Mervyn's in goal, Gordon moves the posts and second-guesses the goalkeeper
oised on the Bank of England's line, Mervyn King, its Governor,
I' stands ready to save us from the penalty goal of inflation. He has been heard to grumble that Gordon Brown has moved the goalposts. Inflation is now to be measured by a new index, of the Chancellor's choice, which leaves the bad news (housing costs, council tax) out to great effect. His new inflation rate, at 1.3 per cent, is only half the old one. Never mind. says Mr King, the Bank thinks it will work its way upwards and come out in two years' time at 2 per cent, where it would hit the Chancellor's new target. Just to keep it on track, Mr King and his colleagues raised Bank rate last week, to applause from the Treasury end. Ed Balls waved his scarf in support and Gordon Brown urged the Bank on to do it again: 'We will continue to support our monetary authorities in the difficult choices they have to make.' First he moves the goalposts, then he second-guesses the goalkeeper — this is the Chancellor who memorably gave the Bank its independence, but second-guessing is second nature to him and he can leave nothing alone for too long. One of these days the Bank and the Treasury will fail out — they always do — and the Governor will find himself at cross purposes with the government. That will be the test of Mr King's mettle, and of the Bank's independence.
Ask Sir Tony
To each his own rate of inflation. The Chancellor's new index covers very few of the activities for which he and his colleagues are responsible. The government's own statisticians say that inflation in the public sector is now running at 7 per cent. He might like to explain — it would make a thumping paragraph in next month's Budget speech — why this inflation rate is so much higher than other people's, and more than five times as high as the rate of inflation he now wants to use as a yardstick. What excuse can he make for his government's stewardship, what explanation, indeed, can he offer, beyond waste, fraud and loss of control? Resourceful chap that he is, he has asked Sir Tony Atkinson, who is the Warden of Nuffield College, Oxford, to look at the way the public sector's output is measured. Then Sir Tony can say that higher education is highly productive, and so is the National Health Service, really, and in no time at all we shall have a new index which will suit the Chancellor's book. That is the kind of index he likes. Wait for him to announce it.
Spotting the gap
To everything there is a season, and this time last year I was looking for bargains in boredom. It would make a change, I thought. The stock market, in its exciting way, was going down like an express lift, and the yield gap, after four decades of absence, was on its way back. Shares were once supposed to yield more than British government stocks, because they were thought to be riskier — they were issued by companies, which might default, whereas governments wouldn't. Then inflation came along to do governments' dirty work for them, and the yield gap was turned inside out. Its return was a portent. It meant that by old-fashioned standards, we could begin to look for value — starting with boring shares in solid companies which could be expected to plug on through good times and bad and carry on paying their dividends. I picked out three shares that met this description, all of them yielding usefully more than government stocks did: Shell, Rio Tinto and Land Securities. A month later, the express lift jerked on its cable, stopped falling and bounced. By now two of my Boring Three have proved rewarding: Rio Tinto, up 20 per cent, and Land Secs, up 35 per cent. Shell, I am vexed to report, has got nowhere.
Shell damage
The trouble with Shell is that it has started to be interesting. Until now it would have made a key component of any FT-SE Tedium Index. This great Anglo-Dutch commercial bureaucracy, with its stately
committee of managing directors, each succeeding the next in a pre-ordained pattern, has always spurned excitement of any kind as a distraction from its work. Now, though, it seems to have mislaid one-fifth of its reserves of oil, and Sir Philip Watts, chairman of Shell Transport and Trading, which is the London end, is under fire. Investors were cross with him for not being there to tell them where the oil had gone, and are calling for change. There is even talk of reforming Shell's chain of command to make it simpler. Then the way would be clear for Sir Philip's successor to introduce an exciting new strategy, just as Lord Weinstock's successors did at GEC, which they renamed Marconi.
Bricks without straw
Here's a message from a board of directors with strategic vision: 'We are pursuing a once-in-a-lifetime opportunity. We have made the transition from slow-growth conglomerate to fast-growth technology company. In this way we will profit and grow, supplying the picks, shovels and maps of the new internet gold rush.' Yes, this was Marconi, well set on the road to ruin. Don Young and Pat Scott cite it in Having Their Cake (Kogan Page, f17.99), to make their point that corporate gambits are fun for directors but minding the shop is hard work. They minded Redland's shop, which sold bricks, while an ambitious board embarked on deals and reconstructions. Smith New Court's analysts were unconvinced: 'The image of the Redland director — whizzing round the world, dropping out of the skies — is plainly that of the flying doctor.' This superman came down to earth when the money ran out. First the deals dried up, then the dividend followed, and then Redland was, predictably, knocked down and taken over. What was fun for directors was death for the shop.
Year of the comet
Footnote on the yield gap: briefly sighted last year, it has receded into the darkness of space, like a comet. Leading shares now yield 31/2 per cent, on average, and government stocks yield 43/4 per cent. They have lost value as the conviction has dawned that Gordon Brown will need to issue more and more of them. If inflation were really as low as he says it is, they would look cheap, but the markets don't believe him, and no wonder.
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