9 Dec 2024

WAR WAS TRADITIONALLY DELEGATED TO MEN In the last thousand years or so, nations that considered themselves civilised generally delegated the task of fighting wars to their male populations. On average, men were stronger and probably more violent and possibly less prone to the introspection that might question whether an order to engage in a near-suicidal action was stupid and pointless.  Napoleon and Wellington live on through war gamers who deploy men in ways that might have led to a different outcome at Waterloo. The US civil war (also a gamers’ favourite) was for a while peak slaughter of loyal male soldiers. In addition there were unsurprisingly many civilian casualties but these were regarded as regrettable mistakes.  And then came World War I. The women kept the home fires burning (and much else) but the reputation of that conflict is that it was a foolish and immoral waste of young male life.  AFTER WWI WE ALL BECAME INVOLVED The result was widespread pacifism with a twist. George Orwell said that if nations insisted on going to war they should accept that the cost would and moreover should be borne by the whole population. The Spanish civil war and in particular the attack on Guernica in 1937 by German and Italian bombers brought to international attention what this meant – that civilians would be casualties of contemporary warfare.  Consequently, appeasement was an extremely popular response to the demands of the Nazis in the late 1930s. When Churchill voted against Neville Chamberlain’s Munich agreement of September 1938 he was nearly deselected by his own constituency party. A few months later Hitler broke his word and invaded Czechoslovakia. At that point war was seen as nearly inevitable and, correctly envisaging that London would be a bombing target, the government began to prepare for the mass evacuation of children, gasmasks in hand, to rural and seaside areas. WWII is notorious for the attempted genocide of Jews but also for the bombing of cities. The “Battle of Britain” aimed at London, first by the Luftwaffe and then by V1 and V2 rockets, the destruction of German cities by British and US bombers in early 1945 and the atomic bombs...

4 Nov 2024

Here is a top tip for finding something that you have mislaid. Don’t look for it. Instead, adopt a Rodin posture and think. I call this the Sherlock Holmes method based on his mystery-solving technique that once you have eliminated all the most likely explanations, whatever remains, however improbable, must be the truth. The strong chances are that you will find what you are looking for during the process of eliminating the most likely explanations. I can report that the Holmes method often irritates other people because their instinct is to race around in pursuit of the most unlikely answers. But they like it when you have correctly worked out where their sunglasses/passport/pet hamster are most likely to be. Holmes’ technique is often misleadingly referred to as “eliminating the impossible”, which is nearly the exact opposite of his advice. As an investor I am committed to judging probability. Possibility is by definition always assumed. It is very rare that an outcome can be judged to be impossible. And when something that is highly unlikely is treated as impossible, disaster can follow. See the global financial crisis of 2008, sometimes characterised as a “black swan” event. The circumstance in which impossibility might be profitable for an investor is when the world, or a large part of it, appears to be in denial. I am thinking of two examples now. They are the idea that government debt can rise inexorably and still be treated as if it will be serviced and repaid and secondly that “Net Zero” will be achievable or acceptable. It is an unspoken assumption that major first world governments are good for their debt. This might be credible in the case of the US which borrows in the world’s default currency – even Bitcoin and gold depend on the continuing credibility of the dollar. The fact that Japan is the global emperor of state borrowing (268% of GDP) is remarkable but it is usually explained that domestic institutions and individuals are loyal buyers of government debt, long conditioned to low nominal returns. For Eurozone countries the topic is much hotter, as we saw when “Grexit” seemed to be a thing. (Grexit was a...

2 Oct 2024

It was another steady quarter for stocks. The FTSE 100 rose by 0.8%, the All Share by 1.2% and the more domestically exposed 250 by 3.7%. Once again, excitable global news headlines were not reflected by the financial markets.  Government bond yields are lower as central banks appear to have started to ease rates. The UK ten year gilt fell from 4.2% to 3.8% but is now back up to 4.0%. While inflation headline numbers have been trending down there must be underlying concern about the relentless rise in government debt (pretty much everywhere).  Despite staged warnings from the new Labour government about the legacy of the excessive spending by its predecessors (previously known as “Tory austerity”) there are reports that another £50 billion of borrowing headroom will be discovered by reclassifying some borrowing as “investment spending” and saying that it doesn’t count. This is all good except that it still has to be paid back and it will still compete with less virtuous borrowing for the attention of lenders. Ultimately interest rates are a function of the credibility of the borrower and inflation will trend up as credibility falls. Not the other way around.  But ahead of the budget this good “headroom” news will probably allow the government to reverse its scrapping of the pensioners’ winter fuel allowance. Perhaps that will be good for energy stocks as well as general well-being and fewer deaths from climate change. Flagons of mulled wine all...

9 Aug 2024

Just the other day, or rather in November 2017, I wrote a post entitled “Prepare to turn left”. After the global financial crisis the UK had endured seven years of “austerity” according to a narrative that was becoming widely accepted as fact. Theresa May’s Conservatives were enfeebled by her hapless attempt to add to her majority with a surprise election (she lost her majority).  This sounds very familiar now but then it was mildly surprising that the Tories didn’t dare attempt any traditional Conservative policies, such as tax cuts, to entice investment. Instead Mrs May decided that her legacy would be to sign the Net Zero abomination (other views are available) into law in order to sabotage any attempts by her successors to spare its innumerable victims. The legislation was waved through in 2019 despite her own Chancellor, Phillip Hammond, saying that it would cost £1 trillion.  With no apparent motivation to challenge the prevailing coalition spirit that had prevailed since 2010 (and endures to this day) I wrote that the Conservatives were doomed to be their own opposition. Below is what I published then and I am delighted to reproduce it now (my new highlights) because the chances are that we have just elected a new government of comparable weakness.  So what does a weak Conservative government do in these circumstances? The answer follows two left wing agendas. First, it interferes in private sector businesses to combat perceived unfairness, but with little regard for the unintended but arguably predictable consequences. This has already happened in the case of private landlords and energy companies. The curious strategy appears to consist of little more than trying to ensure that the provision of housing and energy are as unprofitable as possible. Perhaps there are sound ethical reasons for this but one sure consequence is that investment is discouraged. Why commit capital to an area where the government has a record of applying penalties, apparently motivated by the wish to punish rather than the need to generate tax revenue? Discouraging investment is not a practice normally associated with Conservatives. So perhaps the second left wing policy can compensate – direct investment by the government itself. The new...

8 Apr 2024

Surely the most important question when a country goes to war is – What does success look like? Churchill the wartime Prime Minister left no one in any doubt “Even though large tracts of Europe and many old and famous states have fallen or may fall into the grip of the Gestapo and all the odious apparatus of Nazi rule, we shall not flag or fail. “We shall go on to the end, we shall fight in France, we shall fight on the seas and oceans, we shall fight with growing confidence and growing strength in the air, we shall defend our island, whatever the cost may be. “We shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; we shall never surrender, and even if, which I do not for a moment believe, this island or a large part of it were subjugated and starving, then our Empire beyond the seas, armed and guarded by the British fleet, would carry on the struggle, until, in God’s good time, the new world, with all its power and might, steps forth to the rescue and the liberation of the old.” Although this was obviously intended to unite and inspire the population, it was also an implicit invitation to persistent pacifists to speak up, stand up or, if necessary, flee. To Vera Britten, success was to be found in defeat. A singular opinion but admirably clear. “There is a strange lack of dignity in conquest; the dull, uncomplaining endurance of defeat appears more worthy of congratulation.” I am no geopolitics expert (I am no anything expert) but I would say that it is obvious that a nation under attack has a reasonably clear idea of what success looks like. If it is losing the war, this will change for the worse where a primitive form of survival becomes an aspiration. We can all look at Ukraine now and make up our own minds about that. Where nations are aggressors under the banner of morality, the definition of success is much harder. The US and its allies invaded Iraq...

31 Mar 2024

As I wrote the other day, markets have been remarkable for their calmness. In the quarter the FTSE 100 rose by 2.8%, the All Share by 2.5% and the FTSE 250 by 1%, The slight relative underperformance of the 250 typically indicates caution over domestic profit margins and there are some obvious areas of concern. Not least among these are the housebuilders who are delaying completions as they wait for better market conditions. Either interest rates will have to fall or, more likely, people will adjust to the new but old normal world in which positive real interest rates are to be expected.  On 28 February TaylorWimpey announced that 2023 completions were down 23% and on 12 March Persimmon reported that its completions for last year were minus 33%. As usual, nobody in the political or press mainstream appears to notice what is going on and the mantra that “we” need to build more homes pounds away relentlessly.  UK housebuilders were burned fifteen years ago and their memories are, creditably, long enough to retain the near-death experience of the last time the supporting chorus was urging them to “build, build, build”.  On 27 March the Bank of England warned about the rising danger of bad commercial property loans and also noted the trend of private property buyers to choose longer dated loans (where the aggregate interest owed will likely be higher but the individual monthly payments will be lower). As for interest rates themselves, yields on government bonds rose over the quarter: ten year gilts from 3.6% to 3.98%, US Treasuries from 4.0% to 4.21% and German Bunds from 2.05% to 2.29%. On the one hand this implies that economic performance is a little better than expected, which is modestly good news: on the other, it tells us that we cannot assume that rates that went up will just go down...

Fear of unpredictable geopolitical events seems to provoke a collective desire for experts who can reassure with their wisdom. And there is never a shortage of volunteers to satisfy these needs. They rush in like hopeful lottery ticket buyers ahead of a rollover.  COVID – DISEASE EXPERTS I suppose that this has been building for a long time but the Covid-19 panic jolted it into a higher gear. When Boris Johnson said in June 2020 that a cricket ball was “a natural vector of disease” he inspired not howls of derision but rather an implicit challenge to say something even more uninformed and ludicrous and to claim a spurious authority for having done so.  Governments all over the world engaged in competitive dictatorship to see what restrictions, including travel bans and curfews, they could place on their citizens. And they came for the children too.   In 1984 Orwell wrote: “If you want a picture of the future, imagine a boot stamping on a human face— forever.” In my mind this apocalyptic image has been replaced by that of infant school pupils wearing masks and for hours recycling their own breath back into their lungs. According to experts, this was for the greater good of their grannies and, let us not forget, their teachers. In the US, teachers demanding the closure of schools staged their own mock funeral processions. As if school children were inadvertent assassins. RUSSIA – WAR EXPERTS As this lunacy subsided, Russia invaded Ukraine. A mad man with nuclear weapons and a grudge was threatening to start World War III. Help! Fear not. Help was indeed at hand. In fact, many of the old experts were the new experts. “Ukraine will win. I’ve never been more certain” Boris Johnson It is the two year anniversary of the invasion. I have lost count of the variations in the expert narrative. Quickly out of the traps was the story that the end of Ukrainian wheat exports would cause havoc, particularly in countries like Turkey and Egypt that have diets of which bread is a large part.  The price of wheat rocketed to US$450 per ton but is now at US$187. What happened? It seems...

26 Jan 2024

I forgot who it was who said that he wasn’t afraid of flying but of landing. The same philosophy may be applied to borrowing. Borrowing is rather like flying – rewarding, useful and even exhilarating. The scary part is landing the debt and returning it to its hangar. It is worth asking why the US seems uniquely able to borrow with impunity compared to other countries which feature at various stops on the slope downwards to habitual insolvency. I would argue that the three main impediments to foreign investment anywhere are distrust of a government, distrust of its currency and, recently, distrust of the reliability of energy supply. There is one policy that Presidents Trump and Biden appear to share – that if you want to sell in America you need to manufacture in America: and according to UN investment data, the rest of the world is happy to fall in line. Despite apparently going along with the COP religious movement, Biden’s government has been careful to continue America’s pursuit of cheap and independent energy and to be a willing exporter of LNG to the world. In 2022 the US became the leading exporter of LNG and, to the horror of the lobbying organisation Covering Climate Now, a “massive expansion” of export terminals is proposed. “Taken together, if all US projects in the permitting pipeline are approved, they could lead to 3.9 billion tons of greenhouse gas emissions annually, which is larger than the entire annual emissions of the European Union,” wrote a group of scientists in an open letter to Biden in December urging the president to halt the expansion. . Source: coveringclimatenow.org STOP PRESS : President Biden has just “paused” new export licences. Lobbying works, sometimes. Financing public spending by borrowing feels irresponsible. Politicians rarely dare to advocate it. Instead, they do it stealthily. In the US the Biden administration launched the comically named Inflation Reduction Act to lend a sense of responsible purpose to its continuing accumulation of a debt pile now standing at $34 trillion (it was $10 trillion in 2000). Before we believers in prudent finance throw up our hands in horror we must be quite clear about why...

8 Oct 2023

At some time I wrote that it is wrong to try to work out how much a company is worth and then compare that to the share price. It’s more productive to do the exercise backwards – look at the valuation of a business and ask if the implied outlook is plausible. You can do this equally effectively with optically high and low valuations. A bonus of this approach is that it indicates what people really think because whatever they say (e.g. about ESG…grrrr) if they don’t invest in it they don’t believe it. But it’s not as simple as that. The propensity to invest in anything is also affected by the cost of money.  If your cash earns zero you are more likely to take a bit of a punt. If National Savings is paying 6.2% (which it was until a few days ago), safety looks far more attractive.  FREE MONEY = GREEN MONEY I think we will look back on the Greta years (2018 – ?) and observe that the perceived virtue of reversing economic development was a luxury correlated with the age of QE and free money. From 2009 to 2021, the white collar classes were coddled by unprecedented government-sponsored liquidity. They worked from home while the less well-paid delivered the essentials of life to their front doors.  You could say that a general complacency crept in. Investments in electric cars and wind turbines were characterised almost as no brainers and if their promised financial rewards were rather long term, many public subsidies (more free money) were available. Low interest rates (10 year gilts still yielded only 1% at the end of 2021) apparently discouraged financial scrutiny and (historic term) cost-benefit analysis. .  In 2022 the Bank of England ceased its gilt purchases and, deliberately or not, infamously torpedoed the new PM Truss by commencing sales of its portfolio in September. Politics aside, the attitude to public and private investment has changed markedly in 2023. THE RETURN OF COST-BENEFIT ANALYSIS The 2010 HS2 rail project was going to cost £33 billion. By 2020 this had risen to £88 billion and allegedly to more than £100 billion in 2023. Naturally the project...

3 Oct 2023

The last time that the UK stock markets put in a meaningful positive performance was Q4 last year when it was obvious that many highly investable companies were oversold. A year ago I even spotted that. This year has been very dull after that rally. The FTSE 100 is up by 2.3% and the FTSE 250 is down by 2.8%. So larger companies have outperformed smaller ones but not in a way that excites comment from me.  Government bond markets have continued to drift down i.e. yields have climbed more. The US Treasury 10 yr yield rose from 4.1% to 4.7% and the German Bund from 2.6% to 2.9%. Only gilts stabilised at around 4.6%. Rising yields imply that investors remain cautious but do not expect serious economic slowdown (bond yields fall in response to recessions). But higher rewards for playing it safe (as exemplified by National Savings paying 6% for a one year deposit) make investors more risk averse. There are speculative and long-term investments that you will try when cash yields nothing but will spurn when doing nothing starts to be rewarding. This dynamic explains why smaller companies that appear to offer more growth potential are being spurned in favour of larger and duller ones that pay decent dividends.  It seems fairly probable that today’s higher yields will become the future norm. If that is so we can expect stock markets to remain...

26 Jul 2023

All the UK share indices fell modestly in Q2 as the wait for recession continued and inflation remained stubbornly high. Year to date, the FTSE 100 has a clear lead (+5%) over the more domestically exposed 250 (-1.3%).  There was some blood spilt in the government bond markets, especially in the UK where the 10 year gilt yield leapt from 3.49% to 4.65%. Germany (2.18% to 2.63%) and the US (3.41% to 4.00%) moved in the same direction but less dramatically. Sensible but shocked financial TV commentators could be heard breaking a lifetime’s habit and actually suggesting that private investors might invest in government debt.  This is a trickle, as the calm stock markets show and most attention has focused on the woes of those who need to remortgage at rates that they apparently never considered to be possible. Crony capitalism has shown a few stress fractures, not least with a ruling from a judge in Missouri that the Biden administration should stop directing the large media organisations to suppress unwelcome opinions. The bizarre sight of the liberal media closing ranks around big Pharma, big Tech and, thanks to Coutts and Natwest, big Finance, is perhaps paused for a moment.  https://twitter.com/i/status/1677289360486457345 But the subsidy truffle hunters are still snuffling away. Tata has secured unknown public money for its battery factory in Somerset and the Swedish company Vattenfall has halted work on its Norfolk offshore wind farm pending….you guessed...

21 Apr 2023

The first quarter saw a limited banking crisis, including the demise of the wounded Swiss champion Credit Suisse, but otherwise there was not much to see. The FTSE 100 managed to rise by 2.4%, again doing better than the more domestically-based FTSE 250 (+0.4%). Government bond yields were also largely unchanged in the UK and Germany but lower in the US (3.6% vs 3.9%) where inflation is more obviously falling. It was a curious incident of the dog in the night time quarter – despite much noise about failing banks and impending recessions, the markets snoozed their way through.  For an investor, something not happening is every bit as significant as something happening.  My theory is that large corporations are more comfortably in bed with governments than has ever been the case. Due to the explosion of government borrowing and spending since the “great financial crisis” of 2008-9 and the doubling down that occurred with lockdowns. Governments are the most important customers and, as we know, the customer is always right.  Corporate lobbying may be unedifying but it appears to be annoyingly successful. Politicians who take a principled stand tend to find themselves maligned as borderline mentally ill if they cross an agreed line delineating agreed public/private interests.  As Groucho Marx said, “Those are my principles, and if you don’t like them… well, I have others.”  Essentially, the governments of the US, UK and Europe have huge patronage at their disposal and it is hardly surprising that big business knows where to find it.  This is what is sometimes called Crony Capitalism, defined as – An economic system characterized by close, mutually advantageous relationships between business leaders and government...

5 Mar 2023

When I talk of stupidity I do not refer to my own which, save in painful retrospect, is an unknown unknown. For better or worse I am limited to my own perception of the stupidity of others.  My proposition is that when some people are wrong, others can profit. Like all judgements, observations of stupidity need to be subjected to a probability test.  Warren Buffett says that sometimes prices are “foolish”, absolving people of some responsibility for the valuations of “Mister Market” but he is a kindly man and evidently much nicer than me.  One advantage of our publicly-traded segment is that – episodically – it becomes easy to buy pieces of wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect Warren Buffett, Berkshire Hathaway shareholder letter, February 2022 THE LONELINESS OF THE LONG DISTANCE INVESTOR It makes sense that the greater the number of people that are wrong, the greater the potential rewards for those who know better. If you haven’t read The Big Short by Michael Lewis, or watched the film made of it, you should. It was a lonely life, defying consensus ahead of the great financial crisis of 2008 and it is never easy. As Keynes said, most investors would rather fail in the comfort of a crowd than risk standing out.  Holding a minority opinion can be worse than lonely. For some reason, rejecting consensus appears to provoke hostility, particularly at times of perceived emergency (see my last post). After Neville Chamberlain agreed to Hitler’s annexation of the Sudetenland in Munich in September 1938, Winston Churchill denounced the deal (“England…has chosen shame and will get war”). This may look like a historical footnote but Churchill’s own constituency party attempted to have him deselected and very nearly succeeded. The appeasers of 1938 were in a large majority and the idea that Hitler could be bought off was treated as believable because people wanted “peace in our time” so much. Stupidity is surely the eager and dangerously loyal...

5 Feb 2023

“Power tends to corrupt, and absolute power corrupts absolutely. Lord Acton, 1887 On 6 May 2020 I published ECONOMIC SHUTDOWN! EMERGENCY!!. This has aged quite well, in my opinion. I forecast a form of stagflation; essentially economic slowdown and rising prices. At the time, in common with almost everybody else, I took the government’s need to exercise emergency powers for granted. The Public Health Act of 1984 was supplemented by The Coronavirus Act, hurried through after four days of whatever passed for Parliamentary scrutiny in March 2020.  The act allowed the government to detain anyone suspected of having the virus (a pretty alarming negation of civil liberties by itself), to close borders, to record deaths without inquests, to restrict the right of assembly, to close schools, to suspend elections. As I recall, it did all of those. Legislation, which normally needs to be laboriously passed through Parliament, is not practical in an emergency. Obviously the question of what constitutes an emergency is a matter of opinion. And a perpetual state of emergency is ideal for anyone who wants to restrict or compel the behaviour of others. This explains why the language of crisis (catastrophe, extinction, mass murder) is employed by Net Zero enthusiasts. There is a website that monitors the progress of extinction claims over time. So the Thunberg team knows what it is doing. But while we may fend off the most extreme demands, the plausibility of Lord Acton’s words was supported all too well during the pandemic.  The leaders of Canada, New Zealand, Scotland, Wales and many other places appeared to relish the power and to believe that authoritarianism was a measure of responsibility.  LABOUR’S FIRST YEAR I recently read a book, published in 1947, about the parliamentary debates of the first year of the post-WWII government. In July 1945, Labour was elected with a dominating 150 seat majority on a manifesto of stunning radicalism. Almost everything that moved was to be nationalised; coal, coking, railways, airlines, healthcare and the Bank of England.  During the war, an Emergency Powers Act was renewed by Parliament annually. Given that the country was fighting the most notorious dictator the world has ever known, who passed...

18 Jan 2023

For the first time in five quarters The FTSE 250 outperformed the FTSE 100 (+9.8% vs +8.1% compared to Q3). This does not change the fact that the big-cap index with international exposure trounced its smaller more domestically exposed rival over the year as a whole (+1% vs -20%). But some recovery by FTSE 250 shares would be very welcome in the face of much public negativity about the UK economy. In my Q3 report I wrote that half a dozen shares must be long term buys. I invest in line with what I perceive as probability and necessarily one is sometimes correct. While I take a brief lap of honour I shall recite as follows – Sainsbury +40%, Tesco +20%, Halfords +39%, Kingfisher +23%, Pets At Home +27%, M&S +52%. I own all those shares but the only one that I actually bought at the end of Q3 was M&S. The government bond markets have been interesting, as I wrote here on 23 December. Over the quarter UK 10 year gilts fell from 4.23% (a peak induced by the Bank of England, not Liz Truss) to 3.67%, a normalisation from an excellent buying opportunity. US 10 year Treasuries were flat at 3.88%, summing up the unresolved debate between inflation mongers and recession peddlers. German yields rose from 2.1% to 2.5%. CHINA AND NUMBERS Finally, a geopolitical strategist named Peter Zeihan mentioned something that I have seen before – namely that China, in addition to reporting dodgy population and Covid numbers, has long overstated its GDP growth. While this might seem just the grandiose bull of an authoritarian government, it has huge mathematical implications once you take into effect the compounding effects over time. An overstatement by 3% of a number that is itself already overstated will, in twenty five years, produce a GDP number that is distorted by 100%. It could be that the reason why the world has withstood the repeated closure of the Chinese economy is that China is not as important as its official GDP numbers...

Conventional theory holds that an inverted bond yield (in this case where the two year pays more than the ten year) is a negative economic forecast. I have never been quite clear on whether this is regarded as a causal relationship or simply an observable correlation. The former seems unlikely – that the sight of a threatening yield curve sparks widespread fear and recession follows as a result of cautious behaviour – but I have heard people talk as if that is the case. It seems more likely that inverted bond yields are a response to or a forecast of tough economic times. I prefer to remember that bond prices are the terms on which borrowers and lenders choose to trade. High short dated yields might imply inflationary fears but they also reflect the credibility, or lack of it, of the governments that need to borrow. Lower long dated yields imply scepticism about future growth but they also suggest the belief that returns from safe investments will revert to the modest levels that became normal in the last ten or so years. A DECADE OF BOND MARKET MANIPULATION MAY HAVE DISTORTED INVESTORS’ PERCEPTION The obvious flaw with the idea that low long term yields are normal is that it is probably wrong. We have been conditioned by more than ten years of government bond market manipulation by central banks. In some countries like the US, the UK and the Eurozone, central banks have led the way with QE. It is a matter of opinion as to how independent of government influence these central bank actions have been. The fact that they have de facto financed unprecedented government borrowing, first through the Great Financial Crisis aftermath and then through Covid-inspired lockdowns, speaks for itself. HISTORY OF UK 10 YEAR GILT YIELDS Here are UK ten year gilt yields since 1980. In the 80s they were in a 10-15% range and then a 5-10% range basically until 2008 when the estimated $60 trillion of outstanding credit default swaps began falling like dominoes, threatening numerous financial institutions around the world. The chart illustrates nicely the result of the critical need for cheap money around the world. In...

8 Oct 2022

The FTSE 250 fell by 8.0% in Q2 and is down by 25.5% year to date. The FTSE100 is down by just 2.7% year to date, a massive and, in my experience, unprecedented outperformance. On average FTSE 100 companies are larger and more international meaning that they are typically earning dollar revenues, a very good cushion in recent months. UK ten year government bond yields began the quarter at 2.06% and ended it at 4.1%, a rout that was ludicrously attributed to a trivial mini budget. As I wrote recently, this has been coming for a long time and the cause is a combination of relentless excessive borrowing, to which the nation appears to be addicted, and blundering behaviour by the Bank of England which naturally fails to accept responsibility. The overdue correction in government bond yields was certainly not confined to the UK. Ten year German Bund yields soared from 1.2% to 2.1% and US Treasuries more modestly from 3.02% to 3.8%. As those yield movements imply, Europe has a bigger inflation threat because most commodities are priced in dollars. Stock investors in the US have seen most commodity prices well off their highs and are disappointed that the Fed appears to be set on continuing to dampen an economy that appears to be slowing down quite nicely. It is worth mentioning that most US commentators see a bad recession across Europe as a given. I have been buying two year Gilts yielding above 4% in the knowledge that these represent a very viable alternative to stocks, at this difficult time, as they say when flags are flying at half mast. There is no doubt that many share prices are very low and some of them may even be cheap. I have been looking at retailers. Sainsbury, Tesco, Halfords, Kingfisher and Pets at Home all have solid balance sheets and yield between 4.5% (Pets) and 7.5% (Sainsbury).Marks & Spencer, which must be selling hair shirts, pays no dividend for some reason but its historic free cash flow yield is 33%. Barring serious management blunders, which are of course quite possible, these companies are long term buys. I am tempted to write that there...

28 Sep 2022

The rapidly falling pound sterling is, according to the opposition coalition of political and media commentators, proof that confidence in the three week old Truss administration is fading away. There are certainly plenty of economists saying that the chancellor’s tax cuts will not stimulate growth and that, whatever, it’s all not fair. The Bank of England is probably wondering whether to raise the bank rate to defend sterling, though it will also be nervous that any indications of panic will make things worse. The gilts market is anyway taking the decision out of its hands. Two year government paper yields 4%. The Bank of England does not command the rates at which actual transactions take place in the real world. I suggest that the Bank continues its policy of pretending to be a cork in a jacuzzi. I have written many (many) times about the remarkable growth of UK government borrowing and how the costs were artificially disguised by the QE through which the Bank of England, as an agent of the Treasury, purchased gilts in the open market while the same Bank of England sold new gilts on behalf of the same Treasury. It really was as circular as that. It must be time to quote Lewis Carroll. “But it’s no use now,” thought poor Alice, “to pretend to be two people! Why, there’s hardly enough of me left to make one respectable person!” While QE was still in operation (until the end of last year) there was an implicit market agreement to see no folly, hear no folly and speak no folly. The wonder is not that the gilts market is being yanked back to reality now but that it spent so many years in a hallucinogenic stupor. The Bank of England bought £445 billion of gilts to smooth over the fallout from the subprime crisis and Brexit and a further £450 billion to fund lockdown. Due to the fact that it drove prices up and paid top dollar it lost £112 billion on its transactions (a hundred billion here, a hundred billion there – whatever) which means, to be clear, that it lost that money on our behalf. And, to be...

2 Sep 2022

Fifteen months ago I pointed out that ESG (Environmental, Social and Governance) investing would make a few people rich (via the vast public subsidies directed their way) and many people poorer. I tried to appear even handed without disguising my characteristic scepticism. Subsequent events have proved to me that I was much too restrained. ESG is not only rubbish but it is toxic rubbish. It fills up companies’ financial reports with box ticking nonsense that replaces facts that investors need to make decisions based on, you know, the financial outlook. Tom Kerridge is a “celebrity” chef who owns three successful gastropubs. He says that his energy bill is about to rise from £60,000 to £420,000 a year. The UK hospitality sector, having spent the best part of two years in imposed lockdown, is now staggering out of control towards a new disaster. All UK businesses that need significant retail outlets have seen their share prices dive because investors fear that rising energy costs will push them into loss or worse.  On 16 June Halfords released upbeat results for the year to April 2022. The dividend was 9p a share and the dividend policy is described as “progressive”. Today the shares are at 130p, down 60% this year, offering a theoretical yield of 7%. So I turned to Halford’s annual report and accounts to seek some clue about the company’s sensitivity to energy costs.    It seems that for Halfords risk management is based around a Task Force on Climate-related Financial Disclosures (“TCFD”). As the lights are about to go out Halfords’ ESG committee is meeting monthly to discuss the effect of climate change on the business between 2030 and 2050. The significant risk to Halfords retail sites is said to be extreme weather that results in flooding across the UK.  This might be the stuff of satire were it not for the fact that it replaces rather than supplements useful analysis.  Sainsbury’s shares are down 30% this year and the dividend yield appears to be 6.5%. As with Halfords, investors probably have visions of winter shopping in mittens by candlelight. Sainsbury’s annual report has seventeen pages of risk assessment. The company is watching out for...

8 Jul 2022

The FTSE 250 fell by 11.8% in Q2 and was down by 20.5% in the first half. For the FTSE 100 those numbers were -4.6% and -2.9% respectively. The message was that the big international companies were relatively unscathed but the more domestically exposed businesses flashed a big warning about recession or worse.  It was only to be expected that government bond yields, with less central bank support than before and gathering inflation, would rise and so they did. By mid June, UK 10 year gilt yields jumped from 1.6% to 2.65%, US treasuries from 2.34% to 3.48% and German Bunds from 0.56% to 1.76%. But in the second half of June, a mini bull market resumed in government bonds. On 1 July, UK yields were back down to 2.06%, US to 3.02% and German to 1.2%. On the face of, the bond markets are now more frightened of recession than inflation.  Consistent with this, despite the front page news about inflation and wage demands and threatened strikes, most commodity prices are well off their highs. Oil is +39% this year but was up 73% in March. Wheat is +23% but was up by 56% in May. The near certainty of rising prices for aluminium and copper has turned into falls of 13% and 19% respectively year to date. There has probably been stockpiling by producers as well as the self-inflicted closure of much of the Chinese economy. One should also remember that the monetary splurge that accompanied lockdowns probably filled the savings of the professional classes very nicely. History may record that this was a huge and regrettable transfer of resources in the wrong direction i.e. from the relatively poor to the relatively well off. Whatever one thinks, it is notable that the summer holidays are marked not by complaints of price gouging by holiday companies (though there is some of that if you were a regular user of Eurotunnel) but by the scandal of not enough flights to transport those who sport pale skins to the sun.  I note also that despite the threat or probability of costlier mortgages, UK house prices rose at an annual rate of 13% in June. Once...

20 Jun 2022

I am struck by the knowledge that the stock market hit its Covid panic low on 23 March 2020 (FTSE at 4994). That was the very day that the first UK lockdown was announced. This is a splendid example of how desperately keen share prices are to discount bad news. Because the actual news got much worse for much longer than anyone could have believed – but the low was already in for the stock market. Today, it is hard to see how much worse the news could get for UK consumer shares or government gilts. So here are some deservedly unpopular ideas that might just pay off. THREE SHARES VULNERABLE TO CONSUMER SPENDING National Express (buses and coaches) 217p Since the beginning of March it is an amazing fact that three of the four UK listed bus (& train) companies have received takeover bids Stagecoach – bid 105p (now unconditional) vs March low 76p (38% premium) FirstGroup – indicative bid of 163.6p vs 89p in March (84% premium) Go-Ahead – bid of 1500p vs 550p in March (173% premium) That leaves only National Express which is now just a bus company (plus a few trains in Germany). It is huge (£2.7 bn in revenues this year)  and supposedly in the sweet spot for new transport habits (out of those wicked cars, people, and get on board with the monarchs of the road). It raised £235million from shareholders in May 2020 at 230p per share and the price has gone nowhere (now 217p). It plans to restore a dividend in 2022. It has hedged its fuel costs 100% for this year, 64% of 2023 and 25% for 2024. It has guided to a 7% operating margin in 2022 (10% in 2019).  I do not love this company but it has the potential to benefit from a certain scarcity value. Halfords (auto centres and bikes) 157p Another theoretical sweet spot – second hand car servicing and cycling. This statement of the bleeding obvious last week sent the shares down by 20%. While rising inflation and declining consumer confidence will naturally present short-term challenges for any customer-facing business like ours, we remain confident in Halfords’ long-term...

4 Apr 2022

The stock market trend that began in Q4 accelerated in Q1. The FTSE 100, with its big oil, gas and mining shares, rose by 1.8% while the FTSE 250, mostly populated with companies that use those products as raw materials, lurched down by 9.9%. I cannot recall such a divergence between those two indices in a single quarter. Despite this, the bond market action was more dramatic still. Ten year UK Gilt yields rose from 0.97% to 1.6% as purchases by the Bank of England ceased. In the US, 10 year Treasuries yielded 1.51% on 31 December and 2.34% at the quarter end. The German 10 year Bund yield rose from -0.18% to 0.56%. Despite the serious risk that Putin, net zero and raw material prices will combine to send us back to recessionary times, the main message from government bonds is that inflation is a problem that historically demands high interest rates. The theory that the cost of borrowing should rise in order to discourage speculative investment looks rather thin in today’s circumstances but markets are not famous for looking around corners to see what might lie just out of sight. . Rishi Sunak’s spring financial statement contained the inevitable tax increases that many seem to find unbelievable and the reason for them. The government is now expected to pay interest of £83 billion in 2022/3. This may include losses on its stock of redeeming gilts but even so it is a shocking number implying that the nation is now paying 4% to borrow, which is roughly twice as much as its more solvent citizens. Though the latter can only expect their mortgage rates to rise in turn. The time may have come for the idea that the credit worthiness of all governments is something that must be factored into the usual calculations about the relative cost of...

10 Feb 2022

The rising cost of living is suddenly all over the news. The Bank of England is forecasting that inflation will rise to 7.25%. Transparently ineffective and arguably misleading measures have been taken to mitigate the raising of the ridiculous energy price cap. Talking of ineffective, the Governor of the Bank of England is calling for pay restraint. Excellent. Political commentators have called for the abandonment of April’s proposed rise in the rate of national Insurance on the simplistic grounds that people will actually have to pay it. This is not unusual in the case of taxes. No one wins votes by being in favour of them. For some reason the Chancellor seems to have persuaded the Prime Minister to hold his nerve, for now. It’s almost as if Rishi Sunak understands the state of the nation’s finances.  The nagging feeling that something is wrong and that “something must be done” causes excitement when there appears to be the chance to raise someone else’s taxes. Currently there is a call for windfall taxes for the oil companies who have had the effrontery to recoup in 2021 what they lost in 2020. BP and Shell are preparing to pay $16 billion in tax between them as it is (not all to the UK treasury) and the dividends they pay will be received by the pension funds that most of us own, directly or indirectly.  The truth is that the scale of the national debt is too intimidating for proper public discussion.   At the end of December the value of gilts in circulation was £2,011 billion (just over £2 trillion, as people like to say now when they want to intimidate with numbers that are nearly impossible to contemplate) of which 28% have been issued since March 2020 i.e. in large part due to the cost of the response to the pandemic. Over the twenty one Covid months government expenditure has exceeded its receipts by £467 billion and £563 billion has been raised in gilt sales.  It may be that the treasury decided to take advantage of exceptionally low interest rates to sell as many gilts as possible. The reason why rates have been so low for...

4 Feb 2022

The FTSE 100 outperformed (+4.2% in the quarter) the other indices (250 and All Share) because big resource shares (oil, gas, metals) did well as the market began to realise that high commodity prices promised outstanding profits. Free cash flow would be enhanced by the fact that the environmental lobby has bullied these businesses out of making the investments that would once have been expected. Instead the likes of BP (sorry, bp) have begged for forgiveness by bidding up the price of offshore wind licences.  For the full year, all the main UK indices rose by just over 14%, perhaps a sign of a fairly indiscriminate wall of money looking for a home. This was not a great result by international standards: the S&P 500 returned 27% in 2021. Meanwhile UK gilts began to show some signs that the Bank of England Asset Purchase Facility was nearly full, meaning that 2022 gilt auctions would be offered to an unrigged market. In December the 10 year yield rose from 0.82% to 0.97% and (spoiler alert) in January was set to soar up through...

28 Dec 2021

Post hoc ergo propter hoc, or after this, therefore because of this, is a well known logical fallacy. A sequence of events does not guarantee that there is a causal relationship between those that precede and those that follow.  Wise investors know to beware of confusing correlation with causation. A famous and surely harmless example is the Super Bowl indicator that claims that the stock market has a good year when a team from the NFL triumphs but falls if an AFC team is victorious.  Nevertheless, retrospective explanation for the movement of asset prices is a serious industry that seeks to establish an understanding of the past and, by implication, of the future, available only to a select few. I have written about this before. To an investor it doesn’t or shouldn’t matter why an asset rose or fell in price. All that matters is being aligned with the outcome. Occasionally a company that has been performing badly gets taken over at an agreeable price. Shareholders who had invested because they thought that the managers of the business were competent discover that this was not the case but ultimately are rewarded for being wrong. They give thanks and move on, as unelected leaders of their own portfolios, to their next idea without embarrassment. (Or maybe that’s just me). The so-called nonpharmaceutical interventions (NPIs) to deal with Covid-19 have elevated “post hoc ergo propter hoc” from a fallacy to the foundation of policy. Imposing lockdowns, shutting schools and destroying businesses are all actions that I consider cowardly as well as destructive, though it seems that the majority were willing to go along with them as long as the government would drive itself to the edge of insolvency to compensate them. What is, I think, beyond dispute is that the advocates of these NPIs must appear to be supported by convincing evidence that they made a positive difference. Issues of liberty, free speech, mental health and the treacherous Swedes can be relegated to background noise as long as the narrative holds.  Karl Popper proposed the Falsification Principle. It states that for a theory to be considered scientific it must be able to be tested and conceivably...

15 Dec 2021

There seems to be a puzzling disconnect between the available facts from South Africa about Omicron (that it spreads quickly but has relatively benign health consequences) and the gloomy and even panicky reaction in the UK from the government, the self-appointed “science” and the political opposition, such as it is.  It is almost as if the establishment, if that’s the right word, has an ulterior motive in keeping the fear going, even at the expense of the usual suspects such as children, people with undiagnosed conditions like cancer and, of course, the leisure and travel industries.  As this website is about money, I will speculate about financial motives. Fighting Covid has been extraordinarily expensive. The UK government has borrowed more than £550 billion since April 2020. Clearly this money has gone to some obvious recipients like vaccine manufacturers and the rapacious “approved” PCR testers but also to the NHS, to local councils and in the form of furlough payments to employers of the temporarily unemployed. I don’t suppose that many people associated with any of these groups, the pharma companies aside, actually want the pandemic to continue. But be aware that this is potentially a very big week for the UK Treasury. In March 2020 it was agreed that the Bank of England’s Asset Purchase Facility could be increased from £445 billion (it was full at the time) by £200 billion and later in the year by another £100 billion and again (in November) by a further £150 billion for a total of £895 billion (popularly known as QE or quantitative easing).  Since April 2020 the Bank has duly bought gilts steadily from institutional holders. We have only the detailed figures up to the end of September but at the consistent rate at which it was operating it should have reached its £895 billion target this very week (13th December). Over that period the Bank purchasing arm has bought £3 of gilts for every £4 that it has issued on behalf of the government. In other words, 75% of this extraordinary borrowing has been funded by what one might call an elaborate accounting trick.    Unless the QE facility is ramped up again, the government...

7 Nov 2021

Q3 was again quite calm in the equity markets. The FTSE rose by 0.7%, quarter-on-quarter, and the domestic orientated FTSE 250 by 2.9%.  It is the bond markets that are relatively volatile. After a rather surprising rally in Q2 (when yields fell) the official message that inflation will be transient began to met with scepticism again in Q3.Government bond yields began to rise again – US treasuries from 1.3% to 1.6% and gilts from 0.6% to 1.1%. At present there is much speculation about whether the Bank of England will raise the Bank Rate from 0.10% to 0.25%. So what? Is a reasonable question. The Bank Rate is the interest that the Bank of England pays to commercial banks when they deposit money with it. The long years of near zero rates are part of a policy to encourage banks to lend. In addition, QE has swamped the private market with cash. The Bank Rate is classically raised in order to discourage excessive lending which leads to overheating and inflation. As a Fed chairman once said, you take away the punchbowl just as the party is getting going.  I find it hard to imagine that interest rates play any significant role in commercial bank decisions at the moment. If the Bank Rate is effectively an opportunity cost of lending it is going to have to be much higher than 0.25% to make any difference. Perceived counterparty risk must be the dominant consideration. The most important factor for the Treasury and the Bank of England is their own borrowing costs. At some point, surely, the government will have to stop borrowing from itself and will need to raise money from savers and investors who will need inducements. Keeping the Bank Rate low will be an irrelevance and won’t stop long dated yields from rising. Roll on the...

17 Sep 2021

The company once known as British Petroleum (a name revived by President Obama when he wanted to stick it with all the blame for the Deepwater Horizon oil spill) has quietly rebranded itself in the lower case though almost nobody seems to have noticed. As if it is the corporate embodiment of white privilege, bp can only apologise and beg forgiveness for its own existence.  The splendidly named CEO, Bernard Looney (who will soon rebrand himself as Nigel Neurodiverse) has pledged to reinvent the company as a provider of multi energy customer solutions. My opinion is that if he thinks this is going to keep the eco warriors at bay he needs to change his medication, but never mind.   What interests me now is the entertaining contrast between the reinvention rhetoric and the grim reality that bp is probably having a stupendously profitable year due, of course, to the rises in the prices of oil and natural gas. How embarrassing could this get? I will save you the trouble of ploughing through bp’s 2020 annual report (tagline: “Performing While Transforming”) and take you straight to page 183 where you can get an idea of how the company actually earns its money. Essentially it is 94.5% from oil, oil products and gas. There was little bp could do in H1 2021 to avoid the surge of cash that resulted from the pop in gas prices in Q1 and the stronger crude oil price in Q2.  In its presentation about Q2 it was careful to say that it expected gas supply to remain tight and refining margins to remain roughly unchanged. In fact the natural gas price (Henry Hub) which averaged $2.9 in Q2 is now (17 September) at $5.37. And industry refining margins which for bp were strong at $13.7 per barrel in Q2 seem to be sharply higher again across the industry. It seems probable that bp will experience another embarrassingly strong quarter when it reports in late October.  The share price of bp would surely be higher were it not for the armies of Net Zero shamers whose abuse will only increase in volume as the delightful prospect of that orgy of UN...

8 Aug 2021

Back in 2014 I delivered a presentation on “Turning a good idea into an investment”. Among the precious jewels of advice was this observation.  Milestones should be plausible and realistic. We should feel that a start-up company knows what it hopes to do next week, next month, next quarter. If someone tries to interest me in a business that has invented a device that makes perfect poached eggs, I don’t want to be shown a graph of estimated global egg consumption up till 2020. I want to be shown a poached egg. I hardly need to point out that today’s politicians love to announce targets that are a long way into the future.  COVID 19 – HEADLESS CHICKENS GO VIRAL The Covid-19 pandemic has given us the rare sight of politicians made to take short-term decisions with quick measurable consequences. It has been their ultimate discomfort zone. It has not been pretty to watch but it has been instructive.  Responsibility has been outsourced with urgency – decision-making has effectively been devolved to rolling committees of the unelected who might or might not have the necessary scientific qualifications.  More surprising to me has been that the terror has spread to opposition parties whose positions have been as difficult to nail down as a smack of jellyfish at high tide. Perhaps it is not surprising, though it is certainly not admirable, that the leaders of nations prefer to bask in the warm waters of the infinity pool. BEING BRAVE AND DECISIVE ABOUT THE YEAR 2100 If future targets were awarded Oscars, the winner of best picture would be that one about the global temperature in 2100. Essentially it seeks to restrict the temperature rise between two dates; the first being when no one alive today had been born and the second where all today’s decision makers will be dead. It is a fine example of something that is beyond accountability due to lack of proper data.  I doubt if one person in fifty realises that the self-congratulatory COP 2016 Paris meeting was promising something to be realised 84 years into the future.  Given that there is little sign that China and India (for example) are taking...

30 Jul 2021

It was another tame and friendly quarter in the equity markets. The FTSE rose by 4.6% and the domestic orientated FTSE 250 by 3.8%. Rising commodity prices are more likely to be good for large international businesses than for domestic companies that often have to import raw materials or finished goods. Year on year, it still looks like boom time for the FTSE 250 (+31%) while the FTSE 100 was up by a more restrained 14%. The major story since Q1 has been the austere message from the bond markets. Once again the only direction for yields has been downwards, a strange reaction to forecasts of rising inflation and post-Covid consumer recovery. US 10 year treasuries which started the quarter at 1.7% and apparently looking to break 2.0% are back down to 1.3%. And UK 10 year gilt yields are down from 0.8% to 0.6%. What is going on? One point to make is that the post-pandemic bounce is being restrained by cautious or possibly panicked government intervention. In the UK, the official opposition, such as it is, is keen to accuse the government of lifting restrictions too quickly and eager to blame it for causing extra deaths in quantities and for reasons yet unknown. The leisure industries have become used to having to incinerate their plans at a moment’s notice and economically this is of course disastrous. In Australia, to take one painful example, a zero tolerance of Covid allied with a snail pace vaccination roll-out has led to huge and endless lockdowns that make Australia and New Zealand seem as if they are now situated on another planet, possibly the birthplace of Jacinda Ardern, who has declared herself the sole source of truth. Traditionally, the bond market is a better predictor of economic direction than the stock market (though to be fair the stock market generally has the predictive capacity of a dog chasing a car). There is also a spreading realisation that governments cannot afford to pay higher interest rates on their extraordinarily high debts. If there could be said to be a consensus it is that all the central banks know this and are trying to send signals that they...