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Monday, 26 June 2017

Ocado, Tesco and Amazon

The start of a big push by Amazon to become the prime supplier of food to retail American customers is beginning to unsettle UK stock markets. Already one hedge fund based in the US has bought a block of Tesco shares, to hold alongside their block of Amazon shares. They intend to sell the Tesco shares when their price has begun to go down, short-selling to help precipitate a price collapse in Tesco shares. They expect such a collapse to be more than offset by a rise in Amazon shares in the UK when stock-pickers expect the UK to become an early target for the expansion of Mr Bezos's global expansion.

The coming months will see increasing 'volatility' in the share prices of the different supermarkets as their presumed resilience in the face a possible launch of Amazon in the UK food market is evaluated. Sainsbury's has assimilated Argos and is now trying to buy the wholesale distributor to a large number of convenience stores, to maximise their spread across the retail market. Tesco has taken similar action in the takeover of Booker. Morrison has been working hard to made up for a slow start in the online market, but now faces a huge dilemma. Waitrose and Morrisons have both put part of their retail home-delivery service into Ocado, which looks a sitting duck for Amazon either to assimilate [in which case  Waitrose and Morrisons would be pushed out] or to wipe off the floor.

I do not myself think that Amazon will consider a takeover of the eternally-lossmaking Ocado operation. Ever since it was established I thought the Ocado business model was 'too clever by half', and I have watched in amazement as year after year investors piled in to add to the capital input that has never produced a significant output. The management of Ocado have repeatedly said that their business model and their software were sure to be taken on by foreign firms; and that has not happened. The development of online markets and the related software have developed so fast all round the world that a quaint British experiment never had a chance of becoming a global leader.

The coming months will see rumours and counter-rumours about what Amazon intends, and how it would go about it if the giant vampire squid of the bookselling world does decide to target the UK food sector as the next big opportunity. If they do so decide, the impact on Ocado will be terminal. The effect on some other supermarkets may be less than some stockpickers will expect: Morrisons has a largely regional and class-based clientele, Waitrose and Sainsbury's have their own special niches as well as now a broad spectrum of goods on offer at Sainsbury's; and the John Lewis envelope will largely protect Waitrose. That leave Asda and Tesco as the most vulnerable, alongside the Co-op [which also has it own loyal customers and regional strengths]. Hence Tesco has been the number one target. How both sides - the UK supermarkets and stock-market speculators - behave in the coming months will be fascinating to behold.

Sunday, 25 June 2017

Implausible and Impossible Prime Ministers

It remains unfashionable, especially in Tory circles, to suggest that the financial crash of 2007-8 was an inevitable outcome of 'Thatcherism'; but it was. It is obvious, in all but tightly Tory circles, to recognise the Grenfell Tower disaster as an outcome of 'Thatcherism'. The stubborn stupidity of the leader of Kensington and Chelsea Council is typical of the Thatcherite brood, three generations on from the real thing.

The parenthetic use of the lady's name is to emphasise that, in my view, she did not know what she was doing. Thanks to Sir Keith Joseph she was one of the first politicians to be introduced to the ideas that were just becoming significant in Economics. This was in the middle nineteen-seventies, when she became leader of the Conservative party amid the chaos that followed the bizarre misapplication of Keynes's theories by the self-styled 'Neo-Keynesians' who set up the inflationary chaos that make the economy unmanageable and the state virtually ungovernable by 1975. The new theory of 'rational markets' that has now become the impenetrable dogma of the Econocracy [as explained in earlier blogs] was the intellectual justification for the rush to deregulation, denationalisation and diminution of government which became central to her politics. That there was a powerful and developing academic community supporting her actions was enough for the Iron Lady, who was not herself an intellectual giant. She had tremendous qualities of drive, determination and sheer willpower, which she imposed on a largely-uncomprehending and spectacularly supine Cabinet.

Deregulation and cheeseparing in government, assisted by a cynical recognition among people like many of the Tories of Kensington that the largely-migrant population of the tower blocks were not keen to attract the interest of the authorities, are the direct causes of the Grenfell tragedy. Thus it can be seen as a direct outcome of the Thatcherite implementation of the daft dogma that also gave us the crash and the systematic weakening of the bonds of British society through the implementation of Osbornian 'austerity' in combination with the mania for 'deregulation' and cheapness in public services and amenities.

This disaster has come on Mrs May's watch, and her failure to comprehend it has been seen by the entire nation. The at-least-equally comprehensive failure by the Borough Council has been less prominently noticed by the media because of the ability to blame the government, and - above all - its head. Even if Mrs May displayed any comprehension of the risks that attach to Brexit, her failure for several days to face up to the Grenfell Tower situation has shown her unfit for office. As this tragedy has even driven the Brexit talks off the front pages for several days it has made it ever more inevitable that the intellectual and empathic resources in Downing Street are not up to scratch.

So now the search is on for a new Prime Minister. In Tory minds, it has to be a Tory: the party dare not face an election. Boris, as the papers say in setting him aside as 'too risky', "is Boris". Philip Hammond, a dull fish if ever there was one, seems to be emerging as the favourite; but he could turn out OK.

Anthony Eden was seen as a golden boy in the nineteen-thirties, and was Conservative 'heir apparent' to Churchill from 1940 for over a dozen years before he finally became a disastrous Prime Minister who was carted off to the Caribbean after a 'breakdown'. The Earl of Home was almost competent, when the nation faced  Macmillan's choice of a successor. John Major was constantly harassed; but he won a general election convincingly and was later chosen chosen by the royal family to serve as Trustee for the inheritance of Princess Diana's sons: probably the biggest vote of confidence a Prime Minister can get. Major was a success; May is a failure.For four decades Thatcher been seen [at least, on her own side] as a success: how bizarre is that? We are just beginning to realise.

So whether the Tories next opt for Hammond or Gove or Rudd or Johnson [or any of the others who are mentioned in today's papers], the fitness of that person for the office will only become apparent in the event.

Saturday, 24 June 2017

Rates of Interest 3

Once upon a time, between 1820 and 1914, a person who had legitimately acquired some money could invest it in any one of a wide range of opportunities; each of which offered a return to the investor in the form of interest or dividends. Dividends are the reward for handing your money over to some other agency, usually a company, which will pay you a share of the profit from the venture if it is successful. The amount of the dividend that any shareholder gets is proportional to the portion of the capital in the enterprise that the individual shareholder has provided.

Throughout that long period, shares in various sectors of the economy rose and fell in price according to the honesty and effectiveness of the managers of businesses and the success of the firms they ran. There were periods when share prices were driven up by speculators, as in the 'railway booms' of the early-mid-nineteenth-century and when the economic development of various countries reached a stage where the bright prospects for that region became widely known. Some such booms were based on myths or gross exaggerations, which resulted in unsuspecting greedy would-be investors loosing their money.

Underpinning all markets, however, were 'the Funds', government bonds, usually offering a return of 2%. The government was regarded as an absolutely secure vehicle to invest in: after all, they could take the money with which to pay the interest from everybody in taxation. Any investor who wanted to build up a secure portfolio of investments to leave to their widow or children would buy some state stocks, then add to them a mix of other investments, some of which brought in low returns but were regarded as secure, and some less steadily-remunerative stocks on which greater dividends could be hoped for with less assurance that this would consistently be delivered. Provided company law was adequate, and properly enforced, investors could expect to be fairly treated. The greater risk they were prepared to take that the companies they invested in would fail, they could hope for greater rewards arising from the speculative nature of their investments.

Provided the government also issued the necessary basis of steadily but modestly remunerative investments, in the Funds, there was a 'floor' to the whole market.

It was as necessary that the Funds existed as that the stock market existed; enabling investors to buy and sell shares. George Osborne's ambition to abolish the government deficit would [if it were achievable] would remove the opportunity [going forward] for the Funds to perform their traditional role. That would be more disastrous than selling too much government debt and thus increasing too far the amount that future taxpayers would have to pay to support that debt.

Friday, 23 June 2017

Rates of Interest 2

The present situation in the UK, where there is effectively no interest rate, leaves a free-for-all in financial markets. Mortgage lenders are able to raise cash at very low rates of interest, and lend it on to intending homebuyers at rates which are very much lower than those which prevailed in the years down to 2007. The Bank of England has several times become concerned at the amount of lending that is being advanced against peoples' homes, because they are aware that a collapse of property prices would leave millions of households in a situation of 'negative equity', where they owe much more in the debt that they took on to buy their home that they could get from selling the house. Thus the Bank and the government ask the lenders [principally, banks and building societies] to limit the amount that they lend. This limitation is set on the aggregate of money advanced to all home purchasers, rather than on categories of property or classes of home buyers [such as the young, or people of limited means].

Alongside the mountain of debt that house-buyers have been allowed to accumulate, the same people have been encouraged to borrow to maintain their standard of living as real wages have declined for the majority of the population; hence the amount of unsecured debt [that which is not 'covered' by the 'value' of the borrowers' material assets] has escalated alongside mortgage debt. In the bizarre Britain that has been created since 2008, sales in the shops largely depend on the customers borrowing a significant  proportion of what they spend. Thus Economists on the television tell citizens that the 'dominant service sector' of the economy is what 'drives' the growth of the system. So when government representatives talk about the UK as a successful, growing economy; indeed as the 'world's fifth-largest economy'; they are talking about a reckless growth of debt owed by the British people to the financial system and to the foreign firms that are prepared to advance credit to British firms and institutions. The whole thing is unsustainable; and unless rational economic policies are explained to the electorate, and adopted by them, a crash much more catastrophic that that of 2007-8, or that which followed the 'Wall Street crash' of 1929.

As the country most addicted to debt, we can be sure that the United Kingdom will suffer more than others when the inevitable crash occurs.

Thursday, 22 June 2017

Rates of Interest

The media employ thousands of Economists, whose principal roles are to unravel the impenetrable prose and the ludicrous dogmas that permeate their subject, and to explain economic policy to the victims on whom it is inflicted. These Economists have been allowed more air-time and column inches in the past few days to explain how the US Federal Reserve Board can raise the controlling rate of interest in the US economy, while the Monetary Policy Committee of the Bank of England has done nothing since it foolishly lowered the bank rate after the Brexit vote last year. This arid discussion is slightly enlivened by the fact that the Governor of the Bank of England and the Bank's Chief Economist have very recently made public statements which appear to be conflicted. The Governor says the time is not yet ripe to raise the rate, the Chief Economist seems to think that it is just the right time.

Interest rates in all the major western economies [though not in some well-run states, like Canada] were lowered to historically absurd levels in 2008, as governments and central banks strove to shore up the world's banking industry as the monumental extent of their past reckless gambling became clear. The supply of money to the banking system was expanded beyond all historic precedent, and interest rates were reduced to a fraction of one per cent. In effect, monetary policy was abandoned in face of the perceived need to avoid an economic collapse that would make the slump of the nineteen-thirties seem like a trivial glitch in the long process of growth in the global economy.

A whole generation of adults has grown up in a world where there has been no regime of interest rates. The lack of interest in Economic History on the part of most university teachers of Economics has compounded this issue. So here is just a brief reference to the 'real' world that existed before 2007. That world was epitomised in the British economy between 1819 and 1914.

After paying for the wars against revolutionary France and reactionary Napoleon by high taxation and high inflation, the British government decided to stabilise the monetary system. This was achieved through the implementation of a new Bank Charter Act. The Act specified that the Bank of England could issue a limited amount of paper currency, under the condition that the notes would be exchangeable, on demand, at the Bank for fine gold at a specified rate. Thus banknotes were as 'good as gold' and the amount of them could only be increased as the Bank's reserve of gold increased. The Bank could also lend notes, at a standard rate of interest that was known as the Bank Rate. If the Bank increased the Bank Rate, that signaled that money was only available to borrow on stiffer terms, and investors were thus discouraging from taking higher risks. When the Bank rate was reduced, credit was relaxed and business relatively boomed. While most private borrowing and lending was undertaken by agencies other than the Bank of England, at higher rates of interest than the Bank Rate, rates on private loans rose and fell in response to the changes in the Bank Rate. Thus control of the system was established by the Bank: and that has effectively been abrogated since 2008.

More on this topic to follow, but the above dollop is enough for one day.

Wednesday, 21 June 2017

Theresa May: Competence and Comprehension

It is increasingly a matter of speculation, as to how competent a person the Prime Minister is. Despite the great achievements of people like Professor Ron Johnston, the general perception of geographers among the intellectual hierarchy is pretty low. Mrs May read geography at Oxford, which may rank higher than media studies at Mid-Montgomeryshire but it is not regarded as a particularly powerful component of the university overall. She has had a steady political career, indicating that she is content to take orders and vote at the call of her party whips; most of the time. When in the safe-hands role of party chairman she voiced the popular view that the post-Thatcher Tories were regarded as the 'nasty party' she spoke no less that the truth: and the import of her message to the party was that 'we have to invest more in improving our image', rather than telling the Buffton-Tufftons to change their personalities. Her mention of the'nasty party' was frequently cited over the ensuing years, almost as her defining achievement; it certainly got her name nationally known, which ultimately helped to get her the leadership.

In six years as Home Secretary she 'failed' to get net annual immigration reduced below 100,000: by a margin of several hundred per cent. Now, as Prime Minister, she declares herself determined to try again, harder. The reduction of immigration is at the heart of her determination not to retain the EU obligation of free movement of people in the European Economic Area: it virtually sets the tone and terms of how she sees 'Brexit'.

She appears to be incapable of understanding that she had to 'fail'. If intending immigrants had simply been turned away from the ports and airports of a fortress Britain, the economy would have been undermined catastrophically. Market gardening would have collapsed, at least until the firms in the industry moved their capital to countries where they could find labour. Many of the rising 'knowledge industries' would likewise have emigrated. The City of London would have imploded as a global financial centre. British users would have had to pay foreign firms inflated prices for the goods and services that had ceased to be made or grown in Britain; with a disastrous detriment to standards of living.

Meanwhile many thousands of non-EU immigrants would still have got into the UK under threat of  appeals to the human rights industry on the ground that 'family reunion' is a human right: so there would have been more non-English-speakers appealing to the benefits system and using the NHS in the face of a collapse of the state's revenues. The 'racial' dimension to the anti-immigrant mood would not have been exorcised; though fewer ethnic  groups would be scapegoated.

Mrs May still seems to want all those bad things to happen. She is deaf to appeals from industry and commerce. Unless she can clarify quickly that she has not meant these things, her government must fall quickly.

Tuesday, 20 June 2017

Politics and Classification

It is reported this morning that 'angry worshipers' at Finsbury Park Mosque have been 'demanding' that journalists should classify the man who drove a truck into some of their number on the previous evening should be classified as a "terrorist". The Metropolitan Police have already indicated that they will attempt to use the terrorist legislation to charge and prosecute him; and the Prime Minister, goaded into precipitate comment in view of her ineptitude over the recent fire, has made remarks indicating that she would prefer to be able to use such a classification. Presumably the officials who have adopted this language think that by suggesting that the Muslim 'community' is under threat of 'terrorism' they are in the same position as the multi-national group of individuals who were struck down in Borough Market.

It may be politically helpful for establishment politicians to us such language, but that does not make it true. It does not help the forensic process that is under way; and it does little for social cohesion.

It is more likely, in my mind, that the occurrence of this incident [almost] on the anniversary of Jo Cox's murder by a lone nutter points to the more likely circumstances of the recent attack. It is equally inexcusable with all the other episodes that are glibly described as 'hate crimes'. That classification, too, seems to me to be profoundly unhelpful: 'hate' is a powerful word, but it does not describe the range of emotions and social pressures that cause some people to commit outrageous acts.

This set of circumstances causes one to look at classifications that have been used in past eras. Between the two world wars, "the unemployed" had a very powerful meaning: it covered the tens of millions of people in the then-advanced countries who were reduced to destitution by the great depression. The memory of that episode was evoked to justify the action by central banks and governments in 2007-8, which avoided a repetition of the 'thirties horror but which did dislocate the entire economic system in a way which is now haunting British politics and society. The USA and most of continental Europe have recovered much better from the trauma that followed the financial crash than has the UK: the worst is yet to come for the UK. If the government intensifies Osborne's austerity, even by a small amount, it could cause the tipping-point at which social acceptance of the effect of the cuts [to the police, to the NHS, to schools, to welfare and social care] cease to be tolerated.

An increasing proportion of the population have no significant assets, insecure and irregular earnings, and - as the last resort - low levels of benefit if they pass stringent tests as to their 'need'. These people are paupers - the 'poor' - such as have existed throughout history. There have been many attempts to abolish poverty. The whole endeavour of the post-1945 Welfare State was to eradicate poverty and ignorance and unattended illness: and it has slowly been dismantled over the past forty years. Society is coming very closely to an existential crisis: and divisions within society - including that between Muslims and those whom the militants among them call 'crusaders' - could horribly exacerbate a very bad  period of future history.