8th November 2010

7IM - "From mud, through blood, to the green fields beyond"

Dear Mr Cameron - now it's time to get on the front foot. We have had enough headline news on cuts, and the new age of austerity. Now is the moment to start lifting people's eyes up from disconsolately staring at their shoes, to start looking to the future and to the horizon. Much of the success or otherwise in an economy is down to confidence, and not just each of us as consumers but also for companies as well. Thus it is vital that our 'dear leader' (that may be the wrong country?) points us towards the way out of our financial problems and that in five and ten years things will be better than they are today. Yes it will be tough over the next few years but there is a clear goal at the end of it.

To be fair, the Prime Minister has already started on this by focussing on the smaller to medium sized companies as the potential growth generator for the economy and as a way for rebalancing the economy back from its service and consumer dependence. However, broad statements of encouragement and high level investment announcements will do little to change much sentiment until something is felt directly by the broader population.

As I go around the country, I hear a universal clamour and it is of course against the banks in all their various forms. Obviously the current fashion for bank bashing is exorcising a certain amount of anger, but it is more than just a need to blame someone - it is more a series of issues from their attitude to their inaction. The attitude has been that the banks were seen as being arrogant during the good days, and unapologetic in the bad days. The truth is that of course it was not just the banks that were to blame, for we can also point at politicians (especially those with the financial portfolios), the regulators, and even ourselves as the public as all seemed to ignore that there was too much lending and too much borrowing.

However, now the cry against the banks is more to do with their seeming inaction to get lending moving again. The reply goes up that no-one wants to borrow. The answer comes back - not at that price and that margin, as although the base rate hasn't gone up, interest rates certainly have. I have bored you before I am sure about the need for banking reform, but there is one key area that I can identify that I found with certain banks - they seem not to have trained the right people for the right job.

I have recently seen several examples of corporate banking in action or maybe inaction. With corporate trading and utility banking (nothing to do with investment banking) the managers need to work with their clients and understand their businesses. This means understanding their finances and with it their business plan. The corporate banking service may not be a partnership but it is one of being a trusted adviser. This I have seen has badly broken down in many areas.

The test I find is to discuss trading issues and terminology such as documentary letters of credit and Bills of Lading and foreign exchange lines. Also then to discuss and get their thoughts on a company's balance sheet. What I get back are usually glazed expressions, along with offers of a corporate credit card, a biro and a cup of tea backed by mutterings that such areas have to be referred to their specialist centres.

Additionally any request for any facility seems now to have attached the requirement for another Letter of Indemnity of extended value and sometimes for a far greater extended time. This is not corporate banking with a trusted adviser, but a sales operation with a polite relationship manager.

However, maybe it is time for another idea? One idea that I liked was for the establishment of a national investment bank. Governments have had such banking initiatives before - whether in the origins of the private equity company 3i, or the Girobank which was sold off some years ago. Such a bank could be seen to be directly implementing government lending policy and of course be given a full government guarantee. This could be the vehicle to push forward key infrastructure projects by being able to raise capital to initiate lending when the main public banks seem frozen. Still I suppose this would take time to set up a bank and get it operational.

Wouldn't it be nice if they already owned one which they could get going immediately? But of course yes we do - 84% of RBS! Prime Minister you can have your National Investment Bank. That would provide a tangible message for all of us that things were moving and things were improving.

Another idea is Stamp Duty on property purchases. Personally I would scrap it as I suspect the maths could make an interesting calculation to show whether the amount lost in revenue here would be made up by the VAT earned by the expenditure of those moving houses. We all know that if you move house that the kitchen and bathroom at the very least will have to go, as well as the carpet next year! I would have thought that the amount currently coming in given the dearth of sales must be pretty low anyway?

However if they could not swallow that, why not consider swapping the tax so that it moves from penalising the buyer, to be paid by the seller? After all it is the seller who is often sitting on the profit, or looking to downsize, and it is the cash strapped buyer who is the one who needs the extra money to spend.

So Mr C, a bit more positive leadership please, with some tangible ideas. Yes we are in a mess; yes you have a plan, but show us the actions to get ourselves out of it. If I may borrow the motto of the Royal Tank Regiment: "From mud, through blood, to the green fields beyond".

And finally... not funny but interesting. Bread was around 30,000 years ago. Starch grains found on 30,000-year-old grinding stones suggest that prehistoric man may have dined on an early form of flat bread, contrary to his popular image as primarily a meat-eater.

The findings indicate that Paleolithic Europeans ground down plant roots similar to potatoes to make flour, which was later whisked into dough."It's like a flat bread, like a pancake with just water and flour," said a researcher on the team. The grinding stones, each of which fit comfortably into an adult's palm, were discovered at archaeological sites in Italy, Russia and the Czech Republic.

The researchers said their findings throw mankind's first known use of flour back some 10,000 years, the previously oldest evidence having been found in Israel on 20,000 year-old grinding stones.

However, I think there are a couple of slices in my kitchen which could give them a run for their money.

Have a good week.
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

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