24 Nov 2020

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

25 Oct 2020

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

29 Sep 2020

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

26 May 2020

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

6 May 2020

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

20 Apr 2020

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

29 Mar 2020

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

23 Feb 2020

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

14 Nov 2019

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

18 Oct 2019

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

28 Aug 2019

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

5 Aug 2019

There seems to be common agreement among first world liberals that we live in unusually difficult times. In my view this a case of “people like us” on steroids. Populism (possibly explained here) has caused great discomfort to people who have grown up feeling pleased with themselves and their kind. Watching them explain their troubles to some of the 29 million people who live in the Dehli region of India, a country with annual GDP per capita of $2,000, would perhaps make great reality TV (note to self – pitch that to someone). But we should resist the temptation to be judgemental if we can (though clearly most of us can’t). Instead I would like to suggest an exercise that can be summed up as “exactly whose problem is this?” When people annoy or upset us we want it to be their problem. We are implicitly saying that they should take responsibility and do something about it. Sometimes, if they ignore us we will get increasingly stressed and suddenly it’s our problem. “YOUR BEHAVIOUR IS UPSETTING ME” It boils down to this: what is the driver of the sentence “Your behaviour is upsetting me”. Is it your behaviour or my being upset? Her are two examples: Malodorous Malcom has a personal hygiene problem. He must be told. Smug Simon and Suzi are blissfully (nauseatingly) in love and don’t seem to want to hang out with any of their old friends. They are starting to alienate people. I think it is pretty clear that Malcolm needs to own the problem, with the support of your helpful advice. If he refuses to acknowledge that no one will stand downwind of him he will soon discover that he loses friends. In the case of the smug lovebirds, it is highly likely that your alienation is a price that they will readily pay in return for the indulgence of their mutual obsession. All you can do is to smile and nod and secretly pray for a traumatic break up. When we are upset we want to blame and we often lose sight of where accountability actually lies. But rational thought can help us decide whether we need to...

21 Mar 2019

In my round-up of Q4 2018 I mentioned three risks that I intended to keep an eye on. Here are three really bad things that could happen in 2019 or preferably later. 1) London house prices fall by 20% rapidly or 40% gradually (or both) 2) A major issuer of government debt suffers a catastrophic collapse in confidence or actually defaults (will the person who said “China” see me afterwards?) 3) A neo-Marxist garden gnome becomes Prime Minister of Great Britain. Numbers 2) and 3) remain of great interest but now I want to update myself on the developing story of property prices. Two observations are becoming quite well known: the apparent insanity of new high rise apartments shooting up all over Zone 2 London and the decline in turnover of the traditional property market. FLIPPERING HELL The FT had a good article on 20 February entitled “London’s property ‘flippers’ forced to sell at a loss”. Flippers are speculators who buy flats off-plan before construction has begun. It seems that they are often individuals either originating from or actually still living in Asia. They are probably rather ignorant about what they have agreed to buy. According to the FT, someone lost £770,000 buying and selling an uncompleted apartment in One Blackfriars, a monstrous glass eyesore (obviously that’s just my unsophisticated opinion) towering over the Thames (which has surely been punished enough). “In 2014, 21 per cent of resales in recently completed developments were sold at a discount, according to property research company LonRes. Last year that number had more than trebled, to 67 per cent. At the same time, the size of discounts has ballooned. From an average of 2.2 per cent in 2014, to 13.1 per cent last year.” To be brutally frank, most Londoners just find these stories of burnt speculative fingers quite satisfying. Some might say that it’s payback for despoiling our historic city with your greed and ignorance. Others might suggest that this attitude is somewhat hypocritical, given that mutual self congratulation about how much everyone had made on their houses was the backbone of London dinner parties for about three decades. PENSION PURGATORY Over those years many representatives of...

4 Feb 2019

There is a classic episode of Yes Prime Minister (“The Bishop’s Gambit”) in which Jim Hacker has to choose between two problematic candidates for a vacant bishopric. One is a “modernist” and the other is a “separatist” (of church and state). There is a famous exchange that runs as follows: Sir Humphrey : “The Queen is inseparable from the Church of England” Hacker: “What about God?” Sir Humphrey: “I think he’s what is known as an optional extra”. Sir Humphrey explains that a “modernist” is a coded word. “When they stop believing in God they call themselves modernists”. Theists tend to prefer the word “faith” to “belief”. Much blood has been spilled across the centuries over the question of whether the wafer and wine offered as part of holy communion are really the body and blood of Christ or merely symbols. If you think that the answer to that question is obvious (and the chances are 1000-1 on that you do) that is because you can’t help yourself. Belief is not a result of choice. It’s something that happens to you based on the empirical evidence that you see. FAITH IS NOT AN INVESTMENT TOOL By contrast, faith is a great liberator. The more improbable something is, the deeper the faith required to accept it. Faith is not based on reason. Consequently, behaviour driven by extreme faith often looks like irrationality or worse to outsiders. For this reason belief is an essential tool of investment while faith is a menace. It is often difficult to distinguish one’s own beliefs from what might loosely be called wishful thinking. It is quite natural, but not good, to suffer from confirmation bias when hearing news about a company in which one has already taken the decision to invest. Confirmation bias is a symptom of faith. Not merely in investment but in all aspects of life we are keen and competitive to be clever and right and successful. I find it remarkable how hard it can sometimes be to work out what I actually believe. I would like to think that my beliefs frequently coincide with what turns out to be the truth but the relationship between belief...

10 Nov 2018

  When I wrote recently about financial  contagion I pointed out that holding cash is an investment. It is effectively a bet against inflation and for political and economic stability. Moreover, holding any currency involves a potential hidden opportunity cost – that of not holding a different currency. On a couple of occasions in my lifetime, the British government has had to abandon a policy of maintaining the level of sterling against another currency; in 1967 against the dollar and in 1992 against the deutschmark. GREAT STERLING DEVALUATIONS OF OUR TIME On the first occasion, following a 14% devaluation, the PM Harold Wilson attracted a certain amount of ridicule for addressing the nation in the following terms. He acknowledged that sterling was worth less “abroad” but said: “That doesn’t mean, of course, that the pound here in Britain, in your pocket or purse or bank, has been devalued”. Essentially he said that the pound hadn’t been devalued against the pound. In truth, it wasn’t much of an argument but it relied on the fact that currency losses are largely invisible until people are obliged to make some kind of foreign transaction. I don’t remember the devaluation of 1967 but in 1992, on (Black) Wednesday 16th September I was sitting in a dealing room listening to an open line from the Bank of England’s dealer who repetitively intoned the price at which he was prepared to buy sterling. One of my colleagues told me that the Bank of England dealer always closed for the day at 4.30pm (presumably to catch the 5.07 to Sevenoaks) and wondered what would happen then. What happened is that he did indeed bid everyone a good afternoon and no doubt picked up his briefcase and headed for the door. In the time the world’s only buyer of sterling could have walked to the station, the dam had burst and he had pissed away £3.3 billion, which was real money in 1992. If that sounds like a story of pinstriped establishment incompetence from ancient British history, I must mention that the Bank of England is sitting on paper losses of some £49 billion (my estimate) from the gilts that it has bought...

16 Oct 2018

  “The least thing upset him on the links. He missed short putts because of the uproar of the butterflies in the adjoining meadows. ” PG Wodehouse Financial contagion is a phrase employed by those who try to explain a fall in an asset price that they didn’t see coming.  If it means anything, which is not certain, it describes the fallout from the volatility that results when any market falls because people are forced sellers. This is prone to cause panic which in turn means that the attraction of holding cash rises. Given that no one likes to sell a falling asset (a psychologically taxing experience) people prefer to raise money by selling things that haven’t fallen in price but look potentially vulnerable (especially if viewed with a newly sceptical eye). As the quote from PG Wodehouse shows, when things go wrong we tend to cast around for something to blame. Bad things happen to relatively overpriced assets and the nature of the event that triggers their decline is really of no consequence. The need to explain what happened is driven by a reluctance to take responsibility for a poor investment decision. Hence we are allegedly the victim of the devaluation of a currency, the collapse of an obscure foreign bank, the failure of a harvest or the uproar of beating butterflies’ wings. In reality, contagion is not a hidden threat but a constant reality that we should never forget. All assets are in competition all the time, subject to perceived risk and liquidity. All asset values are relative to each other. The most crass mistake that financial analysts make (and I certainly write from experience) is to compare the price of an asset with its own history and to declare that this proves it to be cheap or expensive. Here are ten assets in which you, if your assets and liabilities are UK based, might conceivably invest, ranging from cash (the most liquid) to commercial property arguably the least liquid). Note that all savings are investments, even cash.   Gross yield Cost of ownership Net yield Capital gain/loss? Building society 2.0% 0.00% 2.0% No Government Gilt 1.7% 0.25% 1.5% No Cash 0.0%...

14 Sep 2018

“I DON’T WANT TO BE A BURDEN” People are vaguely aware that the populations of many developed and relatively wealthy nations are on average ageing and that this is likely to become a financial problem. In the UK the median age (at which the same numbers are older and younger) hit 40 in 2014 having risen from 33.9 in 1974 (source: ONS). As things stand, the pensions and care of old people are paid for by the state and the state is funded by the taxes of younger people. Hence there are many cries of protest about inter-generational unfairness.     Many of us will “blame” increased life expectancy due to rising GDP per head and advances in medical treatment. It is difficult to treat this as a problem because most people seem to assume that they would like to live as long as possible. Unless we distinctly harden our attitude, challenge the value of extending failing life and consider the idea of encouraging euthanasia, there seems little to be done that people are not already doing themselves by making poor diet and minimal exercise choices.  LAY DOWN A LIFE FOR YOUR COUNTRY  But while it is probably impractical to urge people to die, there is the better and less ethically troubling possibility of encouraging them to breed. The snag is that much of the general population sees fecund women as a potential menace – in short, a burden on the welfare state, as The Specials pointed out in 1979 (ironically a year of exceptionally low birth rate) You’ve done too much, much too young Now you’re married with a son when you should be having fun, with me Ain’t he cute? No he ain’t. He’s just another burden on the welfare state (The most shocking thing about those lyrics today is that the mother is married. In 1979 it was banned from Top of the Pops because of the line “Ain’t you heard of contraception?”) But the truth is that in most developed countries, the birth rate has been below the “replacement rate” (2.1 births per fertile woman) for decades. We have been here before, specifically in the early 1940s, when George Orwell wrote as follows:...

10 Aug 2018

A little more than three years ago I wrote in defence of the word “scepticism”. I said that scepticism, which was once habitually paired with the word “healthy”, was having its meaning changed pejoratively to imply that a sceptic was a borderline fanatic who was in denial of the consensus agreed by all enlightened liberals. But scepticism is essential to successful investment and it might do people some good to employ it on other occasions. Something similar but opposite has happened to the word “liar”. It seems that everyone with whom some people disagree is called a liar. It has turned into a playground taunt, an insult tossed off casually without thought as to its actual implications. I will explain at the end why this really matters. Let me insist, if I dare, on two conditions that must be satisfied if someone is to be convicted of lying. First, what they say must be false and second, they must have a reasonable expectation that it is false. According to these criteria it is a very strong accusation to make. In the House of Commons to accuse another member of lying is considered unparliamentary language and the words must be withdrawn. Of course, in a trivial way, most of us lie routinely every day. For this reason the phrase “white lie” was invented. The film “Liar Liar” is about the hilarious chaos that ensues when a lawyer is forced to tell the truth for twenty four hours. Saki’s story of Tobermory the talking cat, written nearly a century earlier, was based on similar comic consequences: as was  William’s Truthful Christmas by Richmal Compton (1925).  By and large, it is considered better to be kind than truthful in personal relationships. “What can I do, what can I do? Much of what you say is true, I know that you see through me, But there’s no tenderness beneath your honesty.” Paul Simon (Tenderness) The very existence of white lies alerts us to the fact that darker lies are serious stuff. People go to prison for perjuring themselves in court and the reason that they tend to receive custodial sentences (up to seven years) is that the law...

11 Jun 2018

When making investment decisions I try to employ pragmatism and to avoid behaving emotionally or irrationally. As a rule of thumb, most other words that end in “–ism” are not useful. Optimism, pessimism, idealism – these are all attitudes that we find appropriate or inspiring in our daily lives but when it comes to making decisions supposedly based on evidence, they load us with confirmation bias. I read a good piece about The Psychology of Money which points out no fewer than twenty common mistakes that can damage your wealth. One that I particularly liked was titled: “The seduction of pessimism in a world where optimism is the most reasonable stance”. Brexit, or the contemplation of it, appears to have plunged half of the UK into some kind of collective nervous breakdown. It is group-think of the most destructive kind and its victims wallow in anything that can be spun as bad news. Bluntly, they see pessimism as a virtuous scourging exercise because the people must pay for their sins. This is a phenomenon that is far from new. Gilbert & Sullivan wrote the Mikado in 1885. The song “As some day it may happen” is a “little list” of “society offenders” which reads rather oddly in 2018 (lady novelists?; seems harsh). But 133 years on, we are still very familiar with: “The idiot who praises, with enthusiastic tone, all centuries but this and every country but his own.” The current leader of the Labour Party, anyone? Moreover, anyone who is upbeat today is liable to be seen as deluded or laughable or even dangerous and fanatical.    The current President of the United States, anyone? In my report on Q4 2017, just after the Trump tax cuts had been implemented, I wrote that: Almost all the reporting in the UK mocks Donald Trump and strains to suggest that he is incompetent and dangerous. This remains mostly true though some people are beginning to contemplate the idea that Trump’s thoroughly unfashionable bullishness may be effective. He is bullish and he is demanding: put those two words together and you might come up with the word bullying – just how unfashionable can this man get?...

14 May 2018

Regulators should operate free of political interference. Ideally, they should be independent, honest and robust and people should both depend upon and fear them. They should be part of the judiciary rather than the executive. Above all, they should not court popularity nor try to placate the mob when it is demanding blood.  OFGEM: MORE OF A MEDDLER THAN A REGULATOR Ofgem (Office of Gas and Electricity Markets) is a UK regulator set up to ensure that competition in the energy market is fair to consumers. Its statutory duties and powers have been established by at least eight parliamentary acts and of course some EU rules too. It has a budget of £90 million and more than 750 staff. Consumers can switch freely and seamlessly between suppliers, of whom there are many. I have counted thirty seven ‘alternative’ suppliers in addition to the infamous Big Six for a total choice of 43 competitors. Ofgem’s most important responsibility concerns the electricity generators. It needs to ensure that enough capacity, of whatever kind, is built to satisfy our future energy needs. Our future consumption will not be directed mainly by economic and population growth but overwhelmingly by the plan to ban the sale of petrol and diesel cars by 2040. The UK’s electricity grid needs to be enlarged substantially and, given the lead times for new power stations, quite urgently. I don’t know if this was the right way to set things up but it seems reasonable to say “GO OFGEM!” and let it get on with what it has been empowered to do. I mean, how hard can it be? The answer is that if Ofgem is treated as a policy tool by the government of the day its work can be both difficult and ineffectual. For major capacity investments, Ofgem encourages competitive tendering, reasoning that the leanest transmission owner will produce the lowest prices for consumers. To this end, Ofgem sets guidelines for financial risks and cost of capital and acceptable returns. If these guidelines are too lenient, consumers might end up paying too much. If too harsh, the investments in new capacity might not happen. It is perhaps unfortunate that today’s political mantra...