Issue 164: 2018 07 26: Lens on the week

26 July 2018

Lens on the Week

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UK

PUBLIC SECTOR PAY: On the surface it sounds good:  pay for junior teachers up 3.5%, for the military up 2% (with a bonus for the current year), 2% for junior doctors, 1.5% for their seniors, 2% for the police. But without new money from the Treasury these increases are to be funded through cuts and by squeezing departmental reserves.  That will mean departments scrambling around to save money, more defence cuts and a general thinning of services.  There will be disappointment among recipients too.  The pay review board recommended 3.5% across the board for teaching staff but senior teachers will only get 2%.  The armed forces were hoping for 3%.  So, despite the end of the public sector pay freeze, austerity continues.

Still, there may be worse to come.  We have been told (at times of growing GDP) that the important figure is the ratio of government borrowing to GDP.  Everyone agrees that if we leave the EU without a deal GDP will fall.  That will send the ratio the wrong way.  Will we cut more deeply or discover that it is a different ratio which really matters?

BREXIT: All looks like chaos at the Department for Exiting the EU.  David Davis has gone, replaced by fellow Brexiteer, Dominic Raab.  Number 10 makes its oversight of the process official with a movement of civil servants.  The power wielded by civil servant Olly Robbins reminds us of the ill starred Fiona Hill/ Nick Timothy combination or even the Dispensers in the early 1300s .  Mrs May’s Chequers deal satisfies neither Brussels nor her domestic critics.  Are we moving towards leaving without an agreement?  Is the doomsday scenario becoming inevitable?

Industry certainly thinks it may be.  Airbus talks about moving their UK factories to the continent.  Rolls-Royce might have to do the same.  There is talk of mass unemployment, riots, collapse of public services.  There are worries about the status of EU citizens in Britain and British citizens who wish to remain in the EU.

It is all very worrying, but it is hard to tell how real the problem is.  At the beginning of the negotiating process, the Shaw Sheet predicted that there would be a period shortly before the end of the negotiations where everyone took stronger and very aggressive positions, and attempts to settle anything looked doomed to failure.  That is what always happens as you approach the deadline for a commercial deal and that is what is happening now.  That doesn’t mean that a deal will be done.  Sometimes negotiations do collapse, sometimes with disastrous consequences.  On the other hand, one should not read the wildness of this part of the process as an indicator that collapse is inevitable.  It is merely what you would expect.

ROTHERHAM: The Labour MP for Rotherham, Sarah Champion, has been attacked (even receiving death threats) because of her highlighting of the rape of white girls by Pakistani men in her constituency.  Just Yorkshire, technically a charity, leads the criticism (although there is nothing to link it to the death threats), referring to Ms Champion’s article as lending legitimacy to abuse and racism and as having dismayed an entire community.  There must be many people in Rotherham who would do a lot to prevent too much light being shone on what occurred there but, in the end, only truth and bluntness will disinfect this ugly sore.  Local politicians who try to shut Ms Champion up are in precisely the same place as those who threaten whistleblowers to conceal abuse within their organisations.

But as always one should look for those who are trying to exploit an ugly situation.  It has been suggested that Momentum would rather like to have their own candidate in as the Rotherham MP.

International

HOT HOT HOT: Wild fires have killed at least 74 people, injured another 200 and destroyed houses in the holiday resort of Mati on the Greek mainland.  Fifteen blazes on three fronts were raging in the eastern Attica region.

Extreme weather and record high temperatures and droughts have been recorded throughout Europe. Forest fires have swept through parts of Sweden, Norway (where one firefighter was killed), Finland, Latvia and Russia.

In Laos, by contrast, a dam collapsed after heavy rain, flooding six villages and leaving at least 20 people dead, hundreds missing and 6000 displaced.

ATTACKS: In Toronto, Canada, a 29 year old man armed with a handgun killed a girl aged 10 and a woman aged 18 and wounded 13 other people before being confronted and shot dead by two police officers, in a busy street of crowded restaurants on Saturday night.

A 34 year old man armed with a knife attacked passengers on a crowded bus in Lubeck, Germany, after setting fire to his backpack.  Ten people were wounded (three seriously).  He was overpowered by other passengers and arrested by the police.

SYRIA: Israel shot down a Syrian warplane which entered Israel’s airspace.  The jet crashed in Syrian territory.  Days earlier, Israel had used its new ‘David’s Sling’ anti-missile defence system in an attempt to intercept two Syrian SS-21 missiles which appeared to be heading towards its border.

The rebels in south west Syria – where the revolution began – have surrendered, following the regime attack of recent weeks.  Hundreds of rebel fighters will be bussed to the last rebel enclave in Syria, around Idlib in the north west, as part of the surrender agreement.  Hundreds of thousands of people have been displaced and refugee camps have been set up along the borders with Israel and Jordan. Hundreds of White Helmet civilian defence group volunteers were allowed to cross into Israel following a deal brokered by the governments of the UK, Germany and Canada and the armies of Israel and Jordan; over 400 of them (including the volunteers and their wives and children) were taken to Jordan by bus and have been granted asylum by the UK, the USA, France and Germany.

Elsewhere in Syria, Isis suicide bombers killed more than 200 people in and around the town of Sweida, no doubt in anticipation that the regime will turn its attention to Isis now that the defeat of the rebels is almost complete.

Financial

FEELING HOT HOT HOT:  It may be hot outside but shareholders round the world are feeling the heat too:

FIAT CHRYSLER AUTOMOBILES:  The Italian car giant – with enormous US operations but run from Milan and Turin, has a serious senior management issue.  Sergio Marchionne, who turned round the car company when it was facing issues of survival post the 2008 crash, is ill following a major operation, and has decided not to return to the office of CEO.  Although Mr Marchionne is 66 and had intended to leave next April, succession planning had not been completed.  The board, still heavily influenced by the founding Agnelli family (currently via John Elkann, chairman), has appointed in Mr Marcionne’s place, Mike Manley, an Englishman currently CEO of the North American operations.  That has created another problem after Alfredo Altavilla, head of FIAT businesses outside North America, resigned, feeling (as do some shareholders) that he ought to have had the top job.  At a time of great turmoil and political threat to car makers, many shareholders feel that Mr Manley does not carry the political and charismatic clout required for leadership.  This is causing particular concern in Turin, where the group has its manufacturing business base – but a high cost one, long seen as an issue requiring resolution.

HAMMERSON PLC:  2018 is turning out to be a bad year for Hammerson, the UK company whose main business is the ownership and management of a portfolio of retail investments in the UK.  Retail generally is having a bad time, but Hammerson seems to be hit especially badly, with occupancy down to 97% and shopper visits in slow decline.  Its attempt in the spring to take over Intu, a rival but with a stronger European presence, did not get the support of shareholders on either side, and Hammerson turned away what now looks like a generous bid by the French retail property company Klepierre.  The Hammerson board did not consult shareholders on the merits of the Klepierre bid – and many are now aggrieved as the share price of Hammerson has failed to perform – it is well below the market value of the company’s property assets.  Activist fund Elliott Capital Advisors has acquired over 5% of the company and is now leading a shareholders action group calling for board changes and a revised strategy.  The company meanwhile has said that it will sell some of its department store investments and part of its high street portfolio – but that won’t be easy, with retail tenants failing and rents and values falling.

TESLA HOLDINGS:  The stock market says this is the most valuable car manufacturer in the US – but it has one of the slowest (and smallest) production lines.  Elon Musk, who controls the company, has bet the farm on the Series 3 mid market saloon, a beautiful and entirely electronic car, but one which the company is struggling to make at an economic rate.  Production has certainly improved this year – it is said to be at about half the public target Mr Musk set – but in the first quarter Tesla lost over US$1bn.  As its cash reserves are suggested by the company to be about $2.3bn that is not sustainable for long.  Now Tesla are asking for major suppliers to make cash returns to Tesla based on the value of their supply contracts.  The suppliers, already squeezed hard on their contracts, are not keen.  Nor are Tesla’s public shareholders or market analysts, who are increasingly worried about whether the business will survive at all – some suggest that the cash position must be tighter than indicated if it is having to try methods such as these to conserve liquidity.  Don’t scrap your gas guzzler just yet.

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