Getting around – transport investment in a pandemic

Getting around – transport investment in a pandemic

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....

PANDEMIC POLITICS

PANDEMIC POLITICS

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...

NOT SO SPLENDID ISOLATION

NOT SO SPLENDID ISOLATION

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,...

ROLLING BACK THE 20th CENTURY

ROLLING BACK THE 20th CENTURY

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...

Report on Q2 2019

Report on Q2 2019

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....

The real estate “bubble” is global

The real estate “bubble” is global

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...

OVER TO YOU, KIDS

OVER TO YOU, KIDS

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:...

The Euro Elephant

The Euro Elephant

2 Sep 2017

Who is in the room containing those who are supposedly negotiating the terms of Britain’s exit from the EU? We seem to have sent a team of men (mostly) who are used to attending meetings without trousers which is perhaps appropriate.  The Europeans are fielding another team of men (mostly) who are seemingly permanently “flabbergasted” and like to talk about the conditions for talks about talks. Were they to remove their trousers you can be sure that they would be wearing a second pair underneath. But what is that large white quadruped that keeps sticking its proboscis where it’s not wanted? It is the elephant in the room and its name is sadly not Donald the Tusk but Erich the Euro. Here is a picture of Erich, trumpeting towards his glorious target of parity with the pound (the chart runs from 2014 to this week – click to enlarge).   No one knows for sure why currencies move against other currencies. To listen to analysts and other commentators you might imagine that it is quite obvious, in retrospect if not in advance. This is largely tosh. The best answer is the one that I heard every day when I worked on the floor of the London stock exchange: “More buyers than sellers, mate”. THE REASON FOR CURRENCY MOVEMENTS IS UNCLEAR AND UNIMPORTANT Looking at the elephant picture it appears that there have been more buyers of euros than sellers. In 2015 there were more sellers than buyers. Remind me, why was that again? There just were! Okay, okay. I suppose that Brexit uncertainty and a slowing top-end property market (yes, they might be the same thing) have caused foreign investors to buy less sterling this year. You might just about persuade me that others have been buying euros in preparation for opening new offices in Budapest, Valletta and Clermont Ferrand. But currency movements have real effects, though they take time to play out. There has been a 40% increase in UK tourists to Greece this year (doubtless fuelled partly by aversion to Turkey – people prefer oppressed governments to oppressive ones, it seems). As I write, these tourists will be asking themselves why Greece...

WE NEED TO TAX ASSETS

WE NEED TO TAX ASSETS

20 Jun 2017

Nearly every commentator admits that he or she was wrong about the recent election, in particular their belief that no one with a modicum of responsible judgement would vote for Jeremy Corbyn. I also was wrong when I wrote this: Just as the Labour party cannot afford to be a blunt advocate of public spending because it knows that government debt is critically high, the Conservatives are no longer perpetually calling for lower taxes because they know that services to which we all think we are entitled are going to become yet more expensive. So the result is that the debate at this election has become a little more subtle than usual. As it happened, Labour produced a costed manifesto in which 80% of the extra revenue was to come from corporations or rich people, those joint gold medallists in legal tax avoidance. This was anything but subtle (“people in suits can pay”) and was effectively trashed by the party itself when, in response to complaints from students who have already incurred high debts that their successors would benefit from Labour’s plan to abolish fees in future, Jeremy Corbyn promised to “deal with it”. Dealing with it sounds expensive and was not covered by the manifesto. By contrast, the Conservatives decided that it was a good time to have a grown-up conversation about relieving young people from the burden of paying for the care of the elderly by tapping the assets of the elderly themselves. It turns out that the country is not ready for this discussion which is a great shame. Time is running out. Between now and 2030, for every net person joining the major income tax paying years of 30-59, there will be nine (net) joining the over 75s. The Conservative MEP Daniel Hannan has this plausible explanation for the surprising performance of a Labour movement led by its left wing. No, I’m afraid we’re down to the simplest and most depressing explanation. Quite a few voters will support any party that seems to be offering them free stuff. Labour’s manifesto was a ridiculous list of public handouts. More money was promised for healthcare, schools, the police, public sector pay rises,...

Investing for our old age

Investing for our old age

16 Jan 2017

Here are two pieces of great news for the citizens of relatively rich, relatively developed, relatively Western economies. Women can increasingly combine career and motherhood rather than having to choose between them: and improved healthcare (if not exercise and diet) mean that people on average are living to greater ages. Fifty years ago, the UK average birthrate per woman was 2.9 (over her fertile life, not per pregnancy, obviously). Now it is 1.8. No doubt this is down to a combination of reasons which you can work out for yourself. Given that medical science has not yet worked out how to allow men to give birth you might imagine, if the UK’s experience is typical, that in the long term the global population will decline, on the rough basis that each woman should on average have two babies to replace those falling off the perch at the far end of life’s journey. Were it not for the fertility of some African countries, where birthrates of >5 per woman are quite common, mankind might become an endangered species.  According to the World Bank, the average fertility of women in the world was 2.5 in 2016 and the necessary “replacement rate” is 2.1. So the human race looks as if it will walk on for a while. Yet the story for developed nations is quite different. BIRTH RATE IN DEVELOPED NATIONS – FLACCID France (2.0), the US (1.9) and the UK (1.8) are doing their best (all, note, countries with histories of racially diverse immigration). The EU, which only promotes immigration from within itself, is overall at just 1.6 and Germany (1.4), Italy (1.4) and Spain (1.3) are below average. China, just unwinding its one child policy, is at 1.6 and Japan, perhaps the world’s most notorious ageing nation, is at 1.4. But the populations of established nations like the US, Germany and the UK are certainly not declining yet. Instead we have decades ahead in which the population will continue to grow but will age significantly. This is important for all kinds of financial reasons, none of them good. The last time that the fertility rate in the UK was at the “replacement rate” of...

FIVE FALSE TRUTHS

FIVE FALSE TRUTHS

13 Dec 2016

Imagine that your morning post contains an envelope that has your name and address written by hand in block capitals. Inside is a note, written by the same unknown hand that says, “YOU ARE SMELLY”. What do you make of that? For a moment you will regret having two helpings of chilli con carne last night and you will think back to last Thursday when you had a shower. But then you will start wondering about who could have sent such a note. What kind of strange person would bother to take the trouble to deliver such childish (and doubtless unjustified) abuse. What kind of sinister creep does that? Is this the start of something that could escalate? Will it end with a chalk line on your floor marking the position of your dead body when it was discovered?   Much of what passes for “social media” on the internet is effectively a worldwide digital version of an anonymous “YOU ARE SMELLY” note. And once you have asked yourself what sort of person spends time commenting, usually negatively, on anything that takes their fancy, with their ignorance protected with the cloak of anonymity, you must then come to a more awkward question: who in their right mind takes any notice of this stuff? It is certainly the case that corporations and politicians manage their Twitter and Facebook (and doubtless many other apps that I’ve never heard of) identities carefully. They employ people to try to ensure that their public face is shiny and smiley. Television channels read out texts and tweets to give the impression that someone sitting at home sending messages to the TV is not sad at all but is really a member of an upbeat community. Everyone is frightened of provoking a Twitterstorm, defined on Wikipedia as “a sudden spike in activity surrounding a certain topic on the Twitter social media site”. Sadly, Twitterstorms are frequently responses to someone questioning orthodox or just populist opinion. We pretend to revere people who challenge consensus but in practice they are fair game for mob anger. (I appreciate that Donald Trump is the exception to the above: he is far from anonymous, he does not...

Housing demand and demographics

Housing demand and demographics

5 Nov 2015

If you arrived today from Mars and the first human you met tried to explain the housing market, you might hear that average prices are >10x average earnings for the first time and that interest rates are at a 3000 year low. If he then told you to invest all your savings in a property you would probably zap him into a little pile of ashes. Because Martians can do that. Yet you would soon find that this apparent rogue adviser would have felt (were he still capable of it) unlucky to have been zapped because he was part of a crowd and people in crowds typically feel (unjustifiably) secure. He could have pointed you at newspaper stories following the latest population estimates from the Office of National Statistics (ONS).    Britain’s population set to rocket by 10 million over next 25 years   Migration will cause UK population to explode by almost 10 MILLION over the next 25 years I suppose that headlines of “UK population to grow by compound rate of 0.54% per annum” would have seemed less exciting though that is exactly what the estimates amount to. While I think that 25 year projections are so likely to be wrong as to be next to useless it is worth remembering that average GDP growth in the last 60 years has been 2.5%. It is also worth mentioning that population growth from 1981 to 2015 was compound 0.44% per annum. On a per head basis we have all become much better off. This may be why old people of today have trouble reconciling what counts as poverty today with what they remember from their childhoods. But an increase in the annual rate of population growth from 0.44% to 0.54% is an increase and is clearly a very important matter to some people. What particularly seems to strike fear and loathing into the population is that the ONS estimates that half of the extra 10 million will be from net migration. (The government’s annual net migration target of c.100,000 is ignored by the ONS which assumes a persistent long term rate of 185,000).      But 10 million extra people will need somewhere to...

Our fictitious “housing crisis”

Our fictitious “housing crisis”

6 May 2015

IT’S NOT ABOUT HOMES, IT’S ABOUT HOUSE PRICES Politicians, journalists and sundry do-gooders seem, against the odds, to have discovered one fact on which they all agree. It seems that Britain has a housing shortage and, to paraphrase the late Vivian Nicholson, we must build, build, build. Whenever an opinion, no matter how compellingly simple, is presented as a fact with which no one could disagree it is wise and even compulsory to question it. I bought a dead tree copy of the Times last week (28 April 2015) and there was an opinion piece about housing that contained this sentence: “It’s reckoned that we need about 250,000 new homes a year”. It didn’t add who reckons that or why. But once you start googling “250000 new homes” you quickly light upon a report written in 2003 by Kate Barker, a one-time stalwart of the Bank of England Monetary Policy Committee. It is reckoned, as they say, that this report demanded 250,000 new homes a year and eleven years on that has not been achieved once. It would appear that the nation has accumulated a bit of a backlog: to be more precise, a backlog of 845,000, that being the difference between the actual number of completions and 2.750,000 (11x 250,000). So what did the esteemed Kate (now Dame) Barker actually say in her report? Did she really demand that 250,000 new homes should be built every year? (Spoiler: no). The first line of the report is this: “The UK has experienced a long-term upward trend in real house prices.” And there’s a clue. I think it is fair to say that the primary motivation of this report is to make housing more affordable by increasing the supply in order to restrain prices. Here is the section that deals directly with the question of how many new houses are desirable: “Looked at purely from the perspective of the UK economy, more housing would be beneficial. Different approaches to measuring the shortfall, produce a range of estimates: • projections of population growth and changing patterns of household formation (a proxy for future demand), compared to current build rates implies there is a current shortfall of...