Report on Q4 2020

Report on Q4 2020

2 Jan 2021

The European bond markets signalled nothing other than the expectation that cheap or free money is expected to be available sine die. German 10 year yields slipped from -0.50% to -0.57% implying that an extended “oven ready” depression awaits Europe. UK 10 year gilt yields loitered at 0.2%. Only the US, with a rise from 0.7% to 0.9% hinted at any future sign of life as we knew it. It was a much more cheerful quarter in the equity markets. The FTSE rose by 10%, the All Share by 12% and the domestic orientated FTSE 250 by a fairly whopping 18%. This left the FTSE down 15% for the year as a whole, the All Share -13% and the FTSE 250 just -6%.  Despite the obvious fact that the lockdown fanatics are apparently delighted to keep the economy on life support and regret only that we have not shut down sooner, harder or for longer, the stock market is eagerly anticipating a reviving spending spree. Those who find this almost morally objectionable should remember that share markets always try to discount everything as quickly as possible. The FTSE 250 that turned out to be the brightest spot of the year melted by 31% in Q1. I just checked to see what I wrote at the end of Q1: The sight of a self-inflicted depression is unprecedented outside of wartime. It is worth bearing two points in mind: 1) you can’t buy bargains without cash and 2) remember to look down rather than up. Up will look after itself. Eventually. Obviously I could have been more bullish but I did spend plenty of cash while looking down. And I would re-emphasise that up takes care of itself. Stock markets always want to go up. In December we discovered that the UK’s regulatory agency was the fastest in the world to approve the first vaccine and repeated the trick at the end of the month with the Oxford university product. I suppose that this proves how keen or desperate the country is to escape the pandemic. Other nations are more cautious about cutting corners on their regulation processes.  So although the number of people who have...

Covid ’20 – a personal diary

Covid ’20 – a personal diary

28 Dec 2020

This is a personal record to help me understand how and when this shitstorm blew up and if anything of importance was missed by me (or anybody else) that should or could have been anticipated. Most of the material comes from my email in and out boxes and has not been edited. I should say that the virus itself has never particularly concerned me. I think that there are broadly two kinds of fear, both of which we all experience to varying degrees. There is the fear caused by specific and known danger in the face of which some people try to hold their nerve and respond as rationally as they can. Dorothy Parker glamourised this kind of courage by attributing to Hemingway the phrase “grace under pressure”. And there is fear of the unknown which has a tendency to induce panic and paralysis. I make no claim to be courageous but I have a certain amount of contempt for fear of the unknown, though in the UK it appears to have gripped a majority of the population. The trigger word for these people is “uncertainty” as in “markets/investors/businesses hate uncertainty”.  It seems to me that the more that is known about Covid-19 the less frightening it is. It also appears that for some reason the government, its public servants and most of the media tend to promote fear and to suppress reassuring news lest it leads to complacency and (can I really be using this word?) disobedience. As an investor, as I have written elsewhere, uncertainty is to be welcomed because it causes assets to be mispriced. The problem, as 2020 has demonstrated, is that it sometimes takes extraordinary imagination to see it. Thursday 23 January  The Foreign Office advised against non-essential travel to Wuhan province. I cannot seriously suggest that I could have interpreted that as a harbinger of what was to come.  Wednesday 29 January  BA halted all flights to mainland China. At the same time, there were reports that the virus had definitely arrived in Lombardy in Italy. This is the point when it seemed real to those of us living in Europe and if I am hard on myself...

Report on Q2 2020

Report on Q2 2020

9 Jul 2020

In isolation, Q2 was quite good for stock markets. But in the context of what happened in Q1, we are still in the mire with our Wellington boot just out of reach of our hovering, stockinged foot. The FTSE 100 rose by 9% but is still down 17% year on year. The FTSE 250 recovered by 14% in Q2 (having been down 31% in Q1) but is -12% year-on-year. As usual, the All-Share was between the two. It seems fair to say that we are no wiser about the probable economic outcome of the pandemic though we can see that there is a consensus that central banks can print any amount of money on the single condition that they don’t admit that that is what they are doing. In the US it is more explicit because it is more acceptable to say that anything large is too big to fail when it would involve the loss of large numbers of jobs. Even if you are not seeking re-election as President, it is hard to argue against that. The response to Covid-19 is becoming highly political in the UK, despite there being no general election scheduled until 2024. Mass unemployment cannot be deferred indefinitely, even by money printing. Everyone must know this but no one wants to say it – governing politicians are terrified of hard truths unless they can be floated under a halo of brave sacrifice and oppositions bide their time until they can feign shocked surprise at how badly things turned out.   So we are left with a pretend future funded with pretend money.  Pretend money is far from being just a UK phenomenon.  The euro was infamously pretend money before the financial crash. Greece, Italy etc thought that they could borrow extravagantly but cheaply because their euro liabilities were implicitly guaranteed by the ECB. Kyle Bass, who, in around 2008, took long positions in German Bunds matched against shorts of Greek government bonds, called it the greatest asymmetric trade of all time.  Eight years ago this week, Bunds yielded 1.5% and their Greek equivalents 26%. The spread between the two was 24.5% having been around 0.5% when Bass took his position....

AFTER THE PLAGUE, THE FAMINE

AFTER THE PLAGUE, THE FAMINE

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...

ECONOMIC SHUTDOWN! EMERGENCY!!

ECONOMIC SHUTDOWN! EMERGENCY!!

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...

Report on Q1 2020

Report on Q1 2020

4 Apr 2020

It is difficult to remember now but UK equities had a storming close to 2019, driven by the Conservative victory in the General Election and the release from the threat of becoming a loose money, centralised, statist economy. But, as Corbyn finally goes, the UK enters a period of unknown duration featuring the most fiscally “irresponsible” government ever, a nearly universal bailout for the private sector and social rules that are martial law in all but name. Back to Q4 for a second to note that the star performer was the FTSE 250, the most domestically exposed index, which rose by 10%, compared to 2% for the 100 and 3% for the All Share. With the leisure industry shuttered and its quoted representatives suddenly revenue-free and left with only their balance sheets between them and oblivion, it is no surprise that the FTSE 250 was -31% compared to a sprightly -25% for the FTSE 100. With the world now able to agree that any doubt of a severe global recession has been removed, government bond yields fell again. The US 10 year yield fell from 1.79% to 0.62% and the 10 year gilt yields from 0.74% to 0.33%. Despite the proposals of bail out packages which are worth numbers that are too large to have meaning for most people, there is apparently no general worry about governments’ ability to sell debt. I find it hard to believe that this will last, not least because the default solution appears to be that countries buy their own debt. Perhaps I am too dim to understand how this would work but, at least in the case of the UK, it implies devaluation and inflation to me. Most listed companies have issued Covid-19 trading updates in the last week or so and most are assessments of the probability of survival, coupled with cancelled dividends. It is important to remember that a business can continue while its equity becomes worthless – for example, the government seems disinclined to be generous to airlines because it knows that the grounded fleets will fly again one day, regardless of who owns them. Bus and train companies are by contrast largely having their...

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,...

Left hand down, hold on for the ride

Left hand down, hold on for the ride

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...

Report on Q3 2019

Report on Q3 2019

1 Oct 2019

At the end of Q2 I wrote that part of my brain wanted to go on an equity buying spree but I wasn’t sure which part that was. It seems to have been the part that wants a quiet life because the FTSE 100 was unchanged over the last three months. The broader FTSE 250 rose by 2.4%, perhaps due to takeover activity. Sterling rose by 0.7% against the euro which is effectively also unchanged. The political noise of the last three months happened in a wind tunnel as far as the financial world was concerned (though that may change, especially if Britain’s MPs continue to risk their own legitimacy). As the global economic news continued to deteriorate government bond yields fell again. The US 10 year yield fell by about 0.25% to 1.75%. 10 year gilt yields dived from 0.86% to 0.55% and the German Bunds now have an even more negative yield (-0.30% to -0.57%). If these are unprecedented scary times, this is the reason. In my recent post entitled “Equities are the new junk bonds” I pointed out that takeover bids had favoured shares in my own portfolio no fewer than four times this year. I have been thinking some more about why this is happening and, by implication, how one might incorporate that into stock picking. Unlike purely financial investors, corporate buyers hate uncertainty. They like to know what they are buying and are put off by the thought of unquantifiable liabilities. This is one of the reasons why companies in trouble are rarely rescued. It’s far easier and safer to buy the assets from the administrator. The new accounting standard IFRS 16 is now kicking in and it invariably increases a company’s balance sheet financial debt – but it removes the uncertainty of obligations to pay future operating leases which were previously off-balance sheet. Now they are there for all to see. A business with reliable cash flow that easily covers its seasonal working capital requirements, its minimum capital expenditure needs and its annual interest payments is potentially of interest and if it is perceived as badly managed that is not necessarily an impediment. If times are tough, one...

Report on Q4 2018 – full of sound and fury

Report on Q4 2018 – full of sound and fury

5 Jan 2019

Over the first nine months of 2018, the UK stock market was barely changed. In Q4 the world’s obsession with uncertainty overtook it. Trump took on China again, Trump took on the Fed, Congress took on Trump, the ECB took on Italy, the Conservative party took on Theresa May, everyone took on Saudi Arabia and the oil price took fright. While a falling oil price is sometimes considered broadly beneficial to the world economy, it is currently identified as a harbinger of global recession. The FTSE 100 fell by 10.7% in Q4, the 250 by 13.9% and the All Share by 13.1%. The rule that in nervous times investors favour large international shares (i.e. the FTSE 100) overall held good, though not on a scale to promote rejoicing or relief. For roughly the 17th time since the financial crisis the fear of impending inflation faded away. The underlying assumption that we are living in long-term deflationary times held good again. Government bond yields have duly subsided again. The US ten year yield has slipped from 3.0% to 2.6%, the UK 10 year gilt yield is now c.1.2% as opposed to 1.5% three months ago. It is times such as this (when the Japanese stock market’s daily change is one of the news headlines on the Today programme) that it is most important to remember our (or my) basic investment rules. Sharp and extensive falls in the price of classes of assets are caused only by the forced capitulation of unwilling and unhappy sellers. Great market collapses are invariably accompanied by the realisation that something that everyone took for granted is no longer true. Black Monday in 1987 was, with hindsight, a financial services event. Stockbrokers, fuelled by American money following Big Bang, were being paid more than bank directors had earned only a few years before. It was the time of Loadsamoney (Harry Enfield), Money (Martin Amis) and Serious Money (Caryl Churchill) and I am prepared to say without embarrassment that it was bloody marvellous to be part of when you were in your mid twenties. But when it was over you knew it was over. When the DotCom bubble burst in 2000 it...

£££ The case for the pound £££

£££ The case for the pound £££

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...

Contagion

Contagion

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%...

Report on Q3 2018

Characterised by such slogans such as “sell in May and go away”, the third quarter of any financial year is often expected to be cautious. This year saw a mild confirmation of that view – the main UK indices in Q3 fell by +/- 2% compared to Q3; year on year there was an increase of around 2% leaving shares year-to-date down marginally (-0.25%). This is something of a relief in view of the political noise that irritates us on a daily basis but we should note that the US S&P is +8.5% year-to-date.  Whether it is the combination of tax cuts and trade deals or something else, the US is showing either where we could be going or what we are missing, depending on your view. US government bond yields are still inching rather than exploding upwards. US 10 year treasuries are now hovering just above 3% and 10 year gilts are just above 1.50%. These started the year at 2.4% and 1.2% respectively. Perhaps this is a trend. But we should not forget that although there are plenty of Britons who remember inflation, it is 25 years since it was last a problem. I think that wage inflation is worth keeping an eye on but there again it seems that so many of today’s new jobs are relatively unskilled – the more that technology leaps ahead the more we seem to need people who can drive a car or ride a bicycle. When pricing power reaches sellers of that kind of labour then inflation might be off to the races. At the end of the quarter there was another bout of panic about Italy being rebellious against the decrees of the EU/ECB. The premium of 10 year Italian yields over Bunds is climbing. If it continues it will politically disruptive in Europe and could conceivably affect the Brexit deal, though whether it would make the EU negotiators more conciliatory or more obstinate is anyone’s...

Report on Q1 2018

Report on Q1 2018

30 Mar 2018

In my report on Q4, I wrote that “for the third successive quarter, the markets were mysteriously calm.” The calm was disrupted in Q1 for sure: the main UK indexes fell by between 6% and 8%. The German DAX was -6.3%. Supported by a falling dollar, the US markets, though volatile, did better with the DJIA -2.5%. I hinted before that the stock markets might be vulnerable to rising interest rates or, more specifically, rising bond yields. In February it started to look as if this was happening; the US 10 year treasury yield had risen from 2.40% to 2.94%; but by the end of the quarter it was back to 2.74%. A similar pattern played out elsewhere. The 10 year gilt yield rose from 1.20% to 1.69% but ended the quarter back at 1.34%. It would seem that the wait for inflation goes on. Aside from the usual nonsensical white noise about “uncertainty” it is hard to escape the conclusion that the stock market is truly concerned about the ability of large corporations that feature in our lives daily to invest capital, service debt and pay dividends. Here is your day described in terms of dividend yields: you are woken by the ringing of the house phone (BT: 6.8%) and switch on the light (National Grid: 5.6%); you turn up the central heating (Centrica: 8.5%) and clean your teeth (Glaxo: 5.7%); you decide to go into town but your car has no petrol (BP: 6.0%, Royal Dutch Shell: 5.8%) and needs a new rear light (Halfords: 5.4%) so you decide to take the bus (Stagecoach: 9.0%, Go-Ahead: 5.8%); you do some shopping in Currys PC World (Dixons Carphone: 6.0%, Vodafone: 6.7%) and M&S (Marks & Spencer: 6.9%) before treating yourself to a pub lunch (Marstons: 7.4%, Greene King: 7.0%). Is it the end of the world as we know it? Yet, against this rather sinister background something quite different has been happening. Companies who want to buy each other seem to like these prices very much. On 22 December GVC announced its intention to buy Ladbrokes plc. On 17 January, Melrose bid for GKN; on 30 January UBM agreed to be taken over;...

Prepare to turn left

Prepare to turn left

14 Nov 2017

I have been on the town recently. Two weeks ago I went to see Reasons to be Cheerful, a brilliant play based around the music of Ian Dury. It is performed by the Graeae theatre company that featured in the 2012 Paralympics opening ceremony. I saw it when it was produced the first time in 2010 and eagerly returned for more. Ian Dury was to say the least an anti-establishment figure and by today’s standards not politically correct. I’m not sure whether he would have appreciated the fact that a new song was tacked on to the end of the show. “If it can’t be right then it must be wrong” has rather puerile lyrics that I don’t think Ian himself would have written (“Keep the funding flowing from a loving cup”). As the song was played and sung, pictures of various politicians with devil horns sprouting from their heads were flashed onto a screen: Mrs Thatch, natch, David Cameron and, oh look, Tony Blair. But I will let someone else summarise: “This new anti austerity song from Graeae and the Blockheads captures the current mood of the country. Its lyrics bring people together in a moment of shared experience to challenge the status quo.” Jeremy Corbyn, Leader of the Labour Party. There I was watching a play set in 1979 and suddenly the “mood of the country” in 2017 was sprung on me. How did that happen, I wondered. Last week I revisited 1979 for the second time by paying a 2079 price to see Squeeze at the Royal Albert Hall. And it happened again. In between Cool for Cats, Up the Junction and Labelled with Love, the band naturally played songs from their new album. These included Rough Ride which laments the lack of affordable housing in London and A&E which really challenges the status quo by calling for more funding for the NHS. Perhaps I should get out more but I was struck by the way in which the anti austerity message was offered on both occasions with such confidence, as if it were not a politically contentious message but almost a fact. Perhaps I live in a London bubble but...

Report on Q2 2017

Report on Q2 2017

5 Jul 2017

The UK stock market was on a rollercoaster ride to nowhere in Q2. The FTSE 100 fell by -0.3% and the 250 managed a rise of +1.8%. Given that we had a shock election, a shock result, a hung parliament and that the shadow Chancellor thinks that democracy has failed, you could say that the stock market has been amazingly calm. Likewise the government bond market. The 10 year gilt yield was 1.23% at the end of Q1 and 1.26% at the end of Q2. This is the dog not barking in the night time. We are widely told that the pale imitation of austerity that has been attempted for the last eight years is to be abandoned but the bond market is not panicking yet. Here is a picture of gilt yields since 2007.    One of the lessons of the election was that voters under the age of fifty or so are not frightened of the things that made the 1970s rather messy. Inflation, double digit interest rates and labour unions challenging the government’s right to run the country to name but three. It remains the case that the return of inflation is what bears warn about most frequently. In the 1970s the best way to protect oneself against inflation was to buy property. House prices rose by 492% over the decade. I wouldn’t advise the same strategy now. In fact I would consider doing the opposite. The world still seems pretty deflationary to me. You can choose your own explanation and file it under “uncertainty” but it still seems to me that listed companies are still being very cautious about capex and expecting their shareholders to approve of this caution. Here are five domestically exposed UK companies that have reported March or April year-end results recently. Halfords cut capes by 11% and raised its dividend by 3%. Dairy Crest cut capex by 62% and raised its dividend by 2%. M&S cut capex by 25% and kept its dividend unchanged. Stage Coach cut capex by 18% and raised its dividend by 4%. Royal Mail cut capex by 16% and raised its dividend by 4%. All these are behaving in a risk averse...

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,...

The crumbling social contract

The crumbling social contract

15 Mar 2017

THE LAND OF THE FREE-FROM-RESPONSIBILTY The Occupy protesters (what was it they were protesting about again?) used to chant “We are the 99%”. The 1% were portrayed as the selfish and/or crooked people who had appropriated most of the wealth. It is demonstrably easy to be part of the 99% – in fact, it’s darned hard not to be. Rarely had so many ever been against so few. The trouble with being part of a 99% majority is that it is difficult to be focused. Even the French revolutionaries of 1789, who had pretty much the same numbers on their side, could not agree on their objectives and ten years later succumbed to dictatorship (by a chap named Napoleon). But the recent UK budget, delivered by the harassed Chancellor, Philip Hammond, highlighted one point on which close to 99% of politicians, lobbyists and commentators are agreed. They all have limitless opinions about how public money should be spent but next to no constructive suggestions about how that spending should be funded. There is no responsibility for funding that is commensurate with the responsibility for spending. This seems unfair because the latter offers all the joys of patronage and moral superiority and the former, as Mr Hammond might agree, is like having toothache in a land of no dentists (whose absence is widely attributed to your own austerity policy).      I believe that most citizens are supportive of the idea that they should pay their fair share of taxes. But what weakens their support is any suggestion that the government is misusing their money, either by waste and incompetence or by channelling it to family and friends or by funding causes with which they do not agree. (The 2016 EU referendum ticked all those boxes for many people). There was a great experiment in California in the 1970s that showed what happens when people revolt against their social obligation to pay taxes. PROPOSITION 13 Essentially, Proposition 13, passed overwhelming in a referendum in 1978, imposed severe restrictions on the ability of local Californian politicians to raise taxes. Its genesis was the Howard Jarvis Taxpayers Association. The US has a history of taxing real estate that...

Report on Q4 2016

Report on Q4 2016

13 Jan 2017

The UK stock market continued to climb the wall of fear or crawl forward in the sea of uncertainty or whatever you will in Q4. The FTSE 100 outperformed the FTSE 250 for the third time (out of four quarters) in 2016. Rising interest rates helped the UK banks index rise by 16% in the quarter. Some people think that lending margins will improve as interest rates “normalise”. Good luck to them. I will not be making that trade. Over the year as a whole the FTSE 100 rose by 13.9% having fallen by 4.8% in 2015. The FTSE 250 was up by 3.5% after +8.4% in 2015. The bond market was a bigger story in many ways with the 10 year gilt yield falling from 1.93% in December 2015 to 0.58% in August and then back up to 1.41% in December 2016. That is quite a rollercoaster dip. Many people believe (or hope) that the rise in interest rates will continue.  In many ways it would be helpful if they did (to help savers rather than borrowers) but I am not convinced that it is going to happen. The trading statements that January has seen have mostly been very encouraging. Marks & Spencer actually sold more clothes. I must admit I didn’t see that coming. I was less surprised that Morrisons sold more food. That has been a slow burner for me but it has started to come good. Let me say that I bought both these shares because of their financial strength (M&S’s cash flow, Morrison’s balance sheet) on the assumption that they would have the time to sort out their retailing problems. I know next to nothing about retailing but I can see that burdensome debt must make it much harder (eg Tesco). I was also amused and pleased to see that Sainsbury is now being helped by its acquisition of Argos. That stock (Home Retail Group) was my one attempt to take a view on a retail model and I just got away with it. The post that is most often called to mind at present is Four kinds of bias from May. The selective use of facts is all...

How QE plays out – and other guesses

How QE plays out – and other guesses

15 Sep 2016

This is a follow up to my last post about how QE is a wrecking ball that distorts financial markets and economic decision making. I have no opinion – despite a sceptical mindset – about whether QE is being applied correctly or about whether it will work. I doubt if even hindsight will allow people to agree about whether it succeeded. As an investor I need to weigh the probable outcomes of the distortion itself. Even this is not the same as making a definitive call on what will happen. That is gambling. As always, investing is about probability. THE WEALTH GAP – ONLY SHARES ARE CHEAP As long as QE carries on and the pool of safe assets shrinks further, savers in search of yield will keep chasing other assets. The stock market has been climbing the wall of fear this year. Before the referendum vote, George Soros and others forecast a decline of up to 20% in UK shares. Chancellor Osborne did not rule out suspending stock exchange trading in the face of the expected panic. With the atmosphere so full of “markets hate uncertainty”, that notorious cliché so readily embraced by third rate market commentators, many people will have assumed that the stock market would have performed its patriotic duty and dived after Brexit. But shares are cheap and quick to buy and sell, five days a week. I have just been offered a two year fixed rate bond by a building society that yields 0.95%. That’s a decision that ties up my money for two years. Were I to choose to buy Marks & Spencer shares instead I could get a dividend yield of more than 5% – and if I change my mind and decide that M&S is too racy, I can sell it in two minutes. Back in verdant Blackheath and vibrant Lewisham near to my house, yields on buy-to-let properties are between 3.6% and 4.5% (source portico.com). That seems like a lot of cost, time and risk compared to being a passive and better-rewarded owner of M&S. There is no hint that QE will be curtailed or reversed. On the contrary, the central banks of the UK...