Boom & bust?

Where is the economy going on? And equally important, in what timescale? I wish I knew!

Unemployment is up a whole 10% in the last quarter to 2.26 million. Yet there has been a bounce in the stock market, and our oh so short term memory is leading us towards the end of the recession. After the stock market collapse last year, people expected a bear market rally and that is what we have had. There has been a bounce in economic activity as businesses were forced to restock after cutting back so sharply last year. But the rally continued, and people have started to question whether this is a bear market after all. They wonder if the recovery is actually genuine. Surely this is what bear market rallies do – they suck in investors, stocks rise, until eventually there aren’t any buyers left, and stocks plummet again.

It’s always wise to consider the fundamentals. Any recovery in corporate earnings is probably short lived, because it has been made by cost-cutting, and by government spending money that we don’t have. At some point the economy must generate growth without the benefit of extra government money fuelling it, and cost-cutting in corporations can only go so far. What cost-cutting does is make life harder for businesses in the future. By all means cut out waste now, but remember on a countrywide scale that firing people leads to higher unemployment, which leads to less spending power, which leads to fewer sales for your company.

The general public is desperately paying off debts as fast as it can, and so are companies. I make no complaint – it’s what people should be doing, but people also need to be aware of the long term implications of this policy. Companies are doing everything they can at the moment to reduce their indebtedness, usually by selling more shares to their shareholders to repay debt. They’re not raising money on the market to invest in future growth. They’re even repaying debt when interest rates are low.
And it can clearly be seen that interest rates are likely to rise – look at the standard variable rate mortgages now, and what a building society will offer you as a fixed rate of two to five years in the future. There is about 1½ percent difference – higher of course. They expect interest rates to rise. So does everybody else.
Which in the long term tends to leads to inflation. The government will be pleased, because then it will be repaying at the enormous amounts of debt that it incurred in bailing out banks etc with cheaper money. We, as taxpayers, should be pleased as well because it will reduce the amount of time that we have to pay interest to the people who have bought this debt. But we as consumers will be paying out through an inflationary period in the longer term.

In the near term, we are still in a recession and there may be some deflation. In short, we’re back to boom and bust.

Holes and avoiding them

Denis Healey’s First Law of Holes – “ When you’re in one, stop digging!”

A very good thing to keep in mind when you are Chancellor of the Exchequer. And also a very good thing to keep in mind when you’re in business.

Because, I have discovered, people have a habit of repeating themselves, especially when they are in some difficulty. The businessman thinks that if he works harder, the problem will get better. But often it is the method of working that is causing the problem. So working harder makes it worse quicker. So he works even harder, because he sees the problem getting worse, but he does not stop to think why. He is too busy doing when he should be thinking.

In this recession we are seeing the rate of personal bankruptcies and insolvencies rising. It’s no surprise – so many businesses were started in the boom years, and the owners have never experienced a recession so do not know what defensive steps to take. It’s such a waste when the business goes bust. The headline news is the personal bankruptcy and the redundancies. But that’s really just the tip of the iceberg. In the last recession a large housebuilder went bust in the south east of England, and 120 of its subcontractor firms went bust because of it. The same thing is happening now.

Apart from the personal tragedies, there is a collective pool of knowledge in any business which is now dissipated. So starting again is much more difficult for everybody concerned.

There is another, very common, issue when the business is failing, which is generally evidenced by business men rather than business women. The male of the species does not want his wife and family to worry, so does not talk in as much detail about the problems he is facing as perhaps he should. Then, when the business does fail, it is a shock to the family. His wife feels there has been a lack of trust in the relationship, and it puts it under even more strain than the business failure alone. So a failure in the business can lead to a failure in the relationship and the family as well. Such a waste.

So I think there are two points to note. Firstly, businessmen would benefit by being more open with their family. And secondly, they need to stop digging holes. To do that, they need to change the thinking. Or, at the least, stop and think. And if they cannot think of a better way of doing it, then they need to find someone who can.

The great house price debate!

In English it is called a complex equivalence. It’s when two statements are joined in your mind but not in reality – it’s as though someone has said ” which means that” in between the two sentences. Salesmen use it all the time when trying to sell the benefits will feature of some new car or the like. The rest of us just use it continually without noticing. “ You’re not smiling.” (which means that) “You’re not enjoying yourself”. No – I’m simply not smiling!

There’s plenty of this about in the discussions on the economy that you can hear about at the moment. Particularly where house prices are concerned, because they seemed to be the key barometer of how we feel about our personal wealth in this country.

Today’s announcement that the housing market has seen a bit of a pickup is a case in point. The Royal Institution of Chartered Surveyors has reported that buyer enquiries have risen for the seventh month in a row. Apparently, this means that house prices have at worst bottomed out, and may even be rising! Whereas I simply think that people think that the market is coming to a bottom and are looking for a bargain.

But if we look at historical measures of affordability, even this looks bizarrely optimistic. Historically, average earnings and house prices have a correlation – 3 ½ times average earnings equals average house prices. Currently, even after the last 18 months of price drops, it is nearer for a half times average earnings. So on that basis, a further drop is necessary just to make houses affordable again. Given that the UK economy is in recession, and that unemployment is still rising and will do so for the foreseeable future – at the least the rest of this year – I cannot see that the bottom has been reached yet.
There is another measure as well – apparently charts are available going back to before the 1800 is showing that house price cycles go in 18 year patterns. 14 years of growth and four years of falling prices. You work it out – how many years of falling prices have we had so far?

I also don’t follow the logic of people who want to buy before they are certain that the bottom has been reached. They argue that if they haven’t quite reached the bottom then at least they’ve bought the property they want at a reasonable price. However they can only judge that in hindsight once the bottom has been reached. They don’t know when they buy where the bottom is yet. They could be buying still quite expensively. Surely it is better to wait until a continual upturn has been observed, and buy then, knowing that they are away from the bottom? It makes much more sense to me.

But what are your views – there’s a survey on this page, so please take it and let me know your thoughts. Do you think house prices are going to go up, stabilise or go down in the near future?

Govt funded help

The Government are funding training and consultancy on a wide range of business issues allied to the recession. It can be for planning, strategic issues on finding new customers, keeping the ones you have, improving profits - in fact, pretty much anything that can demonstrate a business benefit for the owners and senior managment.

The scheme has been extended for another year, and is aimed at small businesses with 5 to 250 people, although smaller entities can benefit too, in the right circumstances. The paperwork is simple, and funding of £1000 is available for businesses that spend £1500 on this process.

As a firm, we've had a lot of success with this scheme. We've found extra profits for every business we've run it for, by using our specialist software package which facilitates a discussion on the areas for improvement, and produces an easily actioned list of changes.

It's good, produces quick results, and costs next to nothing. And might make your business survive!

The sizzle and the sausage

In selling, there is an adage that you sell the sizzle, not the sausage. This means that you sell benefits rather than the product itself. This is how it goes.

“Hello Madam. Would you like to buy some of these tubular cardboard coloured things with flecks of green and brown in them? You can eat them you know! They are called sausages. Would you like me to slip you a sausage Madam? You're going to report me to who? I'm sure there's no need for that……”

Or maybe it should go like this.

“ Hello Madam. Here is a quick tasty and nutritious meal for all the family. You can cook them really easily, and they go with all sorts of things. Everybody likes them. They are full of meat herbs and spices so they're really tasty. Can't you just hear them sizzling in the pan ready to be eaten, with that lovely smell wafting out? You'd like me to slip you one Madam? Well, really!”

Do you see what I mean?

However, there is often a difficulty both in sales and in other areas of life. Some people get the idea of selling the benefits very easily. But after they have sold the benefits, and got the sale, they stop. They miss out the last vital point. You may sell the sizzle, but you still have to deliver a sausage.

In other words, they over promise and under deliver. But if you deliver on your promises, whilst you will be in the minority, you will be trusted, and people will know that they can rely upon you. So make sure that before you make a promise, you think about the delivery, and negotiate if needs be time and space so that you know you can deliver. It's worth it. It saves an awful lot of hassle. And people will always be happy to see your sausage!