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WHAT’S YOUR PROBLEM?

Posted by on 5 Aug 2019

There seems to be common agreement among first world liberals that we live in unusually difficult times. In my view this a case of “people like us” on steroids. Populism (possibly explained here) has caused great discomfort to people who have grown up feeling pleased with themselves and their kind. Watching them explain their troubles to some of the 29 million people who live in the Dehli region of India, a country with annual GDP per capita of $2,000, would perhaps make great reality TV (note to self – pitch that to someone). But we should resist the temptation to be judgemental if we can (though clearly most of us can’t). Instead I would like to suggest an exercise that can be summed up as “exactly whose problem is this?” When people annoy or upset us we want it to be their problem. We are implicitly saying that they should take responsibility and do something about it. Sometimes, if they ignore us we will get increasingly stressed and suddenly it’s our problem. “YOUR BEHAVIOUR IS UPSETTING ME” It boils down to...

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Quarterly review

Report on Q2 2019

Posted by on 2 Jul 2019

Falling bond yields continued everywhere in Q2. US 10 year yields are now just over 2%, UK at 0.86% and Germany at a record low of -0.3%. In the report on Q1 I wrote: “Perhaps by the end of Q2 we will be able to guess what people were worrying about.” The short answer appears to be world trade. President Trump believes that holds all the cards and, ignoring the fact that he doesn’t seem to know or care that import tariffs are a tax on his own citizens, he is not far wrong. His hostility to China is well known. Some people suspect that he next wants to turn his fire on the EU which to him essentially means Germany. Of course by implication it could also mean the UK. Assuming that Donald Trump is capable of deferring a threat, it might just be that he is waiting for the UK’s exit from the EU before firing his cannons. In the 29 quarters since the start of 2013, the average quarter-on-quarter GDP growth in the US has been 0.59%, in...

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Companies

ON BELIEF – LISTEN TO YOURSELF, TRUST YOURSELF

Posted by on 4 Feb 2019

There is a classic episode of Yes Prime Minister (“The Bishop’s Gambit”) in which Jim Hacker has to choose between two problematic candidates for a vacant bishopric. One is a “modernist” and the other is a “separatist” (of church and state). There is a famous exchange that runs as follows: Sir Humphrey : “The Queen is inseparable from the Church of England” Hacker: “What about God?” Sir Humphrey: “I think he’s what is known as an optional extra”. Sir Humphrey explains that a “modernist” is a coded word. “When they stop believing in God they call themselves modernists”. Theists tend to prefer the word “faith” to “belief”. Much blood has been spilled across the centuries over the question of whether the wafer and wine offered as part of holy communion are really the body and blood of Christ or merely symbols. If you think that the answer to that question is obvious (and the chances are 1000-1 on that you do) that is because you can’t help yourself. Belief is not a result of choice. It’s something that happens to you...

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Big picture

WHAT’S YOUR PROBLEM?

Posted by on 5 Aug 2019

There seems to be common agreement among first world liberals that we live in unusually difficult times. In my view this a case of “people like us” on steroids. Populism (possibly explained here) has caused great discomfort to people who have grown up feeling pleased with themselves and their kind. Watching them explain their troubles to some of the 29 million people who live in the Dehli region of India, a country with annual GDP per capita of $2,000, would perhaps make great reality TV (note to self – pitch that to someone). But we should resist the temptation to be judgemental if we can (though clearly most of us can’t). Instead I would like to suggest an exercise that can be summed up as “exactly whose problem is this?” When people annoy or upset us we want it to be their problem. We are implicitly saying that they should take responsibility and do something about it. Sometimes, if they ignore us we will get increasingly stressed and suddenly it’s our problem. “YOUR BEHAVIOUR IS UPSETTING ME” It boils down to...

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Recent Posts

WHAT’S YOUR PROBLEM?

WHAT’S YOUR PROBLEM?

5 Aug 2019

There seems to be common agreement among first world liberals that we live in unusually difficult times. In my view this a case of “people like us” on steroids. Populism (possibly explained here) has caused great discomfort to people who have grown up feeling pleased with themselves and their kind. Watching them explain their troubles to some of the 29 million people who live in the Dehli region of India, a country with annual GDP per capita of $2,000, would perhaps make great reality TV (note to self – pitch that to someone). But we should resist the temptation to be judgemental if we can (though clearly most of us can’t). Instead I would like to suggest an exercise that can be summed up as “exactly whose problem is this?” When people annoy or upset us we want it to be their problem. We are implicitly saying that they should take responsibility and do something about it. Sometimes, if they ignore us we will get increasingly stressed and suddenly it’s our problem. “YOUR BEHAVIOUR IS UPSETTING ME” It boils down to this: what is the driver of the sentence “Your behaviour is upsetting me”. Is it your behaviour or my being upset? Her are two examples: Malodorous Malcom has a personal hygiene problem. He must be told. Smug Simon and Suzi are blissfully (nauseatingly) in love and don’t seem to want to hang out with any of their old friends. They are starting to alienate people. I think it is pretty clear that Malcolm needs to own the problem, with the support of your helpful advice. If he refuses to acknowledge that no one will stand downwind of him he will soon discover that he loses friends. In the case of the smug lovebirds, it is highly likely that your alienation is a price that they will readily pay in return for the indulgence of their mutual obsession. All you can do is to smile and nod and secretly pray for a traumatic break up. When we are upset we want to blame and we often lose sight of where accountability actually lies. But rational thought can help us decide whether we need to...

Report on Q2 2019

Report on Q2 2019

2 Jul 2019

Falling bond yields continued everywhere in Q2. US 10 year yields are now just over 2%, UK at 0.86% and Germany at a record low of -0.3%. In the report on Q1 I wrote: “Perhaps by the end of Q2 we will be able to guess what people were worrying about.” The short answer appears to be world trade. President Trump believes that holds all the cards and, ignoring the fact that he doesn’t seem to know or care that import tariffs are a tax on his own citizens, he is not far wrong. His hostility to China is well known. Some people suspect that he next wants to turn his fire on the EU which to him essentially means Germany. Of course by implication it could also mean the UK. Assuming that Donald Trump is capable of deferring a threat, it might just be that he is waiting for the UK’s exit from the EU before firing his cannons. In the 29 quarters since the start of 2013, the average quarter-on-quarter GDP growth in the US has been 0.59%, in the UK 0.46%, in Germany 0.34% and in the euro countries (the EU 19) just 0.27%. It appears that some combination of factors – demographics, the ECB, the euro itself, the EU’s insular anti-trade practices – has produced an era of disturbingly low growth in the EU and hence the lowest, deadest interest rates since the invention of money. Many people these days are spooked by “uncertainty”. They needn’t worry. There is nothing on the horizon to rouse the economies of Europe from their slumber. When I hear endless warnings about what will happen to the UK economy when or if it separates from the EU (three and a half years of “project fear” so far – keep it up, guys) I don’t know whether to laugh or guffaw. The UK stock market indices rose by 1.9% in the quarter. They are down by 3-6% over the last year and around 1% higher compared to two years ago. So it has been hard going. There is little easy money to be made and those who try too hard can easily come a cropper....

Report on Q1 2019

Report on Q1 2019

2 Apr 2019

In the Q4 report I listed all the reasons (far too boring to repeat) why the stock market had fallen in those three months. Then I asked: Yet here we are in January 2019 and are any of the alarming headlines remotely surprising? That was a rhetorical question and I listed seven shares that I was trying to buy on weak days. Since 31st December, two of them (Halfords and Victrex) are down but on average the selection rose by 13%, greatly helped by the fact that Dairy Crest, which I tipped on 4th February, received a takeover bid less than three weeks later. As ever, judgement + luck = success. The UK indices had a good quarter, rising by c.9%. Given the general nervousness, which has been reflected in the bond markets, I am surprised that the FTSE 100 (+8.4%) slightly underperformed the more domestically focused FTSE 250 (+9.2%). In the end, perhaps the biggest story of the quarter was the return of 10 year German Bund yields to negative territory, for the second time ever and the first time since the summer of 2016. It is true that GDP forecasts of most developed nations have fallen recently but a negative yield on Europe’s reference government bond implies something more than cautious economic forecasting. It smells of fear. Perhaps by the end of Q2 we will be able to guess what people were worrying about. Finally, a quick comment on UK politics. In the middle of March I had a bet (that’s a gamble, not an investment) that the next general election will be this year. At the time the odds were 11/8 against. Today they are 8/11 on, implying a greater than 50% chance. A Labour government led by J Corbyn and J McDonnell is one of the most obvious risks to our incomes and our assets. These guys are dangerous and if elected they will move quickly. My personal threat level is standing at...

The real estate “bubble” is global

The real estate “bubble” is global

21 Mar 2019

In my round-up of Q4 2018 I mentioned three risks that I intended to keep an eye on. Here are three really bad things that could happen in 2019 or preferably later. 1) London house prices fall by 20% rapidly or 40% gradually (or both) 2) A major issuer of government debt suffers a catastrophic collapse in confidence or actually defaults (will the person who said “China” see me afterwards?) 3) A neo-Marxist garden gnome becomes Prime Minister of Great Britain. Numbers 2) and 3) remain of great interest but now I want to update myself on the developing story of property prices. Two observations are becoming quite well known: the apparent insanity of new high rise apartments shooting up all over Zone 2 London and the decline in turnover of the traditional property market. FLIPPERING HELL The FT had a good article on 20 February entitled “London’s property ‘flippers’ forced to sell at a loss”. Flippers are speculators who buy flats off-plan before construction has begun. It seems that they are often individuals either originating from or actually still living in Asia. They are probably rather ignorant about what they have agreed to buy. According to the FT, someone lost £770,000 buying and selling an uncompleted apartment in One Blackfriars, a monstrous glass eyesore (obviously that’s just my unsophisticated opinion) towering over the Thames (which has surely been punished enough). “In 2014, 21 per cent of resales in recently completed developments were sold at a discount, according to property research company LonRes. Last year that number had more than trebled, to 67 per cent. At the same time, the size of discounts has ballooned. From an average of 2.2 per cent in 2014, to 13.1 per cent last year.” To be brutally frank, most Londoners just find these stories of burnt speculative fingers quite satisfying. Some might say that it’s payback for despoiling our historic city with your greed and ignorance. Others might suggest that this attitude is somewhat hypocritical, given that mutual self congratulation about how much everyone had made on their houses was the backbone of London dinner parties for about three decades. PENSION PURGATORY Over those years many representatives of...

ON BELIEF – LISTEN TO YOURSELF, TRUST YOURSELF

ON BELIEF – LISTEN TO YOURSELF, TRUST YOURSELF

4 Feb 2019

There is a classic episode of Yes Prime Minister (“The Bishop’s Gambit”) in which Jim Hacker has to choose between two problematic candidates for a vacant bishopric. One is a “modernist” and the other is a “separatist” (of church and state). There is a famous exchange that runs as follows: Sir Humphrey : “The Queen is inseparable from the Church of England” Hacker: “What about God?” Sir Humphrey: “I think he’s what is known as an optional extra”. Sir Humphrey explains that a “modernist” is a coded word. “When they stop believing in God they call themselves modernists”. Theists tend to prefer the word “faith” to “belief”. Much blood has been spilled across the centuries over the question of whether the wafer and wine offered as part of holy communion are really the body and blood of Christ or merely symbols. If you think that the answer to that question is obvious (and the chances are 1000-1 on that you do) that is because you can’t help yourself. Belief is not a result of choice. It’s something that happens to you based on the empirical evidence that you see. FAITH IS NOT AN INVESTMENT TOOL By contrast, faith is a great liberator. The more improbable something is, the deeper the faith required to accept it. Faith is not based on reason. Consequently, behaviour driven by extreme faith often looks like irrationality or worse to outsiders. For this reason belief is an essential tool of investment while faith is a menace. It is often difficult to distinguish one’s own beliefs from what might loosely be called wishful thinking. It is quite natural, but not good, to suffer from confirmation bias when hearing news about a company in which one has already taken the decision to invest. Confirmation bias is a symptom of faith. Not merely in investment but in all aspects of life we are keen and competitive to be clever and right and successful. I find it remarkable how hard it can sometimes be to work out what I actually believe. I would like to think that my beliefs frequently coincide with what turns out to be the truth but the relationship between belief...

Report on Q4 2018 – full of sound and fury

Report on Q4 2018 – full of sound and fury

5 Jan 2019

Over the first nine months of 2018, the UK stock market was barely changed. In Q4 the world’s obsession with uncertainty overtook it. Trump took on China again, Trump took on the Fed, Congress took on Trump, the ECB took on Italy, the Conservative party took on Theresa May, everyone took on Saudi Arabia and the oil price took fright. While a falling oil price is sometimes considered broadly beneficial to the world economy, it is currently identified as a harbinger of global recession. The FTSE 100 fell by 10.7% in Q4, the 250 by 13.9% and the All Share by 13.1%. The rule that in nervous times investors favour large international shares (i.e. the FTSE 100) overall held good, though not on a scale to promote rejoicing or relief. For roughly the 17th time since the financial crisis the fear of impending inflation faded away. The underlying assumption that we are living in long-term deflationary times held good again. Government bond yields have duly subsided again. The US ten year yield has slipped from 3.0% to 2.6%, the UK 10 year gilt yield is now c.1.2% as opposed to 1.5% three months ago. It is times such as this (when the Japanese stock market’s daily change is one of the news headlines on the Today programme) that it is most important to remember our (or my) basic investment rules. Sharp and extensive falls in the price of classes of assets are caused only by the forced capitulation of unwilling and unhappy sellers. Great market collapses are invariably accompanied by the realisation that something that everyone took for granted is no longer true. Black Monday in 1987 was, with hindsight, a financial services event. Stockbrokers, fuelled by American money following Big Bang, were being paid more than bank directors had earned only a few years before. It was the time of Loadsamoney (Harry Enfield), Money (Martin Amis) and Serious Money (Caryl Churchill) and I am prepared to say without embarrassment that it was bloody marvellous to be part of when you were in your mid twenties. But when it was over you knew it was over. When the DotCom bubble burst in 2000 it...

£££ The case for the pound £££

£££ The case for the pound £££

10 Nov 2018

  When I wrote recently about financial  contagion I pointed out that holding cash is an investment. It is effectively a bet against inflation and for political and economic stability. Moreover, holding any currency involves a potential hidden opportunity cost – that of not holding a different currency. On a couple of occasions in my lifetime, the British government has had to abandon a policy of maintaining the level of sterling against another currency; in 1967 against the dollar and in 1992 against the deutschmark. GREAT STERLING DEVALUATIONS OF OUR TIME On the first occasion, following a 14% devaluation, the PM Harold Wilson attracted a certain amount of ridicule for addressing the nation in the following terms. He acknowledged that sterling was worth less “abroad” but said: “That doesn’t mean, of course, that the pound here in Britain, in your pocket or purse or bank, has been devalued”. Essentially he said that the pound hadn’t been devalued against the pound. In truth, it wasn’t much of an argument but it relied on the fact that currency losses are largely invisible until people are obliged to make some kind of foreign transaction. I don’t remember the devaluation of 1967 but in 1992, on (Black) Wednesday 16th September I was sitting in a dealing room listening to an open line from the Bank of England’s dealer who repetitively intoned the price at which he was prepared buy sterling. One of my colleagues told me that the Bank of England dealer always closed for the day at 4.30pm (presumably to catch the 5.07 to Sevenoaks) and wondered what would happen then. What happened is that he did indeed bid everyone a good afternoon and no doubt picked up his briefcase and headed for the door. In the time the world’s only buyer of sterling could have walked to the station, the dam had burst and he had pissed away £3.3 billion, which was real money in 1992. If that sounds like a story of pinstriped establishment incompetence from ancient British history, I must mention that the Bank of England is sitting on paper losses of some £49 billion (my estimate) from the gilts that it has bought above...

Contagion

Contagion

16 Oct 2018

  “The least thing upset him on the links. He missed short putts because of the uproar of the butterflies in the adjoining meadows. ” PG Wodehouse Financial contagion is a phrase employed by those who try to explain a fall in an asset price that they didn’t see coming.  If it means anything, which is not certain, it describes the fallout from the volatility that results when any market falls because people are forced sellers. This is prone to cause panic which in turn means that the attraction of holding cash rises. Given that no one likes to sell a falling asset (a psychologically taxing experience) people prefer to raise money by selling things that haven’t fallen in price but look potentially vulnerable (especially if viewed with a newly sceptical eye). As the quote from PG Wodehouse shows, when things go wrong we tend to cast around for something to blame. Bad things happen to relatively overpriced assets and the nature of the event that triggers their decline is really of no consequence. The need to explain what happened is driven by a reluctance to take responsibility for a poor investment decision. Hence we are allegedly the victim of the devaluation of a currency, the collapse of an obscure foreign bank, the failure of a harvest or the uproar of beating butterflies’ wings. In reality, contagion is not a hidden threat but a constant reality that we should never forget. All assets are in competition all the time, subject to perceived risk and liquidity. All asset values are relative to each other. The most crass mistake that financial analysts make (and I certainly write from experience) is to compare the price of an asset with its own history and to declare that this proves it to be cheap or expensive. Here are ten assets in which you, if your assets and liabilities are UK based, might conceivably invest, ranging from cash (the most liquid) to commercial property arguably the least liquid). Note that all savings are investments, even cash.   Gross yield Cost of ownership Net yield Capital gain/loss? Building society 2.0% 0.00% 2.0% No Government Gilt 1.7% 0.25% 1.5% No Cash 0.0%...

Report on Q3 2018

Characterised by such slogans such as “sell in May and go away”, the third quarter of any financial year is often expected to be cautious. This year saw a mild confirmation of that view – the main UK indices in Q3 fell by +/- 2% compared to Q3; year on year there was an increase of around 2% leaving shares year-to-date down marginally (-0.25%). This is something of a relief in view of the political noise that irritates us on a daily basis but we should note that the US S&P is +8.5% year-to-date.  Whether it is the combination of tax cuts and trade deals or something else, the US is showing either where we could be going or what we are missing, depending on your view. US government bond yields are still inching rather than exploding upwards. US 10 year treasuries are now hovering just above 3% and 10 year gilts are just above 1.50%. These started the year at 2.4% and 1.2% respectively. Perhaps this is a trend. But we should not forget that although there are plenty of Britons who remember inflation, it is 25 years since it was last a problem. I think that wage inflation is worth keeping an eye on but there again it seems that so many of today’s new jobs are relatively unskilled – the more that technology leaps ahead the more we seem to need people who can drive a car or ride a bicycle. When pricing power reaches sellers of that kind of labour then inflation might be off to the races. At the end of the quarter there was another bout of panic about Italy being rebellious against the decrees of the EU/ECB. The premium of 10 year Italian yields over Bunds is climbing. If it continues it will politically disruptive in Europe and could conceivably affect the Brexit deal, though whether it would make the EU negotiators more conciliatory or more obstinate is anyone’s...

OVER TO YOU, KIDS

OVER TO YOU, KIDS

14 Sep 2018

“I DON’T WANT TO BE A BURDEN” People are vaguely aware that the populations of many developed and relatively wealthy nations are on average ageing and that this is likely to become a financial problem. In the UK the median age (at which the same numbers are older and younger) hit 40 in 2014 having risen from 33.9 in 1974 (source: ONS). As things stand, the pensions and care of old people are paid for by the state and the state is funded by the taxes of younger people. Hence there are many cries of protest about inter-generational unfairness.     Many of us will “blame” increased life expectancy due to rising GDP per head and advances in medical treatment. It is difficult to treat this as a problem because most people seem to assume that they would like to live as long as possible. Unless we distinctly harden our attitude, challenge the value of extending failing life and consider the idea of encouraging euthanasia, there seems little to be done that people are not already doing themselves by making poor diet and minimal exercise choices.  LAY DOWN A LIFE FOR YOUR COUNTRY  But while it is probably impractical to urge people to die, there is the better and less ethically troubling possibility of encouraging them to breed. The snag is that much of the general population sees fecund women as a potential menace – in short, a burden on the welfare state, as The Specials pointed out in 1979 (ironically a year of exceptionally low birth rate) You’ve done too much, much too young Now you’re married with a son when you should be having fun, with me Ain’t he cute? No he ain’t. He’s just another burden on the welfare state (The most shocking thing about those lyrics today is that the mother is married. In 1979 it was banned from Top of the Pops because of the line “Ain’t you heard of contraception?”) But the truth is that in most developed countries, the birth rate has been below the “replacement rate” (2.1 births per fertile woman) for decades. We have been here before, specifically in the early 1940s, when George Orwell wrote as follows:...

ARE YOU CALLING ME A LIAR?

ARE YOU CALLING ME A LIAR?

10 Aug 2018

A little more than three years ago I wrote in defence of the word “scepticism”. I said that scepticism, which was once habitually paired with the word “healthy”, was having its meaning changed pejoratively to imply that a sceptic was a borderline fanatic who was in denial of the consensus agreed by all enlightened liberals. But scepticism is essential to successful investment and it might do people some good to employ it on other occasions. Something similar but opposite has happened to the word “liar”. It seems that everyone with whom some people disagree is called a liar. It has turned into a playground taunt, an insult tossed off casually without thought as to its actual implications. I will explain at the end why this really matters. Let me insist, if I dare, on two conditions that must be satisfied if someone is to be convicted of lying. First, what they say must be false and second, they must have a reasonable expectation that it is false. According to these criteria it is a very strong accusation to make. In the House of Commons to accuse another member of lying is considered unparliamentary language and the words must be withdrawn. Of course, in a trivial way, most of us lie routinely every day. For this reason the phrase “white lie” was invented. The film “Liar Liar” is about the hilarious chaos that ensues when a lawyer is forced to tell the truth for twenty four hours. Saki’s story of Tobermory the talking cat, written nearly a century earlier, was based on similar comic consequences: as was  William’s Truthful Christmas by Richmal Compton (1925).  By and large, it is considered better to be kind than truthful in personal relationships. “What can I do, what can I do? Much of what you say is true, I know that you see through me, But there’s no tenderness beneath your honesty.” Paul Simon (Tenderness) The very existence of white lies alerts us to the fact that darker lies are serious stuff. People go to prison for perjuring themselves in court and the reason that they tend to receive custodial sentences (up to seven years) is that the law...

Report on Q2 2018

Report on Q2 2018

5 Jul 2018

In Q1 the main UK indexes fell by between 6% and 8%. In Q2, they rose by 7% to 8%. The chart of the first six months is a “V” or perhaps a two-fingered salute to all the financial commentators who claim knowledge of the future. Bond yields again did almost nothing.   I have written elsewhere about the prevailing mood that seems to try to put a pessimistic spin on everything. As a result I would imagine that most people would be amazed to know that shares were so strong in Q2. How could they be in the turmoil of the imminent collapse of international trade, courtesy of the hardball tactics of Mr Trump and M Barnier, l’homme who loves to say “non”? The sole purpose of trade rules is to prevent trade from taking place and that these two gentlemen are both happy to use that threat as what I suppose we must call a negotiating tactic, if we could only tell what it is that they are trying to negotiate. Never mind that. The stock market doesn’t seem very concerned about it. Last quarter I listed thirteen everyday UK shares with markedly high dividend yields. Unsurprisingly, in view of the market performance, you would have done quite nicely if you had bought them. Not a single one of them went bust between April and June, I am pleased to say and the shares of none of them declined. It is better to look at valuations and to ask what they are telling us than to listen to what commentators are actually telling us. How about the yields on government bonds? I have said that there was little change in Q2 (despite innumerable predictions of falling prices) but are there trends and what do the absolute levels tell us? Germany is the benchmark bond for the EU. The ECB will continue its asset buying programme until the end of this year. It is still boosting asset prices by its own version of QE, implying that the crisis that started in 2008 continues. A year ago, 10 year Bunds yielded 0.5%. Now they yield 0.3%. Not many signs of imminent recovery there. Bond yields...

DEFEATISM – THE DISPIRIT OF THE AGE

DEFEATISM – THE DISPIRIT OF THE AGE

11 Jun 2018

When making investment decisions I try to employ pragmatism and to avoid behaving emotionally or irrationally. As a rule of thumb, most other words that end in “–ism” are not useful. Optimism, pessimism, idealism – these are all attitudes that we find appropriate or inspiring in our daily lives but when it comes to making decisions supposedly based on evidence, they load us with confirmation bias. I read a good piece about The Psychology of Money which points out no fewer than twenty common mistakes that can damage your wealth. One that I particularly liked was titled: “The seduction of pessimism in a world where optimism is the most reasonable stance”. Brexit, or the contemplation of it, appears to have plunged half of the UK into some kind of collective nervous breakdown. It is group-think of the most destructive kind and its victims wallow in anything that can be spun as bad news. Bluntly, they see pessimism as a virtuous scourging exercise because the people must pay for their sins. This is a phenomenon that is far from new. Gilbert & Sullivan wrote the Mikado in 1885. The song “As some day it may happen” is a “little list” of “society offenders” which reads rather oddly in 2018 (lady novelists?; seems harsh). But 133 years on, we are still very familiar with: “The idiot who praises, with enthusiastic tone, all centuries but this and every country but his own.” The current leader of the Labour Party, anyone? Moreover, anyone who is upbeat today is liable to be seen as deluded or laughable or even dangerous and fanatical.    The current President of the United States, anyone? In my report on Q4 2017, just after the Trump tax cuts had been implemented, I wrote that: Almost all the reporting in the UK mocks Donald Trump and strains to suggest that he is incompetent and dangerous. This remains mostly true though some people are beginning to contemplate the idea that Trump’s thoroughly unfashionable bullishness may be effective. He is bullish and he is demanding: put those two words together and you might come up with the word bullying – just how unfashionable can this man get?...

YES TO REGULATORS, NO TO MEDDLING

YES TO REGULATORS, NO TO MEDDLING

14 May 2018

Regulators should operate free of political interference. Ideally, they should be independent, honest and robust and people should both depend upon and fear them. They should be part of the judiciary rather than the executive. Above all, they should not court popularity nor try to placate the mob when it is demanding blood.  OFGEM: MORE OF A MEDDLER THAN A REGULATOR Ofgem (Office of Gas and Electricity Markets) is a UK regulator set up to ensure that competition in the energy market is fair to consumers. Its statutory duties and powers have been established by at least eight parliamentary acts and of course some EU rules too. It has a budget of £90 million and more than 750 staff. Consumers can switch freely and seamlessly between suppliers, of whom there are many. I have counted thirty seven ‘alternative’ suppliers in addition to the infamous Big Six for a total choice of 43 competitors. Ofgem’s most important responsibility concerns the electricity generators. It needs to ensure that enough capacity, of whatever kind, is built to satisfy our future energy needs. Our future consumption will not be directed mainly by economic and population growth but overwhelmingly by the plan to ban the sale of petrol and diesel cars by 2040. The UK’s electricity grid needs to be enlarged substantially and, given the lead times for new power stations, quite urgently. I don’t know if this was the right way to set things up but it seems reasonable to say “GO OFGEM!” and let it get on with what it has been empowered to do. I mean, how hard can it be? The answer is that if Ofgem is treated as a policy tool by the government of the day its work can be both difficult and ineffectual. For major capacity investments, Ofgem encourages competitive tendering, reasoning that the leanest transmission owner will produce the lowest prices for consumers. To this end, Ofgem sets guidelines for financial risks and cost of capital and acceptable returns. If these guidelines are too lenient, consumers might end up paying too much. If too harsh, the investments in new capacity might not happen. It is perhaps unfortunate that today’s political mantra...

INVESTING IN SOFTWARE COMPANIES

INVESTING IN SOFTWARE COMPANIES

30 Mar 2018

Ten years ago, I was paid to write research on investing in software companies. My USP was that I was pretty much a technophobe with little or no interest in software but with something of a passion for finding how to make money by investing in companies. Back in the early 2000s the world of software was full of exclusive jargon which, deliberately or not, served to discourage scepticism. The following is selected more or less at random from the 2006 Annual Report of SAP AG. THE “NEXT BIG THING” IN INFORMATION TECHNOLOGY Today, the IT sector stands on the verge of widespread adoption of service-oriented architecture (SOA), a development that promises to change the dynamics of the software industry as much as the shift to client-server architecture did 15 years ago. In essence, SOA defines the technical standards that enable the various enterprise software applications used by companies and their business partners to exchange data effectively. Thus, SOA will help reduce the costs of creating and maintaining data exchange interfaces, a factor CIOs consistently cite as one of their top challenges. When I read stuff like this I used to think a) does this mean anything and b) even if it does, how is anyone going to persuade the board of a major company to throw money at it? That is why I hit upon a personal rule that can be usefully extended from the narrow world of software analysis to life itself – never be afraid to ask the stupid question. Experience teaches that it’s often the hardest one to answer. Fifteen years ago the normal software business model was to sell a perpetual licence that allowed the customer to use the software plus an annually payable fee that got him maintenance and upgrades. The analyst community was obsessed with the growth of software companies and consequently watched the “new licence sales” number in every quarterly earnings release. Share prices were highly volatile as a result. A “miss” from the quarterly numbers often resulted in carnage for the shares. I was actually frightened. How I could I make recommendations to buy and sell shares when my view could and probably would be...

Report on Q1 2018

Report on Q1 2018

30 Mar 2018

In my report on Q4, I wrote that “for the third successive quarter, the markets were mysteriously calm.” The calm was disrupted in Q1 for sure: the main UK indexes fell by between 6% and 8%. The German DAX was -6.3%. Supported by a falling dollar, the US markets, though volatile, did better with the DJIA -2.5%. I hinted before that the stock markets might be vulnerable to rising interest rates or, more specifically, rising bond yields. In February it started to look as if this was happening; the US 10 year treasury yield had risen from 2.40% to 2.94%; but by the end of the quarter it was back to 2.74%. A similar pattern played out elsewhere. The 10 year gilt yield rose from 1.20% to 1.69% but ended the quarter back at 1.34%. It would seem that the wait for inflation goes on. Aside from the usual nonsensical white noise about “uncertainty” it is hard to escape the conclusion that the stock market is truly concerned about the ability of large corporations that feature in our lives daily to invest capital, service debt and pay dividends. Here is your day described in terms of dividend yields: you are woken by the ringing of the house phone (BT: 6.8%) and switch on the light (National Grid: 5.6%); you turn up the central heating (Centrica: 8.5%) and clean your teeth (Glaxo: 5.7%); you decide to go into town but your car has no petrol (BP: 6.0%, Royal Dutch Shell: 5.8%) and needs a new rear light (Halfords: 5.4%) so you decide to take the bus (Stagecoach: 9.0%, Go-Ahead: 5.8%); you do some shopping in Currys PC World (Dixons Carphone: 6.0%, Vodafone: 6.7%) and M&S (Marks & Spencer: 6.9%) before treating yourself to a pub lunch (Marstons: 7.4%, Greene King: 7.0%). Is it the end of the world as we know it? Yet, against this rather sinister background something quite different has been happening. Companies who want to buy each other seem to like these prices very much. On 22 December GVC announced its intention to buy Ladbrokes plc. On 17 January, Melrose bid for GKN; on 30 January UBM agreed to be taken over;...

WAITING FOR INFLATION

WAITING FOR INFLATION

14 Mar 2018

They say that if you can remember the 1960s you weren’t there. By contrast if you lived in London you will never forget the dynamic decade of the 1980s (even if you can’t remember the name of the current Prime Minister). The period of the Thatcher government (1979-1991) is rightly known for taking on the culture of perpetual strife promoted by the labour unions and, as many of us saw it at the time, enabling an era of private capital investment and personal wealth opportunities. What is probably less well remembered is that the Thatcher years were bookended by high inflation. Inflation was 18% in 1980 (stoked more by OPEC than the NUM) and, having moderated in the middle of the decade, was back up to 9.5% in 1990 (arguably stoked by Nigel Lawson). By 1993, inflation had fallen to just 1.6%. This was extremely unusual because the UK had been growing with a distinct inflationary bias since the Second World War. From 1946 to 1992 the average annual inflation rate was 6.8%: that’s the best part of 50 years in which people’s expectations were absolutely tuned in to higher prices. No doubt it is for this reason that people born before c.1970 have typically been waiting for the re-emergence of inflation ever since. The average inflation rate in the last 25 years has been 2.8%. People’s expectations have changed and are now more tuned in to stable or even lower prices. It is quite logical that inflationary and deflationary expectations affect behaviour. If you expect prices to rise constantly you will not defer purchases: you might even borrow to fund your spending. But if you expect prices to fall you will sit on your cash until you absolutely need to buy. The inflation hounds are running out of hares to chase. Inflation used to be a great subject for academic study. Keynsians talked about “cost-push” and “demand-pull” inflation and “full employment” and Monetarists talked about the supply of money. One unusually visionary economist, Roger Bootle, published a book called The Death of Inflation in 1996. He wrote: “The textbooks show that deflation is dead easy to cure. So it is — in the...

FALSE CORRELATIONS

FALSE CORRELATIONS

26 Jan 2018

POVERTY AND INEQUALITY Listening to Radio 4’s Today (aka NHS Daily) I heard a professional lobbyist from Oxfam explaining that poverty and inequality are inextricably linked. Most of us are against poverty and inequality and, if we suffer from neither, probably feel slightly guilty about both. The counter argument, which is fairly obvious, is that economic growth is the only practical way to relieve poverty; that economic growth is best served by liberal democracy or free market capitalism, (if you think that term is more honest); and that inequality is always promoted by such growth. Reading its latest polemic about the “inequality crisis” I learn that Oxfam broadly agrees with the argument that economic growth is the answer to poverty. Between 1990 and 2010, the number of people living in extreme poverty (i.e. on less than $1.90 a day) halved, and has continued to decline since then. This tremendous achievement is something of which the world should be proud.   Reward work not wealth: Oxfam January 2018 It goes on to say that we would have done even better if we had eradicated inequality. This is the big contentious and unknowable point and is therefore the object of lobbying rather than reasoned argument. Oxfam’s lobbying might be more convincing coming from an organisation that rewards its executives less lavishly. The president of its US operation was paid a package of $504,000 last year; its CFO $258,000. Oxfam UK’s eight directors averaged £113,000 having received an inflation beating 3.7% rise. What first struck me about the Today item was that I heard the Oxfam lobbyist say that “we (Oxfam) know more than anybody else the power of enterprise to help overcome poverty” – this is bragging worthy of Donald Trump and is perhaps evidence of how his influence is becoming pervasive, even among those who presumably despise him. On reflection I was more taken with the casual way that poverty and inequality were conflated. Dodgy correlation is everywhere. Take two facts or convincing assertions and smoothly merge them into one conclusion that appears plausible because the two original statements can be presented as truthful. PRIVATE EDUCATION AND UNIVERSITY PLACES 7% of UK pupils are privately...

Dogs and tricks – new light from accounting changes?

Dogs and tricks – new light from accounting changes?

13 Jan 2018

The following paragraph is not true. A neat way to value a company is to divide the share price by the earnings per share (EPS) which gives you something known as a P/E (price/earnings) ratio. A low P/E ratio (say <10x) implies that a share is cheap and a high P/E ratio (say >20) suggests expensive. Many people, some of them claiming to be investment professionals or financial journalists, still promote P/E ratios (which came to be the standard valuation method in the 1970s and the 1980s). Here are some reasons why they are wrong. MARKET CAPITALISATION IS NOT THE VALUE OF THE COMPANY The price of a share is a measure of one of a company’s liabilities (the equity owned by shareholders) but not the value of the company. The equity is what is left over after all other obligations have been met. The value of the equity is known as the market capitalisation of the company. EI Group (formerly Enterprise Inns) has 479.5 million shares trading at 143p giving it a market capitalisation of £685 million. Also with a market capitalisation of £685 million is Go-Ahead Group with 43.2 million shares at 1586p. Their earnings per share last year were 20.5p (EI Group) and 207.7p (Go-Ahead) giving them P/E ratios of 7.0x and 7.6x respectively. How cool is that? Are they both cheap and are they almost equally cheap? You will not be surprised to read that it’s not as simple as that. The balance sheet of EI Group reveals that it the business is carrying more than £2000 million of net debt whereas Go-Ahead has £200 million of net cash. Consequently, the enterprise value of EI Group is £2700 million (market capitalisation plus net debt) and Go-Ahead’S enterprise value is just £485 million (market capitalisation minus net cash). On that basis the pub leasing business is worth 5.6x as much as the bus and train operating business. This doesn’t tell us which share is more likely to go up but it gives us plenty of ideas about what might influence their prices. None of which involve reported EPS. EARNINGS PER SHARE Another reason why P/E ratios are nearly useless is that...

Report on Q4 2017

Report on Q4 2017

4 Jan 2018

For the third successive quarter, the markets were mysteriously calm. Long term government bond yields barely stirred again. Bunds yielded 0.44% in September and they yield 0.44% today. The range, if that word applies, of gilts has been almost as tight. The UK stock markets slow-marched upwards in step in Q4: FTSE 100 +4.4%, FTSE 250 +4.5%, FTSE All Share +4.4%. It would seem that behind the blizzard of infantile stories about Bitcoin and Brexit, there were no events of substance.  The US has been much more exciting. The Dow Jones Industrial Average rose by 24% last year and by 10% in Q4 alone. Almost all the reporting in the UK mocks Donald Trump and strains to suggest that he is incompetent and dangerous. Given that Trump campaigned on the basis that “good people don’t go into government” it is, to put it mildly, understandable that many people are keen, not to say desperate, to see him fail. It may turn out to be the only major legislation that he ever delivers but the tax reform is certainly a thing and the stock market seems to like it. Cutting the corporate tax rate from 35% to 21% is clearly beneficial for business and has been naturally portrayed as Trump helping out his true personal constituency but it is interesting that the balancing reduction of allowances is causing some huge short term hits in reported earnings ($5 billion for Goldman Sachs alone).    As soon as the bill was passed a raft of companies announced immediate $1000 cash bonuses for every employee. This looked suspiciously coordinated but I don’t suppose the 200,000 AT&T or 100,000 Comcast recipients mind. And the US consumer has been in celebratory mood with spending over the holiday period up by around 5%. The overall effect of the tax cuts has been reported as if they are a straight transfer of money from the poor to the rich. This is a question of whether you think that the lower taxes will promote economic growth (the classical capitalist view) or whether you think that they will merely drain government coffers (a more left wing attitude of course). The undeniable fact that individual...

Populism explained!!

Populism explained!!

21 Dec 2017

The causes of the financial crisis have not been properly addressed. In particular, the perpetrators are widely and correctly seen as having got away with it. This, in my view, lies behind the populist behaviour that keeps giving us “anti-establishment” election results like Brexit, Trump and Corbyn. That’s the conclusion of this essay. Here are my arguments, looking at what happened in the US, the EU and the UK and the common failures of leadership in all three territories. WALL STREET AND THE FINANCIAL CRISIS I think we all know that the financial crisis involved junk debts being packaged by rogues as AAA and sold to idiots. Faults on both sides, no doubt. US officials are relatively good at hammering those considered dispensable. (Bernie Madoff was sentenced to 150 years at the age of 71. That showed him). But the biggest banks were considered “too big to fail”. They operated with an implicit guarantee that, no matter what, they would be bailed out by the state. This was extended to the claim that they were “too big to jail”. It has been said that it would be destabilizing to the financial system if the senior management of a major institution were taken on the “perp walk”, handcuffed in front of a global TV audience. At the same time, the alumni of US investment banks seem to penetrate government at the highest levels. The original bailout was presided over by the Treasury secretary Hank Paulson, once of Goldman Sachs. Also from a Goldman career is the current Treasury secretary, Steve Mnuchin (there are limits to President Trump’s populism). You can read plenty about Goldman Sachs here. US politicians who complain about the big banks tend to stand out because they are unusual. Bernie Saunders and Elizabeth Warren are portrayed as “progressive liberals” (that’s an insult in establishment parlance) and possibly anti-capitalist or un-American. It is estimated that the US banking lobby spends more than $100 million a year fighting attempts to regulate it.    In 2011 the Occupy Wall Street movement claimed to represent “the 99%” against income inequality and corporate influence. President Obama said perceptively that: “I think it expresses the frustrations the American...

Prepare to turn left

Prepare to turn left

14 Nov 2017

I have been on the town recently. Two weeks ago I went to see Reasons to be Cheerful, a brilliant play based around the music of Ian Dury. It is performed by the Graeae theatre company that featured in the 2012 Paralympics opening ceremony. I saw it when it was produced the first time in 2010 and eagerly returned for more. Ian Dury was to say the least an anti-establishment figure and by today’s standards not politically correct. I’m not sure whether he would have appreciated the fact that a new song was tacked on to the end of the show. “If it can’t be right then it must be wrong” has rather puerile lyrics that I don’t think Ian himself would have written (“Keep the funding flowing from a loving cup”). As the song was played and sung, pictures of various politicians with devil horns sprouting from their heads were flashed onto a screen: Mrs Thatch, natch, David Cameron and, oh look, Tony Blair. But I will let someone else summarise: “This new anti austerity song from Graeae and the Blockheads captures the current mood of the country. Its lyrics bring people together in a moment of shared experience to challenge the status quo.” Jeremy Corbyn, Leader of the Labour Party. There I was watching a play set in 1979 and suddenly the “mood of the country” in 2017 was sprung on me. How did that happen, I wondered. Last week I revisited 1979 for the second time by paying a 2079 price to see Squeeze at the Royal Albert Hall. And it happened again. In between Cool for Cats, Up the Junction and Labelled with Love, the band naturally played songs from their new album. These included Rough Ride which laments the lack of affordable housing in London and A&E which really challenges the status quo by calling for more funding for the NHS. Perhaps I should get out more but I was struck by the way in which the anti austerity message was offered on both occasions with such confidence, as if it were not a politically contentious message but almost a fact. Perhaps I live in a London bubble but...

EVERYBODY KNEW

EVERYBODY KNEW

27 Oct 2017

There was a glorious time – and it was just a few weeks ago – that I had never heard of Harvey Weinstein. Apparently he was thanked over the years in thirty four Oscar acceptance speeches because although it was widely known “what he was like” there was some kind of implicit consensus that his behaviour, though reprehensible and pathetic, was a price worth paying for the chance of more Oscars. I may have misunderstood, but if it is true that many people knew or suspected and turned a blind eye then it was an inconvenient truth. There is often a financial motive behind the ignoring of inconvenient truths. Enron was a notorious example. It was widely admired: according to various articles it was named “America’s Most Innovative Company” by Fortune magazine for six consecutive years between 1996 and 2001. When a lone Wall St analyst asked on a recorded conference call in April 2001 why the company hadn’t published a balance sheet, Jeffrey Skilling, Enron president, replied, “Well, thank you very much, we appreciate that … asshole.” The company filed for bankruptcy before the end of that year. “As of last month, 13 analysts covered the company. Eleven recommended it as a “buy” or “strong buy.” Just one said “sell” and the other said “hold.” This was just one week before the roof fell in”. (Forbes magazine on Enron, 29 November 2001) There were a couple of brave analysts who waved a red flag about Enron just as there are some brave women who spoke out against Harvey Weinstein. But stating inconvenient truths does not make you popular at the time. Once the truth is out, the righteous mob surges forward like a tidal wave. Jeffrey Skilling was sentenced to 24 years in prison and Harvey Weinstein might lose his honorary CBE and who knows what else.     How do we identify inconvenient truths that “everybody knew” before anyone realises that everybody knows them? Merely holding a view with which everyone disagrees is not the answer. (Would that it were: making money would be so easy).   It is important and potentially lucrative to question consensus views, if only to check that they...

Report on Q3 2017

Report on Q3 2017

3 Oct 2017

In the Q2 report I said that the stock market had been amazingly calm. The amazement intensified in Q3. Political and economic commentators are so certain of impending collapse that they can hardly get the words out quickly enough. The politicians themselves are cringing in response, like the invertebrates that most of them sadly appear to be. You can be sure that if the fear gets to investors they will panic but, rightly or wrongly, they are not doing so. It has usually been a sound investment policy to say that if it’s reached the front page of the news, it’s probably in the price. In other words, the perceived risks have been accounted for.  Obviously perceived risk is a moving target and securities will continue to trade accordingly. To take a singular example, the Labour party wants to nationalise Royal Mail, probably at its issue price of 330p. The shares are down 17% this year to 385p, just a further 14% above Labour’s assumed confiscation price. The company just raised the dividend again and they yield 6%. That looks to me as if the price is discounting the risk quite efficiently. (Given that the competitors to Royal Mail are “gig economy” delivery companies I cannot imagine why Labour hates it so much). Labour’s wider threat is that it proposes to confiscate privately owned assets (starting with anything that has ever been state-owned which is pretty much everything that existed before the internet). This is potentially catastrophic (defined by Dr Johnson as “A final event; a conclusion generally unhappy”). The wing of the Labour party that hates capitalism would be delighted because capital would flee to the land of Anywhere Else. The stock market tells us that, specific victims like Royal Mail aside, it thinks that Corbyn’s electioneering pledges are hot air on which he would never be able to deliver. But the closer he comes the more frightening he will get. So watch that space.        In the quarter, the FTSE 100 was +0.9%, the All Share + 1.3% and the 250 + 2.8%. 10 year gilt yields rose from 1.26% to 1.33%. A big yawn, even if it was a nervous...

The Euro Elephant

The Euro Elephant

2 Sep 2017

Who is in the room containing those who are supposedly negotiating the terms of Britain’s exit from the EU? We seem to have sent a team of men (mostly) who are used to attending meetings without trousers which is perhaps appropriate.  The Europeans are fielding another team of men (mostly) who are seemingly permanently “flabbergasted” and like to talk about the conditions for talks about talks. Were they to remove their trousers you can be sure that they would be wearing a second pair underneath. But what is that large white quadruped that keeps sticking its proboscis where it’s not wanted? It is the elephant in the room and its name is sadly not Donald the Tusk but Erich the Euro. Here is a picture of Erich, trumpeting towards his glorious target of parity with the pound (the chart runs from 2014 to this week – click to enlarge).   No one knows for sure why currencies move against other currencies. To listen to analysts and other commentators you might imagine that it is quite obvious, in retrospect if not in advance. This is largely tosh. The best answer is the one that I heard every day when I worked on the floor of the London stock exchange: “More buyers than sellers, mate”. THE REASON FOR CURRENCY MOVEMENTS IS UNCLEAR AND UNIMPORTANT Looking at the elephant picture it appears that there have been more buyers of euros than sellers. In 2015 there were more sellers than buyers. Remind me, why was that again? There just were! Okay, okay. I suppose that Brexit uncertainty and a slowing top-end property market (yes, they might be the same thing) have caused foreign investors to buy less sterling this year. You might just about persuade me that others have been buying euros in preparation for opening new offices in Budapest, Valletta and Clermont Ferrand. But currency movements have real effects, though they take time to play out. There has been a 40% increase in UK tourists to Greece this year (doubtless fuelled partly by aversion to Turkey – people prefer oppressed governments to oppressive ones, it seems). As I write, these tourists will be asking themselves why Greece...

Report on Q2 2017

Report on Q2 2017

5 Jul 2017

The UK stock market was on a rollercoaster ride to nowhere in Q2. The FTSE 100 fell by -0.3% and the 250 managed a rise of +1.8%. Given that we had a shock election, a shock result, a hung parliament and that the shadow Chancellor thinks that democracy has failed, you could say that the stock market has been amazingly calm. Likewise the government bond market. The 10 year gilt yield was 1.23% at the end of Q1 and 1.26% at the end of Q2. This is the dog not barking in the night time. We are widely told that the pale imitation of austerity that has been attempted for the last eight years is to be abandoned but the bond market is not panicking yet. Here is a picture of gilt yields since 2007.    One of the lessons of the election was that voters under the age of fifty or so are not frightened of the things that made the 1970s rather messy. Inflation, double digit interest rates and labour unions challenging the government’s right to run the country to name but three. It remains the case that the return of inflation is what bears warn about most frequently. In the 1970s the best way to protect oneself against inflation was to buy property. House prices rose by 492% over the decade. I wouldn’t advise the same strategy now. In fact I would consider doing the opposite. The world still seems pretty deflationary to me. You can choose your own explanation and file it under “uncertainty” but it still seems to me that listed companies are still being very cautious about capex and expecting their shareholders to approve of this caution. Here are five domestically exposed UK companies that have reported March or April year-end results recently. Halfords cut capes by 11% and raised its dividend by 3%. Dairy Crest cut capex by 62% and raised its dividend by 2%. M&S cut capex by 25% and kept its dividend unchanged. Stage Coach cut capex by 18% and raised its dividend by 4%. Royal Mail cut capex by 16% and raised its dividend by 4%. All these are behaving in a risk averse...

WE NEED TO TAX ASSETS

WE NEED TO TAX ASSETS

20 Jun 2017

Nearly every commentator admits that he or she was wrong about the recent election, in particular their belief that no one with a modicum of responsible judgement would vote for Jeremy Corbyn. I also was wrong when I wrote this: Just as the Labour party cannot afford to be a blunt advocate of public spending because it knows that government debt is critically high, the Conservatives are no longer perpetually calling for lower taxes because they know that services to which we all think we are entitled are going to become yet more expensive. So the result is that the debate at this election has become a little more subtle than usual. As it happened, Labour produced a costed manifesto in which 80% of the extra revenue was to come from corporations or rich people, those joint gold medallists in legal tax avoidance. This was anything but subtle (“people in suits can pay”) and was effectively trashed by the party itself when, in response to complaints from students who have already incurred high debts that their successors would benefit from Labour’s plan to abolish fees in future, Jeremy Corbyn promised to “deal with it”. Dealing with it sounds expensive and was not covered by the manifesto. By contrast, the Conservatives decided that it was a good time to have a grown-up conversation about relieving young people from the burden of paying for the care of the elderly by tapping the assets of the elderly themselves. It turns out that the country is not ready for this discussion which is a great shame. Time is running out. Between now and 2030, for every net person joining the major income tax paying years of 30-59, there will be nine (net) joining the over 75s. The Conservative MEP Daniel Hannan has this plausible explanation for the surprising performance of a Labour movement led by its left wing. No, I’m afraid we’re down to the simplest and most depressing explanation. Quite a few voters will support any party that seems to be offering them free stuff. Labour’s manifesto was a ridiculous list of public handouts. More money was promised for healthcare, schools, the police, public sector pay rises,...

Are you rich and is everything your fault?

Are you rich and is everything your fault?

28 Apr 2017

THE PARADOX OF SPENDTHRIFT AUSTERITY It may be stretching a point to say that any of the political parties in the forthcoming “snap” election will make interesting financial arguments but it does seem that the days of competitive spending pledges might be behind us. That would be a relief and at least we could say that the continuing nine year fallout from the financial crash was not for nothing. I will generalise by saying that opposition parties have a strategic problem. They would like to criticise the Conservatives for allowing government debt to rise from 76% to 90% of GDP during a number of years labelled as a period of “austerity” but they are also against austerity in principle and disinclined to criticise the Tories for pursuing it with insufficient discipline.    Yet it seems that calling for even more government borrowing is not regarded as an option for a party with serious ambitions to be elected. So the debate, if that is not too dignified a word, is turning towards where the burden of taxation should lie and whether the status quo is “unfair” (a word that we all remember well from the school playground). LET’S TALK ABOUT TAX We can all agree that tax evasion, which is illegal, is a bad thing. Unfortunately tax avoidance, which is not illegal, is frequently lumped together with evasion and cited as part of the evidence that some wealthy people or companies are not doing their share. It is certainly the case that some tax avoidance is morally dubious and some tax advisers come close to crossing legal lines. But much tax avoidance is the result of behaviour that has been encouraged by the government of the day. I avoided income tax by paying money into my pension. I was deliberately incentivised to do this. Children are encouraged to avoid tax by putting their savings into a Junior ISA. The fact is that you are unlikely to meet anyone who wants to pay more tax but it would be equally unusual to find a person who doesn’t think that someone else should. Just as the Labour party cannot afford to be a blunt advocate of public...

Report on Q1 2017

Report on Q1 2017

1 Apr 2017

The UK stock market had a sound quarter with the post Brexit vote devaluation effect fading. The FTSE 250 resumed its customary outperformance. It rose by 5.1% in Q1 compared to 2.9% for the FTSE. This is typically a sign that people are feeling less defensive or fearful. Given the somewhat alarmist nature of news headlines in the last months this might seem strange but as ever when something is on the front page of the news it is generally already absorbed by the stock market.          The rollercoaster performance of gilts continued. Having risen to 1.41% in December 2016, the 10 year gilt yield has sunk again to 1.23%. Many financial commentators talk as if the return of inflation is a certainty but the bond market apparently does not believe it. I was thinking seriously about investing modestly in long-dated gilts if the 10 year yield went above 1.5% but it didn’t happen and for now that ship is sailing away. In January I wrote about investing with a view to changing demographics and the rapidly growing elderly population. I recommended three shares. McCarthy & Stone – which builds retirement homes – has done quite well. It has risen 17% from 162.5p to 190p. Saga – which offers insurance and other services tailored for the over 50s – is up by 6% (to 203p) and the share price appears to be recovering nicely from the trauma of having 68% of its stock drip fed through various placings over a period of less than two years. The disappointment has been Pets At Home which delivered a somewhat bleak trading update due to its failure to increase sales of merchandise in its stores. There was a better story from the services (vets and grooming) part of the business (which is where the growth is supposed to be). The shares are down by 24% to 180.5p where they yield 4.4%. All three shares continue to be suggested by me as long term investments.      In December 2016 I wrote about Five False Truths, one of which was that “EVERYONE LOVES THE NHS”. Here is an extract: The brutal truth is that if you give something away...

The crumbling social contract

The crumbling social contract

15 Mar 2017

THE LAND OF THE FREE-FROM-RESPONSIBILTY The Occupy protesters (what was it they were protesting about again?) used to chant “We are the 99%”. The 1% were portrayed as the selfish and/or crooked people who had appropriated most of the wealth. It is demonstrably easy to be part of the 99% – in fact, it’s darned hard not to be. Rarely had so many ever been against so few. The trouble with being part of a 99% majority is that it is difficult to be focused. Even the French revolutionaries of 1789, who had pretty much the same numbers on their side, could not agree on their objectives and ten years later succumbed to dictatorship (by a chap named Napoleon). But the recent UK budget, delivered by the harassed Chancellor, Philip Hammond, highlighted one point on which close to 99% of politicians, lobbyists and commentators are agreed. They all have limitless opinions about how public money should be spent but next to no constructive suggestions about how that spending should be funded. There is no responsibility for funding that is commensurate with the responsibility for spending. This seems unfair because the latter offers all the joys of patronage and moral superiority and the former, as Mr Hammond might agree, is like having toothache in a land of no dentists (whose absence is widely attributed to your own austerity policy).      I believe that most citizens are supportive of the idea that they should pay their fair share of taxes. But what weakens their support is any suggestion that the government is misusing their money, either by waste and incompetence or by channelling it to family and friends or by funding causes with which they do not agree. (The 2016 EU referendum ticked all those boxes for many people). There was a great experiment in California in the 1970s that showed what happens when people revolt against their social obligation to pay taxes. PROPOSITION 13 Essentially, Proposition 13, passed overwhelming in a referendum in 1978, imposed severe restrictions on the ability of local Californian politicians to raise taxes. Its genesis was the Howard Jarvis Taxpayers Association. The US has a history of taxing real estate that...