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Too Many Manifestos: Too Little Leadership - Justin Urquhart Stewart Commentary

April 22, 2010

Too Many Manifestos: Too Little LeadershipI normally try to restrict my comments to investment related issues, but I feel a rant coming on about the insipid publications that were presumably supposed to inspire us to vote for any of the
major participants. Although the parties may have their own colours, frankly their programmes and policies seem to be coated in a bland magnolia. It appears that their spin doctors have, at least for the moment, ordered them all to be as non-controversial as possible and not to step too far out of line.
 

So let me give them some issues to consider. This election provides these politicians with a remarkable opportunity to show some real leadership, initiative and courage, and to come out with some ‘radical common sense’ (sorry, one of our own 7IM tenets) ideas to lead us out of this financial morass.
 

There are too many areas to cover but let me mention just a couple. Our leaders will (or should) want people to save more and take more responsibility for their own family affairs, especially with regards to retirement and old age. So why not radically reform the savings systems? Why not rationalise the Child Trust Fund, ISAs and Pensions all into a single saving scheme which is simple, transparent and flexible in terms of its use from providing security for a mortgage, through to
education, health care and retirement for the family – most of which currently fall back to the government. Add to that a form of real compulsory saving as we have seen in Australia (as opposed to the UK’s own Ponzi scheme - also known as National Insurance) and a more certain stream of longer term savings can be created.
 

This in fact could save on the duplication of various operational charges, be simpler to understand and vitally transfer costs, power and influence away from the government back to those who should be more responsible for looking after ourselves – us! Also why not face reality – we are all living longer and usually healthier lives, so realistically why on earth do we retire at 65 when on average we are going to have quite often at least another 25 years to live? So raise the retirement age as a standard default (allowing for certain health exceptions) to a
more logical age of 70. At the same time the civil servant final salary schemes will have to face the reality that they are now unaffordable and will need be adjusted to contributory structures.
 

One other area to mention must be that of Smaller to Medium Size Enterprises (SMEs). After the government (who now employs directly and indirectly 39% of the entire workforce!) it is this sector that is the largest employer in the UK. In my travels around the country I have found that it is this group that frankly has the ability and talent to be the reviving force within the UK economy.
 

However, seedlings don’t grow without nurturing, so whether it is access to easier and cheaper banking facilities, simpler investment processes as well as the scything of the heap of bureaucratic administration that has been put onto them, there is a great deal that can be done. Why not simplify and regenerate the now somewhat tired VCT and EIS structures and rationalise all those little meddling initiatives that endless Chancellors have started over the years - mostly in the name of trying to get a good headline the day after the Budget. They all come out with entrepreneurial platitudes – now is the time to prove their focus and commitment to the best area of opportunity we have for economic regeneration.
So politicians - stop pleading about our abject economic failures, and start leading us out of it.
 

What happens if a country does default on its debts? Does it really matter? After all, the country will stll be there tomorrow and it is not as though another country will come in and claim it for themselves as collateral for a bad debt – although certain European nations do have a track record for unwanted expansionary policies. No, the main pain comes from their ability to be trusted in the future and if so, at what cost.
 

It has usually been the case that riskier countries have to borrow in stronger foreign currencies as local monetary value is not trusted. Often this leads to further pain as the local currency can significantly devalue in times of nerves, as perfectly demonstrated by Iceland whose currency collapsed by 50% and Government debt leaped to 80% from something close to nil. Taking this further, Greece is finding itself in an equally invidious position. Greece already has a sky high debt to GDP ratio of just over 100%, thus if its yields on its debt are running at 5-6% , then the
country is paying 5-6% of its GDP in just paying the interest! It is thus going to be almost impossible to start paying down this debt and in fact it may have to keep piling up unless the economy can find some way of growing at a greater rate. So as it cannot devalue, all it can do is look to carry out some very significant cuts in public spending as well as raising taxes. Sound familiar?
 

So please beware countries can go bust, can default and can lose you a lot of money. We are back in a world where some companies can be safer than certain countries. If there is a direction for investors at the moment, it is that some sovereign debt may well be riskier than the more highly rated corporate debt. So who do you trust with your money – a successful corporate leader or a
politician? Be careful when choosing.
 

Whilst the current popular tone of economic commentaries seems to be almost unanimously positive, perhaps I can be Grinch and point out that under certain measures the US is still in recession. Although usually recession is accepted as being two quarters of ‘negative growth’ (i.e. shrinking!), the National Bureau of Economic Research has a broader definition which includes a variety of measures which have a longer lag time and thus extends the recession further. However,
although we are seeing growth, such measures still indicate the sensitivity of the recovery and especially around jobs. I think there is a very good chance that we are going to see some astonishingly good corporate results, but often on the basis of ‘efficiency and productivity programmes’, which translates as cost and especially job cutting. Hence the comments being made about a ‘jobless recovery’ and confidence in a real recovery will not really take root until we start to see some tangible change in permanent employment trends.
 

The equity markets are still being run by the excited ‘bulls’, but please be aware that the easy money has already been made. The risks get higher from here.
 

And finally.....another superb headline that caught my eye – “Corpse was still alive at airport, wife says.”A German woman was arrested recently on suspicion of trying to smuggle a corpse onto a plane, saying her husband was still alive when they reached the airport. The husband, a retired pilot, was pushed in a wheelchair through the airport wearing sunglasses before check-in; staff became suspicious and he was prevented from boarding the plane. Gitta Jarant and her daughter were arrested at Liverpool's John Lennon airport on Saturday, suspected of failing to give notice of her husband Willi's death. She told the paper the 91-year-old
former pilot had died at the airport just before the flight. "I'm not a smuggler," Jarant, 66, told the newspaper Bild. "My Willi only died at the airport. He suddenly looked so lifeless, like a wax figure. His fingernails turned blue all of a sudden. At home he was still warm - I swear!" I am sure I have sat next to people like that on planes – mind you, that was normally after the inflight meal.
 

If I may pay my respects to our forbears on this day (Friday 16th) who fought and died at the Battle of Culloden in 1746 – thankfully the last battle fought on British soil.
 

Have a good week.
Justin

P.S. When an Icelandic bank blows up you lose your cash but when Iceland blows up we just get their ash. Maybe I won’t give up the day job.....