Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: UK economy on the mend, says King. House prices can pay for long term care. House prices are not the answer. O’Neil says more US stock market rises need ridiculous economic growth. Chinas sees new premier. Executive pay under attack, again. Kuroda settles down. Companies in the news. Savills, Playtech
UK economy on the mend, says King
Mervyn King, Doctor King, Sir Mervyn, appears to be a man that cares about his legacy. He has gone decidedly dovish, and, one has to say, voluble of late.
Now he has come pretty close to uttering those dangerous words: green shoots. Poor old Norman Lamont, he once used the that phrase to describe baby plants that are coloured a kind of bluish yellow as a metaphor for the economy, and his credibility was never the same again. Many years later, after the ONS had finished revising its data, Lamont was proven right, but by then no one cared, and the view that the former chancellor was hopelessly out of touch was permanently etched onto the British psyche.
Still, it didn’t prevent Norman becoming Baron Lamont of Lerwick. Do you think Mervyn King will become his lordship one day? His lordship, the King, they might say.
Anyway, yesterday he said: “I think that during the course of 2013 we will see the recovery come into sight.” He added: “If you take away what happened in the North Sea oil production and in construction, the UK economy last year grew by 1.5 per cent.”
He was interviewed on ITV news. And then Sir Mervyn talked about his relationship with two future kings/peers/lords: George and David. “We talked privately about the various things that could be done… I’m confident there are things the UK can do and I’m very confident the Government understands that,” he said.
He also referred to supply side. Some see that as a hint about the supply of money, but using QE to get investment up, increase entrepreneurial activity thus improving the UK’s productive capacity would be a nice result.
Then the good doctor turned his attention to the pound. “We’re certainly not looking to push sterling down,” he said, “We are moving to a properly valued exchange rate. I think we’re probably there.”
So there you have it.
It is just that you need to ask the question: why? Why the recovery?
Mervyn (let’s be done with titles for now) said the right thing; he talked about manufacturing, exports and investment.
Scan today’s media, however, and the focus is on the housing market. It is becoming clear that mortgage lending is on the up. According to data published by the Council of Mortgage Lenders yesterday, house purchase lending recorded its highest January total since 2008. The funding for lending scheme is working.
House prices can pay for long term care
Meanwhile, Ros Altmann, ex of Saga and famous for her criticisms of QE, has said “house prices provide a means of funding long term care.”
House prices are not the answer
Zzzzz. Sorry about that, I just had this dream, it was 2013, and we had suffered five years of economic troubles. Then I woke up, and we were back in 2006. House price growth was providing the impetus for the economy, and all was right with the world.
It’s a bit like that, isn’t it? Have we learned nothing? House price growth is not the means by which the UK can enjoy sustainable recovery. If anything, the UK needs cheaper house prices.
In fairness to Sir Mervyn and Doctor Altmann, they were not really guilty. The Bank of England governor said: “There’s no point pretending we can go back to the pattern of demand we saw in 2006-2007.
Saga’s former high profile boss, also said: “House prices are a bubble.”
But perception matters, even if it is not reality. Besides, in the medium term, perception can become reality. And the UK’s obsession with rising house prices is not dead; it is not even resting, and that may yet prove to be a problem.
O’Neil says more US stock market rises need ridiculous economic growth
Jim O’Neil, chairman of Goldman Sachs Asset Management, has said that any rise in the S&P 500 to over 1,600 can only be justified if US growth moves to ridiculous levels.
The index has risen by almost 10 per cent this year, and is currently trading at around 38 points shy of 1,600 and just two points off the all-time high set in October 2007.
Interviewed on Bloomberg TV, Mr O’Neil said: “In order to justify the S&P above 1,600, we’d have to see growth expectations go to something like 4 per cent and beyond.”
Chinas sees new premier
And so Li Keqiang is the man. It’s official, he is now China’s Premier, and has taken over from Wen Jiabao.
We don’t know much about him, other than he was born in 1955, meaning he is young for the job, and presumably he is very popular because all but seven members of China’s Communist party’s legislature voted for him. Of the seven who didn’t, six abstained, one voted against. But who were these dissenters? Why did they vote that way? Are they brave, stubborn, or just plain stupid for not seeing what is right for China?
Mr Li’s first big challenge may be to fight corruption. Good luck on that.
Wen Jiabao fought corruption too, but I’m not sure how successful he was, and the Wen family have done pretty well over the last ten years or so.
Combating corruption is a good idea, but the reforms must start at home.
Executive pay under attack, again
In Italy it’s the central bank that is striking a blow. It is conducting an audit of the country’s 20 biggest banks. The idea is to get the banks on a stronger footing with more capital and a higher tier one ratio. To that end, the central bank is likely to demand cuts in dividends and bonuses. The ‘FT’ cited research from Mediobanca Securities, which has estimated that Italy’s banks need to increase their provisions by 21 billion euros in order to realign Italy with Europe.
In Germany, Angela Merkel’s government is finally making it clear where it stands on executive pay. In fact Mrs Merkel herself recently told German newspaper ‘Freie Presse’ that: “Exorbitance cannot be allowed in a free and socially minded society.” She said: “When people shake their heads over salaries that tip the scale and want them to stop.”
Merkel’s government is planning to introduce a law to parliament to regulate managers’ salaries.
Meanwhile in China data shows that salaries for senior executives rose 8 per cent in 2012. The ‘China Daily’ quoted Christine Hayward, managing director for Asia-Pacific and the Middle East at the Association of Executive Search Consultants, who said: “Salaries of executives in China are becoming more and more on a par with those of expat executives.”
The ‘China Daily’ stated: “In October, further evidence of the rapid increase in executive pay in China was provided by the 2011 China Salary Development Report issued by the Ministry of Human Resources and Social Security. The report said executive salaries rose by 370,000 yuan ($59,000 at today’s exchange rate) in five years. The average annual salary for company executives in 2010 was 668,000 yuan, up from 291,000 yuan in 2005.”
Returning to Italy and Germany, one can only speculate on what Boris Johnson thinks. He might say it is barmy – the worst idea since Daedalus said: “Let us use wax to keep these feathers in place.” As for rising executive pay in China, Johnson might say that is the best idea since Odysseus said: “I know: why don’t we build a wooden horse?”
Kuroda settles down
Talking of plans to make the gods envious, Japan’s parliament has approved plans to appoint Huruhiko Kuroda as the next governor of Japan’s central bank. He will take up the position next week.
Mr Kuroda has this radical idea of targeting 2 per cent inflation.
With recent rises in Japanese direct taxes, inflation in the economy of the rising sun is set to go up anyway. Who knows, with so many Japanese people now retired, maybe we are entering a new phase in the story of Japan, as its retired people draw down savings, and start demanding more than Japan can produce, which may create inflation.
What role the central bank can play in all this is open to debate. To pull that trick off, Kuroda may need help from the gods.
Companies in the news
Bull: In today’s ‘Times’ Tempus took a look at Savills. It is flourishing much as large swathes of the UK property market are, it says. Tempus also noted the company’s growth in Asia Pacific, but then was also impressed by the way the firm is conservatively run. It has, it said, largely viable costs and little debt.
Bull and bear: Playtech (gambling software) came under the stare of Tempus, and Questor at the ‘Telegraph’. Latest results were good, revenues were up 53 per cent, dividends increased by 41 per cent. Questor said “buy” if you are brave enough. Tempus however, raised a doubt about the company’s board make-up.