Honesty. Cut to the bone.

TMM were surprised, nay shocked, last week when they went to buy some cat food. Not that they were having to do such (TMM do indeed have a cat and TMM do indeed go to the shops) but by the latest "hide the inflation, disguise the cuts" marketing ploy. Whilst TMM have gently been watching the weight of M+S prepacked  "steak for £5" fall steadily for the past 6 months and been in awe at how UK fuel price volatility has remained at zero throughout the collapse in oil prices, we sort of let them get away with it as, well, it is luxury steak and it is dirty carbon stuff. But here in front of us was our large carton of regular cat food emblazoned with "Super Saver! 44 sachets!",  with one of those ends designed to say "look we've coloured the last 4 inches of the box yellow to make it look extra long". You may think that TMM has better things to think about than cat food, but we know damned well that box, for the past 5 years, always held 48 packets. "Sorry Macrocats, you feel hungry? Take it up with Purina and their marketing men because they have convinced us that you are actually getting MORE so you'll be just fine"? Of course we are meant to respond as usual to the demand side opening more cartons blaming the macrocat's sudden increase in gluttony for the 9% increase in costs. Who would do that to a cat?

Now why do TMM bore you with such a small frustration? Well, dear reader, because we suspect this cat food scenario is being played out  near you in many guises. Be it at a peripheral European Sovereign, a Japanese company or even in the IT expenditure at a place of work all too close to you. Sovereigns and Corporations trying to improve their ratios, whether it be debt to GDP or earnings per share, generally first try and reduce costs, many of which, as a Sovereign too often finds out, are sticky, fixed-ish and generally involve a lot of heartache (read riots).

For most flow oriented businesses life is cyclical and so the volatility should be felt at the front office if say a bank, or front line if a sov/corp. In a bank, if flows drop 50% you can live with half as many salespeople/traders. But if you cut 50% of IT in the bank, or 50% of the bridge maintenance staff in a country, things stop working. Badly. Sadly, as TMM note, this is seldom how things work. Instead the thinking goes more like this

1) We need to cut costs
2) How much money does IT dept generate?
3) I know, cut tech!
4) Success! Costs are lower!
5) Oh nothing works. Collapse.

It is a very fine line to walk between a steady state "business as usual" and phase change collapse of a supercritical structure just waiting to be triggered by that butterfly's wings in a server under someone's desk. Which is interesting as we see the same thought process in action in the revenue side of financial firms end with similar consequences.

1) We need to increase revenues.
2) How much risk are we taking.
3) I know! Increase risk!
4) Success! revenues are up!  
5) Oh, those correlations don't work. Collapse.

Both of which scenarios end up with

6) Fire the management.
7) Retrench back to core activities.
8) Shut up overseas branches and go home to milk a low risk low volume franchise.  

OR .. Go bust.

Unfortunately TMM lay much of the blame for this culture on the need for growth. Growth for the sovereign is needed to pay for their Ponzi schemes of debt and growth in the corporate is driven by the shareholders demand for returns (normally pension fund managers, those guardians of YOUR future). TMM have long believed that the model for business sustainability is more that of the privately owned German Mittlestand, driven by long term objectives not short term gains at the cost of future stability. But whilst we are seeing the short-termism the incentive towards deceit is still too strong,

So whether you are a peripheral sovereign talking about your debt load, or a Japanese company that has found a way of hiding cameras in your advisor's briefs (or its bank going through its normal 10 year cycle), or a financial company that has decided to "help" bail out Europe, or bosses telling your staff that the IT is just fine, or just a cat food company trying to survive in the heady world of boiled animal parts, paring things to the bone (or cow lip in the case of the cat food), TMM ask you to please show some honesty in conducting your business as that is what we are really lacking in the world. We have always enforced a simple rule with our kids - "Tell us the truth and there is very good a chance we will support you. If you don't? God help you when we find out".



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Late PS posted at 21.15 ldn

Following this post about honesty and integrity, TMM could not believe their ears when they heard the rumour that the London Clearing House had held a call with primary dealers that reportedly went something along the lines of "Hello chaps, you OK if we raise the haircut on BTPs?", with all but one dealer replying "OK". And apparently everyone went away with the firm belief that a margin hike was a done deal... shortly followed by a 20bps widening in BTPs, spooz selling off 15-handles and TMM cursing. TMM were cursing, not so much as a result of the actual inevitable margin hike (though, the P&L damage certainly didn't help their mood), but at the fact that such if this rumour were to be true, a price sensitive move might be "sounded out" on the phone to dealers first, allowing them to sell ahead of everyone else ensure their books were in order. TMM shouldn't be surprised, really, but they do still hold this ideal that perhaps people might like to follow the rules of not trading on non-public information. *Sigh*...