One of Britain's most successful companies in recent decades is WPP - originally Wire and Paper Products - whose success is almost entirely ascribable to the genius of its long-term Chief Executive. Though it is still a London-listed company, it has a truly global reach; which means that for at least twenty years its fortunes have largely been independent of the ups and downs of the British economy. When Asia has been in crisis, the Americas have generally been strong; when Europe has stagnated, Asia has thrived: so WPP has been able to expand in most years, as a global conglomerate.
Like Warren Buffet, Martin Sorrell entered and then took over an existing company that was not doing particularly well, re-oriented its business by moving into a completely different sphere of activity where it proved uniquely innovative and deservedly became a leader in its field. The chosen field for Wire and Paper Products was advertising: precisely at the tie when brands were becoming globally important and technologies were advancing rapidly. Standards of living worldwide were rising, and consumers were becoming more conscious of their power in the market. Consumers were also better-informed than ever before, as firms increased their advertising and sales budgets. By the use of better-informed I do not imply that the quality of the customers' understanding was enhanced: simply that more information was being presented to them, much more professionally. Commercial television was in most homes in the advanced countries; radio was still expanding as a means of disseminating news, information and entertainment [particularly popular music]; and print media - books newspapers, magazines and journals [both popular and targeted at specific groups] were more affordable and better-presented than ever before. In that world, WPP thrived: and as more countries entered the consumerist age [at least, for the upper and middle classes] so WPP could bring in its expertise and marry it with an intelligent development of local methods and traditions.
But with apparent suddenness - this week - the past year's results from the company show a downturn in business that has instantly been associated by commentators with major global trends.
Over two decades entertainment and information have been digitised: people now look to their smart phone for data on almost every topic. Companies have responded, so that it is now possible from one's armchair to find out which shop in the locality currently stocks which item. As this process has developed, so the great organisers of information - most obviously, Google - have responded by developing the means largely to predict what a user will want as soon as he or she types in [or says] the first fragment of the request. Hence the demise of traditional advertising is confidently predicted; though it is recognised that new brands, products, services and approaches will always have to be promoted, and most promoters will not want to have to put their fate entirely in the hands of the giants like Amazon and Google. Thus independent advisers who are up-to-the-minute on technology and offer an affordable service will always be needed; but this will be a niche rather than a mass-market business. Print media are declining. Families no longer sit around looking at one TV set, as all members have their own access to their own preferences: so the value to a firm of advertising through that medium needs to be focused on specific groups - like the elderly - who are likely still to watch 'conventional' TV.
If any affected firm can keep abreast of these developments it is the highly-adaptable WPP; but how much of the world's business will need to use such services in the future is an increasingly disputed area of prediction. Most of the pundits expect WPP to survive for at least a decade, but probably in a shrinking context: unless, of course, some as-yet unimagined innovation comes to their rescue. In his eighth decade, Martin Sorrell remains an outstanding innovator and developer of ideas. I would not yet write off him or his firm; despite the changed world in which he is now operating.
Showing posts with label Warren Buffet. Show all posts
Showing posts with label Warren Buffet. Show all posts
Thursday, 24 August 2017
Sunday, 30 July 2017
The Very Basics
It is some time since I simply stated the basic assumption on which this blog is based. Although it was one of the earliest principles of Political Economy to be established, I have repeatedly cited Millicent Fawcett's introduction to the topic in her Political Economy for Beginners, which was published for use in the elementary schools which all children were legally enabled to attend under the Education Act of 1870. The book can be accessed on line via the Library of the University of California. I recently commented that it is highly appropriate that Mrs Fawcett is to become the first woman honoured with a statue in Parliament Square, Westminster.
It is a truism today that when the British economy comes under examination, there is a focus on the deplorably low productivity of employment in this country. Just scratch the surface of any such discussion, and the shocking fact emerges that productivity has scarcely improved [and in some sectors of the economy it has declined] since the financial crisis took hold in 2007.
When she mentioned productivity, Mrs Fawcett also dealt with productiveness; which is virtually never mentioned at all in the current discussions. Yet for Mrs Fawcett - as for me - it is the very key to understanding the basic economic problem that bedevils the country.
Productiveness means the extent to which any economic activity yields a surplus [of output, that can be converted to cash] that is used for investment. The investment may be applied to expanding or updating the plant that yielded the surplus, or to training the people who work there, or to recruiting better-skilled people; or it can be invested in other sectors of the economy. There are three main ways in which such cross-economy investment is facilitated:
1. by firms transferring profits from one part of the complex organisation to another, or
2. by the surplus being given to shareholders or bondholders as dividends or bonuses, which they can reinvest at their discretion,or
3. by firms that retain some profit as reserves or receivers of dividend depositing the money with banks, which the banks then lend to firms with ideas for expanding or improving production.
In any of the above circumstances, there is a realistic prospect that many [though not all] of the investments will improve the productivity of the sector in which the investment is made. Sometimes an investment fails, because it is wrongly timed, or a mistaken choice of technology is selected, or inept individuals are selected to manage the investment; or for a dozen other reasons: and the more risky the investment is, while it may yield spectacular returns, it also carries a higher degree of probability that it will fail.
The crucial fact is that the only way to raise productivity [and production] in general is if the productiveness of the system is properly understood and a sufficient proportion of the surplus that is generated sector by sector is applied optimally to investment in those sectors that will contribute most to the productivity and productiveness of the economy in the future. In simple terms, unless investment is the absolute focus of business thinking and of economic policy, the economy can not succeed optimally: because everybody in a decision-making role is looking in a wrong direction. Warren Buffet has become an international celebrity by persuading people to let him make investment decisions with their money; and by delivering excellent results [overall] for decades on end. Mrs Fawcett would have approved of him, strongly.
In Britain, especially since the crisis of 2007-8, profitable businesses have been piling up cash reserves and returning cash to investors [through special dividends and share buy-backs]. In the current circumstances, shareholders who receive these cash bonuses use them to meet current spending because real earned incomes have been tightening; rather than making their own independent investment decisions for the future. This situation has greatly been exacerbated by the combination of institutional and policy disasters that have meant that major investing institutions [such as pensions funds and insurers] are discouraged from making equity investments.
Economic policy has become a conspiracy against productiveness, rather than a stimulus to investment. That is contrary to the basics that Mrs Fawcett set out for elementary schoolchildren in 1870: and the shocking fact that cabinet ministers have no notion of the concept of productiveness is a wonderful measure of the intellectual regression through which Britain has descended since the nineteen-twenties, when fantasy Economics was allowed to supplant the truths of Political Economy: because simplified mathematical models were easier to teach than the complex inter-relationships that are exposed in Political Economy.
It is a truism today that when the British economy comes under examination, there is a focus on the deplorably low productivity of employment in this country. Just scratch the surface of any such discussion, and the shocking fact emerges that productivity has scarcely improved [and in some sectors of the economy it has declined] since the financial crisis took hold in 2007.
When she mentioned productivity, Mrs Fawcett also dealt with productiveness; which is virtually never mentioned at all in the current discussions. Yet for Mrs Fawcett - as for me - it is the very key to understanding the basic economic problem that bedevils the country.
Productiveness means the extent to which any economic activity yields a surplus [of output, that can be converted to cash] that is used for investment. The investment may be applied to expanding or updating the plant that yielded the surplus, or to training the people who work there, or to recruiting better-skilled people; or it can be invested in other sectors of the economy. There are three main ways in which such cross-economy investment is facilitated:
1. by firms transferring profits from one part of the complex organisation to another, or
2. by the surplus being given to shareholders or bondholders as dividends or bonuses, which they can reinvest at their discretion,or
3. by firms that retain some profit as reserves or receivers of dividend depositing the money with banks, which the banks then lend to firms with ideas for expanding or improving production.
In any of the above circumstances, there is a realistic prospect that many [though not all] of the investments will improve the productivity of the sector in which the investment is made. Sometimes an investment fails, because it is wrongly timed, or a mistaken choice of technology is selected, or inept individuals are selected to manage the investment; or for a dozen other reasons: and the more risky the investment is, while it may yield spectacular returns, it also carries a higher degree of probability that it will fail.
The crucial fact is that the only way to raise productivity [and production] in general is if the productiveness of the system is properly understood and a sufficient proportion of the surplus that is generated sector by sector is applied optimally to investment in those sectors that will contribute most to the productivity and productiveness of the economy in the future. In simple terms, unless investment is the absolute focus of business thinking and of economic policy, the economy can not succeed optimally: because everybody in a decision-making role is looking in a wrong direction. Warren Buffet has become an international celebrity by persuading people to let him make investment decisions with their money; and by delivering excellent results [overall] for decades on end. Mrs Fawcett would have approved of him, strongly.
In Britain, especially since the crisis of 2007-8, profitable businesses have been piling up cash reserves and returning cash to investors [through special dividends and share buy-backs]. In the current circumstances, shareholders who receive these cash bonuses use them to meet current spending because real earned incomes have been tightening; rather than making their own independent investment decisions for the future. This situation has greatly been exacerbated by the combination of institutional and policy disasters that have meant that major investing institutions [such as pensions funds and insurers] are discouraged from making equity investments.
Economic policy has become a conspiracy against productiveness, rather than a stimulus to investment. That is contrary to the basics that Mrs Fawcett set out for elementary schoolchildren in 1870: and the shocking fact that cabinet ministers have no notion of the concept of productiveness is a wonderful measure of the intellectual regression through which Britain has descended since the nineteen-twenties, when fantasy Economics was allowed to supplant the truths of Political Economy: because simplified mathematical models were easier to teach than the complex inter-relationships that are exposed in Political Economy.
Saturday, 21 January 2012
Vigorous Capitalism
In another brilliant instance of intelligent capitalism in operation, Warren Buffet has taken advantage of herd irrationality by so-called professional investors in the UK. He has bought another 2% of the shares in Tesco [increasing his holding to 5%] at a time when the shares had fallen by around 15% in price because of a single set of bad trading results.Buffet is famous as a long-term investor in companies whose future prospects meet criteria that have been formed in his extremely well-developed mathematical brain. Most of his punts have been proven successes; and sometimes the success has been secured by him reinforcing his investment by buying shares in a company, or lending money to it, when it has hit a temporary bad patch on its growth path.
Who are the idiots who sold shares in sufficient numbers to depress the price by a huge percentage, on so thin a pretext? Not small-scale personal investors: most such people take a similar long-term view to Buffet's. They are mostly professional investors, buying and selling shares for institutions - pension funds, insurance reserves, investment trusts, charities etc - who possess degrees and professional qualifications [many of them in 'actuarial science'] and supposedly have experience that enables them to make intelligent decisions. Why, then, did a large number of them offload shares in Britain's most-successful-ever retailer in huge volume on a single report, and despite the fact that the company made clear that it understood and was already addressing the causes for the relatively poor performance? Some did so like automata because the funds that they managed were committed to 'track' the stock-market index. Some saw the price going down and joined the rush. A few may have been quick-moving opportunists who sold as soon as the price began to fall so that they could use the money to buy more shares at a lower unit price in a few days [or even a few hours] time. The combined effect of their selling was to give Buffet a great opportunity.
Friday's news also included the item that the Chinese sovereign wealth fund has bought 8.68% of the shares in Thames Water. This means that users of water and sewerage supplied by Thames will be paying tribute to investors in China, as well as in Abu Dhabi and Australia; who will also be able to exploit loopholes in UK water regulation to increase the dividends that they receive by increasing the debt that the water company and its customers will have to carry in future and cashing-in on such deals.
In the first case supposedly clever professional investors were the mugs, in the second a massive disadvantage to British consumers was created by Parliament and its advisers when they privatised the water industry. In both cases intelligent foreigners took advantage - quite legally - of dysfunctional systems.
Also on the same day the press reported a speech by a senior Bank of England official who suggested that international accounting standards [that were created by a forceful Scottish 'expert'] had not 'stood the test of time' and had almost certainly added to the misunderstanding of the credit bubble and the exaggerated assessment of the calamity that followed the crunch. This is because the standard assumed that there was a 'fair value' of any asset that was magically equal to the market price of the small sample of similar assets that were actually sold on any day. The sublime idiocy of such a notion was unnoticed all through the process by which it was adopted by international regulatory structures. Hence it was strangely appropriate that on the same day both the British Prime Minister and the Leader of the Labour opposition should make speeches on how to transform a much-criticised form of capitalism into a 'responsible' system that would guarantee prosperity and 'fairness' for all. The both suggested [in different terms, but with similar aspirations] that markets were the best way to generate wealth and to distribute it fairly among the population, provided that markets were regulated properly. There is a germ of truth in this assumption.
No market has ever succeeded in a vacuum: markets only work if they are interconnected with the rest of the economy: they need buyers to enter with purchasing power that was gained outside that market, and in it the sellers offer produce which incorporates components [including inputs by autonomous human beings] that are attracted from outside the market. No market has ever been free of crooks and liars and predators: people who decide that they can gain personal advantage by bending or breaking the rules that the other buyers and sellers assume everyone in the market is following. No market has ever been composed - and no market will ever be composed - of participants with exactly equal intelligence, the same ethical principles, identical capital resources, and identical access to all the same data as all the others [about their specific market and about the prevailing economing conditions and about prospective changes] which they all interpret in exactly the same way. So the assumptions about 'perfect competition' that set the criteria for formal market theory in Economics are utter balderdash; and any attempt to regulate markets as if they can be compelled to conform to the theory are doomed to fail.
So when the politicians step down from their podiums and ask their civil servants how on earth they can give effect to the high-blown [loudly applauded] rhetoric about 'responsbile capitalism' they get an answer in two parts: both of which are wrong.
The first part of the answer is to look for some well-publicised cases of 'unfairness', some individuals who are paid vastly more than the norm for employees in the country, and suggest that their income should be capped - or even reduced - at source, and then subjected to confiscatory taxation. In the last couple of days the media and some politicans have picked on Stephen Hester, the Chief Executive of the Royal Bank of Scotland; and they have suggested that he should not receive the income to whch he is entitled under his contract. He was brought into the bank, from a good job elsewhere, to pull it away from the catastrophe into which its former managers had dragged it. Because it was a state-supported institution in crisis, Hester patriotically accepted an unusually modest salary for a bank Chief Executive, to which was attached a bonus scheme if he achieved certain steps to assist the recovery of the business. Now the 'gutter press' and some policy-making fools are suggesting that the state should order the Royal Bank of Scotland to welsh on the contract, to appease public anger at the fact that some people in other banks whose functions are not understood by the policy advisers [and even less by the press] are getting much more than Hester; mostly as bonuses for proprietary trading.
The second string to the advice offered to politicians is much more long term than the scalp-hunting of individuals. It is to 'enhance' the system of regulation within which markets should be constrained. The phrase 'risk-based regulation' has recently been in high fashion but very few people in business have understood the concept. Business men and women well understand risk: they take risks on their own behalf and that of their firms every day: those who have the sharpest appreciation of both opportunity and risk are usually the most successful in planning investments and avoiding losses. It is now considered necessary to determine what categories of risk the regulators should require companies to avoid, or to mitigate if they cannot be eliminated if they must necessarily be accepted to enable the operation to continue. Some policy advisers have reached deep into formal Economics and suggested that regulators should compute the future long-run average cost of producing the output and require the price regime to converge with the assumed future cost. Provided the generality of firms in the market are moving towards convergence of prices around equality with the average cost at a selected future date, the market should be allowed to operate freely. The theory predicts that firms whose prices rise above the trend will fail to secure customers because rational consumers will buy cheaper alternatives. Similarly the theory predicts that firms that charge below cost price will bankrupt themselves. The firms that charge prices broadly in line with average cost of production [including a fairly-calculated 'cost of capital' that is the same for every firm] are good: the market will eliminate the others.
Such a model ignores branding, and therefore ignores the predominant determinant of 'value' in the perception of the vast majority of global consumers. Any attempt by regulators to impose such a naive theory would be ruinous to the real economy. But the concept of regulating to aim for average long-term cost pricing is presented on the political agenda because it is the one idea that people trained in Economics can think of in the present circumstances: old-hat Victorian marginalism is presented as the new panacea. My simple text PPE explains this point in depth. Such regulation as is now being advocated would transform the present economic crisis into an unmitigated calamity.
Who are the idiots who sold shares in sufficient numbers to depress the price by a huge percentage, on so thin a pretext? Not small-scale personal investors: most such people take a similar long-term view to Buffet's. They are mostly professional investors, buying and selling shares for institutions - pension funds, insurance reserves, investment trusts, charities etc - who possess degrees and professional qualifications [many of them in 'actuarial science'] and supposedly have experience that enables them to make intelligent decisions. Why, then, did a large number of them offload shares in Britain's most-successful-ever retailer in huge volume on a single report, and despite the fact that the company made clear that it understood and was already addressing the causes for the relatively poor performance? Some did so like automata because the funds that they managed were committed to 'track' the stock-market index. Some saw the price going down and joined the rush. A few may have been quick-moving opportunists who sold as soon as the price began to fall so that they could use the money to buy more shares at a lower unit price in a few days [or even a few hours] time. The combined effect of their selling was to give Buffet a great opportunity.
Friday's news also included the item that the Chinese sovereign wealth fund has bought 8.68% of the shares in Thames Water. This means that users of water and sewerage supplied by Thames will be paying tribute to investors in China, as well as in Abu Dhabi and Australia; who will also be able to exploit loopholes in UK water regulation to increase the dividends that they receive by increasing the debt that the water company and its customers will have to carry in future and cashing-in on such deals.
In the first case supposedly clever professional investors were the mugs, in the second a massive disadvantage to British consumers was created by Parliament and its advisers when they privatised the water industry. In both cases intelligent foreigners took advantage - quite legally - of dysfunctional systems.
Also on the same day the press reported a speech by a senior Bank of England official who suggested that international accounting standards [that were created by a forceful Scottish 'expert'] had not 'stood the test of time' and had almost certainly added to the misunderstanding of the credit bubble and the exaggerated assessment of the calamity that followed the crunch. This is because the standard assumed that there was a 'fair value' of any asset that was magically equal to the market price of the small sample of similar assets that were actually sold on any day. The sublime idiocy of such a notion was unnoticed all through the process by which it was adopted by international regulatory structures. Hence it was strangely appropriate that on the same day both the British Prime Minister and the Leader of the Labour opposition should make speeches on how to transform a much-criticised form of capitalism into a 'responsible' system that would guarantee prosperity and 'fairness' for all. The both suggested [in different terms, but with similar aspirations] that markets were the best way to generate wealth and to distribute it fairly among the population, provided that markets were regulated properly. There is a germ of truth in this assumption.
No market has ever succeeded in a vacuum: markets only work if they are interconnected with the rest of the economy: they need buyers to enter with purchasing power that was gained outside that market, and in it the sellers offer produce which incorporates components [including inputs by autonomous human beings] that are attracted from outside the market. No market has ever been free of crooks and liars and predators: people who decide that they can gain personal advantage by bending or breaking the rules that the other buyers and sellers assume everyone in the market is following. No market has ever been composed - and no market will ever be composed - of participants with exactly equal intelligence, the same ethical principles, identical capital resources, and identical access to all the same data as all the others [about their specific market and about the prevailing economing conditions and about prospective changes] which they all interpret in exactly the same way. So the assumptions about 'perfect competition' that set the criteria for formal market theory in Economics are utter balderdash; and any attempt to regulate markets as if they can be compelled to conform to the theory are doomed to fail.
So when the politicians step down from their podiums and ask their civil servants how on earth they can give effect to the high-blown [loudly applauded] rhetoric about 'responsbile capitalism' they get an answer in two parts: both of which are wrong.
The first part of the answer is to look for some well-publicised cases of 'unfairness', some individuals who are paid vastly more than the norm for employees in the country, and suggest that their income should be capped - or even reduced - at source, and then subjected to confiscatory taxation. In the last couple of days the media and some politicans have picked on Stephen Hester, the Chief Executive of the Royal Bank of Scotland; and they have suggested that he should not receive the income to whch he is entitled under his contract. He was brought into the bank, from a good job elsewhere, to pull it away from the catastrophe into which its former managers had dragged it. Because it was a state-supported institution in crisis, Hester patriotically accepted an unusually modest salary for a bank Chief Executive, to which was attached a bonus scheme if he achieved certain steps to assist the recovery of the business. Now the 'gutter press' and some policy-making fools are suggesting that the state should order the Royal Bank of Scotland to welsh on the contract, to appease public anger at the fact that some people in other banks whose functions are not understood by the policy advisers [and even less by the press] are getting much more than Hester; mostly as bonuses for proprietary trading.
The second string to the advice offered to politicians is much more long term than the scalp-hunting of individuals. It is to 'enhance' the system of regulation within which markets should be constrained. The phrase 'risk-based regulation' has recently been in high fashion but very few people in business have understood the concept. Business men and women well understand risk: they take risks on their own behalf and that of their firms every day: those who have the sharpest appreciation of both opportunity and risk are usually the most successful in planning investments and avoiding losses. It is now considered necessary to determine what categories of risk the regulators should require companies to avoid, or to mitigate if they cannot be eliminated if they must necessarily be accepted to enable the operation to continue. Some policy advisers have reached deep into formal Economics and suggested that regulators should compute the future long-run average cost of producing the output and require the price regime to converge with the assumed future cost. Provided the generality of firms in the market are moving towards convergence of prices around equality with the average cost at a selected future date, the market should be allowed to operate freely. The theory predicts that firms whose prices rise above the trend will fail to secure customers because rational consumers will buy cheaper alternatives. Similarly the theory predicts that firms that charge below cost price will bankrupt themselves. The firms that charge prices broadly in line with average cost of production [including a fairly-calculated 'cost of capital' that is the same for every firm] are good: the market will eliminate the others.
Such a model ignores branding, and therefore ignores the predominant determinant of 'value' in the perception of the vast majority of global consumers. Any attempt by regulators to impose such a naive theory would be ruinous to the real economy. But the concept of regulating to aim for average long-term cost pricing is presented on the political agenda because it is the one idea that people trained in Economics can think of in the present circumstances: old-hat Victorian marginalism is presented as the new panacea. My simple text PPE explains this point in depth. Such regulation as is now being advocated would transform the present economic crisis into an unmitigated calamity.
Wednesday, 26 October 2011
Back to the Mighty Markets
The Morning Posting
Though the media are still saying that the European Union and the Eurozone are under all sorts of threats from 'the Markets', the immediacy and seriousness of the threat is being downgraded. Back in prehistory Harold Wilson said that "a week's is a long time in politics": and time seems to be moving more quickly in this century. Commentators have not stopped mentioning the fact that 'markets' are a major source of pressure on the politicians and their advisers as they forgather again in Brussels; but they have been forced to respond to the demand of their readers and listeners for the nature of the threat to be specified. The press and broadcast commentators have begun to admit that the risk is not from 'markets' as such, but from individual users of and traders in financial instruments who tend to pursue a form of herd behaviour.
Throughout economic history there has been a series of 'bubbles' when far more investors have offered far more money than has seemed sensible after the event, for 'assets' that suddenly seem so attractive that almost every investor wants a slice of them. Nineteenth and Twentieth-century History regarded as absurd the boom in shares of ownership of black tulip genetics in seventeenth-century Holland: but it seems slightly less absurd today when it can be viewed as a 'false dawn' of the modern capabilities of genetic engineering. No doubt, there will be future bubbles in shares in businesses that make breakthroughs in the application of genetic science. Early in the eighteenth century, even though Scotland had already experienced a boom and a horrible bust of shares in a company for colonisation in Central America, the whole of the now-United Kingdom experienced a huge bubble in the value of shares in the South Sea Company. People who bought the shares early and then sold while the market was still rising made fortunes. Then far more people found their family nest-egg of gold or silver coins, or sold assets to get cash, which they became desperate to spend on shares: so there appeared people willing to create companies in which they sold shares - even including a company 'whose purposes will duly be disclosed'. Suddenly someone recognised that most of these companies had no real assets: some had paid dividends out of the money shareholders had given them, but there was no evidence that they would yield dividends even for a couple of years. The most percipient few investors were able to sell the shares for at least as much as they paid for them, but then more and more people tumbled to the truth and sought to sell: a sales panic ensued and most of the new companies vanished. The South Sea Company survived, in a much diminished state; then over the decades the lesson was shelved. The nineteenth century saw a succession of 'railway booms' as that technology spread around the world; Brazil had a 'rubber boom' [ended when Brits stole rubber genetics and installed plantations in Malaysia and Ceylon]; and the twentieth century had alarming stock-market booms and crashes. The dawn of a new millennium brought the dot-com bubble, and then followed uncontrolled expansion of a huge range of financial instruments which inevitably led to the greatest crash of all.
In every case the markets in which assets have been sold were simply media: the booms and busts were caused by the human psyche. Economists and journalists have written extensively about 'sentiment' and 'animal spirits', which was wholly appropriate: they also wrote about 'market sentiment' which was absurd.A major complicating factor is the fact that investors' optimism or pessimism is influenced strongly by cheerleaders: media commentators, 'analysts', rating agencies, Central Banks' statements and actions, government policy, opposition warnings and the lucubrations of Warren Buffet and other 'sages' or 'gurus'.
Market participants' behaviour could become so irrational that they sold Euros or Italian Government Bonds regardless of how much of the purchase-price they had lost, ignoring the fact that Europe is more than rich enough broadly to maintain the exchange rate of the Euro against the US Dollar and the Yen; and Italy is rich enough to unwind any perceived excess of government debt over a period of years. Any such asset-sellers would hurt the funds for which they are responsible, perhaps irreparably. Thus it is in their interests to preserve the medium-term 'value' of their holdings. As long as the Eurozone governments can show that they have the capability of maintaining medium-term assets-in-being [having dumped Greece, which is an unsustainable basket-case] they do not need to assemble trillions of dollars-worth of cash-on-the-table today. So they won't pile the cash up pointlessly: they don't need to. Markets have nothing to do with it. Market participants need strong nerves and common sense, and if fund managers should begin to behave destructively their employers should get rid of them - without any bonus or severance packages beyond the statutory minimum.
Evening Posting
After this afternoon's European Union 'summit' meeting no mighty new bail-out fund has been created, no immediate step has been taken towards 'fiscal union' of the Eurozone, and Italy has been forced into a humiliating promise to retrench further than had been intended by the busted Berlusconi government. The crunch on Greece is still being prepared; and there may yet be weeks of chatter before the banks are softened-up sufficiently to take the write-down of Greek state debt that will be necessary whether or not some means are found to keep Greece in the Euro The German Parliament has accepted a minimalist proposal from the Chancellor, who is far more concerned about German public opinion than she is about relations with France [though her speech this morning bizarrely referred to a threat that there could be a return to the era of wars in Europe if the EU should collapse].
After this evening's non-news had broken the immediate reaction of participants in 'the markets' was to raise stock prices a little. The politicians have made it clear that they are concerned to preserve the Eurozone: but are nowhere near panicking: they would not be stampeded into the sort of measures that US politicians [in particular] have been demanding from them. The eurorats' favoured technique of proceeding at snails'-pace towards consolidation of all power and wealth in their own hands has worked again.
Though the media are still saying that the European Union and the Eurozone are under all sorts of threats from 'the Markets', the immediacy and seriousness of the threat is being downgraded. Back in prehistory Harold Wilson said that "a week's is a long time in politics": and time seems to be moving more quickly in this century. Commentators have not stopped mentioning the fact that 'markets' are a major source of pressure on the politicians and their advisers as they forgather again in Brussels; but they have been forced to respond to the demand of their readers and listeners for the nature of the threat to be specified. The press and broadcast commentators have begun to admit that the risk is not from 'markets' as such, but from individual users of and traders in financial instruments who tend to pursue a form of herd behaviour.
Throughout economic history there has been a series of 'bubbles' when far more investors have offered far more money than has seemed sensible after the event, for 'assets' that suddenly seem so attractive that almost every investor wants a slice of them. Nineteenth and Twentieth-century History regarded as absurd the boom in shares of ownership of black tulip genetics in seventeenth-century Holland: but it seems slightly less absurd today when it can be viewed as a 'false dawn' of the modern capabilities of genetic engineering. No doubt, there will be future bubbles in shares in businesses that make breakthroughs in the application of genetic science. Early in the eighteenth century, even though Scotland had already experienced a boom and a horrible bust of shares in a company for colonisation in Central America, the whole of the now-United Kingdom experienced a huge bubble in the value of shares in the South Sea Company. People who bought the shares early and then sold while the market was still rising made fortunes. Then far more people found their family nest-egg of gold or silver coins, or sold assets to get cash, which they became desperate to spend on shares: so there appeared people willing to create companies in which they sold shares - even including a company 'whose purposes will duly be disclosed'. Suddenly someone recognised that most of these companies had no real assets: some had paid dividends out of the money shareholders had given them, but there was no evidence that they would yield dividends even for a couple of years. The most percipient few investors were able to sell the shares for at least as much as they paid for them, but then more and more people tumbled to the truth and sought to sell: a sales panic ensued and most of the new companies vanished. The South Sea Company survived, in a much diminished state; then over the decades the lesson was shelved. The nineteenth century saw a succession of 'railway booms' as that technology spread around the world; Brazil had a 'rubber boom' [ended when Brits stole rubber genetics and installed plantations in Malaysia and Ceylon]; and the twentieth century had alarming stock-market booms and crashes. The dawn of a new millennium brought the dot-com bubble, and then followed uncontrolled expansion of a huge range of financial instruments which inevitably led to the greatest crash of all.
In every case the markets in which assets have been sold were simply media: the booms and busts were caused by the human psyche. Economists and journalists have written extensively about 'sentiment' and 'animal spirits', which was wholly appropriate: they also wrote about 'market sentiment' which was absurd.A major complicating factor is the fact that investors' optimism or pessimism is influenced strongly by cheerleaders: media commentators, 'analysts', rating agencies, Central Banks' statements and actions, government policy, opposition warnings and the lucubrations of Warren Buffet and other 'sages' or 'gurus'.
Market participants' behaviour could become so irrational that they sold Euros or Italian Government Bonds regardless of how much of the purchase-price they had lost, ignoring the fact that Europe is more than rich enough broadly to maintain the exchange rate of the Euro against the US Dollar and the Yen; and Italy is rich enough to unwind any perceived excess of government debt over a period of years. Any such asset-sellers would hurt the funds for which they are responsible, perhaps irreparably. Thus it is in their interests to preserve the medium-term 'value' of their holdings. As long as the Eurozone governments can show that they have the capability of maintaining medium-term assets-in-being [having dumped Greece, which is an unsustainable basket-case] they do not need to assemble trillions of dollars-worth of cash-on-the-table today. So they won't pile the cash up pointlessly: they don't need to. Markets have nothing to do with it. Market participants need strong nerves and common sense, and if fund managers should begin to behave destructively their employers should get rid of them - without any bonus or severance packages beyond the statutory minimum.
Evening Posting
After this afternoon's European Union 'summit' meeting no mighty new bail-out fund has been created, no immediate step has been taken towards 'fiscal union' of the Eurozone, and Italy has been forced into a humiliating promise to retrench further than had been intended by the busted Berlusconi government. The crunch on Greece is still being prepared; and there may yet be weeks of chatter before the banks are softened-up sufficiently to take the write-down of Greek state debt that will be necessary whether or not some means are found to keep Greece in the Euro The German Parliament has accepted a minimalist proposal from the Chancellor, who is far more concerned about German public opinion than she is about relations with France [though her speech this morning bizarrely referred to a threat that there could be a return to the era of wars in Europe if the EU should collapse].
After this evening's non-news had broken the immediate reaction of participants in 'the markets' was to raise stock prices a little. The politicians have made it clear that they are concerned to preserve the Eurozone: but are nowhere near panicking: they would not be stampeded into the sort of measures that US politicians [in particular] have been demanding from them. The eurorats' favoured technique of proceeding at snails'-pace towards consolidation of all power and wealth in their own hands has worked again.
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