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...

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...

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...

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...

2 Jul 2019

Falling bond yields continued everywhere in Q2. US 10 year yields are now just over 2%, UK at 0.86% and Germany at a record low of -0.3%. In the report on Q1 I wrote: “Perhaps by the end of Q2 we will be able to guess what people were worrying about.” The short answer appears to be world trade. President Trump believes that holds all the cards and, ignoring the fact that he doesn’t seem to know or care that import tariffs are a tax on his own citizens, he is not far wrong. His hostility to China is well known. Some people suspect that he next wants to turn his fire on the EU which to him essentially means Germany. Of course by implication it could also mean the UK. Assuming that Donald Trump is capable of deferring a threat, it might just be that he is waiting for the UK’s exit from the EU before firing his cannons. In the 29 quarters since the start of 2013, the average quarter-on-quarter GDP growth in the US has been 0.59%, in the UK 0.46%, in Germany 0.34% and in the euro countries (the EU 19) just 0.27%. It appears that some combination of factors – demographics, the ECB, the euro itself, the EU’s insular anti-trade practices – has produced an era of disturbingly low growth in the EU and hence the lowest, deadest interest rates since the invention of money. Many people these days are spooked by “uncertainty”. They needn’t worry. There is nothing on the horizon to rouse the economies of Europe from their slumber. When I hear endless warnings about what will happen to the UK economy when or if it separates from the EU (three and a half years of “project fear” so far – keep it up, guys) I don’t know whether to laugh or guffaw. The UK stock market indices rose by 1.9% in the quarter. They are down by 3-6% over the last year and around 1% higher compared to two years ago. So it has been hard going. There is little easy money to be made and those who try too hard can easily come a cropper....

2 May 2016

THE “UNREPEATABLE” MISTAKES OF THE 1930s According to the IMF (and pretty much everyone else, I believe) the Great Depression of the 1930s was made worse by protectionism. After the financial crisis that blew up in 2008, leaders of the Group of 20 (G-20) economies pledged to “refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing WTO inconsistent measures to stimulate exports.” They all agreed that a return to protectionism would be a disaster. The World Trade Organisation (WTO) is not a promotor of liberal free-for-all trade. It is an organisation of 162 countries based in Geneva (where else?) that employs 640 Secretariat staff. It particularly promotes the interests of developing nations and negotiates and monitors international trading rules. As we shall see in a moment, developed nations are showing an increasing wish to do their own thing. In its own words: “WTO agreements cover goods, services and intellectual property. They spell out the principles of liberalization, and the permitted exceptions.” Agreements are negotiated and then ratified by member countries one by one. Many of them ratify with qualifications that they individually require. The phrase “bureaucratic nightmare” comes to mind. The Doha development agenda has been under discussion since 2001. It is easy to suspect that these negotiations will occupy entire (probably highly agreeable) working lives. Consider this sinister undertaking: “Virtually every item of the negotiation is part of a whole and indivisible package and cannot be agreed separately. This is known as the “single undertaking”: “Nothing is agreed until everything is agreed”.” Nothing is agreed until everything is agreed. Wow. IS INTERNATIONAL TRADE REALLY CONDUCTED BETWEEN NATION STATES? The WTO was founded in 1995 on the premise that international trade is an activity that takes place between nations. As far as this applies to undemocratic nations it is at least partly true. North Korea, for example, exports a fair amount to China. I’m guessing that the nations involved monitor this pretty closely. Yet much of what passes for political debate seems to assume that we all function in this way. Don’t take my word for it. Listen to Donald J Trump on...

25 Jan 2016

Don’t Ask, Don’t Tell (DADT) was a (now repealed) US official policy that insisted that gays serving in the military must take part in a cover-up. On the grounds that they kept their sexual preferences a secret they were excused from being openly bullied, discriminated against and dismissed. Something that everyone knew to be untrue (the idea that the US military was staffed entirely by patriotic heterosexuals) was sanctioned in a big game of “let’s pretend”. If everyone acted as if it were true it would be just as if it were actually true. But DADT turned out to be too convenient a device to be confined to such a narrow issue. It was perfect for the treatment of subprime mortgages! It was clear to many insiders that people who had no realistic chance of repaying were being granted loans to buy properties that had to rise in value to bail out the borrower, that these debts were being insured on terms that didn’t come close to reflecting their risk and that the loans were being repackaged and sold on, backed by credit agency ratings that were uninformed and irresponsible at best. Yet even when the crisis was unfolding at speed, banks and other financial institutions were saying publicly that everything with which they had been stuffed was AAA quality. Check out The Big Short for a great explanation of the story. The trouble with DADT is that it is like a Ponzi scheme. Once you have started to pretend, you have to keep going. The morons working at the soon-to-be rescued banks did not mean to buy toxic junk. But once the mistake was made the easier option was to keep playing along. Like a trader who hides loss-making positions in the bottom drawer (or a secret computer file), the final thing you can try to buy is time. You literally decide to wait for a miracle.    Something like this is going on with Quantitative Easing (QE = DADT). As I have pointed out elsewhere, the truth that QE was a device for inflating asset prices in order to save the banks from marking them to market was spun into an officially...

14 Oct 2015

Next Monday is an evocative date for those of us who worked in the City of London in 1987. The nineteenth of October became known as Black Monday (not the first or the last) as global stock markets went into meltdown. The Dow Jones Industrial Average fell by 22.6% in that single day. At one point during the trading day it was reported that the Chairman of the SEC (the U.S. Securities and Exchange Commission) had mentioned the possibility of suspending trading. Naturally this increased the level of panic. It felt all the more dramatic because the previous Friday, the 16th, had seen the Great Storm that felled trees all over Southern England. My wife and I drove into work that morning through streets that had been laid to waste a few hours before. The City was spookily quiet and the stock market felt abandoned but was also very weak. It turned out to be an eerie harbinger of the full scale panic that was to follow. If you search for explanations of Black Monday you will generally read that the stock market was overheated, partly inflamed by excited takeover activity. In September 1987, the ad agency Saatchi & Saatchi made an approach to buy Midland Bank. Nothing better exemplified the mood of the time – that anything was possible for the new money of the eighties. The Conservatives, led by Margaret Thatcher and Chancellor Nigel Lawson, had won the General Election on 11th June, seemingly confirming that the corpse of socialism had been buried and that capitalism could bring prosperity to anyone with the ambition to pursue it. It is certainly true that the developed world stock markets had risen substantially in 1987. By mid-July the FTSE 100 was up by 45%.  In that sense, prices were high though of course that is not the same as saying that they were expensive. All value is relative, as we know. As stock markets rose, bonds fell. This is a classic danger sign. Ten year gilt yields rose from 8.8% in May to 10.1% in September. High street savings accounts paid 9%. From today’s perspective, it seems incredible that equities were so popular. In relative...