4 Nov 2024

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

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....