Fundsmith's Terry Smith Commenting On The Year Ahead
At an Editorial Intelligence event, in association with the Financial Times, a panel debated "the Year Ahead". The event was chaired by Lionel Barber, the FT's Editor, and Terry Smith, Founder of Fundsmith, was joined on the panel by Lord Andrew Adonis, Gillian Tett and Baroness Shriti Vadera .
Commenting on the Year Ahead, Terry Smith, Founder of Fundsmith said:
"Starting with the ˜movie theme" sequels are rarely as good as the original movie. I think that is one of the rules of cinema. And so it is with quantitative easing too. Quantitative easing, what was it meant to achieve? It was meant to keep bond yields low, and by so doing provide a stimulus; partly through a wealth effect in the economy, which would help revive the housing market as well as the problems of persistent unemployment in the West. It seems to me that it has serially failed with all those objectives. Bond yields obviously rose fairly sharply at the end of last year. The housing market, on both sides of the Atlantic, is at best stuttering and it may even be heading towards some sort of double dip. Unemployment is also persistently high. Ironically, the only category in the United States where employment is rising is in fact government employees. This seems a little ironic in light of the cause of all these difficulties. Of course, what it has managed to do, in the law of unintended consequences, is promote inflation. It is clearly one of the factors that underlie the sharp rise in food prices, cotton prices, oil prices and the prices of shares. I rather suspect that this will be one of the great problems for 2011; the unintended consequences of quantitative easing, which have basically occurred because it has fallen into the category of a "simulating thing" other than those which were intended.
"The Eurozone was clearly the story of 2010. So far, it also continues to be the story of 2011. I am indebted to one member of the audience for the phraseology of what I am about to say. At the start of the Eurozone crisis, one of the great cries was "Ireland not Iceland". Iceland was the country that had allowed banks to default, and Ireland were the people who were taking their medicine. They were going for the deflation and austerity methodology. This now appears to be changing around, and what we are likely to hear people say at some point is, "Iceland not Ireland". Iceland actually has a growing economy now, having allowed its banks to fail. It seems to me that the solution to a crisis, where you lend a country more money at a higher rate of interest, is one that would never apply when refinancing a company in the private sector. If they got into difficulties in the private sector, people would want to know how big a haircut the existing creditors were taking before they put in any money. So at some point I think we have to accept that some form of default is going to have to occur in order to create a genuine solution to this crisis. And so that is what I think may occur during the course of 2011.
"China, I think could also possibly be THE story for 2011. It has got inflation. It has clearly got elements of a property bubble, with ghost towns in both housing and ghost malls in terms of retail and shopping. Should it fall over it will clearly make a very loud bang. There is no doubt about that, notwithstanding the view that the United States is the largest, most important economy. Again I am indebted to somebody else in the audience; now I recall something else they said - that China's capital goods imports are in fact bigger than the combination of the United States, the Eurozone and Japan together. So if it does fall over, it will definitely make a very loud bang. Will it fall over? People tell you that it can't. I would like to point out that during my working life time, if we just deal with the Asia Pacific Zone, I was told that in the 1980's the Japanese economy was "unstoppable" and again in the 1990's that the Tiger economies were "unstoppable". Both of them came to a grinding and rather spectacular halt shortly after being told that they were 'unstoppable'. Therefore I think there is every possibility. China is in a policy bind. Does it put up interest rates to try and cure its inflationary problem, in so doing, putting upward pressure on the Renminbi? This will also mean cutting into its trade surplus, which is already under quite a lot of pressure because of those imports. Or does it keep rates low to try and keep the Renminbi down and stoke inflation further? I don't think there is an easy way out of that.
"At the end, staying with the movie theme, I would say my prediction for 2011 is that the King's Speech will win at the Oscar's"