What does success look like?

What does success look like?

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...

Report on Q1 2024

Report on Q1 2024

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...

GEOPOLITICS AND THE OUTBREAK OF SAFETY PUSHERS

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...

Borrowing on a wing

Borrowing on a wing

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...

Report on Q4 2023

Report on Q4 2023

10 Jan 2024

In Q4, the world appeared to be in a geopolitical crisis. Hamas attacked Israel on 7 October provoking a (predictable?) response that continues. The Ukraine war seems to be stuck in a stalemate about which the major talking point is whether non-combatant powers will provide enough funding to keep it going, seemingly without limit. And the US, now in election year, is mired in “lawfare” with every legal resource imaginable employed to stop the frontrunner from running.  Add in an anarcho-capitalist president of Argentina and a brazen attempt by Venezuela to seize oil reserves from poor Guyana and you have what many unimaginative people would no doubt call a ”perfect storm”. The response of first world asset markets was to turn in a very decent quarter. Government bond markets appeared to decide that the peak in yields was behind them, aided by some reassuring inflation numbers.  The US Treasury 10 yr yield fell from 4.7% to 4.0%,  the German Bund from 2.9% to 2.05% and gilts performed best of all, with the 10 year yield down by 100 basis points to around 3.6%.  The FTSE 100 turned in a fairly limp 1.4% gain in the quarter but the FTSE 250 shone with +7.4%.  I have no predictions save to say that those hoping to have their problems solved by AI will probably be disappointed. I call it Artificial Ignorance because no rational human would be that stupid.  Finally, a mention of the legendary investor Charlie Munger. He was fond of advising people to read history and to learn from it, which is perhaps easy to say when you’re 99. My favourite quote came in an interview with Becky Quick he gave two or three weeks before he died. She asked him what it was like to be 99. His answer was he regretted that he didn’t have the strength he had enjoyed when he was 96....

THE HARSH LIGHT OF HIGH INTEREST RATES

THE HARSH LIGHT OF HIGH INTEREST RATES

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...

Report on Q3 2023

Report on Q3 2023

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...

Report on Q2 2023

Report on Q2 2023

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...

IS CAPITALISM BROKEN?

IS CAPITALISM BROKEN?

16 May 2023

Ever since the Global Financial Crash of 2008/9, some commentators have worried that there are too many “zombie” companies that are unable to make a profit or even a self-sustaining cash flow, but which are being kept alive by the availability of cheap credit. The argument goes that in a truly capitalist world, the unviable would die and their market share would be swallowed up by companies more deserving of success.   It must be said that in today’s world, where the political centre is so far left of where it used to be, many people would approve of the use of public money to help struggling businesses. Let’s face it, there is no use of public money incapable of attracting support from someone.  UBER But the extent to which “zombie” businesses have become established household names is quite astonishing. The Oscar arguably goes to Uber which most people would regard as the epitome of a disruptive (a horribly overused word) success. Uber’s IPO price in 2019 was $45 and today it trades at $38. In the last five years it has made operating losses of $22.2 billion on revenues of $85.9 billion. In aggregate it has lost 25 cents for every dollar of fare.  The fact that the share price is still as high as $38 tells us that Uber is well funded. Its fixed borrowings mature from 2025 to 2029 and it pays an interest rate of c.7% on average. Maybe that’s all fine. Many, many people are happy and trusting customers and have no doubt been delighted to be subsidised at the expense of Uber shareholders and creditors.  Yet, how about the taxi drivers and cab companies that have been forced out of business by Uber’s comprehensive yet (so far) financially unsustainable service? This disruption of the taxi world  is not an unmitigated boon.   OCADO  Back in the UK, how lucky we were during Covid lockdowns to have Ocado bringing groceries to the doors of the sheltering furloughed classes. Householders pinned notes to their front doors saying “Dear delivery driver. Please leave the package in the porch, ring the front door bell for five seconds and then retreat back to the world...

Report on Q1 2023 – crony capitalism closing ranks

Report on Q1 2023 – crony capitalism closing ranks

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...

IN PRAISE OF STUPIDITY

IN PRAISE OF STUPIDITY

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...

EMERGENCY POWERS – FOR THE GREATER GOOD?

EMERGENCY POWERS – FOR THE GREATER GOOD?

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...

Report on Q4 2022 – probability pays out

Report on Q4 2022 – probability pays out

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...

The message from the bond markets

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...

Report on Q3 2022

Report on Q3 2022

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...

It’s the borrowing, stupid

It’s the borrowing, stupid

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...

ESG – EGREGIOUS SHOWBOATING GARBAGE

ESG – EGREGIOUS SHOWBOATING GARBAGE

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...

Report on Q2 2022

Report on Q2 2022

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...

Investments inviting ridicule

Investments inviting ridicule

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...

Report on Q1 2022

Report on Q1 2022

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...