effect of downturn on main trading partners. This was surely the main problem for the UK. Sure, the pound was cheap, but our main trading partners – the US and the Eurozone – were in recession or even depression for many of the last few years.

So what can we take from all this, and say about what will happen to the UK next?

It does seem that the main reason why the falling pound did not lead to rising exports was short term in nature. The UK is slowly exporting more outside the Eurozone, but our exports to say the BRICS, were so tiny that it has taken time for the rise in exports to become noticeable. But the fact is that for the last couple of years export growth to China, for example, has exceeded import growth.

Ditto regarding integration within the supply chain. If it is the case that multinationals find it difficult to change their supply chain structure in the short term, this does not mean they cannot change it in the long term. The real hope, however, lies with re-shoring. If it really is the case that companies are beginning to return their manufacturing closer to where their customers are, that will lead to a slow, bit by bit improvement.

In other words, a cheap pound has not benefited UK exporters that much up to now. But that does not mean it won’t do so over the next few years

© Investment & Business News 2013

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According to a Halifax report, new mortgages are at their cheapest level in 14 years. Mortgages taken out during Q1 accounted for just 27 per cent of borrowers’ net income. In 2007 the ratio was 48 per cent; over the last 30 years the ratio was 36 per cent. Yippee to that.

It is just that…

Remember interest rates are at a record low. They are hardly likely to fall, but they are likely to rise. The Bank of England tries to re-assure us by saying rates are unlikely to go up until 2016. Alas, most new borrowers will not be repaying their mortgage in full between now and 2016. Who knows what rates will be in five years’ time, in ten years’ time or in 20 years’ time? It is anyone’s guess.

Remember that the markets have concluded that rates are rising sooner rather than later. The yield on UK government bonds is now at a two year high. Mortgage costs may rise in their wake.

Above all remember this. Sure, over the last 30 years mortgages on average took a higher proportion of new borrowers’ salary than they do now. But over the last 30 years wage inflation was ever present. Who cares about high borrowing to income ratios when incomes are rising so fast?

It is not like that now. Incomes are no longer rising fast, real incomes are falling. Those who celebrate the low cost of mortgages seem to have forgotten this.

© Investment & Business News 2013

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By one very important measure, stocks are set to crash. This will not be any old crash, but a really major one – as significant as 1929, 1987 or what we saw in 2000 and 2008. And the measure that tells us this is not some obscure ratio, familiar only to academics locked away in ivory towers; it is the ratio that many of the world’s top investors say is the single most important ratio they use to judge whether or not stocks are overvalued. Yet despite this very powerful evidence to say we are set to see a crash, many say that this time it is different. Are they right this time?

The measure that looks so dangerously elevated is called the CAPE – or the cyclically adjusted price earnings ratio. It is calculated by taking the current capitalisation of stocks, and comparing it with average earnings over the last ten years.

For US stocks right now the CAPE is 23.8. The long term average is 16.5. Ergo US stocks are overvalued. And although stocks listed in London are not as expensive, the markets across the world tend to follow the US. If US stocks crash, others will follow, regardless of fundamentals.

Bullish defenders of US stocks are saying: “This time it is different.” And they are greeted with derision. There is one golden rule in investing. When people say: “this time it is different,” sell.

It is just that when you think about it, of course, US earnings over the last ten years have been low; the US economy has suffered a very nasty recession. The CAPE, they say, is distorted by the unique, and never to be repeated experience of 2008.

Besides, add the bulls, the CAPE is not the only measure. Look at current PE ratios, look at stock values to net assets, look at a myriad of other measures, and stocks don’t look that expensive at all. They can even turn the “this time it is different” argument back on their critics, and say: “but by a long list of measures stocks are not expensive, why do you think they will crash?” To the bears they might say: ”Are you saying this time it is different?”

But then we get a counter argument. Sure, the US has suffered one mother of a recession, but corporate profits did surprisingly well. The truth is that corporate profits to GDP are close to an all-time high. The argument continues, if the ratio returns to its historic average, earnings will fall, even if GDP rises.

And finally just to retort to that argument about profits to GDP being high and thus they will fall, some might say: “Yes it is true that profits to GDP are exceptionally high, but this has been a bad thing, and it may have been a factor that triggered the crisis of 2008.” To explain this argument, see it this way: the economy needs demand to rise for growth to occur. If profits to GDP are rising and wages to GDP are falling, demand can only occur if people borrow more. Hence high levels of debt were a symptom of rising profits squeezing wages. If we see the ratio return to average, that will be good for the economy, and in the long run, what is good for the economy is good for company profits.

So where does that leave us? If profits to GDP fall, that may be negative for stocks in the short term, but positive in the long term. If profits to GDP stay where they are, that may lead to earnings rising with the economic recovery, justifying stock valuations, but this may not be so good in the long run.

© Investment & Business News 2013

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So how good a driver are you? Chances are you think you are better than average.

Psychologists have investigated it. A fellow called Svenson questioned 161 students in the US and Sweden. He found that 93 per cent of the US students and 69 per cent of Swedish students thought they were better than average drivers.

The UK government is coming down harder on driving misdemeanours. It is remarkable how many people agree. We all have our pet hates. Drivers who tend to think the inside and outside lanes of motorways are for everyone else also tend to hate tailgaters. While drivers who like to intimidate other drivers by moving right up to their bumpers and flashing their headlights aggressively seethe over those who hog the middle lane. We support the new tougher stances on driving irregularities because we think they apply to someone else.

Yet where would we be without the illusion of superiority? How many entrepreneurs embark on a business venture because they are convinced they can do it – whatever it is – better than anyone else. Without that sense of self-belief they might never try, and the occasional spectacular success –picked out, perhaps by the force of randomness – would never happen. Maybe the predominance of the illusion of superiority explains why the US is more entrepreneurially minded.

It is just that when chance favours us we tend to see it as evidence that our initial feeling of superiority has been confirmed – and we never admit to the illusion.

© Investment & Business News 2013

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Imagine you asked your bank for a business loan. Your bank manager – if indeed there are still members of the genus ‘argentaria procurator’ (that’s Latin for bank manager) left – might ask for the spreadsheets. If they revealed a big fat salary for you, the ‘procurator’ might say: “My Dear Homo Sapien, it appears you expect the bank to take all the risk.” You may well have found you were out on your ear (pércipe) before you could say “ego odi bancarii” (I hate bankers).

Imagine, with the help of your bank, you were trying to arrange one of those MBIs (management-buy-in), MBOs (management-buy-out) or indeed a BIMBO (buy-in-management-buy-out). You would be expected to chip in an amount roughly equal to your annual salary. Nassim Taleb would refer to it as “skin-in-the-game”. Shakespeare’s Shylock might have called it a “pound of flesh.”

Barclays is raising money to bridge a shortfall in its capital ratio. So far we have heard not a dickey bird about how management at the bank may contribute; not a hint about whether this year’s bonuses might be in the form of shares contributing to the fundraising.

Some might respond by saying “nam hypocritae.”

© Investment & Business News 2013

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The problem with electric cars is that while they might save petrol, the cost of buying the car in the first place is so high that it is very hard to come up with an equation which shows that buying such a car makes economic sense for the individual purchaser. As far as the environment is concerned, the jury is out on whether electric cars really make a difference. They still need energy; it is just that the energy is generated centrally at power stations, rather than in the car’s engine as it burns fuel.

Then there are renewables. The problem with them is that they only work under certain conditions; wind turbines are not very effective when the wind is becalmed. Solar power isn’t very effective at night time, and is less effective on a dark and miserable day. As for domestic users, renewable energy comes with a high start-up cost, and it takes years to get your money back via savings on energy. But add it all up, electric cars and renewables and throw in a third ingredient, – more about that in a moment – and suddenly the story changes. And since the car seems so very impressive, the new BMW i3 is a good place to start.

The new BMW i3 has a number of very interesting unique selling points. For one thing it has slightly longer range than most electric cars – 80 to 100 miles as opposed to 75 to 80 miles. For a second thing the car also comes with an option to include a 34-horsepower rear engine, which doubles the range. For a third thing the car is less expensive relative to comparable BMWs than other electric cars compared to their comparable petrol models. Fourthly, the car can be fully recharged in three hours.

But supposing the electric car of the future is recharged primarily by renewables.

The problem with wind power is that it only works when it is windy, but when it comes to charging a car-up overnight, who cares if it’s windy for just a few hours, as long as the car is fully charged in the morning. Providing energy is distributed intelligently, with intermittent energy sources used to provide energy for products that don’t need recharging at specific times, such as cars being recharged overnight, or storage heaters, and so the intermittent nature of renewables matters less – it still matters, but a lot less than before.

The start-up costs of renewables are such that it can take years before households get their money’s worth. But if all of a sudden electric cars are thrown into the mix, then suddenly the time it takes to cover the start-up costs is brought forward by a long margin. Many households spend far more on petrol for their cars than they do on domestic energy.

And now we turn to the third ingredient. If you are a regular reader here you may have guessed at that already. It is called Moore’s Law. Not Moore’s Law in its literal sense relating to the number of transistors on intergraded chips doubling every 18 months or so, but rather as a metaphor for certain types of technology changing rapidly.

The point that critics of both electric cars and renewables forget, is that their cost is falling rapidly, and their cost effectiveness is improving all the time. And just as was the case with silicon chips, the more we make use of this type of technology, the faster this technological progress occurs.

At the moment, electric cars are still primarily the domain of early adopters. Renewables need subsidies to give them a kick-start. Critics say such subsidies distort the market. But they are wrong. The market is lousy at pricing-in technological progress; it is lousy at allowing for deeper forces at play, such as peak oil and climate change.

© Investment & Business News 2013

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It is kind of assumed that savings are good, debt is bad. If that is so, then there has been good news from the EU and bad news from the UK. In the EU savings ratios are rising, according to recent data, while in the UK they are falling. So that is EU good, UK bad. It is just that the real story is quite different, because there is something missing, and that missing ingredient is called investment.

Across the global economy savings equal investment. They have to; it is a matter of definition. GDP equals consumption plus exports, minus imports, government spending and investment. But across the global economy exports must equal imports. Drill down and look at government spending and actually it is one of two things: consumption or investment. So GDP really equals consumption plus investment.

But what are savings? By definition they are income that is earned but not spent on consumption. So by definition, savings equal investment.

But supposing we all decide we want to save more, and we all park more of our earnings in our savings account. Supposing there is no corresponding rise in investment. If this were to happen, given the equation that GDP equals consumption and investment, then either as we save more, other people borrow more, or the money we save is lost forever.

To put it another way, across the economy there is no point in saving unless this is matched by investment.

Now take the EU. According to data yesterday (30 July) in the EU27, the household saving rate was 11.0 per cent, compared with 10.7 per cent in the previous quarter. In contrast the household investment rate was 7.9 per cent in the first quarter of 2013, compared with 8.1 per cent in the fourth quarter of 2012.

Now take the euro area. In the first quarter of 2013, the household saving rate was 13.1 per cent, compared with 12.4 per cent in the fourth quarter of 2012. The household investment rate was 8.4 per cent, compared with 8.7 per cent in the previous quarter.

In short, savings ratios are rising, but investment ratios are not. This is not merely a negative development, it borders on being disastrous.

In contrast, the household savings ratio in the UK was 4.2 per cent in Q1 2013, the weakest since Q1 2009 when it was 3.4 per cent. The UK savings ratio is too low, but what really matters is not savings, it is investment.

In the UK investment remains way too low, but here is some rare good news. 2013 looks to be on course for seeing the highest levels of investment in the UK since before the crisis of 2008.

© Investment & Business News 2013

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The problem with banks lending to small businesses is that it is not often a good idea. Business loans are risky, of course they are. Mortgages are less risky because for one thing there is the property they are secured against, and for another thing there is the fact that to the people who own the homes keeping up mortgage payments is just about the number one priority. But there is a third far more important point. Businesses create wealth; mortgages don’t. And the creation of wealth is incredibly important, but also by its very nature risky. Banks have become the bogey men of the 21st century. The public hate them. The truth is, however, that small businesses, the type run by entrepreneurs and that create wealth don’t really need banks at all, not banks as they are these days anyway. They need something far more. And curiously enough the venture capital industry has just been spelling out what it is.

Barclays is on a fund raising spree. It needs to find £12 billion or so to ensure it can meet the 3 per cent capital ratio that the regulators have decided is essential. So it is raising money, selling shares, and trying to get existing shareholders on board. Of course, in an ideal world its better paid staff, the ones with big bonuses, would contribute to the fundraising by receiving their bonuses in shares rather than hard cash.

But just imagine if more than 3 per cent of its loans went bad. Imagine if the 3 per cent of the people it lent to went bust, and were unable to repay a single penny. The bank would be in rather a lot of trouble. That is why banks prefer providing mortgages, over loans to businesses. Think about that. Businesses fail; it happens all the time, so is a 3 per cent safety margin really enough?

We keep reading about how banks are providing mortgages again, but are not lending to businesses. But is that really a surprise? Banks are not geared to truly understand entrepreneurs; their business model doesn’t fit.

It wasn’t always that way and it doesn’t always have to be that way. But for as long as the principal way in which banks provide money is by charging a fixed rate of interest, which provides the same return regardless of the company being lent to (whether it turns out to be the next Google, a business growing at about 0.0001 per cent year, or a company that fails outright), the most a bank can make for backing such a business is always the same and is actually quite small. The most it can lose is… well it is everything it lent.

If banks were remunerated in the form of share of profits, so that they benefitted from the upside as well as losing out from the downside, it would be a different matter.

It was not always thus, of course. There was a time when local bank mangers understood local businesses, and even if they couldn’t provide funding they might have known someone who could.

Back in November 2008, Edmund Phelps, a former winner of the Nobel Memorial Prize in Economics, said in an interview with ‘Spiegel Online’: “A fundamental issue that regulatory discussions must confront… is what function society needs the banking industry to perform. Increasingly over the past two decades, the banks have tried to make money with mortgages, residential and commercial. As this has proved difficult, the banks will either have to shrink their supply of credit to the economy as a whole or else redirect some [of] their credit to the business sector.”

But now the venture capital industry has spoken up.

For some companies even getting an extension on an overdraft can feel like “pulling teeth”, or so said David Hughes, chief investment officer of Foresight Group, managers of Foresight VCTs. He added: “In our experience banks seem interested only in funding mature, profitable businesses with proven management and clear growth plans… We have heard numerous accounts of banks dragging their heels on seemingly straightforward requests, where for example the request for an extension to a facility took over eighteen months for the approval to come through. … From where we are sitting, the outlook for banks stepping up to the plate remains bleak.”

Alex Macpherson, head of the Ventures team at Octopus Investments, proffered a similar opinion saying: “The banks have rarely been interested in providing debt finance to high growth entrepreneurial businesses where an equity investment is typically more appropriate.”

So what does that mean? Businesses need to court the VC and business angel market and now peer to peer lending.
As for the government, well frankly so far its efforts don’t add up. The UK badly needs a more entrepreneurial minded psychology amongst the funding community in the UK. And the government needs to put its money where its mouth is. It is extraordinary that the last Labour government cut VAT in a scheme that cost the UK government tens of billions of pounds of revenue, while it provided a few million pounds here and there for SMEs mostly in the form of training, and quite often training was not what was required. The current government spends billions on trying to get house prices up, but Vince Cable’s business bank will have one million pounds of new money. The Bank of England creates £375 billion in new money via QE, but still entrepreneurs , the people who can create wealth and make the retirement of the baby boomers affordable, are left to fight over scraps.

© Investment & Business News 2013

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‘Seven habits of highly successful people’ was the title of a book published in the late 1980s and seems to have sparked off a trend. Successful people behave in a certain way, so if you behave that way too, you will be successful. But here is something we don’t often consider. How many of these characteristics shared by successful people, are also shared by unsuccessful people?

It depends on what you mean by success of course. But for the sake of this article let’s assume success equates to making a great deal of money.

Maybe what successful people really need is an eighth ingredient, and that ingredient is called luck. You can’t do much about luck; it is after all down to sheer… well to sheer luck. But there is something you can do to ensure fortune favours you. Alas, this is a lesson few entrepreneurs have grasped.

Actually, some successful entrepreneurs seem to have grasped it. Maybe they are trying to appear humble, or likeable, or just plain modest, but many successful people in business admit to luck. They will quite honestly say that if the particular gamble they had taken had not come off, things would have been very different for them.

They might also admit to major mistakes they made in their carrier, or bad judgement calls, but supposing those bad judgment calls were made very early on in their career before they had, as it were, made it? Maybe the difference between a highly creative and hard-working entrepreneur who makes it and one who doesn’t is one of timing. The successful entrepreneurs made the good gambles early on, while the unsuccessful one didn’t.

Bill Gates famously failed to recognise the potential of the Internet. He also admitted to a degree of luck with Microsoft. Supposing his first big business decision was as hopelessly wrong as his judgment over the Internet. Would he still have become the world’s richest man?

Luck is not something to which we like to admit. It is also hard to accept that we are mortal. It is built into us, and for the young especially this is a very hard concept with which to come to terms. But here is something else it is hard to accept; not all our ideas are good, and if we are of an entrepreneurial leaning, not all our ideas will work.

But the narrative to which so many of us cling tells a different story. It tells us that successful people have seven characteristics in common. We hear of life stories, and how key decisions were made, and it is as if fate was working, making one person’s success inevitable. But if fate really does exist, why is it so hard to predict the future? If it was inevitable that someone was going to be successful, why is that so rarely predicted in advance?

The narrative of success only works in hindsight.

The European Flash Barometer once found that around 43 per cent of people in the UK (compared with 19 per cent in the US) believe that a new business should not be created if there is a risk it may fail. The implications of the findings of this survey are absurd. How can Brits really believe that a business should not be formed if there is a chance it might fail? A business that is guaranteed of success is a business that measures success by the most modest of ambitions.

Those 43 per cent of Brits who think a new business should not be created if there is a risk it may fail have fallen for the narrative that success is somehow predictable.

But while entrepreneurs may laugh at the findings of the European Flash Barometer, they themselves are just as guilty. They concede that risk surrounds us, except that they rarely acknowledge that their own business idea is risky; instead they say and appear to believe that it is guaranteed to succeed.

An entrepreneur might say don’t put money in other companies, on the stock market or in investment trusts, invest every penny you have in your own business. Business advisors may advise focus. A venture capital firm might say it is essential that entrepreneurs do not deviate from their core focus; from their business plan.

From the point of view of a venture capital firm, or VC, with diversified investments, it makes sense to urge entrepreneurs to remain focused. A VC may only need a small number of its investments to come off to stay in businesses. A VC with a portfolio of driven entrepreneurs, who put their heart and soul into their business idea, only need luck to smile on some of those entrepreneurs.

But for the individual, who can see the shortcomings in the narrative sold to them by the VC and public perception, will know that at least some diversification might make the difference between a comfortable old age and one spent in poverty.

© Investment & Business News 2013

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The Luddites were sometimes right. Technology might be a good thing in the long run, but in the short run there are casualties. Actually, there are always casualties, but it’s possible that innovation has sometimes created economic depression before it created something special. It may be like that today, and 3D printing is a prime example.

Consider the age of symmetry. It lasted from around 1867 to 1914, and was perhaps the golden age of innovation. In fact, if you look at the history of innovation from learning how to tame animals to the Internet, it is possible that more innovation occurred in that half a century or so than throughout the rest of history put together. Yet 13 years later, the US entered the Great Depression, and the global economy limped forward into world war. It may have been a coincidence of course, but then again, does it not kind of make sense that innovation can create economic hardship?

Innovation can increase productive potential, but without a corresponding rise in demand the result of innovation may be fewer jobs. Fewer jobs mean less demand and things can become worse.

This does not mean innovation is bad and always destroys jobs; it just means that it can, under certain circumstances, particularly if the government does not try to counteract the negative impacts of innovation with stimulus. Maybe this has been happening of late. It does feel as though modern technology has left two types of jobs: the highly paid skilled jobs, and the manual jobs, such as cleaning. There is little in the middle.

And that brings us to the next wave of innovation: nanotechnology to the internet of things, might not these changes cut though the economy like a sickle though grass?

Take 3D printing: it’s hard to see how this can do anything but destroy jobs. It is hard to see this, but not impossible.

3D printing may provide the opportunity for local craftsman, experts in CAD, design, and materials to provide bespoke products for the customer, at a price that puts such products in reach of the mass market.

A similar point was made here the other day. See 3D printing: game changer or just fair game for the cynics? 
It was good to see others drawing similar conclusions. Kevin O’Marah of SCM World recently wrote “Store-based retail is getting killed by Amazon-addicted consumers whose loyalty is paper thin. Suppose, however, that stores did more than just carry product.

Additive manufacturing (aka 3D printing) has the potential to custom-make many consumer products given progress in the materials sciences that will go from simple resins to metals, ceramics, fabrics and more. Add some well-trained staff and the store could be a place where consumers come to solve problems and experiment with ideas. Imagine the retailer REI deploying these ideas for its ultra-loyal outdoorsy customer base – it’s not hard to see how this beats Amazon.” See Futureworld: 3D printing is the tip of the iceberg 

Maybe 3D printing won’t just have one effect, but will have different effects at different times, and in different sectors. It may lead to job losses and a recession for a while and in some regions, but it may also ultimately create a huge number of skilled and well-paid jobs, creating more wealth for most of us.

© Investment & Business News 2013