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...

BREXIT special. Does politics affect asset prices?

BREXIT special. Does politics affect asset prices?

15 Mar 2016

A STUPID ARGUMENT THAT YOU WILL CERTAINLY HEAR ENDLESSLY One of the most commonly and confidently asserted falsehoods is that markets hate uncertainty. Without uncertainty there would be nothing for markets to price. The pricing of assets is about probability. All questions of probability involve uncertainty. If you ever meet someone who believes in certainty sell them something because they will overpay. Politicians, particularly conservative or establishment ones, often try to scare voters with the unknown. In the current “Brexit” debate, the stayer camp is accused of conducting a Project Fear campaign. One of the central points of this argument is that foreign investors will be put off by the uncertainty that would result from Britain voting to leave the EU. This ignores the fact that almost everything in Britain already seems to be owned by foreigners. Politicians and other public commentators like to pretend that trophy assets are quintessentially British long after they have been sold off.  Witness the farcical outbreak of faux patriotism when a takeover of AstraZeneca by a U.S rival was suggested. The reason why there has been so much foreign investment in Britain is, ironically, politics. More specifically, it has been the lack of interference by politicians in ownership rights. British politicians do not, by and large, confiscate privately owned assets. The downside of this is that rather a large number of exotic individuals with wealth accumulated in dubious circumstances are attracted for this very reason. And there are more on the way, according to today’s news. “Ultra high-net-worth investors from Iran are poised to go on a buying spree of properties around the world – and London is likely to be the top location.”  City A.M. 15 March 2016 This is in many ways very annoying and even shameful unless you happen to be the legal vendor of an asset that has just been sold for a price beyond your greediest dreams. We can’t have it both ways, though it would be gratifying if there were some kind of effective test to verify that the funds used for the purchase had been lawfully acquired. This is supposed to be the function of money laundering laws but these appear...

OSTRICH POST II – DADT

OSTRICH POST II – DADT

25 Jan 2016

Don’t Ask, Don’t Tell (DADT) was a (now repealed) US official policy that insisted that gays serving in the military must take part in a cover-up. On the grounds that they kept their sexual preferences a secret they were excused from being openly bullied, discriminated against and dismissed. Something that everyone knew to be untrue (the idea that the US military was staffed entirely by patriotic heterosexuals) was sanctioned in a big game of “let’s pretend”. If everyone acted as if it were true it would be just as if it were actually true. But DADT turned out to be too convenient a device to be confined to such a narrow issue. It was perfect for the treatment of subprime mortgages! It was clear to many insiders that people who had no realistic chance of repaying were being granted loans to buy properties that had to rise in value to bail out the borrower, that these debts were being insured on terms that didn’t come close to reflecting their risk and that the loans were being repackaged and sold on, backed by credit agency ratings that were uninformed and irresponsible at best. Yet even when the crisis was unfolding at speed, banks and other financial institutions were saying publicly that everything with which they had been stuffed was AAA quality. Check out The Big Short for a great explanation of the story. The trouble with DADT is that it is like a Ponzi scheme. Once you have started to pretend, you have to keep going. The morons working at the soon-to-be rescued banks did not mean to buy toxic junk. But once the mistake was made the easier option was to keep playing along. Like a trader who hides loss-making positions in the bottom drawer (or a secret computer file), the final thing you can try to buy is time. You literally decide to wait for a miracle.    Something like this is going on with Quantitative Easing (QE = DADT). As I have pointed out elsewhere, the truth that QE was a device for inflating asset prices in order to save the banks from marking them to market was spun into an officially...

Melting capex

Melting capex

24 Dec 2015

This seems to be a time in which people have a touching faith in the idea that progress can be achieved through international negotiations. Certainly, the mutual back-slapping following the Conference Of Parties (COP21) in Paris implied that a new era of cooperation has arrived. COP21 had 25,000 official delegates and an estimated further 25,000 fellow travellers (doubtless all busily offsetting their air miles). The direct aim of this conference was to agree to a temperature target for the earth in the year 2100. With nearly 200 nations represented, it is understandable that everyone was pleased and relieved that everyone agreed that something had probably been achieved. The obvious problem is that in 85 years (2100) almost none of the 50,000 attendees will be alive. COP21 is a group-hug endorsement of the contemporary notion that everything that is hard to face now can be flipped into the future. The tendency to defer tough decisions is arguably human nature (though there must be some humans out there somewhere who prefer to face up to difficulties – where are they?) Certainly, putting off the evil hour has dominated central bank policy for nearly ten years to the point that markets were effectively begging Janet Yellen  to pull the trigger on the first rate rise of what might turn into the new current cycle. Avoiding short-term unpleasantness has resulted in a massive build-up in off-balance sheet liabilities for future UK taxpayers through an expensive policy known as PFI. It has allowed students to be obliged to fund their own education on penal terms, using teaser rates to distract attention from the financial burden that will dog them in years ahead. The probable widespread default that will hit the Student Loans Company will be underwritten by all taxpayers in the future. While much political capital is made out of trying to deny benefits to immigrants, nobody seems inclined to address the monumental unfunded liability that arises from the need to pay pensions to and healthcare costs for our dramatically aging population. We’re probably going to need a large number of working age, tax paying immigrants to help us out at some point. The inevitable car crash that will...

Housing demand and demographics

Housing demand and demographics

5 Nov 2015

If you arrived today from Mars and the first human you met tried to explain the housing market, you might hear that average prices are >10x average earnings for the first time and that interest rates are at a 3000 year low. If he then told you to invest all your savings in a property you would probably zap him into a little pile of ashes. Because Martians can do that. Yet you would soon find that this apparent rogue adviser would have felt (were he still capable of it) unlucky to have been zapped because he was part of a crowd and people in crowds typically feel (unjustifiably) secure. He could have pointed you at newspaper stories following the latest population estimates from the Office of National Statistics (ONS).    Britain’s population set to rocket by 10 million over next 25 years   Migration will cause UK population to explode by almost 10 MILLION over the next 25 years I suppose that headlines of “UK population to grow by compound rate of 0.54% per annum” would have seemed less exciting though that is exactly what the estimates amount to. While I think that 25 year projections are so likely to be wrong as to be next to useless it is worth remembering that average GDP growth in the last 60 years has been 2.5%. It is also worth mentioning that population growth from 1981 to 2015 was compound 0.44% per annum. On a per head basis we have all become much better off. This may be why old people of today have trouble reconciling what counts as poverty today with what they remember from their childhoods. But an increase in the annual rate of population growth from 0.44% to 0.54% is an increase and is clearly a very important matter to some people. What particularly seems to strike fear and loathing into the population is that the ONS estimates that half of the extra 10 million will be from net migration. (The government’s annual net migration target of c.100,000 is ignored by the ONS which assumes a persistent long term rate of 185,000).      But 10 million extra people will need somewhere to...

Monday 19th October

Monday 19th October

14 Oct 2015

Next Monday is an evocative date for those of us who worked in the City of London in 1987. The nineteenth of October became known as Black Monday (not the first or the last) as global stock markets went into meltdown. The Dow Jones Industrial Average fell by 22.6% in that single day. At one point during the trading day it was reported that the Chairman of the SEC (the U.S. Securities and Exchange Commission) had mentioned the possibility of suspending trading. Naturally this increased the level of panic. It felt all the more dramatic because the previous Friday, the 16th, had seen the Great Storm that felled trees all over Southern England. My wife and I drove into work that morning through streets that had been laid to waste a few hours before. The City was spookily quiet and the stock market felt abandoned but was also very weak. It turned out to be an eerie harbinger of the full scale panic that was to follow. If you search for explanations of Black Monday you will generally read that the stock market was overheated, partly inflamed by excited takeover activity. In September 1987, the ad agency Saatchi & Saatchi made an approach to buy Midland Bank. Nothing better exemplified the mood of the time – that anything was possible for the new money of the eighties. The Conservatives, led by Margaret Thatcher and Chancellor Nigel Lawson, had won the General Election on 11th June, seemingly confirming that the corpse of socialism had been buried and that capitalism could bring prosperity to anyone with the ambition to pursue it. It is certainly true that the developed world stock markets had risen substantially in 1987. By mid-July the FTSE 100 was up by 45%.  In that sense, prices were high though of course that is not the same as saying that they were expensive. All value is relative, as we know. As stock markets rose, bonds fell. This is a classic danger sign. Ten year gilt yields rose from 8.8% in May to 10.1% in September. High street savings accounts paid 9%. From today’s perspective, it seems incredible that equities were so popular. In relative...

“Clients are very nervous”

“Clients are very nervous”

28 Aug 2015

Like many people, I hoped and almost believed that the financial services industry would reform itself after the global disaster for which it was largely responsible. Sadly, there is plenty of evidence that the “leaders” of the financial community are merely waiting to resume their old behaviour. No one appears to be trying very hard to stop them and, if one can stay out jail (and almost everyone does!), taking advantage of stupid but solvent people is very lucrative. As that schoolboy joke goes: “Why does a dog lick its own private parts?” “Because it can”. And so to this week’s story about the giant asset management firm Pimco.  A story on Bloomberg states that Pimco’s assets under management peaked at $2.04 trillion in March 2013 but subsequently declined by almost 25 percent. Pimco’s funds have not performed as well in the last two or three years as they did in the past and its two most high profile names, Mohamed El-Erian and Bill Gross, both left in 2014, with rumours that they had fallen out (with each other). Senior staff at Pimco were partly paid (in cashable internal currency known as “M shares”) on the basis of the firm’s profitability which is dependent on fee income which naturally rises and falls with funds under management. According to Bloomberg, Bill Gross “took home” $290 million in 2013 (a real hunter-gatherer of the 21st century). As the funds’ performances have faltered and the funds under management have declined the group’s profitability has fallen and the performance award has turned south. This is how capitalism works you might justifiably say to yourself: and these financial superstars must understand and even appreciate that: this, surely, is the game they have chosen to play. But wait! Not so fast there! According to the impressively well-informed Bloomberg reporter, “clients are very nervous”. Are they nervous because they are paying top performance fees for mediocre performance? No! They are scared that the threat of lower rewards will motivate their money managers to take their talents elsewhere. According to Mary Childs (she’s the journalist in the pink cocktail dress if you watch the video), it is too much to expect that...

On Scepticism – can we have our word back?

On Scepticism – can we have our word back?

9 Jun 2015

Scepticism is essential to successful investment. At its simplest, it implies recognising the possibility that anything the market prices as certain or very likely, might turn out to be false. This practical application of scepticism should feature in all investment decisions. Given the priceless value of scepticism, it seems wrong and somewhat suspicious that the word has acquired pejorative connotations. In Britain, “eurosceptics” are taken to be anti-Europe and specifically against the UK’s membership of the European Union. There are plenty of such people, but they seem to me to have made up their minds. If you are decided on a matter you are not sceptical. It may be that people against Europe like being called sceptics because it makes them seem more open minded. But this use of the word has started to turn it into a term of abuse, specifically in relation to the belief in climate change. Climate change deniers are referred to in language that implies them to be corrupt criminals or merely idiots and they are rarely if ever distinguished from those who choose to treat all arguments about climate change with scepticism. Here is Kofi Annan talking to the Guardian last month. “We seriously have to question the motivation of those people referred to as climate change sceptics, who are denying the evidence of human-caused climate change and preventing us from moving forward by spreading disinformation and supporting unchecked carbon pollution.” Climate change believers frequently state that 97% of all climate scientists agree that the consensus view – that global warming is caused by human activity – is true. As an investor, this assertion discomforts me. It makes me think of packages of securitised junk mortgage loans being given AAA+ scores by ratings agencies. If everyone thought or more precisely said that they thought they were OK, what could possibly go wrong? Ratings agencies were, it would seem, paid to award high ratings to rubbish. Whether climate scientists have a financial incentive to swim with the dolphins in the warm waters of the consensus I don’t know. But it is clear that on numerical grounds alone, publicly expressing scepticism will make you stand out a bit.   It...

Our fictitious “housing crisis”

Our fictitious “housing crisis”

6 May 2015

IT’S NOT ABOUT HOMES, IT’S ABOUT HOUSE PRICES Politicians, journalists and sundry do-gooders seem, against the odds, to have discovered one fact on which they all agree. It seems that Britain has a housing shortage and, to paraphrase the late Vivian Nicholson, we must build, build, build. Whenever an opinion, no matter how compellingly simple, is presented as a fact with which no one could disagree it is wise and even compulsory to question it. I bought a dead tree copy of the Times last week (28 April 2015) and there was an opinion piece about housing that contained this sentence: “It’s reckoned that we need about 250,000 new homes a year”. It didn’t add who reckons that or why. But once you start googling “250000 new homes” you quickly light upon a report written in 2003 by Kate Barker, a one-time stalwart of the Bank of England Monetary Policy Committee. It is reckoned, as they say, that this report demanded 250,000 new homes a year and eleven years on that has not been achieved once. It would appear that the nation has accumulated a bit of a backlog: to be more precise, a backlog of 845,000, that being the difference between the actual number of completions and 2.750,000 (11x 250,000). So what did the esteemed Kate (now Dame) Barker actually say in her report? Did she really demand that 250,000 new homes should be built every year? (Spoiler: no). The first line of the report is this: “The UK has experienced a long-term upward trend in real house prices.” And there’s a clue. I think it is fair to say that the primary motivation of this report is to make housing more affordable by increasing the supply in order to restrain prices. Here is the section that deals directly with the question of how many new houses are desirable: “Looked at purely from the perspective of the UK economy, more housing would be beneficial. Different approaches to measuring the shortfall, produce a range of estimates: • projections of population growth and changing patterns of household formation (a proxy for future demand), compared to current build rates implies there is a current shortfall of...

Sex and money – we need to talk

Sex and money – we need to talk

10 Mar 2015

Calm down now. This post does not address the alleged aphrodisiac qualities of wealth or any other aspect of paying for sex. It is about taboo subjects. A combination of embarrassment and distaste tends to prevent the discussion of topics that should properly be addressed. Hence our nation’s ludicrous history of sexual secrecy with its toxic residue of unplanned pregnancies, sexually transmitted diseases and child abuse. Absurdly, forty years after homosexuality was legalised in England, the CEO of BP felt it was necessary (in 2007) to go to court to stop himself being “outed”.   You might think that the sexual inclination of a CEO or any employee is of no interest to anyone else. But a judgemental attitude persists in the UK and it motivates people to behave as if work relationships have to be furtive. Indeed, many organisations take this much further and require all relationships between employees to be confessed. The implication is that such behaviour is sinful. It is quite true that good or bad relationships, sexual or otherwise, can influence the way that people behave at work. And it is essential that unwanted sexual attention is prohibited. But this no excuse for prurient gossip dressed up responsible human resource management. A purely practical point is that many single people who work long hours will spend half their waking time in the company of colleagues. It is nonsense to pretend that professional relationships will not merge with personal life. But I have known couples who have gone to extreme and potentially damaging lengths to disguise relationships that started at work. And once the lying starts it is hard to stop. You think that employment law gives protective rights to woman who become pregnant? It doesn’t if they feel that they must retire to protect the identity of the father whom they met at work. I know of a case just like this. In the UK, a similar damaging reluctance accompanies discussion of financial affairs. While a certain restraint is appropriate when discussing both sex and money – as the Facebook generation might find out to its cost – there is nothing shameful about needing either. And need is not greed. It...

The ECB, QE and the waiting game

The ECB, QE and the waiting game

12 Feb 2015

Quantitative easing is a process by which a central bank buys relatively safe assets (mostly government bonds) and thereby puts cash into the hands of the newly-ex owners of those assets. In the early years of the financial crisis, this was effectively a life-support system for financial institutions which, post-Lehman Brothers, looked like they might fall domino-style. As the central bank bids up asset prices it creates a rising tide that floats many boats. One side effect of this is that the wealthy become wealthier. QE is quite tricky to justify from this point of view. If it is necessary to prevent the collapse of the banking system it is a jagged pill that needs to be swallowed. As I have written before, this is broadly how the Bank of England justified QE in 2009. “Purchases of assets by the Bank of England could help to improve liquidity in credit markets that are currently not functioning normally.” But gradually, while the music remained the same the lyrics changed. Expressing an idea that was essentially imported from the US, the justification from the Bank in 2011 was quite different. “The purpose of the purchases was and is to inject money directly into the economy in order to boost nominal demand.” You see what they did there? Once again, it was party time in financial markets. Bonds and equities were rising nicely. Bonds were rising because the Bank was buying them and other people were buying them because the Bank was buying them and equities were rising because they looked cheap compared to bonds. And property in the areas where financial people live began to go up again, despite the fact that prices appeared to require mortgages that quite high incomes could not plausibly service and that damaged banks could not reasonably be expected to offer. My friends and I have done splendidly from this once we had “got it”. And although I don’t know any influential people, some of my friends do. Call me a conspiracy theorist if you want but these influential people soon popped up all over the place saying how brave and wise central bankers were to extend QE. THE HIGH MORAL...

OIL…….Something Happened

OIL…….Something Happened

7 Jan 2015

The recent sharp fall in the price of crude oil is one of those rare financial events whose importance is appropriately reflected in press headlines.  Oil has a strong claim to be the world’s most important commodity and also the most political. OPEC was founded in 1960 by the charming quintet of Iraq, Iran, Saudi Arabia, Kuwait and Venezuela. According to its website: “OPEC’s objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.” Were these companies rather than sovereign nations, this would be an illegal price rigging cartel subject to enough lawsuits to employ every lawyer until the end of time. As it is, it’s a legal price rigging cartel that everyone else has to live with if they wish to continue consuming oil. In 1973, OPEC became explicitly political when the US supported Israel in the Arab-Israeli war. It banned exports to the US and the barrel price of crude quadrupled from $3 to $12. It was a shocking inflationary impact that the world did not need. The Iranian revolution in 1979 saw a further leap from $14 to $40. The next great move came in the 21st century as global economic growth was propelled by developing countries such as China and India that became huge importers of oil. The price touched $140 until the financial crisis torpedoed the world economy in 2008 and the price fell right back to the 1979 price of $40. It is worth making a couple of points here. One is that the oil price has shown itself to be very volatile with changes in marginal demand having a huge impact. The other is that, partly thanks to OPEC, the market’s opinion of whether oil is cheap or expensive has largely relied on referencing its own history – the most unsophisticated way of valuing anything. That having been said, it is obvious that oil over $100 makes costly oil supply viable, notably from Canadian oil sands but also from fracking. The world...

The paradoxical results of education for the masses

The paradoxical results of education for the masses

2 Dec 2014

The Churchill wartime government was kicked out by the electorate less than three months after the German surrender in May 1945. Labour won a huge majority and set about a radical socialist programme of nationalisation of key industries and the creation of the NHS and the welfare state. That story is quite well known. What will surprise many people now is that Churchill’s government managed to pass one dramatically progressive piece of parliamentary law in 1944: Rab Butler’s Education Act. There would be free education for all with selection at the age of 11. Children who passed the 11 Plus were eligible for places in grammar schools – it was intended that the top 25% should reach that standard. Places for the other children were to be offered at either secondary modern schools or technical schools which specialised in scientific and mechanical skills. Sadly technical schools were expensive and hard to staff and there were few set up. This gradually created the impression that the majority of children “failed” at the age of 11 and were sent to schools for underachievers. The 1944 act also allowed for the creation of comprehensive schools that could incorporate all standards. Perhaps grammar schools were burdened with having been promoted by a Conservative politician, but socialist politicians grew to dislike their perceived elitism and the Wilson governments of the 60s and 70s embarked on a determined programme of abolition. This culminated in an education act in 1976 which stated that state education “is to be provided only in schools where the arrangements for the admission of pupils are not based (wholly or partly) on selection by reference to ability or aptitude.” The class warrior secretary of state for education leading this was Shirley Williams (St Paul’s School for girls and Somerville College, Oxford). It is a matter of wonder that the most privileged members of the establishment tend to be dismissive of grammar schools and the upwards social mobility that they seem to offer. Our Old Etonian Prime Minister called arguments about grammar schools “splashing around in the shallow end of the educational debate” and “clinging on to outdated mantras that bear no relation to the reality of...

Turning a good idea into an investment

Turning a good idea into an investment

29 Oct 2014

This is the transcript of a speech I made this week at the smartfuturelondon conference How to turn a good idea into an investment What makes a good idea?  If everyone agrees that change is inevitable and ‘it’s only a matter of time’, it always seems to take a very long time. Having heard yesterday’s presentation on smart energy – hands up if anyone thinks that’s a bad idea – I suspect that a common drag on the development of really good ideas is that everyone wants a piece. I was watching The Man With The Golden Gun on TV the other day. It was made in 1974 when the world was suffering the first OPEC oil shock. So in the tradition of the James Bond series to be topical, they shoved in a sub-plot in which the Golden Gun Guy steals the Solex Agitator, a device that turns the sun’s rays into energy.  What a great idea. Someone should try that. When mobile payments were agreed to be a good idea in 1997, there were more than 100 companies represented in the first mobile forum. That year, Coca Cola built a vending machine that accepted payment from a Nokia phone. Around 2005 I attended a presentation about mobile payment at which someone said that there was a Coca Cola vending machine in Helsinki. Everybody was trying to get a piece of mobile payments – and it was all taking a very long time. Sometimes, great ideas are just too early. Twenty years ago, Larry Ellison of Oracle thought that the PC was an absurd device, being limited by its own processing power and memory. “Put it on the internet” he said. So Oracle launched what we would now call the first netbook. Unfortunately, the internet was too slow at the time. The Oracle NC failed. But one of Ellison’s managers thought it was a great idea. He was Marc Benioff and he left to found Salesforce.com in 1999. It is now the reference business cloud computing company and has a market cap of $37 billion or 7x forecast revenues. The best and most valuable ideas seem to come from nowhere and often evolve...

The dead constituency

The dead constituency

24 Sep 2014

There is a widespread view in what passes for middle-England that people have a right to leave their wealth to their descendants. It seems odd that, in a country where demonising privilege has persisted as a mainstream political sport, we mostly seem to be more than comfortable with the idea that success or fortune should pass from one generation to another. But it turns out that even ideological turkeys do not vote for Christmas. “According to May 2014 research by Skipton Financial Services Limited, 48pc of under 40s expect to receive a large inheritance from their parents. Of these people, one in five are banking on an inheritance to get onto the housing ladder, and 17pc are relying on it because they have no pension set up. Other stated reasons for hoping for an inheritance include starting a family.” Daily Telegraph, 1 Sept 2014 Accordingly, politicians are frightened of this subject. David Cameron has called the desire to pass on your (hard-earned, responsibly saved) money to your children as “the most natural human instinct of all”. It’s parenthood from beyond the grave. It was reported that in 2007 the opposition Conservatives scared off Gordon Brown from calling a snap general election by pledging to raise the inheritance tax threshold from £325,000 to £1 million. Although Labour pointed out that this was a policy designed to benefit a relatively few relatively wealthy families, it backed off in the face of evidence that the Conservative pledge was popular. (To this day it remains no more than a pledge – it did not survive the coalition government). At present, the law says that an individual may leave £325,000 tax free above which level the rest of the estate is taxed at 40%. At first glance this is generous. Then one looks at UK property prices, particularly those in London and the South East. The average property price in London is now £499,000, in the rest of the South East it is £326,000 (source: ONS, June 2014). If the “family home” is worth the London average of £500,000, it will be liable to £70,000 of inheritance tax when the last exempt person (e.g. spouse or civil partner) has...

Moral money

Moral money

21 Aug 2014

What do Iran, Syria, Zimbabwe and North Korea have in common? There may be several answers but one is that, along with 145 other nations, they are recipients of UK Official Development Assistance (ODA). In 2012, total UK aid was £8.766 billion or 0.56% of gross national income. According to the press, this may have risen to 0.70% in 2013, which is the target suggested by the UN for members of the OECD Development Assistance Committee (DAC). In 2012 the average DAC member trailed well behind the 0.70% target at 0.30% (the US and Japan were both well below the average, the Scandinavian countries were well above). So, if the UK has hit 0.70%, it will be awarding itself a gold star. All UK politicians (with the exception of UKIP) seem to believe that ODA emits a moral glow, in which light they can disport themselves to effect. Doubtless they can’t help themselves and, though a fairly revolting sight, it beats fighting wars.   But I find myself wondering what sort of policy determines the choice of ODA recipients. In 2012, India topped the list with 7.9% of total bilateral aid. (NB bilateral aid is what we give directly – about half of our aid budget is multilateral which means that we donate to international organisations which then pass it on however and wherever they deem best).  India is one of the IMF’s official emerging nations. Is it the most deserving charitable destination in the world? Clearly, a better way to understand these figures is to look at ODA per head. On that basis, India falls to 67th (still in the top half) and above Burundi and Niger, two of the poorest countries of all, both with average annual per capita incomes of less than $1000. The top per capita recipient of UK ODA is barely believable. St Helena is a British Dependent Territory with a population of around 4500. In 2012 the UK gave bilateral aid of £106 million or c.£23,500 per head. Apparently we are building them an airport so that they can become a tourist destination. I have read in the press that the total cost of this airport (not yet...

The eurozone is the frozenzone

The eurozone is the frozenzone

19 Jun 2014

The yields of bonds issued by government are broadly influenced by three factors: the performance of the underlying economy; the outlook for the currency in which the bonds are denominated; and the probability of default. Eurozone government bonds have demonstrated all three factors at work since the financial crisis hit in 2008. The story can be traced by the changing yields offered by (for example) Italian 10 year government bonds since 2008. In the first half of 2008, yields rose as the market worried that governments would have to issue more debt to bail out a few troubled financial institutions. This was widely expected to be inflationary (bad news for bonds). By mid-2008, worries began to be directed towards the probability that the crisis was going to cause recession and that interest rates were heading down. For two years, Italian bond yields fell. Then the story changed again. The possibility that Italy (and a number of other Eurozone countries) might default caused near panic. Finally, in late 2011, the ECB began to convince investors that a solution would somehow be found. The second blip in yields in the summer of 2012 coincided with much wild talk of the break-up of the euro causing some panicky types to worry that Italy et al would honour their debt in a new made-up currency that they could “print” themselves. This was an irrational fear, not least because much of the German and French banking system was a huge holder of such debt and would have been effectively destroyed. Through the rest of 2012 and 2013, Italian government bond yields normalised, offering a consensus view that the economy was poor, inflation low and the government unreliable but unlikely actually to default. In 2014, something quite different has happened. Yields on Eurozone bonds have started to deliver a single rather shocking message – low economic growth and low inflation are here to stay for years and years. Assuming that an investor is happy to disregard the risk that the Italian government will default, we must contemplate the fact that he apparently believes that a 2.6% return on Italian assets is enough to justify a ten year investment. As the...

Patriotism, protectionism and AstraZeneca

Patriotism, protectionism and AstraZeneca

15 May 2014

Boswell attributed to Dr Johnson these well-known words: “Patriotism is the last refuge of a scoundrel.” I suppose there is some merit in this view if you accept that the great tyrants of history have tended to claim to be patriots (though “scoundrel” seems a mild word to apply to the men responsible for the Holocaust, Collectivisation and The Great Leap Forward). Johnson actually wrote at length on the subject of patriotism, specifically in opposition to American independence. “He that wishes to see his country robbed of its rights cannot be a patriot. That man, therefore, is no patriot, who justifies the ridiculous claims of American usurpation; who endeavours to deprive the nation of its natural and lawful authority over its own colonies; those colonies, which were settled under English protection; were constituted by an English charter; and have been defended by English arms.” I think the key sentence here is the first. It raises the interesting but complicated notion that a nation can have rights, beyond the aggregated individual rights of its citizens. It is a potentially dangerous idea and has been the cause of many international disputes, some farcical, others calamitous. After a couple of world wars and a widespread if not ubiquitous international consensus in favour of eliminating racial discrimination, patriotism is a trickier position to hold than it once was. Patriots use their support for sport as a way of expressing themselves. I found the chauvinism during the 2012 London Olympics somewhat distasteful (being of the opinion that hosts have the obligation to put the interests of their guests first) but certainly not dangerous or harmful. If crowd behaviour limits itself to sport, we should be thankful. In 2014, financial patriotism has started to feature in political debates. We have become accustomed to being told that e.g. Romanian families will travel 2000 kilometres in order to claim state benefits in the UK. (I find this hard to believe. How many Britons would emigrate to Romania on the promise of living in poverty for free?) Now, somewhat bizarrely, some people object to foreigners bringing too much wealth to the UK. They are supposedly buying our trophy assets, aided by the fact...

Jittery January

Jittery January

6 Feb 2014

“The bond markets are suggesting that we are looking at a fairly gentle, low inflation recovery.” The dangerously alluring feeling of comfort that I wrote about in my Q4 report did not last long. Major stock markets have fallen this year: FTSE -4%, Dow Jones -6%, Nikkei -13%. Many financial commentators are saying that this is the result of weakness in emerging markets which are in danger of being starved of investment dollars as the Federal Reserve continues its tapering policy. Even writing that makes me feel slightly ridiculous. It is typical of the confusing non-explanations offered by the financial services industry, helping only to encourage ordinary punters in the belief that all this is far too hard for them to understand. “Emerging markets” is an inherently biased way of referring to exotic countries in need of investment.  The term seems to have been invented in the 1980s. According to Wikipedia, prior to that the label Less Developed Countries (LDCs) was used. In 2012, the IMF identified 25 emerging markets. For the record: Argentina;  Brazil; Bulgaria; Chile; China; Colombia; Estonia; Hungary; India; Indonesia; Latvia; Lithuania; Malaysia; Mexico; Pakistan; Peru; Philippines; Poland; Romania; Russia; South Africa; Thailand; Turkey; Ukraine; Venezuela Note, sadly, that that the only African country is RSA. Looking again at the list, if you are particularly attached to democracy, private ownership rights or tolerance of homosexuality, you might find the thought of investing in some of these countries hard to digest. You might also ask how many countries have succeeded in emerging since the 1980s. The answer to that would appear to be zero. Foreign investment in emerging markets tends to be tidal: it flows in and it flows out again (if it can). Why then should this concern the risk-averse investor? There are two reasons, one specific and one general. The specific reason is that businesses in which we might be invested could be hit by diving emerging market economies. Global companies that sell consumer products are especially prone to this. Last week, Diageo the drinks company reported weakness in China and Nigeria. The general reason is that nervousness is infectious (especially in the banking industry). Undoubtedly, we have both these...