When ‘New Labour’ came to power in May 1997 the first thing Crash Gordon, the then Chancellor of the Exchequer, did was hand control of interest rates to the Bank of England stating that they had a target to maintain inflation at 2%.  The logic being that successive Conservative governments had used interest rates as a political tool to curry favour with a home owning (mortgage owing) electorate that they had created since 1979.  Prior to the owner occupier explosion created by the Thatcher Government, interest rates would have little direct impact on a great swathe of the electorate because they were in rented housing.

            The logic of the decision was to take the political element out of the interest rate setting process so interest rates would be set at a level appropriate to the level of growth in the economy.   Now, in order to measure the growth in the economy a full set of metrics would have sensibly been required, manufacturing order books, house price growth, unemployment levels, money  supply levels, strength of sterling compared to other currencies and domestic inflation.  If you think of all these metrics being instruments on a car dashboard it would be a good picture to have in your mind.  What the government was to give the Bank of England was a single measurement, that of inflation. Using the dashboard analogy, this was like ripping your dashboard out and leaving just a voltmeter in place of all the other more useful stuff….. like a speedometer for example.

            The Bank of England was told that they had to maintain inflation at 2%, with the stiff penalty of having to write a letter to the chancellor if the level of inflation went above 3% or below 1%.  Now, the level of UK inflation is based on the Consumer Price Index, CPI, this is set by an independent body, who are essentially statisticians.  They monitor the prices of a basket of typical goods, food stuffs, cinema tickets, domestic and vehicle fuel, computer games etc.  The contents of this basket are reviewed periodically to ensure that it fits in with what people are actually buying otherwise the price of items such as Fish Tail Parkas would still have an impact on CPI despite the fact that nobody has worn one for 30 years.  The CPI is meant to be able to give an international comparison of inflation, thus trifling things (like Council Tax and Mortgage Interest) is not included in the CPI and as we are all so painfully aware Council Tax has increased dramatically since the millennium.

            Critically, one measure that is omitted from the inflation figures is house prices. This, as it turns out, had a dramatic effect on the economy.  Just after Labour came to power, the rapidly growing economies of South East Asia hit something of a crisis. This was big news indeed, and stock markets around the world fell dramatically.  The SE Asian economies that were affected addressed their problems by de-valuing their currencies and promoting their manufacturing base.  In turn, this had a fairly dramatic effect in the UK and other Western economies.  Prices of consumer electronics fell dramatically and the price of oil tumbled at one stage to below 10 USD/barrel due to lack of demand from the East.  UK inflation was pushed down and allowed interest rates to remain at a low level.  Business profits increased as fixed costs such as fuel fell.   Interest rates being low enabled people to borrow a larger principal amount for the same monthly payment as they would have had, say 5 years previously thus lighting the blue touch paper under house prices (increasing by 10-15% per annum). But crucially, this was not reflected in the rate of inflation which stayed low because of all the cheap consumer goods that were coming in from the East.

Eventually, the principal amounts being requested and indeed required by borrowers to buy a home outstripped the supply of money that depositors had in bank accounts. That’s when bankers hit on the idea of securitised mortgages which moved customer debts off their balance sheets. These were then traded in a market (the banks had discovered alchemy) where money could never run out.  They didn’t need to offer savers good rates anymore in order to draw in funds to lend to borrowers.   Banks were also buying bundles of theses securitised mortgages and treating them as fixed rate bonds.  These gave the banks a ‘fixed’ income at a fairly high level as some of these mortgage backed securities had sub-prime lenders at the far end of them who were paying a high rate of interest.  Savers reacted to this by stopping saving and starting spending, mainly it would seem on houses, again pushing prices skyward.

Then the music suddenly stopped, those sub-prime borrowers reverted to type and stopped paying their mortgages so the securitised bonds at the other end of the mortgage stopped paying the interest and the banks were (and still are) left high and dry!  The mortgage backed bonds are worthless, banks cannot sell them on and income from the bonds has dried up.

If house price growth had been included in the inflation figures, interest rates would have been increased to choke off inflation which would have dampened mortgage demand thus reducing the banks’ dependence on traded debt.

            Gordon Brown was revelling in the umpteen quarters of interrupted growth that he had presided over as Chancellor.  Clearly this was all down to his prudent handling of the British economy had nothing to do with the events in SE Asia at the end of the 1990s.  One of the statements that he frequently made was regarding low interest rates; typical mortgage rates having fallen to around 5%.  The fact that you needed to borrow twice as much to buy a house meant that your monthly payments were around the same they would have been when mortgage rates were at 10% was ignored, not just by him but by everybody else.

            May 2007 came along and Tony Blair went off smiling into a cushy number with the UN working on Middle East peace, a job that you can’t really fail at as it’s unachievable, leaving Gordon holding the baby. vAs soon as he took over the reins it all went very wrong;  the wettest summer on record followed by the debacle that marked the end of Northern Rock and the start of the Credit Crunch. 

            Gordon had appointed the comedic ally named Alastair Darling to pick up the job of keeping the economy ticking over, ‘shouldn’t be hard really it’s gone OK over the last 10 years, just keep fiddling with the tax rates which just move the burden around a bit and you should be OK’.   The Northern Rock problems blew up in his face; panicked savers were shown ashen faced on the news night after night facing the loss of their life savings queuing outside branches like in the scene from Mary Poppins where there is a run on the bank.  What was required was strong and decisive action; put a floor under the bank, assure customers that retail deposits would not be forfeit.  What we got instead was a week of dithering and statements which were long on words and short on content not unlike his namesake from Blackadder.  Eventually, the bank had to be nationalised.

            As things have steadily gone from bad to worse since September 2007, we were assured that the problems at Northern Rock were unique to the business model that it was pursuing.  All other UK retail banks were well run and well capitalised we were assured.   Hmmmm! Not really panned out that way has it? It would seem that all the banks were following the same flawed business model.

            It must be said that it was the policies of Crash Gordon that have put the UK into a worse pickle than it needs to be.  But, the policies that our Darling Chancellor is now pursuing are full of good intent but are sadly misdirected.  Banks have been offered a lifeline by the government.  By underwriting a forced massive rights issue by the Lloyds Group and RBS the government have wound up as a majority share holder in RBS and owning almost half of the Lloyds Group.  This was all promised in rather too much of a hurry.  Would a private business buy into another business without performing a due diligence exercise?  Not likely, but Darling promised to underwrite the rights issue over a weekend without so much as a cursory glance at the books.  After the event the government were surprised to find out that 80% of the loan book at RBS was abroad, including 3bn pounds owed by one Russian gentleman who is rather loathed to pay it back.

            What the British economy needed was a shot in the arm, so in the Autumn statement the Chancellor announced a raft of measures designed to give the economy a boost.  Businesses were struggling with demand that had, rather than fading, gradually dropped off a cliff.  The best place to inject the cash would have been into business via cuts in corporation taxes, increasing capital allowances to encourage investment etc.   As a Labour administration, the government could not be seen to be pandering to business which is where the wealth of the nation really starts.  They had to be seen to be giving some to business and more to individual families.  Child benefits were increased by a couple of pounds a week, tax allowances were increased, but the major headline was given to a 2.5% cut in VAT.  The train of thought behind this was that if a tax rebate cheque were sent out to households (as is generally favoured by the US administration) householders may use it to pay down debt or just bank it.  In order to benefit from the VAT cut the British public would have to go out and SPEND ! 

The first impact of this hurried legislation was that businesses up and down the land would have to adjust pricing, tills, computer systems, maybe stationery all at 6 days notice, so the impact to business was a cost in the first instance.  There’s nothing to force a business to reduce prices.  They could just as well leave prices at the previous level and pocket the extra by paying the VAT at the reduced level.  Also, darling Darling has announced that the VAT reduction will be a temporary measure for 13 months only, the biggest fillip that this is likely to have is a sales rush in December 2009 which is not what he intended!

The cost to the exchequer of the cut in VAT is reported to be in the region of £12bn.  Now that could have gone as tax rebate to people on the lower rate of tax who are more likely to spend it than bank it.  The problem with the ‘SPEND IT’ plan is that the UK has a very small manufacturing base, so any money spent is likely to have a small impact with the retailer, wholesaler and distributor and a somewhat bigger impact in a land far, far away where the products are made.  The £12bn wasted in the VAT cut would have been far better spent on measures to increase spending by businesses.  A direct cut in Corporation Tax would just be put onto the bottom line, however increasing capital allowances and allowing business to depreciate capital expenditure in the first year would encourage companies to bring planned capital expenditure forward, perhaps increasing their efficiency and productivity.  

The government also put in place a number of measures to encourage banks to lend to small businesses with the government standing as guarantor for 75% of the loan value (known as the enterprise loan guarantee scheme (ELG)).  This was not discussed with the banks prior to it being announced to the public.  Reports in the media seem to suggest that businesses requesting these types of loans with their business bankers are met with blank looks.  

The companies that are most in need of cash are companies that are outside the target audience for these types of loans, think Woolworths and some of the major house-builders who have had, in the case of Woolworths, major cash flow problems, rather than Mrs. Miggins’ pie shop and Bob the builder round the corner.  It’s the failure of these major employers that will bring the economy down.  Many small businesses are run prudently with cash surpluses to see them through lean times.

The ‘Today’ programme on Radio 4 featured the story of a woman who ran a successful chain of cafes in Scotland.  Wanting to expand her chain she found new premises and agreed funding (£50,000) with the Bank of Scotland.  After signing the lease, the bank pulled her funding leaving her high and dry.  She heard about the ELG and trawled around all the other banks asking for a loan under the conditions of the scheme.  The banks had either not heard of the scheme or had not yet implemented a plan to lend under the scheme.  This has got to be poor communication on the part of the Government.  Banks being banks only make money from their loan book.  If somebody is going to stand as guarantor for 75% of a loan to an already well established business then it’s not a decision that takes much time…you’ve 100% of the upside and only 25% of the downside risks. When you are lending money to a purveyor of sausage rolls in Scotland this is not a high risk business model!

So, Crash Gordon got us into this position with his policy of leaving it to the Bank of England and excluding things that have gone up a great deal from the inflation calculation.  Darling is flapping around throwing money, OUR money, at the problem indiscriminately.  The Bank of England is cutting interest rates every month without waiting to see what last month’s cut has done and the treasury is issuing government debt at an alarming rate… both of which are debasing the UK currency.

Here’s a clue for marvellous Mervyn and the MPC….If cutting interest rates to 1% has not worked, cutting them to zero isn’t going to make any difference.  The problem is people and businesses don’t have the confidence, or the appetite, to take any more debt on even if it’s interest free.  Once interest rates are at zero, Merv has announced his intention to print more money!  Now this is a policy that’s been used before in Germany’s  Weimar Republic where this model pushed inflation in 1923 to, and this is not a misprint,  560 billion percent and more recently in Zimbabwe where inflation is currently a more modest 231 million percent. 

Maybe Darling and Merv have cooked this up as a ‘cunning plan’ as inflation at those levels would quickly mean the Government debt levels would shrink in real terms very quickly but I wouldn’t count on the international community buying any more UK debt after that.

The following post is a summarised extract from a report published jointly by the Chartered Institute of Personnel and Development (CIPD) and KPMG called Labout Market Outlook (Winter 2008-09).  The report is the result of surveying almost 900 companies asking a broad range of job and economic questions.

The full report can be found at: http://www.cipd.co.uk/NR/rdonlyres/3D88488C-C287-4840-8AF8-1E638E29DADC/0/4742LMOWinterWEB.pdf 

Recruitment and Redundancy Highlights:

1. Over a third (36%) of organisations in the survey expect a decrease in staff levels (Vs 18% in the autumn survey)
2. Recruitment intentions have declined significantly over previous quarters; 62% planning to recruit compared to 75% and 86% in previous surveys.
3. One third of employers expect to make some redundancies in the next 3 months.  Primary tactics to avoid redundancies are to freeze recruitment and terminate contract staff.
4. Nearly a fifth of companies have introduced short-time working.

Salary and Wage Costs Highlights:

1. The average pay rise is expected to fall over the next few months with an average pay rise expectation of 2.6% (compared to a previous value of 3.45%).
2. The factors affecting people responsible for planning pay reviews, quoted in terms of decreasing importance are; the organisation’s financial performance, inflation versus business confidence, staff retention, rewarding high-performers and, way behind, the Government’s call for pay restraint.

Economic optimism (or not!):

1. 80% of companies believe that the economic condition of the UK will worsen over the next few months, with just 2% believing that it will improve!
2. 34% of firms think that their company’s financial performance will deteriorate in the short term. With almost half (46%) not expecting a significant change.

Coping with the credit crunch:

1. Almost two-thirds of companies experienced (or are about to) an organisational budget cut in 2008.
2. Travel budgets have been slashed or new restrictions (flights, taxis to name but two) have been put in place by many employers with many companies making use of telephone or video conferencing instead.
3. Increases in communication from top executives and senior management are also popular with many firms.

This is kind of an old urban myth (and I’m not sure what the original source is for this story) but sometimes you need to have something to give you a feel-good factor…..anyway here’s the story……

A professor stood before his philosophy class with some items in front of him.  When the class began, wordlessly, he picked up a very large, empty mayonnaise jar and proceeded to fill it with golf balls.  He then asked the students if the jar was full. They agreed that it was.

The professor then picked up a box of small pebbles and poured them into the jar.  He shook the jar lightly and the pebbles rolled into the open areas between the golf balls.  He asked the students again if the jar was full.  They agreed that it was.

Next, the professor picked up a box of sand and poured it into the jar.  Of course, the sand filled up everything else.  He asked once more if the jar was full.  The students responded with a unanimous “Yes!”

The professor then produced two cans of beer from under the table and poured the entire contents into the jar, effectively filling the empty space between the sand.  The students laughed.  As the laughter subsided, the professor said: 

“I want you to recognize that this jar represents your life.  The golf balls are the important things: your family, your children, your health, your friends, your favorite passions—things that if everything else was lost and only they remained, your life would still be full.”

“The pebbles are the other things that matter: your job, your house, your car.  The sand is everything else—the small stuff.  If you put the sand into the jar first there is no room for the pebbles or the golf balls.  The same goes for life.  If you spend all your time and energy on the small stuff, you will never have room for the things that are important to you. ”

“Pay attention to the things that are critical to your happiness.  Play with your children.  Take time to care about your health; the way you feel and the way you look.  Take your partner out to dinner.  Play another round of golf or go to the gym.  There will always be time to clean the house and fix the disposal.” 

“Take care of the golf balls first, the things that really matter. Set your priorities. The rest is just sand.”

One of the students raised her hand and inquired what the beer represented.  The professor smiled and said,

“I’m glad you asked.  It just goes to show you that no matter how full your life may seem, there’s always room for a couple of beers.”

A philosophy we whole-heartedly agree with here at KK!

I know there’s a lot of snow in London at the moment, but yesterday it seemed as if some people had stumbled their way through the back of the wardrobe and found their way into Narnia!

Enter five journalists; Robert Peston, Jeff Randall, Alex Brummer, Simon Jenkins and Lionel Barber brought up in front of the Treasury Select Committee for, would you believe it, a grilling regarding their part in the downfall of Northern Rock and the Credit Crunch!

Questions centred primarily on their responsiblity as professional business journalists and whether or not they should think first before publishing or at least delay breaking a story for a while! Utter rubbish.

Peston was asked the rather foolish but direct question,

“Were you responsible for the run on Northern Rock?”. 

His answer after a brief crowd-pleasing pause was

“Given it a lot of thought, and no!”  

Firstly, the MPs accuse the journalists of “over-reporting” and then in a dazzling turn-around towards the end of the interrogation, change their mind and the journalists are accused of not publishing enough about the crisis.  Sorry but you can’t have it both ways!  Either way it is now extremely difficult to hide the truth from the public these days even in an industry which is fairly impenetrable by outsiders.

Aspersions are also cast on the journalists’ so-called shady sources.  The journalists counter this by saying that they have multiple sources and cross-check their sources stories to ensure accuracy of reporting. I suspect that several of these sources are likely to be MPs, perhaps even, heaven forbid,
members of the Treasury Select Committee!

Peston fought back against the MPs saying,

“It was fairly clear that the Government, knowing it was about to acquire large chunks of these banks were, I sense, using the press to force down the share price.”

Really? It had never crossed my mind!  

Just for good measure the subject of media regulation popped up again.  This was an easy ball for the journalists to catch with their repost along the lines of - well actually this is a catastrophic failure of the banking system that we’re talking about.

To end with, in a rather farcical fashion, the journos were asked what they thought would happen in the future.  Perhaps the MPs were hoping to get some tips and try some short-selling for themselves but no such luck.

I also caught a few brief minutes of Jeremy Paxman interviewing some economics bod (sorry didn’t catch his name as it flashed on the screen) on Newsnight about the discussion between the journalists and the Select Committee.  He seemed to think that the journalists (although obviously being fine upstanding members of the community and great reporters) were attributable for at least some of the blame.

When asked what Peston could possibly benefit by bringing down major financial institutions through his spot on the BBC and his infamous blog, the economist replied,

“Fame!”

I rest my case!

You’d think that buying a “quality” newspaper at the weekend would mean that if you hold it by the main fold and shake it, some “quality” items might drop out of it - but you’d be wrong.

Take last Saturday’s Telegraph as an example…..

What fell out of it was a glossy booklet sponsored by the Reader’s Digest proclaiming…”1,000 Ways to Save Money and Time”.  Obviously this sparked up a bit of interest as in the current climate we’re all looking to save a few bundles of cash and saving time is always a neat trick when you don’t have any to start with!

I opened the booklet and flicked through it eagerly.  Here are a few of the “top tips”:

1. Separate toes when applying polish Get the comfort of a salon treatment when giving yourself a home pedicure. Just place marshmallows between your toes to separate them before you apply the nail polish. Make sure your feet are completely dry though or they may get sticky!

Sorry but I don’t get this…..what woman in their right mind is going to think “I must get some marshmallows from the supermarket so that I can paint my toenails”?  It’s just never going to happen, plus who gets to eat them afterwards?

2. Make a facial mask Pat your face with mild yellow mustard for a bracing facial that will soothe and stimulate your skin. Try it on a small test area first to make sure it will not be irritating.

This sounds highly dubious to me and brings a whole new meaning to hot flushes!

3. Wash lettuce in washing machine If you are expecting lots of people for an outdoor lunch and have lots of lettuce to wash, place one pillowcase inside another. Pull apart the lettuce heads and fill the inside case with lettuce leaves. Close both pillowcases with string or a rubber band and throw the whole package in the washing machine with another large item, such as a towel, to balance it. Now run the rinse and spin cycle. Your leaves will come out rinsed and dried more effectively than in a salad spinner. 

Hmmmm…..first of all, no matter how big your party, nobody eats this much lettuce especially after you tell them how you “cleaned’ it.  Secondly, aren’t you meant to carefully pat lettuce dry so it doesn’t bruise?

4. Make an extra grill If you have a big party or barbecue planned and the grill is not big enough to handle all those burgers, sausages, steaks and hot dogs, improvise a second grill by building a fire in an large old pot. Cook on a wire cake rack placed over the pot. After you are finished, put the pot’s cover on to put out the fire and save the charcoal for another outdoor cooking session.

Or in true knokknok style, ask a friend if you can borrow his!

5. Make cut flowers last longer Don’t throw away the last drops of a bottle of soft drink. Pour about 50ml into the water in a vase full of cut flowers. The sugar in the drink will make the blossoms last longer. Note: If you have a clear vase and want the water to remain clear, use a clear drink, such as Sprite or 7-Up.

Yes, I can see it now…..children all over the land topping up their glasses of pop and, instead of emptying the last few dregs, they miraculously hold the last bit back to keep for their mother’s cut flowers…a likely story!

I had expected to read a few gems that would help make the credit crunch a little more palatable but this booklet is a joke and a complete waste of time (even more so than this article)!  I wonder how much it cost to produce?

I shan’t be buying the accompanying book.

Who and what is safe in the current recession?  Are there certain industries and jobs that are recession proof?

Recession Proof Jobs

1. Healthcare - think doctors, nurses, surgeons, therapists, other healthcare workers etc…. (do more people get sick during a recession?).  Conversely though, jobs such as dentistry may not be as recession proof.  People will tend to put-off or avoid visits to the dentist in case there may be “hidden costs”!

2. Education - teachers (full and part-time), lecturers etc… people still need to send their kids to school although there is likely to be an impact on private schools as parents juggle their finances and save on school fees by sending their children back to state schools.   For higher education there will be a lot of people looking to hide from the recession by retraining.  So, anticipate an increase in demand for educators and trainers.

3. Other Public Sector - if you’re working on an infrastruture project that is government funded, the finance for the project is extremely likely to be cut.  These are the projects that the government is trying to use to kick the ailing economy (with steel toe-capped boots on) into life again.  You should be safe here! 

4. Computers and Technology - well, it’s the future and every firm (just about) relies on technology to underpin its business functions.  Good people (”Do-ers”) that are properly qualified are also hard to find.  I’m not totally convinced that all job types in computer and technology are safe as IT is still seen as a huge expense by a lot of companies.  New developments are likely to be shelved.  Whether or not you think the IT industry is safe also depends on how you are employed.  The ratio of contractors to permanent staff is important….contractors are a lot easier to shed in times of trouble than permanent staff.

5. Environmental Jobs - as concerns about global warming swell, more and more companies are turning green.  There’s scope here for employment for green engineers, scientists and consultants to help firms become much more eco-friendly, save money and comply with new government regulations.

6. Matters of Life and Death - surely all midwives and funeral directors are safe in a recession? Ditto for good cheap hairdressers!?!

 7. Despairing Urges - as we move further into recession many of us will sink into depression hence there will be a boost in chocolate manufacturers’ sales (think Eddie Murphy style logic in Trading Places). :-)  Ditto for breweries I think!

8. Accountancy - Boom or bust, the world still needs accountants.

Recession Prone Jobs

1. Foreign Travel - Due to certain weak currencies and a weak economy people are less likely to travel abroad whether on business or for a vacation.

2. Car Sales - Car prices are rock bottom at the moment (both new and used).  Maybe we’ll see the proper emergence of a “green car” soon.

3. Building and property - Any job title with the word “building” or “property” is looking extremely precarious.  House prices are falling, nobody is moving and few people are thinking of extensions.

4. Discretionary spending - Any industry that relies on discretionary spending is going to be badly affected.  Think of retail firms (how many high street firms in the UK will go bust this year?) or restaurants…. “eating in” will be the new “eating out” in 2009!

In the interests of fair play……here was the recent, positive statement from Apple….compared to Microsoft.

Best Quarterly Revenue and Earnings in Apple History, iPod Sales Set New Record

CUPERTINO, California—January 21, 2009—Apple® today announced financial results for its fiscal 2009 first quarter ended December 27, 2008. The Company posted record revenue of $10.17 billion and record net quarterly profit of $1.61 billion, or $1.78 per diluted share. These results compare to revenue of $9.6 billion and net quarterly profit of $1.58 billion, or $1.76 per diluted share, in the year-ago quarter. Gross margin was 34.7 percent, equal to the year-ago quarter. International sales accounted for 46 percent of the quarter’s revenue.

In accordance with the subscription accounting treatment required by GAAP, the Company recognizes revenue and cost of goods sold for iPhone™ and Apple TV® over their economic lives. Adjusting GAAP sales and product costs to eliminate the impact of subscription accounting, the corresponding non-GAAP measures* for the quarter are $11.8 billion of “Adjusted Sales” and $2.3 billion of “Adjusted Net Income.”

Apple sold 2,524,000 Macintosh® computers during the quarter, representing nine percent unit growth over the year-ago quarter. The Company sold a record 22,727,000 iPods during the quarter, representing three percent unit growth over the year-ago quarter. Quarterly iPhone units sold were 4,363,000, representing 88 percent unit growth over the year-ago quarter.

“Even in these economically challenging times, we are incredibly pleased to report our best quarterly revenue and earnings in Apple history—surpassing $10 billion in quarterly revenue for the first time ever,” said Steve Jobs, Apple’s CEO. 

“Our outstanding results generated over $3.6 billion in cash during the quarter,” said Peter Oppenheimer, Apple’s CFO. “Looking ahead to the second fiscal quarter of 2009, we expect revenue in the range of about $7.6 billion to $8 billion and we expect diluted earnings per share in the range of about $.90 to $1.00.” 

Hmmm…..not many records set here! Are we in the grip of a recession?  Mind you, what’s 5000 job losses for a company the size of Microsoft?  Bill Gates probably makes that in a lot less than the blink of an eye !

REDMOND, Wash. — Jan. 22, 2009 — Microsoft Corp. today announced revenue of $16.63 billion for the second quarter ended Dec. 31, 2008, a 2% increase over the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $5.94 billion, $4.17 billion and $0.47, declines of 8%, 11% and 6%, respectively, compared with the prior year.

Client revenue declined 8% as a result of PC market weakness and a continued shift to lower priced netbooks. However, strong annuity licensing drove Server & Tools revenue growth of 15%. Entertainment and Devices revenue grew 3% driven by strong holiday demand for Xbox 360 consoles with a record 6 million units sold in the quarter.

During the quarter, Microsoft showcased significant new product innovations by debuting Windows 7, Windows Azure, Office Web applications, Windows Server 2008 R2 and Office Communications Server 2007 R2. Microsoft also announced general availability of Silverlight 2, Exchange Online, SharePoint Online, Windows Small Business Server 2008, Windows Essential Business Server 2008 and a new release of Microsoft Dynamics NAV.

“While we are not immune to the effects of the economy, I am confident in the strength of our product portfolio and soundness of our approach,” said Steve Ballmer, chief executive officer at Microsoft. “We will continue to manage expenses and invest in long-term opportunities to deliver value to customers and shareholders, and we will emerge an even stronger industry leader than we are today.”

In light of the further deterioration of global economic conditions, Microsoft announced additional steps to manage costs, including the reduction of headcount-related expenses, vendors and contingent staff, facilities, capital expenditures and marketing. As part of this plan, Microsoft will eliminate up to 5,000 jobs in R&D, marketing, sales, finance, legal, HR, and IT over the next 18 months, including 1,400 jobs today. These initiatives will reduce the company’s annual operating expense run rate by approximately $1.5 billion and reduce fiscal year 2009 capital expenditures by $700 million.

Business Outlook

“Economic activity and IT spend slowed beyond our expectations in the quarter, and we acted quickly to reduce our cost structure and mitigate its impact,” said Chris Liddell, chief financial officer at Microsoft. “We are planning for economic uncertainty to continue through the remainder of the fiscal year, almost certainly leading to lower revenue and earnings for the second half relative to the previous year. In this environment, we will focus on outperforming our competitors and addressing our cost structure.”

Due to the volatility of market conditions going forward, Microsoft is no longer able to offer quantitative revenue and EPS guidance for the balance of this fiscal year. Microsoft offers operating expense guidance of approximately $27.4 billion for the full year ending June 30, 2009. This information supercedes the fiscal year 2009 guidance that Microsoft provided on Oct. 23, 2008. Management will discuss second-quarter results, and the company’s qualitative business outlook on a conference call and webcast at 8 a.m. PST (11 a.m. EST) today.

The whole world seems to think that their job is the next to go and maybe it will, but people need to keep in mind that a company shedding 25% of its staff would be big news indeed, however 75% are still in a job.

It’s also worth noting that the headlines in the Daily Mail, what I refer to as the ‘Daily Outrage’ that xyz bank is shedding half its staff does hide the fact that a good number of those will work for business unit abc which is being spun off or sold to another bank, so strictly speaking the Daily Outrage is correct the payroll will shrink by 50% but not all those 50% will be walking away clutching a redundancy cheque and a P45.

In the ‘Great Depression’ between 1929 and 1935 things were about as bad as they could get but only 10% of business folded, when the economy recovered the 90% of businesses that survived doubtless divved up the trade from the failed 10% between them. In a similar vein Matalan, Primark and Game are seeing increased trade from the demise of dear old Woolies.

This period of non stop bad economic news will, like all things pass and we’ll move on to better times, perhaps we’ll all be better people for the experience. But everybody should get this into perspective it’s not the end of the world or even the beginning of the end of the world. Things have been far worse than this; 1974 Britain had a government enforced 3 day working week. Power cuts and shortage of commodities particularly sugar I seem to remember were the order of the day. The recession of the early 80’s when I was starting my working life wasn’t a particularly rosy time either, that soon gave way to the boom years of the mid 80’s and the rise of the yuppie. Early 90’s another biggie which gave way to the longest continuous period of economic expansion Britain had ever seen, you remember that – the one that has just come to an end.

In a world of instant this and instant that, people’s expectation of action and effect has become distorted; an interest rate cut on Thursday lunchtime will not lead to the end of the recession in the following month.  Petrol prices have plummeted in the past 3 months, mortgage costs will be following them down, remember many people have mortgages that the payment level is set on an annual basis. These will start to fall typically from the February payment. Gas and Electricity prices will start to come down in the spring.

All these factors will lead to people having more cash in their pockets. However, what they need is the confidence to spend it rather save it. Mervyn King and Alastair Darling cannot give people confidence it’s something that will come from within!

Remember this famous mantra from Bill Clinton’s 1992 election campaign? I was in the states during that final month of the campaign and whenever the TV was turned on this was the cry from the electorate. I dare say that if there was an election in the UK in 2009 that would be the tag line from the opposition parties. Perhaps the cry should be:

 “ It’s Confidence Stupid”.

 What’s different in the economic landscape today compared to two years ago, the missing factor is confidence and without it we are lost. Confidence is the magic ingredient in so many things, love, careers being two good examples. Let’s look at Richard Branson, arguably Britain’s leading business person. Is he as clever as a chap with two heads? Although he doubtless has an IQ that is above average, I could probably nip to the back of the office and drag up two people at random that would out score dear old beardy in any given IQ test. Does he have innovative business ideas, mmmm airlines, mobile phones and fizzy pop had rather been done to death before he came and scrawled ‘Virgin’ across them. No, what separates him from the dull but worthy Arthur Pewty chap at the back of the office with an IQ pushing 200 and a great line in trousers made from man made fabrics is confidence. The confidence that 25 years ago lead him to say,

“Let’s lease some planes and start an airline”.

In matters emotional, the guys (or girls) with all the luck are not necessarily the good looking ones, they are the ones with the confidence to ask someone out on a date, knowing that the likely outcome is that they’ll agree to the date. Our dear friend Arthur with the large IQ isn’t getting a date because he’s never asked, as in his mind they would say no in any case.

January 2007 the world was still brimming with confidence, confidence that we could make the payments on that car loan, confidence that we could extend the mortgage and cover the increased payments, confidence that we would be in gainful employment in 6 months time.

Where has all that gone? It went out of the window when in August 2007 BNP Paribas decided that so many people in the US were not making their mortgage payments that that they could not place a value on the bonds that were at the far end of BillyBob and Emma-Lou’s mortgage payments. It had all got too much as their miniscule brains could not read the smaller print on the mortgage contract that said that the 2% interest rate was just for the first 6 months.

Once you can’t put a value on something it becomes effectively worthless thus all the banks’ balance sheets were full of worthless assets. A financial instrument just like your car or house has no intrinsic value; they are worth what somebody else will pay for them. Now, the banks are arguably architects of their own misfortune. The rather splendid idea of packaging up mortgage debts into bonds that you sell on to get the debt off your balance sheet is rather negated if you then nip out and buy in the same steaming piles that have been put together by other banks. That’s just selling something you knew exactly how risky it was (you lent them the money) and buying something that you’re not sure about.

So, that’s how we got here. The banks now need to rebuild their balance sheets. This involves lending much less to businesses and Joe Public and being far pickier over who they lend it to. I once read that for every dollar a bank loses their lending is reduced by 10 dollars. With the sort of losses that banks are announcing you don’t have to have the 200 IQ of our friend Pewty at the back of the office to see that there will be a massive shortfall between cash required and cash supplied.

This, as everybody knows is leading to mass layoffs in the banking and all other industries.

The way these layoffs are undertaken by businesses doesn’t help that magic confidence ingredient that the economy requires. A business seems to perform layoffs using the following timetable of events:-

1. Make an announcement that due to prevailing economic circumstances head count will be reduced by 15%. Consultation with workers’ representatives will take place and further announcements will be made in 4 weeks.

2. 100% of the employees clamp their wallets shut for the next 4 weeks as it could be them, 85% will have done this for no good reason as it’s not going to be them but just in case the wallet stays firmly shut.

3. Four weeks later the unlucky 15% will be served with their redundancy, they are likely to have 3 months notice, 3 months of being in the office/factory clearly sucking confidence away. The 85% that are left don’t particularly feel like booking a holiday and flaunting in front of the unlucky 15%.  

You can see from the above sequence of events that 100% of the people in a company reduce their spending dramatically for a 4 month period thus causing a ripple effect throughout the economy. 

Wouldn’t it be better to tap the unfortunate 15% on the shoulder one Monday morning give them a cheque and wish them all the best for the future rather than the protracted 4 month process outlined above ? It’s going to be horrible for them but it’s not going to be less horrible in 4 months time.

It’s quick, clean and all over in a day and the 85% can breathe a sigh of relief and get down to Currys for that flat screen telly, thus keeping the staff at Currys nipping round to Starbucks for a 3 quid cup of coffee flavoured froth and the economy slowly starts to get up off its knees!