jka on economics UK

The UK is in a liquidity trap - say no to more QE on planet ZIRP

Last week, the Governor of the Bank of England said This is the most serious financial crisis we have seen since the 1930s, if not ever. Well is it? Just like the 1930s the UK is in what we call a liquidity trap, a situation where monetary policy is unable to stimulate the economy either through lowering of interest rates or increasing money supply.   

Liquidity traps occur when rates are reduced to the zero bound or thereabouts and cannot be reduced further. In real terms UK rates (base rate minus inflation) are negative 4% plus.

The liquidity trap is compounded when expectations of adverse events, either deflation or in the current situation, a lack of aggregate demand, are manifest. Firms are loathe to invest, households are constrained to spend, government spending is limited by a desire to resolve a fiscal debt crisis.

In the UK, the first round of Quantatitive Easing or asset purchases was essential to improve liquidity in the banking system at a time of crisis. 

Inter bank lending was dessicated, LIBOR spreads were extending. The central bank was becoming not just the last lendor of resort but the only lender of resort. Action had to be taken to inject cash into the economy by undertaking a series of asset purchases predominantly gilts. The programme of some £200 billion was equal to 14% of GDP it had to be done.

This is not an argument for more asset purchases, for the exercise came at a price. QE forces up bond prices, pushes yields lower, punishes savers, places more pressure on sterling, increases import prices, leads to higher inflation, greater pressure on real incomes, a reduction in household spending, actually reduces demand and leads to lower growth.

Ten year gilt yields have fallen to 2.4% and thirty year gilt yields have fallen to 3.4%. But what does that mean? Gilts are mis priced, the real risk return on ten year gilts is negative. Effectively investors are paying the government to hold bonds.

Policy makers assume that lower interest rates at the longer end of the curve will lead to a higher level of investment. This is not the case. Any return on investment or payback calculation is a function of cash flows from a determined demand horizon. 

Cost of capital does not feature in the basic investment model. Until the uncertainty about the forward level of demand and growth is cleared, investment plans will remain on the shelf. 

The Bank of England suggests that QE increased GDP by between 1.5% - 2.0% but also led to an increase in inflation of between 0.75% and 1.5%. [Joyce M et al in the September Bank of England Quarterly Bulletin.] This is a highly speculative analysis.

If it were right, this would mean, that at best, the QE2 round of £75 billion would kick growth by just over 0.5% but increase inflation by over 1% on a pro rata basis according to the banks own figures.

One cannot be entirely confident in the bank’s hypothesis. QE led to a fall in gilt yields as a first round effect but thereafter the relationship between QE and the effect on growth and inflation is tenuous. The argument for further QE is intellectually weak and at best the potential economic impact minimal. The risks outweigh the return.

In fact I would argue that a further round of asset purchases merely oils the liquidity trap, digging a deeper hole, increasing the inflationary impact and reducing growth as investment plans are reigned back and household incomes are placed under greater strain. Sometimes the correct action is to do nothing, especially when it is more of the same toxic solution.

In 2008, writing about a zero interest rate policy, I wrote “Welcome to planet ZIRP. Unfortunately, we do not have a handbook, or fully understand the terrain. Our process of quantatitive easing, the plan to helicopter money may work but as a fire fighting option, it may be like dropping water into a desert, such are the fissures in the financial system." We just don’t really know what is achieved. So in the meantime we should say no to more QE and or asset purchases.

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Apple Case Study - from the iPod to the iPad - Product Life Cycles and growth potential

The Apple product life cycles indicates just how big the iPhone and the iPad will be over the next few years. It took the iPod five years to break the thirty million units per annum mark. The iPhone got there in four and the iPad will make it in year two of launch. As for the Sony Walkman it never made it, it took over ten years to top out, the iPod topped out within eight years of launch. Apple product Life Cycles are moving faster and higher sooner than ever before.

iPod sales may have peaked in 2008 at just under 55 million units and may fall to around 45 million units this year but the iPhone is set to sell just under 70 million units and the iPad is chasing fast behind. It all adds up to an exciting phase of growth for Apple over the next four years with revenues set to rise over $100 billion in 2011.

Students of corporate strategy and business theory are familiar with the concept of the Product Life Cycle. Generally the life cycle is perceived to have four specific stages, introduction, growth, maturity and decline generally plotted with volumes a function of time.

In the introduction phase, costs are high, sales volumes are slow, there may be little or no competition and customers have to be stimulated to action. Profits are limited and the product is cash extensive as marketing costs are substantial. Key customers tend to be innovators and early adopters.

In the growth phase, unit costs are reduced as volumes increase, advertising is amortised over greater volume, market awareness increases beyond the early adopters, to the “early majority”, competition increases with more competitors entering the market and price levels may begin to fall. Profits increase but the product remains cash extensive as greater investment in marketing or working capital is required.

In the maturity stage, costs are lowered further as volumes have increased, the market becomes more competitive and alternative products begin to date the initial product offering. The product remains profitable and begins to generate cash. The innovators, early adopters and early majority are joined by the “late majority”.

In the saturation and decline phase, sales volumes decline, profits margins are maintained and the product becomes remains cash generative. The laggards and luddites still do not enter the market. 

Either way for Apple, four years of strong growth are evident from products already in the line up, both the iPhone and the iPad are set to hit the one hundred million units per annum mark in 2012 and 2014. Despite the march of the Androids, the Apple growth story will continue.

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The Apple Case Study Apple from the iPod to the iPad is available as a FREE download. 

The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University. Author of the Apple Case Study from the iPod to the iPad part of which is published in Johnson Scholes Whittington Exploring Strategy 9th edition 2010.

Apple Case Study - from the iPod to the iPad - iPad and the Androids, why the iPad will hold share

Apple has shipped some 20 million iPads in the first twelve months since launch to capture the first mover advantage in the tablet market. Already into the second generation iPad 2.0 the Apple mantra of constant improvement along the Key success factor (KSF) lines is evident. Smaller, faster, better battery life more facilities, more apps, the infinite loop of product development persists. Available in six models 16GB, 32Gb 64Gb wifi and wifi 3G, the price range is from $499 - $829. First mover advantage with Kaizen is a strong combination.

In 2010, Apple shipped 15 million iPads to register a market share close to ninety per cent of the tablet market. But the Androids are coming. Samsung Galaxy emerged as the first to make significant sales as total Android sales jumped to 2.0 million units in the final quarter of 2010. New products from ACER, Advent, and HTC will join forces with the Motorola Xoom and the Blackberry Playbook in 2011 to challenge the Apple hegemony.

Android devices captured 22 percent of global tablet shipments in the three months to Dec. 31, up from 2.3 percent in the preceding quarter according to Strategy Analytics,  the Boston-based researcher. The iPad accounted for 75 percent of shipments in the period, down from about 95 percent, it claimed.

The despatch statistics include pipeline sales rather than consumer purchases, so the estimates of market share flatter the Androids in the final quarter. Let’s not forget the early claims of 8% market share for the MS Zune in the iPod market on launch, quickly falling to 4% then 1%, three years post launch. 

Google gives away Android for free to boost revenue from services such as mobile advertising and expand the market for its search engine. A wider range of cheaper devices will probably erode the iPad’s market dominance, said Neil Mawston, director at Strategy Analytics.

However, we believe that Apple will sustain a 75% share of market over the medium term despite the Android challenge, following the iPod MP3 market share model. First mover with constant improvement is a powerful combination and Apple is never afraid of cannibalistion of own product sales in the process.

How big will the market be? iPad sales in the first quarter of the year fell to 4.7 million units in the first quarter of 2011 down from 7.3 million units in the Christmas quarter. Apple claims to have sold all they could get as supply restrictions failed to meet strong demand.  

Still Apple iPad sales in 2011 are likely to be between thirty to forty million units, with Android sales restricted to around ten million units. This would give total segment sales of forty to fifty million units and feed an Apple market share of 75% to 80%. 

In 2012, the market will increase to one hundred million units with the potential to double in the following year 2013 and double again by 2015. This would create a market worth well over $150 billion dollars retail by the close of the five year outlook. 

In 2011 Apple sales will soar to over $100 billion compared to $5 billion in 2001 the launch of the iPod. The potential prize with the emergence of the Tablet sector is huge and Apple is well placed to meet the challenge of the Androids. First Mover advantage, Kaizen and Key Success Factors the key. 

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Author of the Apple Case Study from the iPod to the iPad. Available as a FREE download here.

The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University. Author of the Apple Case Study from the iPod to the iPad part of which is published in Johnson Scholes Whittington Exploring Strategy 9th edition 2010.