Jeremy Warner's Outlook: Greenspan uses 'R' word again. Someone shut him up before he does serious damage
Gloves are off in Sky versus Virgin fight; Achilles heel at RBS is corporate activity
Friday, 2 March 2007
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Watch out, here comes trouble. Twice in a week now, the octogenarian Alan Greenspan, former chairman of the Federal Reserve, has given speeches in which he has talked about the possibility of the US going into recession later this year. No sooner had the present incumbent, Ben Bernanke, succeeded in stamping out the fire set off by Mr Greenspan's first use of the "R" word than he said it again - this time out in Tokyo.
He would never have opined in such terms when at the Fed, where he was famous for his Delphic nuancing of the economic debate. I guess that, now he's off the leash, he's free to speak his mind - and, at an estimated $100,000 an appearance, he certainly needs to be saying something that will make people sit up and take notice.
Yet, despite his advancing years and growing distance from the levers of power, he still seems capable of exerting enormous influence on markets. His first mention of the possibility of recession was one of the triggers for the disastrous sell-off in the markets which took place on Tuesday. An element of calm descended on Wednesday after soothing remarks from Mr Bernanke. In returning to his theme yesterday, Mr Greenspan seems to have forgotten the first rule of holes.
No doubt he had meant his latest utterance - that a recession in the US this year was a possibility, though not a probability - as a clarification of the earlier one. It didn't work out that way, with world markets suffering another serious wobble. Yet it is all a bit odd really. Mr Greenspan is only making a statement of the bleedin' obvious in talking about the possibility of recession.
The longer an expansion continues, the greater the chances of it coming to an imminent end. Higher interest rates have already caused a pronounced slowdown in the US housing market, and there was renewed evidence yesterday of the construction sector already being in recession. Yet construction is not the whole economy, and most of the other data emerging from the US yesterday was still positive. The balance of probability, as Mr Greenspan would no doubt concede, is still very much that the Fed has indeed engineered the hoped-for soft landing.
So why do markets get so worked up whenever someone important mentions the R word? The reason is that stock markets are already quite high, but there are lots of risks. Confidence is therefore fragile. It only requires a man of Mr Greenspan's stature to remind them of their fragility to prompt another bout of the jitters. Should he be allowed to? Thankfully, it is still a free country. In any case, by saying such things, Mr Greenspan only gives voice to a widely held point of view. If, as seems likely, he turns out to be wrong, then perhaps investors will learn not to take him quite so seriously.
Gloves are off in Sky versus Virgin fight
Both sides seem to have emerged as losers in the game of brinkmanship played out between BSkyB and Virgin Media over the charges Virgin pays Sky for its non-premium channels.
Sky loses £60m to £70m a year in charges and associated advertising revenue by pulling the channels, while the cable TV proposition becomes that much less compelling now that the Sky content is removed. According to one outside estimate, Sky will need to add approximately 185,000 new subscribers to offset the loss. By the same token, however, cable is now bound to lose some subscribers to Sky.
Virgin will either have to charge less for its pay-TV or fast try to patch up its offering with alternative content. Copying Sky One is not going to be as easy to achieve as Sir Richard Branson suggests.
So if both sides have so much to lose, how did it come to this and who is to blame for failure to reach a settlement? The backdrop is that, really for the first time in its history, BSkyB is having to take the competitive challenge from cable seriously.
Post the merger of NTL and Telewest into a single, nationwide, rival in the pay-TV market, cable has begun to show unnerving signs of getting its act together. For the time being, this may be more apparent than real, but the threat is certainly there, and, at the very least, there is a newly aggressive, "can do", approach to the market from cable which wasn't there before.
Add to that Richard Branson and the Virgin name, and it is easy to see why the BSkyB bear is feeling grumpy and bated. It no longer has the woods all to itself. What's more, with Virgin Media's tilt at ITV, there was even a danger of the company getting its hands on some halfway decent content. Sky moved quickly to thwart any such outcome.
Just as cable has been trying to move aggressively on to Sky's traditional turf in multi-channel pay-TV, Sky has been moving equally aggressively in the other direction, into broadband and traditional telecoms. As a consequence, the two have come head to head as never before.
Yet it is Sky which finds itself under the more significant attack with regulators. It is not just Virgin Media which has been crying foul to Ofcom and the OFT at every available opportunity. Both Setanta, the Irish pay-TV operator, and Top up TV have complained about attempts by Sky to make its premium channels available on Freeview's digital terrestrial platform, but only using its own pay-TV encryption system.
Much the same issues have been raised around access to Sky premium sports and film channels through broadband. Shouldn't Sky be forced to give wholesale access to this content, so that rivals can retail it through alternative distribution channels? That's the contention, in any case.
For Sky, competitive and regulatory fires are springing up all over the place. How successfully James Murdoch, the chief executive, deals with them, will define his tenure. In engineering the row with Virgin over carriage charges, his calculation is that he will ultimately gain more by depriving cable of Sky One than he'll lose. Yet it is quite a gamble, both from a regulatory and revenue standpoint.
Achilles heel at RBS is corporate activity
It was hard to find fault with yesterday's sparkling set of numbers from Royal Bank of Scotland. The bank seems to be performing on virtually every front. True enough, impairment charges are higher, but not by as much as its rivals, while income growth continues easily to outstrip the rise in bad-debt experience. In the US and elsewhere, RBS has steered clear of the sub-prime market on which others have foundered. That caution has now been more than vindicated.
So is it time for the City finally to dispense with the famous Fred Goodwin discount? I'm not altogether sure it exists any longer in any case. Over the past year, RBS has done much to defuse City suspicion of what was said to be an autocratic and imperious style in the chief executive, Sir Fred Goodwin. He's largely stopped the process of empire-building through acquisitions, the results are beyond reproach, growth is strong, and the dividend is rising strongly too.
Yet in banking there is always an Achilles heel, and at RBS it is the possibility the bank becomes the victim of its own success in corporate banking. Non-interest income already accounts for more than 60 per cent of the total at RBS, and well over half of this comes from fees and commissions.
This source of income depends crucially on present, very high levels of corporate activity. Think of any of the big leveraged deals and recapitalisations in Europe over the past year, and it is virtually certain RBS will have taken a fee out of them somewhere. All the big high-street banks have made pots of money out of high levels of corporate activity over the past year or two, but none more so than RBS.
Despite an impressively varied diversity of income streams, both geographically and by activity, the bank therefore remains highly exposed to any downturn in M&A activity. Bad debt is not the focus of concern at RBS. Rather it is that the present growth in leverage goes into sharp reverse.
