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...

7 Jun 2021

When money and virtue share a bed, strange and disturbing things tend to happen.  I have written before (in 2014) about the ethical contradictions concerning the destination of the UK’s Oversea Development Aid budget. Seventy three percent of it went to countries where homosexuality was illegal but if there was ever any debate about that I never heard it. Like a Christmas sweater, the giving is more important than the receiving. Once the donation box has been ticked we can pat ourselves on the back and tell ourselves that to enquire about how the money is spent would be colonial and racist. Seven years later, the shadow of virtue casts a much longer and no less contradictory shadow. Here is a brief case study. THE ETHICS OF TOP LEVEL SOCCER I have found the current season of the English Premier League quite hard to watch. The team with the biggest financial backing won easily. Three brave and impoverished strugglers were relegated long before the end of the season. In stadiums empty of fans (who might well have reacted with displeasure) the clubs and officials all participated in “taking the knee”, originally a show of disrespect for the US national anthem, despite it seeming obvious that the anti-capitalist vibe of Black Lives Matter could hardly be further from the realities of club ownership.  These realities came to a head when some of the owners, acting as if they thought the clubs belonged to them, tried to create a breakaway super league. The result was a mob of multi-millionaires, who, unlike the owners, owed their personal wealth to football itself, rushing to denounce the idea that money should be allowed to ruin the game, as they saw it. Many people, unless they happen to support the clubs funded by wealthy foreigners, would say that that ship sailed a long time ago.  While UK football constantly pledges to “kick out racism” and to take women’s soccer seriously there is not a whisper on the subject of sexual orientation. In the past, fans have been notoriously homophobic. They may not be now but we have no way of knowing because, as luck would have it, not one of...

6 Apr 2021

It was an amiable quarter in the equity markets, despite some warnings of bubbles and the occasional bankruptcy. The FTSE rose by 4.1%, the All Share by 4.5% and the domestic orientated FTSE 250 by 5.2%. Year on year, it looks like boom time because the end of March in 2020 was more or less the bottom of the market. A salutary reminder, in case we needed one, that stock markets try to discount news as quickly as possible. Once the pandemic and the lockdown measures had sunk in, it was panic by sundown.   With this flattering point of comparison, the FTSE rose by 18.8% over twelve months, the All Share by 23.8%% and the FTSE 250 by a drool-making 43.3%. Bond markets were stirred from their seemingly endless slumber. Those terrible twins of inflation and currency debasement might be intruding into investors’ thoughts. US 10 year Treasury yields popped from 0.9% to 1.7% over the quarter. UK gilt yields rose from 0.2% to 0.8% – not exactly a compelling offer but a serious price move. German yields “rose” from -0.57% to -0.32%.  It seems that people are beginning to believe in the vast libraries of money that central banks are printing. They expect recoveries in spending and government-inspired investment and equities are the obvious way to play the trend. If your portfolio performed disappointingly in the quarter it’s probably because you owned sensible shares that survived and prospered in lockdown. Sentiment began to move in favour of “reopening stocks” though most of the reopening that we have seen so far has come from a few US States dubbed by President Biden as “Neanderthal”. So far, the throwbacks appear to be doing rather well. As we said, stock markets try to discount news as quickly as possible, even if it’s...

26 Mar 2021

INFLATION – WHAT THEY TEACH YOU AT SCHOOL I remember from economics lessons at school that there were supposedly two categories of inflation, namely cost-push and demand-pull. This was simple enough for anyone, even a pubescent schoolboy, to understand.  Now I can see that this was something of an oversimplification (for which I was no doubt grateful). Supply and demand do not happen in isolation. They respond to each other over time. It is instructive to remember that the price of anything will rise when the current supply is insufficient to satisfy demand and of course it works in reverse.  Yet the demand element of inflation is what occupies most “informed” chatter. That’s probably because we have a more immediate feeling for it. At present there is said to be a dam of spending waiting to spill out as soon as the first world countries are released from lockdown (I’m assuming it will happen one day – stock markets are impatiently celebrating it already).  Consensus says that this will give a transitory boost to inflation which will then subside because private sector unemployment is too high – in short, the poor sods who have been screwed by lockdown will exert a deflationary effect that prevents the economy from overheating. This in turn is offered as a justification for the probability that central banks will not raise interest rates. Well, yes. Given that the US, European, UK and Japanese economies are all funded by the state balance sheets, I think we can reasonably act as if the date for the next increase in official interest rates is approximately never.  SUPPLY SIDE INFLATION But supply side inflation – now that’s a story. Energy, commodity and shipping prices are really moving this year. Given that most of the world’s major economies are still in recessionary territory that’s quite impressive.  SAMPLE OF PRICE CHANGES IN THE LAST SIX MONTHS   Carbon steel 107.8% Container rates 81.4% Oil 49.2% Lumber 44.7% Soybeans 39.8% Iron ore 38.8% Copper 31.7% Coal 31.4% Cotton 31.3% Sugar 23.1% Aluminium 22.9% Natural Gas 21.1% Wheat 12.9% Rice 8.1% IN THE PAST, TECHNOLOGY HAS BOOSTED EFFICIENCY AND CUT COSTS So what is going on? I...

22 Feb 2021

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