Jeremy Warner's Outlook: Macquarie plays a cute game in battle for the LSE, but it will have to pay up to win

To everyone's amazement, and after much prancing around the goalmouth, Macquarie eventually plucked up the courage to make a real bid for the London Stock Exchange, yet five weeks in we are still very much in the phoney war stage of the battle. Nobody believes the Australian investment bank can succeed at the current price of 580p a share, so for the time being, the LSE doesn't have to put up much of a defence.

Yesterday's formal rejection was long on rhetoric but almost wholly lacking in substance. With the share price nearly a pound higher than the offer, the LSE scarcely needs to demonstrate value; assertion is good enough.

Yet though the Australians' opening shot is almost laughably low, tactically, they seem to be playing a rather clever game. Macquarie would not have gone to the bother and expense of mounting a formal bid unless it was serious, which suggests strongly that at some stage, it will raise the offer to a more realistic level - somewhere north of 680p a share.

Tactically, it pays to leave the heavy artillery until the last possible moment, this so as to demonstrate that there really aren't any alternative proposals about to come crawling out of the woodwork. Deustche Börse is out of the game, and so by the look of it is Euronext. After all these years of courting the LSE, they've got fed up with the waiting, and in despair are being driven into each other's arms. A merger between the two of them is said to be close to agreement.

As for Nasdaq and the New York Stock Exchange, neither is yet ready to bid.

In such circumstances, the LSE is left stranded in the outback with Macquarie the only man on the ranch. This may not be an appetising prospect for the LSE's Clara Furse, but if it's the only offer that's going, she'd be unwise to bank on shareholders turning it down.

If there's to be a serious bid, the LSE will eventually have to mount a serious defence. In this regard, the LSE is greatly helped by the recent dramatic rerating of global stock exchanges. On a read through of the ratios being applied to other markets, the LSE is worth at least its current stock market price. The potential for improvement is still huge, and, in any case, shareholders ought to be demanding a substantial premium for London's pivotal position within the global exchange business.

Is Macquarie prepared to pay it? The real battle has yet to begin.

Matalan dispenses with another CEO

Matalan seems to get through chief executives rather faster than the clothing flies off its shelves. Another of them, John King, announced his intention to quit yesterday, though not until the end of the year, and even then he'll be leaving with a year's pay tucked into his back pocket. So if he's getting a pay-off, does this mean he's been fired?

Not a bit of it, insisted Matalan's founder and chairman, John Hargreaves, yesterday. In fact Mr King expressed a desire to go back to the United States - he's marrying an American and used to work there - and rather than going immediately, leaving the company rudderless, he's kindly agreed to stay on for as long as it takes to find a replacement.

This is plainly not going to be easy, for notwithstanding the explanation of the marital bed, to quit so unexpectedly doesn't exactly inspire confidence. As one analyst put it yesterday, it looks as if Mr King is deserting a sinking ship. Matalan was a brilliant idea, but it was of its time, and recent results have been poor. With so many other sources of cheaply priced clothing, it's hard to see the point of it any longer. Its stores are unattractive, the range is limited and unfashionable and it's not even particularly cheap any longer.

Besides which, the new man in the driving seat has to contend with the iron hand of Mr Hargreaves. Both Mr King's predecessors cracked under his grip. Angus Munro, the man who led the company through its stock market flotation in the late 1990s, left in 2001 after a spectacular row with Mr Hargreaves. His successor, Paul Mason, poached from Asda, lasted only a few years before being sacked with a £1m pay-off. Now Mr King seems to have gone the same way. No wonder the board has had to persuade him to stay until the end of the year. They won't exactly be falling over themselves to fill his shoes.

Pension investment: a strategy of despair

Selling at the bottom and buying at the top is not the most obviously rewarding of investment strategies, yet it is the one most occupational pension funds seem compelled to follow. Equities have been dumped wholesale at prices way below their peak, while bonds, with prices so high that if they went any further, they would acquire a negative real interest rate, are being snapped up like there's no tomorrow. The effect has been to exaggerate the peaks and troughs in these markets, and, according to many market commentators, create a "bubble" in long-dated and index-linked gilts.

There is no spelt out rule that requires pension funds to do this. Yet solvency regulation, fashion, demographics and new accounting rules which, for the first time force companies to put numbers on the potential costs of their pensions promise, have pushed them down this treacherous road, helping to drive bonds yields to insanely low levels in the process.

Paradoxically, the lower the yields fall, the bigger the pension deficits become, for the rules require that liabilities previously discounted by expected returns on all pension assets must now be discounted by reference to long term bond yields. The resulting increase in the size of pension liabilities is not fully compensated for by rising equity and bond valuations, so deficits are continuing to swell.

Is there a miracle medication to cure this outbreak of madness? One way of addressing the problem would be to increase the supply of long-dated and index-linked bonds. Willem Buiter, a former member of the Bank of England's Monetary Policy Committee, goes so far as to suggest that the Government's Debt Management Office should redeem the entire supply of short dated gilts and refinance them with longer-dated and index-linked issues, an idea he describes as a "no brainer".

I doubt the DMO would regard it as such an obvious solution as Mr Buiter suggests, as to unbalance the stock of gilts in this way would expose the financing of the Government's future borrowing requirements to significant risks. Yet there may be some limited scope for such a rebalancing, and in any case, plans to issue £70bn of gilts over the coming year, the biggest new supply of British Government bonds ever, plainly provides an opportunity to address market demand for longer dated stocks. There is also the opportunity to create an entirely new debt instrument - longevity bonds, gilts whose maturity dates would extend with improvements in longevity.

Increased supply may provide a partial solution. However, the better approach, it seems to me, would be to address the demand side of the equation. For so much of our savings to be invested in unproductive government debt is neither financially healthy nor economically desirable. What's going on at the moment is a potentially catastrophic misallocation of capital.

It must, of course, make some sense for pension fund trustees where the solvency of the sponsoring company is in doubt to try and underwrite the pension promise by attempting to match future liabilities with current assets. But for most companies it makes no sense at all. For the pensions regulator to insist that all companies put in place proposals to eradicate their pension deficits within 10 years is blinkered and damaging.

Bond-based valuation measures for pension fund accounting are entirely appropriate for the purpose of accountability and transparency. Yet they are only point in time measurements which are hugely sensitive to the assumptions used. To regard these liabilities as current and intractable, still less to allow them to dictate investment strategy, is misguided and harmful.

j.warner@independent.co.uk