Jeremy Warner's Outlook: Policymakers may be leaving it too late</B>

GCap ditches digital radio future; Lurking CDO threat to pension funds; Shifting sands of the Dow Jones Industrial
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The Independent Online

"When the facts change, I change my mind. What do you do sir?" If he were still alive, John Maynard Keynes might have directed his famous rebuke at the Government and the Bank of England, both of which seem to find themselves increasingly alone in believing that the UK economy might weather the US slowdown and accompanying storm in financial markets comparatively unscathed.

This sanguine view is reflected both in the lack of urgency from the Bank of England in cutting interest rates and the Chancellor's relaxed, verging on the complacent, prognosis for both the economy and the UK housing market, as reflected in a speech last week.

Mervyn King's quarterly press conference tomorrow will be watched even more keenly than usual for enlightenment on the Bank's thinking. Reflecting a possibly quite sharp division of opinion on the Monetary Policy Committee, the Governor may find himself at a loss to define it.

Yet there now seems to me to be a real danger, as with the US of a few months back, that policymakers find themselves significantly behind the curve in reacting to events. Leaving it until there is certainty to play catch up may be to leave it too late. As for Alistair Darling, the Chancellor, his complacency may be just wishful thinking. The public finances are already out of control. If the economy goes down, they'll look like a multi-vehicle road crash.

GCap ditches digital radio future

Fru Hazlitt, the newly appointed chief executive of GCap Media, made a reasonable fist yesterday of the argument that digital radio is a technological cul-de-sac with little prospect of a profitable future – certainly for GCap and possibly everyone else too. Yet it is hard to avoid the view that it is necessity rather than choice which is forcing her out.

GCap is under siege from Charles Allen's ambitiously named Global Radio. Ms Hazlitt needs to deliver cost cuts pronto to persuade shareholders they shouldn't accept the 190p a share being offered. The closure of a number of digital radio stations, including Planet Rock and theJazz, together with the related sale of the group's controlling interest in the Digital One multiplex, immediately gives Ms Hazlitt £4.7m of the savings she's looking for.

If she could, Ms Hazlitt would get out of digital entirely to concentrate on FM and broadband delivery, yet contractual arrangements which cannot easily be wriggled out of and the fact that some FM licences are dependent on delivering a digital product too prevents a more complete, immediate, withdrawal. Is she right to be so gloomy about digital radio's prospects, and, if she abandons it, just where is her growth going to come from?

What is certainly true is that public policy with regard to digital radio has been unhelpful and muddled, in sharp contrast to TV, where there is an analogue switch-off date and a number of other forms of government encouragement to go digital. By contrast, digital delivery is still only 9 per cent of the radio market , and actually less than half that once duplication with analogue is taken into account.

Within that cohort, the bulk is accounted for by the BBC, which, with the licence fee behind it, has been investing heavily in its digital future. What's more, digital radio has achieved only 1 per cent penetration of the auto market, the life blood of commercial radio.

Ms Hazlitt believes she'll do better online, where she's seeing 40 per cent growth per annum, all of which she's managing to monetarise. Yet the broadband road takes her even further out of the drive-time market. Others, not least Mr Allen's Global Radio, don't share her view that digital is a busted flush.

To the contrary, Mr Allen believes more effective allocation of capacity might eventually give it a new lease of life. The focus of yesterday's strategy presentation from GCap was very much on cost-cutting. There was little in the presentation to make you believe the company can return to significant top-line growth. It looks a touch desperate to abandon entirely a technology which, though it has been a poor show so far, may eventually have a significant part to play in the delivery of radio audiences.

GCap is going to have to do better to be rid of Mr Allen, who reasonably points out that the doubling of profits the proposed cost-cutting delivers still doesn't support a share price of 190p, given the uncertainty of outlook for the advertising market.

Ms Hazlitt finds herself in much the same position as her former employer, Yahoo, convinced the price being offered undervalues her charge yet unable to explain how she's going to make up the difference. In both cases, the bidder has the advantage of the savings and synergies they can bring about through consolidation.

For years, GCap and its predecessor companies have lurched from one failed strategy to another, not least a hugely costly assault on digital. This one doesn't look any more convincing than the others.

Lurking CDO threat to pension funds

According to the German Finance minister, Peer Steinbrück, speaking at last weekend's G7 meeting of finance ministers in Tokyo, US sub-prime mortgage losses could eventually hit $400bn. This is much higher than previously forecast and more than double the roughly $150bn of losses on asset-backed securities so far disclosed by Western bankers.

If the losses really are destined to be that big, where are the rest of them lurking? With luck, they will be widely spread through the world's financial system, allowing them to be absorbed without undue misery. Unfortunately it is rather more likely that they are concentrated in sizeable pockets. Already a number of Norwegian municipal authorities have admitted to being stuffed to the gunnels with collateralised debt obligations.

It can surely only be a matter of time before a major European pension fund, very likely a UK one, admits to having been similarly sold a pup by overly enthusiastic investment bankers. With equities out of fashion and government bonds scarcely giving a real rate of return at all, many pension fund investors would have lowered their criteria in the hunt for apparently "safe" higher-yielding assets.

The triple A ratings assigned by credit rating agencies would have encouraged some money managers into believing these complex debt instruments were essentially bomb-proof. Falling interest rates and equity prices are once more bringing back the "disease" of pension fund deficits to our major companies, a problem which everyone had assumed largely "cured".

We can only hope nobody has been quite so stupid as to "diversify their risk" wholeheartedly into CDOs, yet the history of pension fund management in Britain gives few reasons for optimism.

Shifting sands of the Dow Jones Industrial

Dong! Like the striking of a grandfather clock, Dow Jones has announced its first changes to the Dow Jones Industrial Average, still the most keenly watched share price benchmark in the world, in four years.

Maybe it's got something to do with Rupert Murdoch's shake-up at The Wall Street Journal, the organ which has overseen the Dow's make-up since its inception. In any case, changes are so rare they make the national news, not just in the US, but the world over.

Out goes Honeywell International and Altria Group, the latter of which is breaking itself up, and in comes Chevron and Bank of America. The constituents of the Dow are chosen subjectively on account of their assumed relevance to the US economy as a whole.

This makes the index quite unlike our own FTSE 100, which is determined simply by reference to the stock market value of companies listed in London and has therefore become about as relevant to what's happening in the UK economy as a 10-bob note. It was brave of the committee of learned souls entrusted with maintaining the Dow's integrity to select a bank, but then if there is going to be a recession it is the bankers who are primarily to blame, so it was possibly appropriate too.

j.warner@independent.co.uk

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