Sunday Thoughts: When will the economy recover? When both a family in Florida and you know what your house will sell for

There is much talk in the Sunday newspapers about the economy, and the comments of UK Shadow Chancellor George Osbourne. The question is – how long will the recession be?

Simply, at present I don’t know anyone who knows the answer to that question. The answer to part of that question is: do you know what value your house would sell for tomorrow? OK, November is not a great time to be selling a house, so what would it sell for say next April, as Easter is traditionally a high spot for the home sales market?

You may think “well its worth X,” and there are many people still believing that – just take a quick look at UK house marketing website RightMove, and see how many properties have the words “Offers in Excess of” tagged before the price. But really, all that is a view of hope over economic reality.

When I was in college, there was an argument between the electronics lecturers and the business lecturers over a project they lead us through, to design and market a product. The electronics lecturers said that the price of the product was cost plus fair margin; the business lecturers said it was whatever the market was prepared to pay. Siding with the business lecturers was what eventually made me end up going into business – its economic and market reality, as in theory the value could go to zero.

My view is that those who put “Offers in excess of” would have sided with the business lecturers – but then, watching those properties, they have now been on the market on average in excess of six months; and those that don’t have those words are starting to – slowly – turnover and sell. These are either fire sales by mainly what seems like buy-2-let owners, or repossession resales by mortgage companies – of buy-2let flats. I have said to friends now for a while, that this recession could well be a middle-class one, where by the buy-2-let dream becomes a reality of “prices can go up as well as down.”

But fire sales always happen in markets, as do repossessions – it’s the growing volume which is concerning, and those growths are not signs of a stable market. It’s the sales price of the average family home which is where the problem of valuing assets is currently the part answer to the recession question.

On Friday, various mortgage lenders re-entered the tracker-mortgage market. The products though, as economists had predicted were changed. The changes were in the form of: a larger “gap” between the Bank of England base rate and the mortgage rate – with some predicting new products may well be based soon on LIBOR as opposed to BoE rates; and the amount of deposit required – there are now less than 50 mortgage products on the entire UK market which require a 10% deposit, and nothing below this level.

What does this data say? It says that most mortgage lenders, already short of cash, can’t take a bet at present on house prices dipping by a further 10% in the next two years. In fact what it is saying, is that that is what is going to at least happen. In most stable markets, a 10% deposit would be enough to take care of most economic changes - at present it is not, and until it is this recession will not find a bottom.

The hailed for and resultant stock market rallying – possibly Gordon Brown lead, I think so – injection of capital into the banks together with buying of so called “toxic” debts has still not occurred. In the United States, Henry Paulson stated that the US Treasury had so far with its $700Bn cash pile only bought shares in banks, not the toxic debt – which resulted in more turmoil on the global stock markets; while new RBoS CEO Stephen Hestor still debates the how and when of the proposed BoE cash injections. All this means that the lack of trust between banks continues, resulting in the continuing instability of the interbank markets reflected in LIBOR, resulting in less lending, and hence to the stock markets falling and climb like the Red Arrows – the whole problem that the Gordon Brown solution was supposed to solve.

The economic storm was started by: over lending in the United States mortgage market; and packaging of these debts in to the world finance market, and purchase by global bankers who didn’t know what they were holding. This storm will continue until the banks can trust each other, and know that either they have sufficient cash to pay back debts, or can sell assets to pay these debts, and know the value of those assets. While the lack of cash-injection continues, and a resultant lack of lending, the value of those assets will fall, and hence the cycle will continue downwards.

What about specifically the UK? Downturns are when Governments should spend, and that what Gordon Brown is proposing – from listening to the media, a tax cut in a pre-Christmas budget. However, as one commentator said yesterday, even a 10% tax cut putting in £30 a week in the average pay packet will be swallowed up by rising fuel prices rather than high street spending – so I don’t like that idea.

My view is – if you don’t have any savings in the cupboard (which the UK doesn’t), and you need to spend (which we ought to), then spend on long term projects, which you would have had to have borrowed for anyway. Transport is a good sector for such projects – which creates many jobs in the construction and operations phase - so why not revive plans for a high-speed link in the UK? Virgin had plans in their bid for the East Coast mainline a few years back, and there is always the old “rebuild the Great Central Railway” which is still relatively untouched post-Beeching; and I can’t see why electrification of the old GWR can’t be undertaken, or a review of the long term location of London’s main airport can’t be undertaken – there are far fewer homes in the Thames than the M4 corridor.

So, when will the recession end? It will bottom after Mr Paulson and Mr Dowling get on and inject their cash into the banks; after Barack Obama gets into the White House; and once you know the price of what your house will sell at next Easter, and the banks will give the buyer of your house a mortgage on a 10% deposit from a choice of more than 250 products, knowing that it provides a fair risk/return. Until that point, and no matter what Gordon Brown spends on or George Osbourne says will make little or no long term difference – it will only add to the peaks and troughs which say: neither I, nor you, nor the bank know what your house is worth.

Good Luck!

Why has Wales suffered so much in the credit crunch – and why it should not have

There are many pieces of news hitting the headlines over various layoffs and redundancies at present. It is unfortunately inevitable that companies will cut expenditure in light of falling revenues – because if they didn’t survive, where would the jobs come from in a revival?

However, from various pieces of government funded analysis, the Welsh economy is presently suffering more in the down turn than most economies, with redundancies around one quarter higher than the average in the UK. The excellent Jamie Owen asked a commentator last night on Wales Today why, and the answer was at best fudged: so here is a personal view.

The Welsh boom time lasted 100 years, from about the 1820’s when the first pits were sunk, to the post war 1920’s when the great depression hit. Since then it has been a slow bleed from employment to unemployment, investment to decay; with around two thirds of the pit jobs lost by the start of World War Two, and Maggie Thatcher just finishing the inevitable in the 1980’s.

At that point, Wales had a clean slate and was offered investment – according to a talk I heard from Ieuan Wyn Jones, from 1973 to 2003 it had some £930million pounds of grant investment made into it, and it’s in how that money was spent as to why Wales is now suffering.

Firstly, 60% of it was invested within 12mile radius of Cardiff Bay. Now partly that should not come as a surprise – that’s about equivalent to the amount of Welsh GDP generation – but that doesn’t reflect the distribution of the Welsh population. Merthyr Tydfil sits at a radius of 18miles from the bay, and has the highest unemployment rate of most towns and cities in the UK.

Secondly, the way the money was invested. Most of the money was given to large incoming investment projects by non-EU head quartered companies. Sony is probably the best example at Bridgend, which was held up as a world class centre by even Sony themselves; the same can be said of the GE engine facility at Caerphilly, or the BAe facility at Wharton. But some of those projects didn’t come off – the LG Philips plant at Newport being the highest profile example, and the film studio at Valleywood presently looks like a missed opportunity. Most of the money was placed in singular large profile projects, around a strategy of “hub and spoke” with the WDA investing in hubs and the companies themselves creating spokes in the local economy. They even created a series of large industrial estates for the developments of these spokes, many of which are still empty rows of large steel sheds. However, unlike the Scot’s the Welsh picked no core hubs, and so there were no world class spokes – which would have led to more hubs.

Thirdly, the local grants were handed out at a local business initiative level in an adhoc and splash the cash manner. A conversation I had 18months ago with a council based business development unit went:
• Me: how many of the following skilled people do you have? (I knew they had the answer, as they would come up with such stat’s when we were looking to place call centres in the UK)
• Council: well, we offer a grant to find out such answers in developing your business. We pay £X for such investigations and reports, and it will cost you £Y (about twice X) to buy the report from one of our approved consultants
• Me: how often do you get asked this question?
• Council: about twice a week at minimum
• Me: so to answer a common question, I have to get a grant to pay someone to answer it for me?
• Council: yes!

The problem this generated was a grant-dependent culture, in local small businesses, and also a series of weak SME businesses. Grants should be from a business level seen as a bonus guarantee, not an essential of business as they have become here. Every time I hear a new business proposal in Wales from a local person, the second issue on the table after the concept is the detailed list of grants available!

The result of the grant expenditure from 1972 to 2003 is that 97% of the jobs created have gone. They came to Wales, were created, and have now left. There were insufficient local roots placed down by the hub investors, so they could leave easily when technology changed – or a downturn came. And the spokes were not strong enough to survive alone.

Have there been successes in the Welsh economy? Yes – and the thing they have in common is that they were in general created by people who are or have strong ties to Wales. Such enterprises include insurance group Admiral, the only Welsh headquartered business listed in the FTSE100 – they are about to take on 500 people into a new centre in Newport; or the Lanelli based TV production company Tinopolis, without which Dr Who could never have been attempted in Cardiff.

Wales will now suffer as a result of poor central strategy – and one which missed its greatest strength: the Welsh people. On any measure, compared to an average UK worker they are three times as loyal, and as a whole are as well educated as any part of the UK thanks to large investment in the educational sector. They are also quite creative and adaptable, in part because of this love and existence of an old Celtic language. What I am trying to say here is that the Welsh people could be horribly entrepreneurial if given the right infrastructure around them, but what appears to have happened is the creation of a grant-dependent business focus. Thankfully most of the new businesses coming through from the sub-25 year old bracket can stand on their own two feet.

I think Wales will go through some tough times, probably even longer than the rest of the UK: we might just as well be in Bejing in 2012, such is the amount of Olympic money that will at presently planned flow down here. But I am convinced by the Welsh people, and that the central government – thankfully because it won’t have the cash – will change it strategy to local entrepreneurial investment focus, over one of buying in multi-national hubs. Modern businesses need to be adaptable, and such choices even by the companies themselves will need to come with far quicker payback timescales.

When faced with that unknown choice, versus a bet on your own people, I hope it is even obvious to central government where the financial investment bet needs to be placed – your own people offer a far, far better set of long term employment odd’s.

Good Luck!