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...

Investing for our old age

Investing for our old age

16 Jan 2017

Here are two pieces of great news for the citizens of relatively rich, relatively developed, relatively Western economies. Women can increasingly combine career and motherhood rather than having to choose between them: and improved healthcare (if not exercise and diet) mean that people on average are living to greater ages. Fifty years ago, the UK average birthrate per woman was 2.9 (over her fertile life, not per pregnancy, obviously). Now it is 1.8. No doubt this is down to a combination of reasons which you can work out for yourself. Given that medical science has not yet worked out how to allow men to give birth you might imagine, if the UK’s experience is typical, that in the long term the global population will decline, on the rough basis that each woman should on average have two babies to replace those falling off the perch at the far end of life’s journey. Were it not for the fertility of some African countries, where birthrates of >5 per woman are quite common, mankind might become an endangered species.  According to the World Bank, the average fertility of women in the world was 2.5 in 2016 and the necessary “replacement rate” is 2.1. So the human race looks as if it will walk on for a while. Yet the story for developed nations is quite different. BIRTH RATE IN DEVELOPED NATIONS – FLACCID France (2.0), the US (1.9) and the UK (1.8) are doing their best (all, note, countries with histories of racially diverse immigration). The EU, which only promotes immigration from within itself, is overall at just 1.6 and Germany (1.4), Italy (1.4) and Spain (1.3) are below average. China, just unwinding its one child policy, is at 1.6 and Japan, perhaps the world’s most notorious ageing nation, is at 1.4. But the populations of established nations like the US, Germany and the UK are certainly not declining yet. Instead we have decades ahead in which the population will continue to grow but will age significantly. This is important for all kinds of financial reasons, none of them good. The last time that the fertility rate in the UK was at the “replacement rate” of...

Report on Q4 2016

Report on Q4 2016

13 Jan 2017

The UK stock market continued to climb the wall of fear or crawl forward in the sea of uncertainty or whatever you will in Q4. The FTSE 100 outperformed the FTSE 250 for the third time (out of four quarters) in 2016. Rising interest rates helped the UK banks index rise by 16% in the quarter. Some people think that lending margins will improve as interest rates “normalise”. Good luck to them. I will not be making that trade. Over the year as a whole the FTSE 100 rose by 13.9% having fallen by 4.8% in 2015. The FTSE 250 was up by 3.5% after +8.4% in 2015. The bond market was a bigger story in many ways with the 10 year gilt yield falling from 1.93% in December 2015 to 0.58% in August and then back up to 1.41% in December 2016. That is quite a rollercoaster dip. Many people believe (or hope) that the rise in interest rates will continue.  In many ways it would be helpful if they did (to help savers rather than borrowers) but I am not convinced that it is going to happen. The trading statements that January has seen have mostly been very encouraging. Marks & Spencer actually sold more clothes. I must admit I didn’t see that coming. I was less surprised that Morrisons sold more food. That has been a slow burner for me but it has started to come good. Let me say that I bought both these shares because of their financial strength (M&S’s cash flow, Morrison’s balance sheet) on the assumption that they would have the time to sort out their retailing problems. I know next to nothing about retailing but I can see that burdensome debt must make it much harder (eg Tesco). I was also amused and pleased to see that Sainsbury is now being helped by its acquisition of Argos. That stock (Home Retail Group) was my one attempt to take a view on a retail model and I just got away with it. The post that is most often called to mind at present is Four kinds of bias from May. The selective use of facts is all...

FIVE FALSE TRUTHS

FIVE FALSE TRUTHS

13 Dec 2016

Imagine that your morning post contains an envelope that has your name and address written by hand in block capitals. Inside is a note, written by the same unknown hand that says, “YOU ARE SMELLY”. What do you make of that? For a moment you will regret having two helpings of chilli con carne last night and you will think back to last Thursday when you had a shower. But then you will start wondering about who could have sent such a note. What kind of strange person would bother to take the trouble to deliver such childish (and doubtless unjustified) abuse. What kind of sinister creep does that? Is this the start of something that could escalate? Will it end with a chalk line on your floor marking the position of your dead body when it was discovered?   Much of what passes for “social media” on the internet is effectively a worldwide digital version of an anonymous “YOU ARE SMELLY” note. And once you have asked yourself what sort of person spends time commenting, usually negatively, on anything that takes their fancy, with their ignorance protected with the cloak of anonymity, you must then come to a more awkward question: who in their right mind takes any notice of this stuff? It is certainly the case that corporations and politicians manage their Twitter and Facebook (and doubtless many other apps that I’ve never heard of) identities carefully. They employ people to try to ensure that their public face is shiny and smiley. Television channels read out texts and tweets to give the impression that someone sitting at home sending messages to the TV is not sad at all but is really a member of an upbeat community. Everyone is frightened of provoking a Twitterstorm, defined on Wikipedia as “a sudden spike in activity surrounding a certain topic on the Twitter social media site”. Sadly, Twitterstorms are frequently responses to someone questioning orthodox or just populist opinion. We pretend to revere people who challenge consensus but in practice they are fair game for mob anger. (I appreciate that Donald Trump is the exception to the above: he is far from anonymous, he does not...

Why investors love uncertainty

Why investors love uncertainty

18 Oct 2016

Every five minutes, someone, somewhere, says that “markets hate uncertainty”. This is an example of anthropomorphism or the attribution of human characteristics to animals, objects or ideas. Benjamin Graham, the father of value investing according to Warren Buffet, wrote about Mr Market, an obliging business partner who offers to buy you out or sell you a larger stake on a daily basis. Mr Market can be generous or miserly but his defining characteristic is that he always shows up. Mr Market is in fact, a market.  Regrettably, the temptation to turn Mr Market into a soap opera character who experiences human emotions has proved too much for many commentators. Watch, read or listen to today’s news and you will find that Mr Market is an extremely judgmental fellow. Donald Trump makes him very unhappy. He is incandescent with anger about Brexit. Interestingly, Mr Market is not a great believer in democracy. When he thinks that voters in the US or the UK are making a mistake he stamps his foot in rage. He much prefers the smack of firm leadership. When Saudi Arabia, Iran and Russia attempt to collude to restrict the supply of oil he performs a little jump of joy. Enough. Mr Market does love or hate anything. Markets are just places where buyers and sellers look for each other and sometimes meet. If you want to attach a smiley face to the chart of a rising market that’s up to you but remember that higher prices result in losers as well as winners. Witness the UK housing market – oldies = smiley face: youngsters = sad face. The sloppy thinking that leads people to say that markets hate uncertainty invariably evolves into the confident factual statement that “investors hate uncertainty”. This assertion is central to the fund management industry that wants to frighten you into paying to have your savings looked after. Please see my post “Clients are very nervous”. But the truth is the opposite. Investors love uncertainty because it causes assets to be mispriced. It is only the mispricing of assets that leads to good opportunities to buy and sell. I don’t want to be unkind but if someone...

Report on Q3 2016

Report on Q3 2016

5 Oct 2016

The second quarter ended just after the Brexit vote and the stock markets were in a state of shock. The FTSE 100, which is where frightened investors go to hide, had one of its rare periods of outperformance over the FTSE 250 in Q2. (The FTSE 100 includes large multinational businesses, the FTSE 250 is a better reflection of the UK economy). In Q3, the FTSE 100 rose by 6.4% and the 250 by 10%, a strong indication that investors recovered their nerve during the summer. Mark Carney would probably claim that this was the result of the Bank of England’s interest rate cut and expansion of QE on 4 August, though much of the stock market recovery had happened by then. European government bond yields have remained low but have had a fairly quiet quarter as people begin to question how much further central banks can go. The consequences of central banks’ actions were addressed by Crowknows in Q3. First in a post called “QE: a wrecking ball to crack a nut“, I suggested that, whatever its ultimate outcome, the predictable side effects of QE are quite disturbing. I looked at the widening of the wealth gap, the rising cost of pension liabilities (see the Tesco half year results on 5 October) and the piling up of the debt burden to be dealt with by future generations. The Bank of England does not print free money: it draws relentlessly on an excellent credit facility better known as the UK economy and its tax receipts of the future. The second post was about how QE plays out. This suggested that shares and arguably only shares are cheap relative to other investable assets. (Never forget thatvalue is always relative and never absolute, unless you believe that there is an investment god). It then suggested that if your house is your pension, then cashing it in is going to become what investment wonks call a “very crowded trade” one day. I don’t know when that will be but included in the possible dates is tomorrow. The third conclusion was that national debt will continue to grow (confirmed by the new Chancellor this week) and that the...

How QE plays out – and other guesses

How QE plays out – and other guesses

15 Sep 2016

This is a follow up to my last post about how QE is a wrecking ball that distorts financial markets and economic decision making. I have no opinion – despite a sceptical mindset – about whether QE is being applied correctly or about whether it will work. I doubt if even hindsight will allow people to agree about whether it succeeded. As an investor I need to weigh the probable outcomes of the distortion itself. Even this is not the same as making a definitive call on what will happen. That is gambling. As always, investing is about probability. THE WEALTH GAP – ONLY SHARES ARE CHEAP As long as QE carries on and the pool of safe assets shrinks further, savers in search of yield will keep chasing other assets. The stock market has been climbing the wall of fear this year. Before the referendum vote, George Soros and others forecast a decline of up to 20% in UK shares. Chancellor Osborne did not rule out suspending stock exchange trading in the face of the expected panic. With the atmosphere so full of “markets hate uncertainty”, that notorious cliché so readily embraced by third rate market commentators, many people will have assumed that the stock market would have performed its patriotic duty and dived after Brexit. But shares are cheap and quick to buy and sell, five days a week. I have just been offered a two year fixed rate bond by a building society that yields 0.95%. That’s a decision that ties up my money for two years. Were I to choose to buy Marks & Spencer shares instead I could get a dividend yield of more than 5% – and if I change my mind and decide that M&S is too racy, I can sell it in two minutes. Back in verdant Blackheath and vibrant Lewisham near to my house, yields on buy-to-let properties are between 3.6% and 4.5% (source portico.com). That seems like a lot of cost, time and risk compared to being a passive and better-rewarded owner of M&S. There is no hint that QE will be curtailed or reversed. On the contrary, the central banks of the UK...

QE : a wrecking ball to crack a nut

QE : a wrecking ball to crack a nut

3 Sep 2016

On 4 August 2016, the Bank of England expanded the QE (quantitative easing) programme that it had begun in 2009. This expansion, which now includes corporate bonds as well as gilts, is ostensibly in response to the Brexit referendum result on 24 June. The Treasury and the Bank had warned that Brexit could lead to a bad recession. You might need reminding that the official purpose of QE, since 2011, has been to stimulate the UK economy. You might think that, if this policy has been a success, it is rather a slow burner. But Andy Haldane (Bank of England Chief Economist) is in no doubt that it is the right thing to do and that this is no time to be faint hearted. “I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison.”   Mr Haldane may be an economist but he knows how employ a ridiculous metaphor to make a point. And although he – incredibly – affects populist ignorance of financial matters (giving interviews in which he says that pensions are too complicated to understand), he does not lack respect for his own ability. He explained that the decision to cut interest rates by 0.25% was in order to save hundreds of thousands of jobs, though whether this included his own was not clear. QE actually commenced in 2009 as an emergency measure to prop up asset prices in a (so far) successful attempt to save the banking system. The banks held vast amounts of tradable assets that could become vulnerable to crises of confidence – so the central bank stepped in as a very public buyer and calm was largely restored. Phew. The official line that this was a form of monetary policy that could stimulate economic growth snuck in later and is much more challenging to justify. It seems to me to be a rather strained argument. Here is the latest official serving. BoE report 4 August 2016 The expansion of the Bank of England’s asset purchase programme for UK government bonds will impart monetary stimulus by lowering the yields on securities that...

Report on Q2 2016

Report on Q2 2016

6 Jul 2016

On the face of it, the quarter was dominated by the UK Brexit referendum decision on 24 June though, in the main, trends were consistent throughout the quarter. The FTSE 100, which delivers its rare moments of outperformance in times of nervousness, had continued to do better than the FTSE 250 up to 23 June. After the referendum result this trend was dramatically extended, partly fuelled by the sharp fall of sterling against the US dollar. At the close of business on 30 June, the 100 was up by 4.9% in the quarter and the 250 was down by 4%, a huge difference in fortunes. (Despite this, over the last 5 years the 250 is +35% and the 100 just +8%). If this signalled nervousness about the future viability of the UK there was no sign of that in the performance of gilts. 10 year gilts yielded c.1.50% three months ago. Now they pay just 0.80%. What this seems to tell us that a prolonged depression is more likely than either a renewal of inflation (normally a probable result of currency devaluation) or a default by the UK government (even though we don’t really have a government at present). The message from elsewhere, especially the EU, is the same. 10 year bund yields were 0.14% three months ago. They are now, as predicted, negative (-0.17%). In Switzerland, even 30 year government bonds yield less than zero. This seems to be confusing aversion to risk with a disinclination to continue to remain alive. The future is unknown. Get over it. I sold some shares ahead of the referendum result on the mistaken view that we would probably vote to Remain. I think that the EU economy is burdened by many problems – unreformed labour markets, burdensome state pension liabilities, unfavourable demographics and ailing banks. European politicians have been allowing the ECB to carry the burden with its “whatever it takes” monetary policy. As I wrote before, “QE looks desperate and desperation does not promote confidence”. It is the banks that really concern me. The share prices of some of Europe’s best known banks are trading near or even below their financial crisis lows. Deutsche Bank...

Hidden charms of Mrs M&S

Hidden charms of Mrs M&S

5 Jun 2016

Back in November one of my first ever blogs was about M&S. The shares were trading at 389p and I wrote that only takeover interest could justify a higher price but I thought that the pension liabilities made that a very unlikely prospect. For reasons which were and remain unclear to me the shares touched 600p last year but M&S has not yet been taken over and they have now tumbled all the way back to 355p. A battered low-end competitor BHS has just been closed with 11,000 jobs lost and 164 stores closed. It is no surprise that it was the pension liabilities that provoked the final bullet to the head. In addition, Austen Reed is closing 120 outlets at the cost of 1000 jobs and Matalan is reportedly struggling under its debt burden. (Matalan’s founder loaded it with extra debt in order to pay himself a dividend – sound familiar?) A hard-headed analysis might suggest that the closure of a competitor is good news for the other clothing retailers but on 25 May M&S shares were hammered following publication of its 2015/16 results. Excluding last week’s ex-dividend adjustment they are down 17% (from 445p). For the nth year, M&S is having trouble with its Clothing business. The CEO was ridiculed for referring to the core customer as “Mrs M&S” though the results presentation offered the slightly surprising observation that 42% of its 32 million customers are men. I seriously doubt if there is any company on which more people have an opinion than M&S. There are millions of experts out there. I can read in the presentation what customers are complaining about. There is too much choice, too much fashion at the expense of style, too many sizes out of stock and not enough consistency about price and value. As someone burdened by little interest in shopping or retailing I must say that none of that looks impossible to fix. You can also shop at M&S online though I don’t know how well it works or whether that would appeal to the 78% of customers who are 35 or over (still reading the presentation). Following the rather negative publicity and the share...

Four kinds of bias

Four kinds of bias

30 May 2016

1)      SELECTIVE USE OF FACTS It is not news to say that people will select facts and opinions that appear to favour their side of an argument. There was a good example last week from the pro-Remain CBI which wants to demonstrate that the possibility of Brexit is already hurting investment. “Overall, surveys of investment intentions have shown a deterioration in investment plans, particularly in the services sector. Some of this is likely to be related to uncertainty ahead of the EU referendum. Although our April investment intentions data for the manufacturing industry actually strengthened, anecdote from the sector suggests some specific factors at play – in particular, replacement spending in the food & drink sector (following flood-related damage earlier in the year) and buildings investment by chemicals manufacturers looking to expand production on the back of solid export demand.” CBI Economic Forecast 16th May 2016 Did you get that? The latest data suggest that their view is wrong so they have concluded that the data are wrong. The CBI is supposedly a highly respectable organisation (so respectable that the EC contributes money to fund some of its publications) and can get away with substituting anecdote for data, or so it seems.    The Leave side is mostly less respectable and, partly by virtue of the necessity that it is promoting something of a leap in the dark, rarely seems to attempt to employ hard facts. But you can be sure that it is highly selective in what it says. You would imagine that the UK is full of people who are deeply worried about immigration. According to a survey that goes back to 1962, the peak year for UK citizens thinking that there are too many immigrants was 1970 when the level reached 89%. In 2014 it was 54%. Enoch Powell’s infamous “rivers of blood” speech was made in 1968 and probably contributed to the high level of antipathy to immigration that the chart shows. During the speech, Powell quoted a white constituent (in Wolverhampton) as saying: “In this country in 15 or 20 years’ time the black man will have the whip hand over the white man.” As it happened, the period...

Trade Agreements – the New Protectionism

Trade Agreements – the New Protectionism

2 May 2016

THE “UNREPEATABLE” MISTAKES OF THE 1930s According to the IMF (and pretty much everyone else, I believe) the Great Depression of the 1930s was made worse by protectionism. After the financial crisis that blew up in 2008, leaders of the Group of 20 (G-20) economies pledged to “refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing WTO inconsistent measures to stimulate exports.” They all agreed that a return to protectionism would be a disaster. The World Trade Organisation (WTO) is not a promotor of liberal free-for-all trade. It is an organisation of 162 countries based in Geneva (where else?) that employs 640 Secretariat staff. It particularly promotes the interests of developing nations and negotiates and monitors international trading rules. As we shall see in a moment, developed nations are showing an increasing wish to do their own thing. In its own words: “WTO agreements cover goods, services and intellectual property. They spell out the principles of liberalization, and the permitted exceptions.” Agreements are negotiated and then ratified by member countries one by one. Many of them ratify with qualifications that they individually require. The phrase “bureaucratic nightmare” comes to mind. The Doha development agenda has been under discussion since 2001. It is easy to suspect that these negotiations will occupy entire (probably highly agreeable) working lives. Consider this sinister undertaking: “Virtually every item of the negotiation is part of a whole and indivisible package and cannot be agreed separately. This is known as the “single undertaking”: “Nothing is agreed until everything is agreed”.” Nothing is agreed until everything is agreed. Wow. IS INTERNATIONAL TRADE REALLY CONDUCTED BETWEEN NATION STATES? The WTO was founded in 1995 on the premise that international trade is an activity that takes place between nations. As far as this applies to undemocratic nations it is at least partly true. North Korea, for example, exports a fair amount to China. I’m guessing that the nations involved monitor this pretty closely. Yet much of what passes for political debate seems to assume that we all function in this way. Don’t take my word for it. Listen to Donald J Trump on...