Taming irrational markets
Times Analysis March 25, 2003 Business Editor's Commentary by Patience Wheatcroft
IIRRATIONAL exuberance rarely comes in quite so pronounced form as it did last week. Even allowing for the extraordinary enthusiasm for worthless internet stocks that led Alan Greenspan to resort to the phrase, the seven consecutive days of rises that the stock market experienced had not been seen in 40 years.
And they were completely irrational. Celebrating the start of war with a flurry of investment in the equity market might have obeyed the historical precedent but it lacked logic. It might have been a bet on a positive outcome to a short, sharp war but that was to ignore the underlying problems that beset so many companies and those investors who have traditionally put their money into equities — the pension funds.
The oil market is just as crazy as shares and could become even more dangerous. It is tempting to believe that price movements are being driven by genuine changes in demand and supply, or potential disruption to supply. Such factors might help to explain the 50 per cent rise in prices between November and early March, as users stocked up for war and Venezuela’s two million barrels per day were stopped by strikes. They might even explain yesterday’s $1.5 per barrel surge. The war suddenly looked longer and, for seemingly unrelated reasons, 800,000 barrels are being lost from Nigeria, a key source of oil for America.
If that were the test, however, it would be hard to explain why oil prices crashed to a four-month low in the first few days of conflict, even if Venezuelan output is gradually coming back into play.
In reality, oil prices, like share prices, are being driven by follow-the-trend speculators and “directional” hedge funds, who are eclipsing the power of Opec as they have that of regular institutional investors. Once a trend has run its course, as the oil price falls and share price rises clearly had by the weekend, traders are looking for an excuse to turn round and head the other way.
Random huge swings in oil prices are not just hopelessly damaging to producers. They can switch growth in the world economy off or on. Given that those oil producers that can produce have little spare capacity left, it would not be amazing to see traders attempt another uptrend in the price.
Over time, however, trend-following in the oil market is something of a zero-sum game. Even if prices were driven only by “real” trades, the market would be cyclical. On the stock market, such trend following can bring a change in investment behaviiour, as it has in recent years in Japan. For decades, we have expected share prices to follow a long-term upward movement, in line with output and profits, even if they occasionally move too fast and too far and have painful corrections. If the directional speculators remain in charge, however, as they have in Tokyo, share prices start to be essentially cyclical. If that happens, even the most most sober long-term pension funds begin to think in terms of getting in and out of shares, as many traded in and out of bonds during the decades of inflation.
That is the opposite of what British businesses need if they are to stand a chance of improving their competitiveness and thus generating better long-term returns for investors. As the CBI highlighted yesterday, with next month’s Budget in mind, British companies are failing to invest in machinery and equipment. The level of investment fell by 12.7 per cent over the past two years, the greatest decline of any of the G7 countries. The CBI wants more tax credits for research and development to help to stimulate an improvement. Even more important though would be incentives to encourage investors in companies to take a long-term approach.
Serious money for serious results
LAST Friday Simon Group announced that Michael Davies “has decided to retire”. A sensible decision, one might have thought, given the company’s miserable performance in recent years and the admission that, after 13 months of trying to find a buyer, it had been forced to abandon hopes of negotiating a deal.
But far from apologising to shareholders and bowing out, Davies is negotiating a payoff. Even as the shares sank to a 30-year low, he was of the view that his one-year contract entitled him to compensation. Some might feel that he had already done rather nicely for a non-executive chairman of a shrinking company. Last year he collected £113,000 but the year before his take had been swollen by a bonus of £193,000, the fifth and final instalment in an unusual bonus scheme negotiated back in 1994, when Simon had been in financial difficulties.
Timothy Chadwick, the new chairman, acknowledged the fact that Davies had seen the port operator through that tricky period. However, he added that: “I am confident that with a new team and sharper focus, we are well placed to grow shareholder value.” That implies there might of late have been a lack of focus under Mr Davies, who is approaching 70. He had certainly found time to sit on plenty of other boards. He was until recently chairman of National Express and Corporate Services Group and a non-executive director of British Airways. He remains chairman of National Express.
Shareholders might resent having to continue paying him a salary in his retirement.
But presumably Davies takes the view that there is no harm in asking for more, since boards generally pay up without protest. At the housebuilder Persimmon, the chief executive John White reckoned that he should not give up his two-year roller for nothing, so he is being compensated to the tune of £1.2 million. Other directors who still enjoy the benefit of contracts longer than the one year which corporate governance best practice decrees appropriate will no doubt support White’s case. Granada directors were compensated when their contracts were reduced from three years to two but, rather than send investors another bill, the chairman Charles Allen has held on to his two-year roller, despite protests from investors.
Unless investors press their case more vigorously, they will continue to find that they are overridden. The message that they need to instil into boardrooms is that they are happy to see executives remunerated handsomely for good results. But rewards need to relate to what shareholders experience.
An example of cluttered thinking
A NEW survey concludes that office staff spend almost three hours a day unproductively. From this information, the survey was able to conclude that wasted time in the office was costing employers more than £150 billion a year.
The organisation responsible for providing this information is learndirect, a purveyor of online education in need of a lesson in the use of capital letters.
Six weeks ago, this same organisation declared that 57 per cent of people had nightmares about work, a quarter of those bad dreams occurring on Sunday nights as the nation braced itself for Monday morning. This insight into an over-stressed workforce was the result of another survey. So was the information, published a couple of weeks later, that more than one in four members of the workploace rated their boss as either “incompetent”, “disinterested” or “a dictator”. Thanks to learndirect, we now know that 93 per cent of people rate “strong, inspirational leadership and professional encouragement” as the most important qualities in a boss.
Perhaps some of the time being spent so unproductively by office workers is being used to answer silly questions from learndirect. There is, after all, serious work to be done by this publicly funded body. It was set up under the auspices of the University for Industry, the vehicle through which the Government set out to encourage people to keep on learning throughout their lives.
A noble cause belittled by such nonsense as the patronising exhortation to celebrate the start of spring with a desk-detox. “A messy desk is very demotivating,” according to Helen Milner, learndirect’s director of operations. So her government-funded organisation enlisted the services of one Dawna Walters who, apparently, presents a BBC Two programme called Life Laundry to produce a guide to . . . tidying your desk.
Few would deny that there are inefficiencies in offices, although whether they cost £150 billion is debatable. There can be no doubt, however, that learndirect is wasting public money on silly stunts that will do nothing to improve literacy and numeracy levels in the country.
LAST night Michael Howard, Shadow Chancellor, dissected Gordon Brown’s attitude to reform of public services generally and the health service in particular. He concluded that the Chancellor’s conviction that there had to be a centralised state monopoly in healthcare meant the increased funds being pumped into the NHS would not produce commensurate improvements. What hope for consumer choice from a Chancellor who reached 6,086 words in a speech on the subject before saying: “Finally, choice . . .”?