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CONSENSUS – THE NEW OPIATE OF THE PEOPLE

Posted by on 22 Feb 2021

The notion of “consensus” makes active investors drool in the manner of Pavlov’s dogs. This is because predicting correctly when consensus is wrong can be profitable. Consensus in itself is useless, a passive snooze, devoid of critical thought – if it were a dog it would be asleep, heart-warming to see but catching no rats and barking at no burglars. Given that consensus is essentially unprofitable, it’s current popularity is somewhat perplexing and even alarming. Everywhere one looks it is providing comfort to those who do not wish to ask difficult questions. LOCKDOWN CONSENSUS The advocates of lockdowns to combat Covid in the UK have achieved consensus and have been able to abandon any pretence of distinguishing between correlation and causation. Covid cases rise and fall – whenever they fall after a lockdown (and there’s always a lockdown) , post hoc ergo propter hoc triumphs unchallenged. If cases continue to rise it is always because lockdown was too late, too light or too short.  There is no opposition from any political party on this point, despite the probability that the lockdown...

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Quarterly review

Report on Q4 2020

Posted by on 2 Jan 2021

The European bond markets signalled nothing other than the expectation that cheap or free money is expected to be available sine die. German 10 year yields slipped from -0.50% to -0.57% implying that an extended “oven ready” depression awaits Europe. UK 10 year gilt yields loitered at 0.2%. Only the US, with a rise from 0.7% to 0.9% hinted at any future sign of life as we knew it. It was a much more cheerful quarter in the equity markets. The FTSE rose by 10%, the All Share by 12% and the domestic orientated FTSE 250 by a fairly whopping 18%. This left the FTSE down 15% for the year as a whole, the All Share -13% and the FTSE 250 just -6%.  Despite the obvious fact that the lockdown fanatics are apparently delighted to keep the economy on life support and regret only that we have not shut down sooner, harder or for longer, the stock market is eagerly anticipating a reviving spending spree. Those who find this almost morally objectionable should remember that share markets always try to discount...

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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

CONSENSUS – THE NEW OPIATE OF THE PEOPLE

Posted by on 22 Feb 2021

The notion of “consensus” makes active investors drool in the manner of Pavlov’s dogs. This is because predicting correctly when consensus is wrong can be profitable. Consensus in itself is useless, a passive snooze, devoid of critical thought – if it were a dog it would be asleep, heart-warming to see but catching no rats and barking at no burglars. Given that consensus is essentially unprofitable, it’s current popularity is somewhat perplexing and even alarming. Everywhere one looks it is providing comfort to those who do not wish to ask difficult questions. LOCKDOWN CONSENSUS The advocates of lockdowns to combat Covid in the UK have achieved consensus and have been able to abandon any pretence of distinguishing between correlation and causation. Covid cases rise and fall – whenever they fall after a lockdown (and there’s always a lockdown) , post hoc ergo propter hoc triumphs unchallenged. If cases continue to rise it is always because lockdown was too late, too light or too short.  There is no opposition from any political party on this point, despite the probability that the lockdown...

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CONSENSUS – THE NEW OPIATE OF THE PEOPLE

CONSENSUS – THE NEW OPIATE OF THE PEOPLE

22 Feb 2021

The notion of “consensus” makes active investors drool in the manner of Pavlov’s dogs. This is because predicting correctly when consensus is wrong can be profitable. Consensus in itself is useless, a passive snooze, devoid of critical thought – if it were a dog it would be asleep, heart-warming to see but catching no rats and barking at no burglars. Given that consensus is essentially unprofitable, it’s current popularity is somewhat perplexing and even alarming. Everywhere one looks it is providing comfort to those who do not wish to ask difficult questions. LOCKDOWN CONSENSUS The advocates of lockdowns to combat Covid in the UK have achieved consensus and have been able to abandon any pretence of distinguishing between correlation and causation. Covid cases rise and fall – whenever they fall after a lockdown (and there’s always a lockdown) , post hoc ergo propter hoc triumphs unchallenged. If cases continue to rise it is always because lockdown was too late, too light or too short.  There is no opposition from any political party on this point, despite the probability that the lockdown of the economy is making the poor relatively poorer and it was once seen as the role of Labour to stand up for the underprivileged. HOUSE BUILDING CONSENSUS The last time I saw this level of political consensus was before the 2015 general election when every political party demanded that greater and greater numbers of houses (in practice, mostly flats) needed to be built – this on the basis of a collective mistaken understanding of the Barker report of 2003, the proposal of which was to reduce property prices by creating an oversupply.  The oversupply began enthusiastically but destroyed the middle-sized privately-owned house building industry after the financial crisis of 2008-9. Yet things soon picked up again, albeit with the big housebuilders now in full control. The consensus to build survived the crisis (presumably because it was characterised as an extraneous event) and those blocks of flats, with or without cladding, have continued to rise like willowy magic mushrooms. INTERVENTIONIST CONSENSUS In early 2021, consensus in all its manifestations is being carried through the streets on the shoulders of a cheering mob.  I...

PROBABILITY IS THE BASIS OF REASON

PROBABILITY IS THE BASIS OF REASON

8 Feb 2021

As far as I remember, the word “philosophy” means “love of knowledge”. Some of the philosophers whose books were in my college library tried to prove that God knew all the answers and others that truth lay in empirical observation or the meaning of words. “Whereof we cannot speak, thereof we must pass over in silence” – Wittgenstein. Somewhere buried in their philosophical texts one might find a grudging reference to probability. John Locke wrote that probability “is to supply our want of knowledge”. In the search for certainty, probability was to some, it seems, as admission of defeat, a last resort. A brief disclosure: the only thing written by me in the college library are the letters zzzzz carved into the leg of a table. The fact that I couldn’t see what Locke, Descartes and Wittengenstein were so exercised about was confirmed by my examination results. But I value the awareness of probability as highly as anything else. PROBABILITY – MAN’S BEST FRIEND?  Some people point to the fact that humans initially learn by imitation and get hung up on the observation that animals do that too. The ability to observe that, if A, then B, puts animals on the first step of logical thought. When I pick up my dog’s lead she immediately starts to celebrate her forthcoming walk. You could say that she thinks the probability of a walk is 100%. In Locke’s terms, the sound and sight of the lead being picked up has supplied her want of knowledge.  The weakness in my dog Hattie’s understanding of probability is her failure to appreciate that there are any numbers between 0% and 100%. Her world is essentially binary. But she should not be too despondent. Humans sometimes think in exactly the same way. The easiest example of probability is 50/50. When we toss a coin we know, assuming no skullduggery, that a head or a tail is equally likely. (Dogs always expect tails, obviously). We should also know, though gamblers sometimes don’t agree, that no matter how many times the same side comes up in a row, the odds do not change for the next toss.  For what it’s worth, this...

CHANGE AND THE SEDUCTIVE PROMISE OF CONTROL

CHANGE AND THE SEDUCTIVE PROMISE OF CONTROL

24 Jan 2021

Change is inevitable and continuous. It is the journey of human life. We can try to preserve what matters to us – our fitness, for instance – but change has an unbeatable ally – time. In the end, change is both inevitable and fatal. For that reason, the promise that change can be controlled is very seductive. Convincing us that this promise is deliverable attracts those who would exercise political or financial power over us.  POLITICS AND CHANGE Some politicians and campaigners pledge to deliver change as an improvement – others to block or reverse it where they see it as bad for us. In each case they are almost certainly over promising by implying that controlling change is in their power.  Nonetheless, at times the public has an appetite for the idea that a government can deliver destiny. Then, perhaps, disillusion sets in. There certainly appears to be a cycle by which the message of change becomes more and then less popular. In the UK 1959 election the incumbent Conservatives campaigned on the slogan “Life is better with the Conservatives, don’t let Labour ruin it”, often summarised as “You’ve never had it so good!”. The voters agreed. But the change hounds, who can come from left or right, were back in the game in 1964. The Labour manifesto was titled “The New Britain” and its leader Harold Wilson became associated with the phrase “The white heat of technology”. In 1970 Labour was expected to win for the third time in a row and was by now warning against change. “Now Britain’s Strong – Let’s Make it Great to Live In” failed to make the grade, even against a pretty bland Conservative party (slogan “A better tomorrow”). In 1979 the Conservatives were undeniably the party of change with the famous “Labour isn’t working” poster.  Fast forward to 1997 and the Conservative were in full change denial again. Their slogan was “New Labour, New Danger” and they were obliterated by Tony Blair and his campaign song “Things Can Only Get Better”. For a while politicians like Blair and Barack Obama sold change as something progressive. The implicit message was that we are all sinners who...

Report on Q4 2020

Report on Q4 2020

2 Jan 2021

The European bond markets signalled nothing other than the expectation that cheap or free money is expected to be available sine die. German 10 year yields slipped from -0.50% to -0.57% implying that an extended “oven ready” depression awaits Europe. UK 10 year gilt yields loitered at 0.2%. Only the US, with a rise from 0.7% to 0.9% hinted at any future sign of life as we knew it. It was a much more cheerful quarter in the equity markets. The FTSE rose by 10%, the All Share by 12% and the domestic orientated FTSE 250 by a fairly whopping 18%. This left the FTSE down 15% for the year as a whole, the All Share -13% and the FTSE 250 just -6%.  Despite the obvious fact that the lockdown fanatics are apparently delighted to keep the economy on life support and regret only that we have not shut down sooner, harder or for longer, the stock market is eagerly anticipating a reviving spending spree. Those who find this almost morally objectionable should remember that share markets always try to discount everything as quickly as possible. The FTSE 250 that turned out to be the brightest spot of the year melted by 31% in Q1. I just checked to see what I wrote at the end of Q1: The sight of a self-inflicted depression is unprecedented outside of wartime. It is worth bearing two points in mind: 1) you can’t buy bargains without cash and 2) remember to look down rather than up. Up will look after itself. Eventually. Obviously I could have been more bullish but I did spend plenty of cash while looking down. And I would re-emphasise that up takes care of itself. Stock markets always want to go up. In December we discovered that the UK’s regulatory agency was the fastest in the world to approve the first vaccine and repeated the trick at the end of the month with the Oxford university product. I suppose that this proves how keen or desperate the country is to escape the pandemic. Other nations are more cautious about cutting corners on their regulation processes.  So although the number of people who have...

Covid ’20 – a personal diary

Covid ’20 – a personal diary

28 Dec 2020

This is a personal record to help me understand how and when this shitstorm blew up and if anything of importance was missed by me (or anybody else) that should or could have been anticipated. Most of the material comes from my email in and out boxes and has not been edited. I should say that the virus itself has never particularly concerned me. I think that there are broadly two kinds of fear, both of which we all experience to varying degrees. There is the fear caused by specific and known danger in the face of which some people try to hold their nerve and respond as rationally as they can. Dorothy Parker glamourised this kind of courage by attributing to Hemingway the phrase “grace under pressure”. And there is fear of the unknown which has a tendency to induce panic and paralysis. I make no claim to be courageous but I have a certain amount of contempt for fear of the unknown, though in the UK it appears to have gripped a majority of the population. The trigger word for these people is “uncertainty” as in “markets/investors/businesses hate uncertainty”.  It seems to me that the more that is known about Covid-19 the less frightening it is. It also appears that for some reason the government, its public servants and most of the media tend to promote fear and to suppress reassuring news lest it leads to complacency and (can I really be using this word?) disobedience. As an investor, as I have written elsewhere, uncertainty is to be welcomed because it causes assets to be mispriced. The problem, as 2020 has demonstrated, is that it sometimes takes extraordinary imagination to see it. Thursday 23 January  The Foreign Office advised against non-essential travel to Wuhan province. I cannot seriously suggest that I could have interpreted that as a harbinger of what was to come.  Wednesday 29 January  BA halted all flights to mainland China. At the same time, there were reports that the virus had definitely arrived in Lombardy in Italy. This is the point when it seemed real to those of us living in Europe and if I am hard on myself...

WELCOME TO THE SECOND WORLD

WELCOME TO THE SECOND WORLD

24 Nov 2020

The Oxford Languages word of the year is usually a horror show for anyone who has any affection for the English language. There is no single word or expression for 2020 because apparently 2020 was an “unprecedented” year. I had previously supposed that all years were unprecedented but it seems that at some point a repeat was sneaked past us. (Was 1975 the same as 1974? I’m trying to remember). So for 2020 we have a projectile word-vomit of lockdowns, circuit-breakers, covidiots, furloughs, infodemics and many, many more. Including this: “The word staycation is well-established in English – it is first recorded in 1944 in the OED – but its frequency has increased by almost 380% this year compared to last, and there is also growing evidence of its use as a verb.” So let us staycation, you and I, when the smog of kettled cars is spread out against the sky.  But we all know what a staycation is. It is a holiday spent in one’s own country or even at one’s home (see “furlough”).  There is a point to this very interesting but slightly rambling introduction. While we have been cowering in our lockups, the UK has become a foreign country in the space of just nine months. And it all happened while most of us travelled nowhere. Other, perhaps, than back in time. WHAT IS A SECOND WORLD NATION? It seems to me that the UK is changing from a first world to a second world nation. The second world was the post-war term used to describe countries that were affiliated to the Communist bloc. According to dear old Wikipedia, the term “second world” has become obsolete since the collapse of the Soviet Union. Not so fast, Wiki old chap, it’s surely time for a revival. Here are four characteristics of second world nations. CIVIL LIBERTY DEFICIENCY Barring a revolution and a military coup, the removal of civil liberties must be executed in small increments. It starts by appealing to the people to make small and time-limited sacrifices in the cause of a much admired state institution. In this case it was “our NHS” because the enemy was a virus.  Had...

DEPRESSION DOMINOES

DEPRESSION DOMINOES

25 Oct 2020

It has been a point frequently well made that the people who appear to be in charge of Covid strategy are not on the whole in fear of losing their jobs. Be they health experts, university professors, politicians or civil servants, they have one eye on tomorrow’s headlines and another on the verdict of history. This results in a strong bias in favour of caution. There are some signs that the public is starting to question the Orwellian mantra of “Save the NHS” as it becomes increasingly clear that this was no reciprocal arrangement. Excess deaths from cancer and heart disease are estimated by some to be likely to exceed the number of deaths attributed to Covid and the average age of those unfortunates is likely to be well below 82 (the average age of a Covid victim). THE SHAPE OF THE RECOVERY The slowly developing realisation that the economy is being damaged has given way to talk of the shape of the recovery. When lockdown was assumed to be a one-off treatment we were going to have a “V-shaped” recovery, like a rubber ball. Now it would appear, as the country is encouraged to retreat back into a state of fear, that the best we can hope for is a “W-shape”. Or perhaps, as one lockdown gives way to another, a “multiple-W shape” like the World Wide Web (WWW….). Pessimists who think that we are trapped in a deflationary spiral talk of an “L-shaped” recovery which is patently not a recovery at all but an endless road of flatness. Those who prioritise the environment over all else might welcome this. It should reduce carbon emissions. Sadly, even the L-shapers might turn out to be optimists. A recession is usually defined as a cyclical downturn, even, as was the case with the 2008 financial crisis, it is caused by human folly. Human folly goes in cycles too. Collective memory fades and the mistakes of the past are repeated. DEPRESSION IS NOT CYCLICAL But the deliberate and relentless deconstruction of the economy in 2020 is not cyclical. As each domino falls, it topples the next and waiting at the end of the line is not...

Report on Q3 2020

Report on Q3 2020

22 Oct 2020

The third quarter was dull and unrewarding, despite the sadly temporary return of sanity to some human activity. The FTSE 100 fell by 5.2%, having rallied by 9% in Q2, meaning that it is down by 21% year to date. The FTSE 250 has done better (+1% in the quarter, -13% YTD). The main reason for the poor FTSE performance was the oil majors, aided in their dirty work by the banks, especially HSBC. Given that the oil price fell little over the quarter, the problem for BP and Royal Dutch may be perceived to be more existential, which is worrying. Poor old BP bangs away about becoming a renewable energy company and no one listens. I read somewhere that the US oil majors are funding the Biden campaign on the basis of its promise to stop fracking. This will eliminate thousands of jobs but it should reduce the supply of oil. The banks are perhaps more worrying. We hear plenty about the various parts of the economy that are being kneecapped by our apparently random and barely comprehensible lockdown policy but the market seems to be acknowledging that the banks will always be manning the rear of the destitution queue. Remember how the taxpayer rescued RBS (now renamed NatWest Group)? The share price fell from c£60 in 2007 to 120p in early 2009. Eleven years later, the share price was 106p. Our banks are zombies and in my view shouldn’t be listed on the stock market at all. The ten year gilt yield crept up from 0.15% to 0.20%. Cheap borrowing is constantly cited as the reason why the government can pay for everything. The fact that the government is borrowing from and lending to itself (“Thank you so much!”; “Don’t mention it old chap!”) is rarely pointed out. Attempting to avoid a depression by printing money is an experiment that most of us hoped never to witness. The bond market will warn us if inflation appears on the horizon. On a more cheerful personal note, I bought some William Hill at 108p on 3 August (not my first but certainly my cheapest investment in that share). Before the end of the quarter,...

Getting around – transport investment in a pandemic

Getting around – transport investment in a pandemic

29 Sep 2020

AIRLINES – INSOLVENCY DENIAL IMPEDES RESTRUCTURING The airline industry as we know it is finished, according to Hubert Horan, a transport and aviation consultant.  After the dotcom bubble downturn in 2001 airline revenues fell by 6% and this resulted in much consolidation of the industry with transatlantic services becoming concentrated in the hands of a handful of players. Long haul and business travel has fallen this year by up to 90%. For US airlines, whose domestic business has held up better, this amounts to a 75% fall in volumes and an 85% revenue decline.  Horan estimates that the airlines might be able to shed up to 40% of their costs over the next two years. Meaning that they will be burning cash as fast as they burn jet fuel. Back in Europe, IAG (which is the holding company of BA) reported an impressive decline of 96.7% in Q2 passenger revenues. Easyjet, which was effectively grounded by pan European closed borders saw its revenues decline by a scarcely credible 99.6% over the same period. Things started to look up for the European domestic companies in Q3 but the latest warnings of a second wave of infections have, according to Michael O’Leary of Ryanair, dealt another mortal blow to winter bookings.  The business models of Easyjet and Ryanair are based on the economics of full planes and they are both in balance sheet survival mode. Easyjet has raised a total of £2.4 billion through a combination of capital increase, aircraft sale and leaseback and government and bank loans. Easyjet burned £774 million cash in calendar Q2 so we can all do our own sums. Hubert Horan believes that all the major airlines are effectively bust and should rightly file for bankruptcy. Yet the managements, supported by government aid, are trying to preserve the companies’ equity capital (and their own jobs and shareholdings). I hear a lot about the EU’s aversion to state aid (apparently a sticking point in any Brexit deal) but it hasn’t stopped the German Federal Republic from offering aid of up to €9 billion to keep Lufthansa airbourne. Air France/KLM has done even better with €10.4 billion from the French and Dutch governments....

Report on Q2 2020

Report on Q2 2020

9 Jul 2020

In isolation, Q2 was quite good for stock markets. But in the context of what happened in Q1, we are still in the mire with our Wellington boot just out of reach of our hovering, stockinged foot. The FTSE 100 rose by 9% but is still down 17% year on year. The FTSE 250 recovered by 14% in Q2 (having been down 31% in Q1) but is -12% year-on-year. As usual, the All-Share was between the two. It seems fair to say that we are no wiser about the probable economic outcome of the pandemic though we can see that there is a consensus that central banks can print any amount of money on the single condition that they don’t admit that that is what they are doing. In the US it is more explicit because it is more acceptable to say that anything large is too big to fail when it would involve the loss of large numbers of jobs. Even if you are not seeking re-election as President, it is hard to argue against that. The response to Covid-19 is becoming highly political in the UK, despite there being no general election scheduled until 2024. Mass unemployment cannot be deferred indefinitely, even by money printing. Everyone must know this but no one wants to say it – governing politicians are terrified of hard truths unless they can be floated under a halo of brave sacrifice and oppositions bide their time until they can feign shocked surprise at how badly things turned out.   So we are left with a pretend future funded with pretend money.  Pretend money is far from being just a UK phenomenon.  The euro was infamously pretend money before the financial crash. Greece, Italy etc thought that they could borrow extravagantly but cheaply because their euro liabilities were implicitly guaranteed by the ECB. Kyle Bass, who, in around 2008, took long positions in German Bunds matched against shorts of Greek government bonds, called it the greatest asymmetric trade of all time.  Eight years ago this week, Bunds yielded 1.5% and their Greek equivalents 26%. The spread between the two was 24.5% having been around 0.5% when Bass took his position....

AFTER THE PLAGUE, THE FAMINE

AFTER THE PLAGUE, THE FAMINE

26 May 2020

Despite the fact that the UK government appears, like Gilbert’s Duke of Plaza-Toro*, to be leading from behind, I suppose that this fearful fog of indecision will eventually dissipate and some kind of hobbled phoenix will stumble out of the smoking ashes of the economy. In passing, I would like to bestow their share of responsibility on the political opposition, including the trade unions, who constantly urge caution and demand something called “safety” for all, in the calculated knowledge that the worse the economic consequences of lockdown, the worse for the government.  Can they really be that cynical? Oh yes. THE DAMAGE DONE But whether you believe that lockdown was a) catastrophically late or b) completely unnecessary, (and history may one day deliver a verdict but you won’t find it on Twitter this afternoon), a vast amount of economic damage has been done. And the longer paralysis continues, the worse it will be.  And given that the government is now a follower of international decisions rather than a decision maker itself, we must look at the US, Germany, France (!), Sweden and pretty much anywhere else you care to name to see how our future might look.   Donald Trump has an election to win in November. (Ladbrokes still has him as the marginal favourite, which seems surprising). Naturally, he is desperate to get America back to work and, as his son says, make it great again, again. Whether you think he is gambling with people’s lives or trying to save them from destitution actually doesn’t matter. What matters is what has already happened.  The US unemployment rate jumped from 3.5% in February to 4.4% in March to 14.7% in April. That’s 23 million Americans out of work. But it will be more than that. The total of initial unemployment claims is at nearly 39 million by the end of last week. That looks like an unemployment rate closer to 25%, an utterly unimaginable number.  If it turns out that “it’s the economy, stupid” then Trump’s Thanksgiving turkey is cooked unless there is a near-magical recovery. Whatever you think of Trump, and there is no need to say or even think it out loud, a...

ECONOMIC SHUTDOWN! EMERGENCY!!

ECONOMIC SHUTDOWN! EMERGENCY!!

6 May 2020

Things are starting to get serious. The SAGE committee is vast and its remit is the virus and nothing but the virus. It has saved the NHS to the extent that the new Nightingale hospital near the O2 in London is shutting after four weeks. Job done except that most of the public is either scared out of its senses or, more worryingly, preferring a life of leisure on 80% wages. The government is now directly supporting more than half the adult population. Normally I would say that a minority of taxpayers is bearing the burden of the rest but that is nowhere near the truth. Taxpayers are being furloughed too. The printers are rolling and the government is set to borrow from itself. The question is, how long will people be able to live on these new government tokens (once known as sterling currency)? CURRENCY DEBASEMENT My son Leo has just written about the use of the first ancient coins. Greek traders who knew nothing of coinage were happy to use them, even though the gold/silver content was lower than natural bullion of the same weight. Leo was puzzled as to how items of lower intrinsic value continued to be accepted. My answer was that a coin’s real intrinsic value is the belief that if you accept it in return for a “real” good you will be able to pass it on to someone else in return for goods of the same value. But once that belief falters the coins will be swiftly debased. The debasement of our currency will manifest itself as inflation. If you weren’t an adult by the 1980s you will not remember a time when people bought assets today for fear that they would cost more tomorrow. I knew a couple in about 1985 who agreed to buy a small house off the King’s Rd. It was suddenly withdrawn from the market and re-listed at a £50k premium. To their credit, I guess, they did not blink and paid up at once. The US is issuing $3 trillion of debt this quarter. (That’s $9146 for every man, woman and child, or $11,363 for every adult). The US can get...

PANDEMIC POLITICS

PANDEMIC POLITICS

20 Apr 2020

Just as I failed to forecast the 30% fall in stock markets, I also never expected the reaction to Covid-19 to begin to diverge along traditional political lines. Life is just one bloody surprise after another these days. It turns out that people on the right, among whom for this exercise I number myself (though see below) think that national lockdown and uniform loss of personal liberty is a dangerous and irrational reaction to a pandemic that primarily targets the old and medically vulnerable. The economic cost is probably both huge and beyond the understanding of the people who are taking medically-driven decisions. People on the left are more likely to worship the NHS and to think that protecting it is worth any cost. They think that complaining about job losses and more trivial inconveniences is in extremely bad taste and that “we’re all in it together” is the right spirit. Though we’re not all in it together because the virus discriminates against some groups that the left favours, including, of course, frontline medical workers and ethnic minorities. The numbers say that the real victims of viral discrimination are the elderly and particularly elderly men. Unfortunately their care is not funded by the NHS and even a 99 year old man walking around and around his garden is not raising money for them. These are not groups that appeal much to the left because, on average, they tend to vote the wrong way. Remember the calls for a second Brexit referendum in 2019 because it was felt that enough Leave voters might have died to reverse the decision? These are all relatively (I use that word carefully) mainstream views. Criticisms of China and the WHO, though contentious, fall under the same heading. But there are plenty of extreme conspiracy theories. Round up the usual suspects. “Since the beginning of the COVID-19 pandemic, there has been a significant rise in accusations that Jews, as individuals and as a collective, are behind the spread of the virus or are directly profiting from it.” Moshe Kantor, president of the European Jewish Congress. Some people seem to think Covid-19 is our punishment for screwing with God’s planet, which...

Report on Q1 2020

Report on Q1 2020

4 Apr 2020

It is difficult to remember now but UK equities had a storming close to 2019, driven by the Conservative victory in the General Election and the release from the threat of becoming a loose money, centralised, statist economy. But, as Corbyn finally goes, the UK enters a period of unknown duration featuring the most fiscally “irresponsible” government ever, a nearly universal bailout for the private sector and social rules that are martial law in all but name. Back to Q4 for a second to note that the star performer was the FTSE 250, the most domestically exposed index, which rose by 10%, compared to 2% for the 100 and 3% for the All Share. With the leisure industry shuttered and its quoted representatives suddenly revenue-free and left with only their balance sheets between them and oblivion, it is no surprise that the FTSE 250 was -31% compared to a sprightly -25% for the FTSE 100. With the world now able to agree that any doubt of a severe global recession has been removed, government bond yields fell again. The US 10 year yield fell from 1.79% to 0.62% and the 10 year gilt yields from 0.74% to 0.33%. Despite the proposals of bail out packages which are worth numbers that are too large to have meaning for most people, there is apparently no general worry about governments’ ability to sell debt. I find it hard to believe that this will last, not least because the default solution appears to be that countries buy their own debt. Perhaps I am too dim to understand how this would work but, at least in the case of the UK, it implies devaluation and inflation to me. Most listed companies have issued Covid-19 trading updates in the last week or so and most are assessments of the probability of survival, coupled with cancelled dividends. It is important to remember that a business can continue while its equity becomes worthless – for example, the government seems disinclined to be generous to airlines because it knows that the grounded fleets will fly again one day, regardless of who owns them. Bus and train companies are by contrast largely having their...

NOT SO SPLENDID ISOLATION

NOT SO SPLENDID ISOLATION

29 Mar 2020

On the 23rd of February I published these seemingly prophetic words. SPLENDID ISOLATION Another idea that we are rowing back from is internationalism. To put it another way, nationalism appears to be on the rise wherever you look. A better word might be insularity because this is not primarily about xenophobia. It is mostly an economic phenomenon again. For some reason we don’t really care about global poverty half as much as we care about global warming. Of course I didn’t have the slightest idea of what was about to happen. So sadly this blog is not a description of how I moved all my assets into cash and am now reinvesting at a 30% discount. While the world appears to have been turned upside down in the last four weeks, people everywhere were very already receptive to turning their backs on the rest of the world. And I was too kind when I downplayed the role of xenophobia. Every country seems to want to lie in its own dirt now and in many countries’ foreigners are regarded with suspicion or even hostility.  I am absolutely not referring to the UK, which is a highly diverse and generally welcoming country, but rather to more monocultural nations. I was in Sri Lanka last week just as the country started to go into lock down. Sri Lankans are and were almost uniformly delightful but when I found myself on a crowded bus with many people standing and the seat next to me vacant, no one wanted to sit next to the white man.  There are reports that African countries are wary of Europeans and Mexicans are demanding to be protected from US citizens.   Here is a comment found on Twitter: Today on my final reporting trip in China, my colleague and I are eating when a man walks up: “You foreign trash. Foreign trash! What are you doing in my country? And you, with him, you bitch.” I think he wanted to fight, but we stayed silent and let him rant. Quite the farewell. Poland closed its borders, causing huge disruption to citizens of Baltic states trying to get home. Given how many Poles work abroad,...

ROLLING BACK THE 20th CENTURY

ROLLING BACK THE 20th CENTURY

23 Feb 2020

The generation known as baby boomers (b.1946-64) looks at 21st century technology and gradually realises that almost all the important, everyday, societal functions with which it is familiar have been usurped by the digital age. Writing letters, making telephone calls, watching television, shopping, going on holiday, banking, insurance and, hell’s teeth, even paying your bloody tax – online, online, online, online……. Everyone younger (b.1965-) is likely to be unsympathetic to any moaning and to suggest that these crotchety ingrates wake up to the fact that the internet age has opened up a new world of opportunities. Everyone is entitled to an opinion and in the end the younger people win by staying alive. TECHNOLOGY DRIVEN JOBS But there is irony in the nature of the jobs that technology creates. They are largely pre-industrial. Collection and delivery about sums it up. The new service economy is unskilled, low paid and part-time. Every time you search via Amazon and click on “Add To Basket”, the company’s software will be contacting one of twenty two fulfilment centres in the UK and in one of them someone wearing trainers will soon be sprinting to find your product. The next morning, if you are lucky or have paid up, a fleet of trucks will arrive to pick up and deliver the results of all those clicks. The fast food delivery industry has moved way beyond Indian and Chinese takeaways. Now someone is offering to bring you Big Macs and Greggs sausage rolls. Two companies that were built on the idea that you could drop in and get fed almost instantaneously are now going to save you the trouble of getting out of your chair. Someone will be paid to deliver your order. This is sometimes known as the gig economy. FAITH IN NEW TECHNOLOGY The key to the business models of most technology businesses is scale. One reason why most global technology companies come from the USA rather than, say, Finland, is that the former has 300 million eager consumers. There is no market testing like launching a product for free and seeing who wants it. Technology successes are not only hard to predict but often seem to come...

Report on Q4 2019

Report on Q4 2019

6 Jan 2020

The last two weeks of 2019 were a good year for equity markets. The immediate cause was of course a decisive majority for the Conservatives and the apparent dispatch of Corbynism to the library shelf marked “Historical Fantasies”, perhaps one day to be studied by students who feel that their knowledge of the Venerable Bede is as complete as it will ever be. From 13 December, the day the results were known, the FTSE 100 rose by 4% to the end of the month, having been down in the quarter up to that point. The star performer in Q4 was the FTSE 250, the most domestically exposed index, which rose by 10%, compared to 2% for the 100 and 3% for the All Share. Year on year, all the indexes were stars due to a meltdown in Q4 2018 which offered a generous comparison. For 2019 as a whole, the FTse 100 was +12%, the 250 + 25% and the All Share +15%. Wow. The US 10 year yield was stable at 1.79%. 10 year gilt yields rallied from 0.55% to 0.74%, perhaps reflecting very small worries about more government borrowing. A year ago when things looked bearish I wrote the following: 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. At the time I said that I was bored by politics and Chinese trade wars. On those fronts the noise has remained much the same. Donald Trump is a year closer to re-election, subject to the Democrats deciding to try to defeat him democratically rather than with the law. Climate change activists have got louder and sillier, though following COP 25 in Madrid, at which 27,000 delegates achieved very little, there was some overdue acknowledgement of the tension between the economic demands of poor countries with hundreds of millions of people living in poverty and the schoolgirl demands of...

Left hand down, hold on for the ride

Left hand down, hold on for the ride

14 Nov 2019

On 9 November, Prof. Brian Cox who is a professor of particle physics and a TV and radio presenter responded to the news that credit rating Moody’s downgraded the outlook for the UK’s debt with this Tweet: “Neither Labour nor the Conservatives will be able to borrow all the money they are pledging if international investors take fright.” Pausing only to note that anyone who relied on Moody’s credit ratings probably got wiped out years ago, Prof. Cox’s view does not seem outrageously controversial to me. Yet he was buried by a landslide of comments such as: “Don’t you just love it when experts step out of their areas of expertise and talk bollocks.” In essence the message is that if Brian Cox thinks that interest rates might rise, then he must be an economic dumbo. But the important point is not whether the professor is a financial simpleton or not but that the crowd is so emphatically behind a view that would quite recently have been unthinkable. Groupthink now knows that interest rates will never rise and that governments can borrow whatever they like. Happy days. And talking of financial simpletons, Donald Trump keeps criticising the Federal Reserve because other countries have negative interest rates on their government debt.  “Give me some of that. Give me some of that money. I want some of that money. Our Federal Reserve doesn’t let us do it.” Source: Speech to the Economic Club of New York 12 November 2019 The remarkable fact is that Brian Cox is regarded as the one who “doesn’t get it” whereas President Trump thinks that he is espousing “the new normal”. HOW DID WE GET HERE? How did we get here and what happens if the consensus is as wrong as usual? “I am concerned that this emerging anti-austerity consensus, driven as it is by the desire for perceived “fair” outcomes, could get messy. Meddling is in the air. An outbreak of doing the wrong thing cannot be far off.” Source: CrowKnows “Prepare to turn left” I wrote that exactly two years ago in the post “Prepare to turn left”. It is surely time to follow up because the steering wheel...

NO TAXATION WITHOUT REPRESENTATION

NO TAXATION WITHOUT REPRESENTATION

18 Oct 2019

This is a follow up to “The crumbling social contract”, written in March 2017. A government that is answerable to the people who elected it has a critical peacetime power that depends entirely on its perceived legitimacy. The power to impose taxes. Where would all those generous spending promises come from if they didn’t have the right to confiscate our money? The UK Parliament’s obligation to pass all taxes into law was conceived as part of the 1689 Bill of Rights which constrained the power of the monarch (James II). The quid pro quo was that the populace would give their consent to be taxed. In practice this means that the people have to believe that the parliament represents them. The slogan “no taxation without representation” is associated with the American Revolution. The colonists objected to paying taxes to the British government which seemed to them, and which was subsequently to become, a foreign power. The debate over the 2016 EU referendum was sometimes claimed (by those who wanted to leave) to be a similar question. They take our money and spend it without consulting us very much. The slogan that helped to win the day was “Take back control”. I think that most of the British public were not particularly concerned about the money. Didn’t Mrs Thatcher get us a rebate once? The attempt by the Remain campaign to turn the referendum into an economic debate, though it continues to this day, was a failure. LOOTERS Recently, though, our MPs have been daring themselves to reinterpret the meaning of democratic representation. They are like looters in the aftermath of a riot. Someone else broke the windows. Surely reaching through and nicking something isn’t such a big crime? If I don’t, someone else will. Some have merely abandoned or if you prefer reinterpreted the manifestos on which their parties stood in 2017. Others have actually changed sides and not one has taken the honourable course of offering themselves back to their voters in a by-election. Every conceivable legal chance has been taken to force through, block, delay or reverse the result of the referendum. No doubt our MPs would say that all’s fair in...

Report on Q3 2019

Report on Q3 2019

1 Oct 2019

At the end of Q2 I wrote that part of my brain wanted to go on an equity buying spree but I wasn’t sure which part that was. It seems to have been the part that wants a quiet life because the FTSE 100 was unchanged over the last three months. The broader FTSE 250 rose by 2.4%, perhaps due to takeover activity. Sterling rose by 0.7% against the euro which is effectively also unchanged. The political noise of the last three months happened in a wind tunnel as far as the financial world was concerned (though that may change, especially if Britain’s MPs continue to risk their own legitimacy). As the global economic news continued to deteriorate government bond yields fell again. The US 10 year yield fell by about 0.25% to 1.75%. 10 year gilt yields dived from 0.86% to 0.55% and the German Bunds now have an even more negative yield (-0.30% to -0.57%). If these are unprecedented scary times, this is the reason. In my recent post entitled “Equities are the new junk bonds” I pointed out that takeover bids had favoured shares in my own portfolio no fewer than four times this year. I have been thinking some more about why this is happening and, by implication, how one might incorporate that into stock picking. Unlike purely financial investors, corporate buyers hate uncertainty. They like to know what they are buying and are put off by the thought of unquantifiable liabilities. This is one of the reasons why companies in trouble are rarely rescued. It’s far easier and safer to buy the assets from the administrator. The new accounting standard IFRS 16 is now kicking in and it invariably increases a company’s balance sheet financial debt – but it removes the uncertainty of obligations to pay future operating leases which were previously off-balance sheet. Now they are there for all to see. A business with reliable cash flow that easily covers its seasonal working capital requirements, its minimum capital expenditure needs and its annual interest payments is potentially of interest and if it is perceived as badly managed that is not necessarily an impediment. If times are tough, one...

EQUITIES ARE THE NEW JUNK BONDS

EQUITIES ARE THE NEW JUNK BONDS

28 Aug 2019

Anyone who cares to investigate can discover that the equities that you probably own directly or through your pension scheme are equitable only with each other. Benjamin Graham, the so-called father of modern investing, called them “common shares” which is a better clue. When a company is wound up this typically means that it has run out of money and run out of people who will lend or give it more cash. Equities represent any surplus assets that are left when all other creditors have been paid off. Every other creditor ranks above the owners of the common shares. First are secured creditors like banks or bondholders who have lent money on fixed terms. If the company defaults on those terms it can be forced into formal insolvency, though sometimes the secured creditors will accept equity in return for a further cash injection, if they judge that their best chance of getting their money back in the end is to keep the business going. In those circumstances they will be issued shares on such favourable terms that existing equity investors are diluted to the point of worthlessness. This is happening now in the case of Thomas Cook. After secured creditors have been paid in full, anything left goes to so-called preferential creditors, including employees, and then to the luckless trade creditors and HMRC. You can infer that common shareholders will usually be completely wiped out. Unsurprisingly, people who invest in equities very rarely think about the risk of insolvency and losing all their money. We all dream of the day when the theoretical value of those surplus assets explodes upwards. Bond holders may get their money plus interest back but as Benjamin Graham pointed out many decades ago, common stocks have “a far better record than bonds over the long term past”. It has widely been accepted as a fact that equities are the answer for a long term investor. Cautious share owners look for sustainable dividends that can rise as the company grows; the more optimistic hope for rising share prices as well. Those are the two elements that drive the long-term performance of common stocks observed by Graham. But stock market investors...

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 to 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...

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...