The first quarter ended just before Donald Trump’s “liberation day” when his tariff announcements sent world stock markets into something close to panic. So it is notable that UK stock markets were more concerned with what was happening at home. Rachel Reeves made a Spring Budget Statement which was provoked by cuts in growth forecasts on the part of the facetiously named Office of Budget Responsibility, a political vanity project by the 2011 Chancellor George Osborne.  In the opinion of many people, the Reeves Autumn Budget contained a number of measures that hurt growth prospects, especially for domestic businesses which have seen their costs of employment rise. Whatever your political leanings, transferring resources from the private sector to the public sector is rarely good economics. So, it is arguable that the Spring difficulty was largely due to the Chancellor’s own Autumn blunders.   Consequently, the FTSE 250 index, which is populated by domestically exposed companies dramatically underperformed the FTSE 100, which is represented by international businesses – that is -5.4% compared to +5.1%. I do not recall ever having seen such a stark divergence.   Lower growth prospects are normally at least good for lower borrowing costs. But not this time. The ten year gilt yield was 4.57% on 1st January and that is where it remains today. The UK government is developing a small perceived counterparty risk. In the long run, economic growth is key to any government’s ability to repay. Debt servicing costs are now uncomfortably high and some Labour MPs are already making squeaks of protest about “austerity”, a word whose meaning has changed from deliberately inflicted short-term deprivation to any tiny disruption in the flow of public money.  It is hardly surprising that the UK stock market has been in a depressed mood. When the “liberation day” fallout was at its depth, I put in some grudging low bids for a few shares, because you have to buy when everyone else is selling. As for the tariffs, Donald Trump has thought for many years that international trade takes place between nations and this should be discouraged. To this end, he taxes his own people with import tariffs. It also seems rather immoral...

3 Jan 2025

The UK indices fell by 1-2% in Q4. If the stock market is a reflection of how investors feel about the UK’s economic prospects, it is not a very pretty sight. Over the year the FTSE 100 rose by 5.6%, the All Share by 5.5% and the FTSE 250 by 4.7%. The UK ten year gilt yield rose from 4.1% to 4.6%, implying lingering worries about inflation and meaning that the cost of servicing the UKs vast debt is likely to be as uncomfortable as ever. I have noticed that my stockbroker is now offering me direct access to government debt issues. From memory, the last time this was done was in the 1990s. This is welcome to me but also carries a faint whiff of desperation. The rise in US ten year government bond yields matched those of the UK (4.0% to 4.55%) while other European yields rose more gently. German ten year yields, at 2.35% (from 2.2%) suggest that investors in Europe are more worried about low growth than inflation.  A number of UK companies made cautious comments about their prospects, typically allocating some blame to the now notorious budget effort by the UK Chancellor Rachel Reeves. In particular retailers are dismayed by the rise in employers’ NI contributions as well as the expected increase in minimum wage. My portfolio suffered warnings from Shoe Zone, Kingfisher and Pets At Home. Shoe Zone (18 December) Consumer confidence has weakened further following the Government’s budget in October 2024, and as a result of this budget, the Company will also incur  significant additional costs due to the increases in National Insurance and the National Living Wage. These additional costs have resulted in the planned closure of a number of stores that have now become unviable. The combination of the above will have a significant impact on our full year figures Kingfisher (25 November) Solid underlying trading in August and September; weak market and consumer in the UK and France in October, impacted by uncertainty related to government budgets in both countries Pets At Home (27 November) In the October Budget, the government announced planned changes to the National Living Wage and employers National Insurance Contributions....

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...

2 Oct 2024

It was another steady quarter for stocks. The FTSE 100 rose by 0.8%, the All Share by 1.2% and the more domestically exposed 250 by 3.7%. Once again, excitable global news headlines were not reflected by the financial markets.  Government bond yields are lower as central banks appear to have started to ease rates. The UK ten year gilt fell from 4.2% to 3.8% but is now back up to 4.0%. While inflation headline numbers have been trending down there must be underlying concern about the relentless rise in government debt (pretty much everywhere).  Despite staged warnings from the new Labour government about the legacy of the excessive spending by its predecessors (previously known as “Tory austerity”) there are reports that another £50 billion of borrowing headroom will be discovered by reclassifying some borrowing as “investment spending” and saying that it doesn’t count. This is all good except that it still has to be paid back and it will still compete with less virtuous borrowing for the attention of lenders. Ultimately interest rates are a function of the credibility of the borrower and inflation will trend up as credibility falls. Not the other way around.  But ahead of the budget this good “headroom” news will probably allow the government to reverse its scrapping of the pensioners’ winter fuel allowance. Perhaps that will be good for energy stocks as well as general well-being and fewer deaths from climate change. Flagons of mulled wine all...

9 Aug 2024

Just the other day, or rather in November 2017, I wrote a post entitled “Prepare to turn left”. After the global financial crisis the UK had endured seven years of “austerity” according to a narrative that was becoming widely accepted as fact. Theresa May’s Conservatives were enfeebled by her hapless attempt to add to her majority with a surprise election (she lost her majority).  This sounds very familiar now but then it was mildly surprising that the Tories didn’t dare attempt any traditional Conservative policies, such as tax cuts, to entice investment. Instead Mrs May decided that her legacy would be to sign the Net Zero abomination (other views are available) into law in order to sabotage any attempts by her successors to spare its innumerable victims. The legislation was waved through in 2019 despite her own Chancellor, Phillip Hammond, saying that it would cost £1 trillion.  With no apparent motivation to challenge the prevailing coalition spirit that had prevailed since 2010 (and endures to this day) I wrote that the Conservatives were doomed to be their own opposition. Below is what I published then and I am delighted to reproduce it now (my new highlights) because the chances are that we have just elected a new government of comparable weakness.  So what does a weak Conservative government do in these circumstances? The answer follows two left wing agendas. First, it interferes in private sector businesses to combat perceived unfairness, but with little regard for the unintended but arguably predictable consequences. This has already happened in the case of private landlords and energy companies. The curious strategy appears to consist of little more than trying to ensure that the provision of housing and energy are as unprofitable as possible. Perhaps there are sound ethical reasons for this but one sure consequence is that investment is discouraged. Why commit capital to an area where the government has a record of applying penalties, apparently motivated by the wish to punish rather than the need to generate tax revenue? Discouraging investment is not a practice normally associated with Conservatives. So perhaps the second left wing policy can compensate – direct investment by the government itself. The new...

8 Jul 2024

Once again, bombarded with deafening assertions that the world is falling apart, blowing up or melting, markets were an example of rather dull stability. The FTSE followed its 2.8% rise in Q1 with exactly the same in Q2. That makes an increase of 8.6%, year on year. Not bad. Government bond markets were slightly more interesting. Once again, yields rose generally, despite the fact that the world is apparently waiting for lower interest rates. Gilts from 4% to 4.2%, Treasuries from 4.3% to 4.3% and Bunds from 2.3% to 2.55%.  Many interest cut groupies are telling themselves that the quantity of national elections, especially in the US, UK and France, would make rate changes look political. I sincerely hope that central bank independence is firmer than that, though the Bank of England arguably has poor form in this respect.  But we should always remember that bond investors care mostly about inflation, the great enemy of fixed returns. If bond prices are falling (yields rising) there will be an underlying mistrust of the inflation outlook.  The UK has elected a Labour government that has for years complained about Tory austerity. Since 2010 national debt has risen from 76% of GDP to 100%. On the basis that you should always experiment with the idea that people are telling you the truth, one can assume that Labour wishes to explode this number through 110% or 120% or something. If you are thinking of adding gilts to your portfolio it might make sense to wait a...

8 Apr 2024

Surely the most important question when a country goes to war is – What does success look like? Churchill the wartime Prime Minister left no one in any doubt “Even though large tracts of Europe and many old and famous states have fallen or may fall into the grip of the Gestapo and all the odious apparatus of Nazi rule, we shall not flag or fail. “We shall go on to the end, we shall fight in France, we shall fight on the seas and oceans, we shall fight with growing confidence and growing strength in the air, we shall defend our island, whatever the cost may be. “We shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; we shall never surrender, and even if, which I do not for a moment believe, this island or a large part of it were subjugated and starving, then our Empire beyond the seas, armed and guarded by the British fleet, would carry on the struggle, until, in God’s good time, the new world, with all its power and might, steps forth to the rescue and the liberation of the old.” Although this was obviously intended to unite and inspire the population, it was also an implicit invitation to persistent pacifists to speak up, stand up or, if necessary, flee. To Vera Britten, success was to be found in defeat. A singular opinion but admirably clear. “There is a strange lack of dignity in conquest; the dull, uncomplaining endurance of defeat appears more worthy of congratulation.” I am no geopolitics expert (I am no anything expert) but I would say that it is obvious that a nation under attack has a reasonably clear idea of what success looks like. If it is losing the war, this will change for the worse where a primitive form of survival becomes an aspiration. We can all look at Ukraine now and make up our own minds about that. Where nations are aggressors under the banner of morality, the definition of success is much harder. The US and its allies invaded Iraq...

31 Mar 2024

As I wrote the other day, markets have been remarkable for their calmness. In the quarter the FTSE 100 rose by 2.8%, the All Share by 2.5% and the FTSE 250 by 1%, The slight relative underperformance of the 250 typically indicates caution over domestic profit margins and there are some obvious areas of concern. Not least among these are the housebuilders who are delaying completions as they wait for better market conditions. Either interest rates will have to fall or, more likely, people will adjust to the new but old normal world in which positive real interest rates are to be expected.  On 28 February TaylorWimpey announced that 2023 completions were down 23% and on 12 March Persimmon reported that its completions for last year were minus 33%. As usual, nobody in the political or press mainstream appears to notice what is going on and the mantra that “we” need to build more homes pounds away relentlessly.  UK housebuilders were burned fifteen years ago and their memories are, creditably, long enough to retain the near-death experience of the last time the supporting chorus was urging them to “build, build, build”.  On 27 March the Bank of England warned about the rising danger of bad commercial property loans and also noted the trend of private property buyers to choose longer dated loans (where the aggregate interest owed will likely be higher but the individual monthly payments will be lower). As for interest rates themselves, yields on government bonds rose over the quarter: ten year gilts from 3.6% to 3.98%, US Treasuries from 4.0% to 4.21% and German Bunds from 2.05% to 2.29%. On the one hand this implies that economic performance is a little better than expected, which is modestly good news: on the other, it tells us that we cannot assume that rates that went up will just go down...

Fear of unpredictable geopolitical events seems to provoke a collective desire for experts who can reassure with their wisdom. And there is never a shortage of volunteers to satisfy these needs. They rush in like hopeful lottery ticket buyers ahead of a rollover.  COVID – DISEASE EXPERTS I suppose that this has been building for a long time but the Covid-19 panic jolted it into a higher gear. When Boris Johnson said in June 2020 that a cricket ball was “a natural vector of disease” he inspired not howls of derision but rather an implicit challenge to say something even more uninformed and ludicrous and to claim a spurious authority for having done so.  Governments all over the world engaged in competitive dictatorship to see what restrictions, including travel bans and curfews, they could place on their citizens. And they came for the children too.   In 1984 Orwell wrote: “If you want a picture of the future, imagine a boot stamping on a human face— forever.” In my mind this apocalyptic image has been replaced by that of infant school pupils wearing masks and for hours recycling their own breath back into their lungs. According to experts, this was for the greater good of their grannies and, let us not forget, their teachers. In the US, teachers demanding the closure of schools staged their own mock funeral processions. As if school children were inadvertent assassins. RUSSIA – WAR EXPERTS As this lunacy subsided, Russia invaded Ukraine. A mad man with nuclear weapons and a grudge was threatening to start World War III. Help! Fear not. Help was indeed at hand. In fact, many of the old experts were the new experts. “Ukraine will win. I’ve never been more certain” Boris Johnson It is the two year anniversary of the invasion. I have lost count of the variations in the expert narrative. Quickly out of the traps was the story that the end of Ukrainian wheat exports would cause havoc, particularly in countries like Turkey and Egypt that have diets of which bread is a large part.  The price of wheat rocketed to US$450 per ton but is now at US$187. What happened? It seems...

10 Jan 2024

In Q4, the world appeared to be in a geopolitical crisis. Hamas attacked Israel on 7 October provoking a (predictable?) response that continues. The Ukraine war seems to be stuck in a stalemate about which the major talking point is whether non-combatant powers will provide enough funding to keep it going, seemingly without limit. And the US, now in election year, is mired in “lawfare” with every legal resource imaginable employed to stop the frontrunner from running.  Add in an anarcho-capitalist president of Argentina and a brazen attempt by Venezuela to seize oil reserves from poor Guyana and you have what many unimaginative people would no doubt call a ”perfect storm”. The response of first world asset markets was to turn in a very decent quarter. Government bond markets appeared to decide that the peak in yields was behind them, aided by some reassuring inflation numbers.  The US Treasury 10 yr yield fell from 4.7% to 4.0%,  the German Bund from 2.9% to 2.05% and gilts performed best of all, with the 10 year yield down by 100 basis points to around 3.6%.  The FTSE 100 turned in a fairly limp 1.4% gain in the quarter but the FTSE 250 shone with +7.4%.  I have no predictions save to say that those hoping to have their problems solved by AI will probably be disappointed. I call it Artificial Ignorance because no rational human would be that stupid.  Finally, a mention of the legendary investor Charlie Munger. He was fond of advising people to read history and to learn from it, which is perhaps easy to say when you’re 99. My favourite quote came in an interview with Becky Quick he gave two or three weeks before he died. She asked him what it was like to be 99. His answer was he regretted that he didn’t have the strength he had enjoyed when he was 96....

8 Oct 2023

At some time I wrote that it is wrong to try to work out how much a company is worth and then compare that to the share price. It’s more productive to do the exercise backwards – look at the valuation of a business and ask if the implied outlook is plausible. You can do this equally effectively with optically high and low valuations. A bonus of this approach is that it indicates what people really think because whatever they say (e.g. about ESG…grrrr) if they don’t invest in it they don’t believe it. But it’s not as simple as that. The propensity to invest in anything is also affected by the cost of money.  If your cash earns zero you are more likely to take a bit of a punt. If National Savings is paying 6.2% (which it was until a few days ago), safety looks far more attractive.  FREE MONEY = GREEN MONEY I think we will look back on the Greta years (2018 – ?) and observe that the perceived virtue of reversing economic development was a luxury correlated with the age of QE and free money. From 2009 to 2021, the white collar classes were coddled by unprecedented government-sponsored liquidity. They worked from home while the less well-paid delivered the essentials of life to their front doors.  You could say that a general complacency crept in. Investments in electric cars and wind turbines were characterised almost as no brainers and if their promised financial rewards were rather long term, many public subsidies (more free money) were available. Low interest rates (10 year gilts still yielded only 1% at the end of 2021) apparently discouraged financial scrutiny and (historic term) cost-benefit analysis. .  In 2022 the Bank of England ceased its gilt purchases and, deliberately or not, infamously torpedoed the new PM Truss by commencing sales of its portfolio in September. Politics aside, the attitude to public and private investment has changed markedly in 2023. THE RETURN OF COST-BENEFIT ANALYSIS The 2010 HS2 rail project was going to cost £33 billion. By 2020 this had risen to £88 billion and allegedly to more than £100 billion in 2023. Naturally the project...

3 Oct 2023

The last time that the UK stock markets put in a meaningful positive performance was Q4 last year when it was obvious that many highly investable companies were oversold. A year ago I even spotted that. This year has been very dull after that rally. The FTSE 100 is up by 2.3% and the FTSE 250 is down by 2.8%. So larger companies have outperformed smaller ones but not in a way that excites comment from me.  Government bond markets have continued to drift down i.e. yields have climbed more. The US Treasury 10 yr yield rose from 4.1% to 4.7% and the German Bund from 2.6% to 2.9%. Only gilts stabilised at around 4.6%. Rising yields imply that investors remain cautious but do not expect serious economic slowdown (bond yields fall in response to recessions). But higher rewards for playing it safe (as exemplified by National Savings paying 6% for a one year deposit) make investors more risk averse. There are speculative and long-term investments that you will try when cash yields nothing but will spurn when doing nothing starts to be rewarding. This dynamic explains why smaller companies that appear to offer more growth potential are being spurned in favour of larger and duller ones that pay decent dividends.  It seems fairly probable that today’s higher yields will become the future norm. If that is so we can expect stock markets to remain...

16 May 2023

Ever since the Global Financial Crash of 2008/9, some commentators have worried that there are too many “zombie” companies that are unable to make a profit or even a self-sustaining cash flow, but which are being kept alive by the availability of cheap credit. The argument goes that in a truly capitalist world, the unviable would die and their market share would be swallowed up by companies more deserving of success.   It must be said that in today’s world, where the political centre is so far left of where it used to be, many people would approve of the use of public money to help struggling businesses. Let’s face it, there is no use of public money incapable of attracting support from someone.  UBER But the extent to which “zombie” businesses have become established household names is quite astonishing. The Oscar arguably goes to Uber which most people would regard as the epitome of a disruptive (a horribly overused word) success. Uber’s IPO price in 2019 was $45 and today it trades at $38. In the last five years it has made operating losses of $22.2 billion on revenues of $85.9 billion. In aggregate it has lost 25 cents for every dollar of fare.  The fact that the share price is still as high as $38 tells us that Uber is well funded. Its fixed borrowings mature from 2025 to 2029 and it pays an interest rate of c.7% on average. Maybe that’s all fine. Many, many people are happy and trusting customers and have no doubt been delighted to be subsidised at the expense of Uber shareholders and creditors.  Yet, how about the taxi drivers and cab companies that have been forced out of business by Uber’s comprehensive yet (so far) financially unsustainable service? This disruption of the taxi world  is not an unmitigated boon.   OCADO  Back in the UK, how lucky we were during Covid lockdowns to have Ocado bringing groceries to the doors of the sheltering furloughed classes. Householders pinned notes to their front doors saying “Dear delivery driver. Please leave the package in the porch, ring the front door bell for five seconds and then retreat back to the world...

21 Apr 2023

The first quarter saw a limited banking crisis, including the demise of the wounded Swiss champion Credit Suisse, but otherwise there was not much to see. The FTSE 100 managed to rise by 2.4%, again doing better than the more domestically-based FTSE 250 (+0.4%). Government bond yields were also largely unchanged in the UK and Germany but lower in the US (3.6% vs 3.9%) where inflation is more obviously falling. It was a curious incident of the dog in the night time quarter – despite much noise about failing banks and impending recessions, the markets snoozed their way through.  For an investor, something not happening is every bit as significant as something happening.  My theory is that large corporations are more comfortably in bed with governments than has ever been the case. Due to the explosion of government borrowing and spending since the “great financial crisis” of 2008-9 and the doubling down that occurred with lockdowns. Governments are the most important customers and, as we know, the customer is always right.  Corporate lobbying may be unedifying but it appears to be annoyingly successful. Politicians who take a principled stand tend to find themselves maligned as borderline mentally ill if they cross an agreed line delineating agreed public/private interests.  As Groucho Marx said, “Those are my principles, and if you don’t like them… well, I have others.”  Essentially, the governments of the US, UK and Europe have huge patronage at their disposal and it is hardly surprising that big business knows where to find it.  This is what is sometimes called Crony Capitalism, defined as – An economic system characterized by close, mutually advantageous relationships between business leaders and government...

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...

Conventional theory holds that an inverted bond yield (in this case where the two year pays more than the ten year) is a negative economic forecast. I have never been quite clear on whether this is regarded as a causal relationship or simply an observable correlation. The former seems unlikely – that the sight of a threatening yield curve sparks widespread fear and recession follows as a result of cautious behaviour – but I have heard people talk as if that is the case. It seems more likely that inverted bond yields are a response to or a forecast of tough economic times. I prefer to remember that bond prices are the terms on which borrowers and lenders choose to trade. High short dated yields might imply inflationary fears but they also reflect the credibility, or lack of it, of the governments that need to borrow. Lower long dated yields imply scepticism about future growth but they also suggest the belief that returns from safe investments will revert to the modest levels that became normal in the last ten or so years. A DECADE OF BOND MARKET MANIPULATION MAY HAVE DISTORTED INVESTORS’ PERCEPTION The obvious flaw with the idea that low long term yields are normal is that it is probably wrong. We have been conditioned by more than ten years of government bond market manipulation by central banks. In some countries like the US, the UK and the Eurozone, central banks have led the way with QE. It is a matter of opinion as to how independent of government influence these central bank actions have been. The fact that they have de facto financed unprecedented government borrowing, first through the Great Financial Crisis aftermath and then through Covid-inspired lockdowns, speaks for itself. HISTORY OF UK 10 YEAR GILT YIELDS Here are UK ten year gilt yields since 1980. In the 80s they were in a 10-15% range and then a 5-10% range basically until 2008 when the estimated $60 trillion of outstanding credit default swaps began falling like dominoes, threatening numerous financial institutions around the world. The chart illustrates nicely the result of the critical need for cheap money around the world. In...

28 Sep 2022

The rapidly falling pound sterling is, according to the opposition coalition of political and media commentators, proof that confidence in the three week old Truss administration is fading away. There are certainly plenty of economists saying that the chancellor’s tax cuts will not stimulate growth and that, whatever, it’s all not fair. The Bank of England is probably wondering whether to raise the bank rate to defend sterling, though it will also be nervous that any indications of panic will make things worse. The gilts market is anyway taking the decision out of its hands. Two year government paper yields 4%. The Bank of England does not command the rates at which actual transactions take place in the real world. I suggest that the Bank continues its policy of pretending to be a cork in a jacuzzi. I have written many (many) times about the remarkable growth of UK government borrowing and how the costs were artificially disguised by the QE through which the Bank of England, as an agent of the Treasury, purchased gilts in the open market while the same Bank of England sold new gilts on behalf of the same Treasury. It really was as circular as that. It must be time to quote Lewis Carroll. “But it’s no use now,” thought poor Alice, “to pretend to be two people! Why, there’s hardly enough of me left to make one respectable person!” While QE was still in operation (until the end of last year) there was an implicit market agreement to see no folly, hear no folly and speak no folly. The wonder is not that the gilts market is being yanked back to reality now but that it spent so many years in a hallucinogenic stupor. The Bank of England bought £445 billion of gilts to smooth over the fallout from the subprime crisis and Brexit and a further £450 billion to fund lockdown. Due to the fact that it drove prices up and paid top dollar it lost £112 billion on its transactions (a hundred billion here, a hundred billion there – whatever) which means, to be clear, that it lost that money on our behalf. And, to be...

8 Jul 2022

The FTSE 250 fell by 11.8% in Q2 and was down by 20.5% in the first half. For the FTSE 100 those numbers were -4.6% and -2.9% respectively. The message was that the big international companies were relatively unscathed but the more domestically exposed businesses flashed a big warning about recession or worse.  It was only to be expected that government bond yields, with less central bank support than before and gathering inflation, would rise and so they did. By mid June, UK 10 year gilt yields jumped from 1.6% to 2.65%, US treasuries from 2.34% to 3.48% and German Bunds from 0.56% to 1.76%. But in the second half of June, a mini bull market resumed in government bonds. On 1 July, UK yields were back down to 2.06%, US to 3.02% and German to 1.2%. On the face of, the bond markets are now more frightened of recession than inflation.  Consistent with this, despite the front page news about inflation and wage demands and threatened strikes, most commodity prices are well off their highs. Oil is +39% this year but was up 73% in March. Wheat is +23% but was up by 56% in May. The near certainty of rising prices for aluminium and copper has turned into falls of 13% and 19% respectively year to date. There has probably been stockpiling by producers as well as the self-inflicted closure of much of the Chinese economy. One should also remember that the monetary splurge that accompanied lockdowns probably filled the savings of the professional classes very nicely. History may record that this was a huge and regrettable transfer of resources in the wrong direction i.e. from the relatively poor to the relatively well off. Whatever one thinks, it is notable that the summer holidays are marked not by complaints of price gouging by holiday companies (though there is some of that if you were a regular user of Eurotunnel) but by the scandal of not enough flights to transport those who sport pale skins to the sun.  I note also that despite the threat or probability of costlier mortgages, UK house prices rose at an annual rate of 13% in June. Once...

20 Jun 2022

I am struck by the knowledge that the stock market hit its Covid panic low on 23 March 2020 (FTSE at 4994). That was the very day that the first UK lockdown was announced. This is a splendid example of how desperately keen share prices are to discount bad news. Because the actual news got much worse for much longer than anyone could have believed – but the low was already in for the stock market. Today, it is hard to see how much worse the news could get for UK consumer shares or government gilts. So here are some deservedly unpopular ideas that might just pay off. THREE SHARES VULNERABLE TO CONSUMER SPENDING National Express (buses and coaches) 217p Since the beginning of March it is an amazing fact that three of the four UK listed bus (& train) companies have received takeover bids Stagecoach – bid 105p (now unconditional) vs March low 76p (38% premium) FirstGroup – indicative bid of 163.6p vs 89p in March (84% premium) Go-Ahead – bid of 1500p vs 550p in March (173% premium) That leaves only National Express which is now just a bus company (plus a few trains in Germany). It is huge (£2.7 bn in revenues this year)  and supposedly in the sweet spot for new transport habits (out of those wicked cars, people, and get on board with the monarchs of the road). It raised £235million from shareholders in May 2020 at 230p per share and the price has gone nowhere (now 217p). It plans to restore a dividend in 2022. It has hedged its fuel costs 100% for this year, 64% of 2023 and 25% for 2024. It has guided to a 7% operating margin in 2022 (10% in 2019).  I do not love this company but it has the potential to benefit from a certain scarcity value. Halfords (auto centres and bikes) 157p Another theoretical sweet spot – second hand car servicing and cycling. This statement of the bleeding obvious last week sent the shares down by 20%. While rising inflation and declining consumer confidence will naturally present short-term challenges for any customer-facing business like ours, we remain confident in Halfords’ long-term...

4 Apr 2022

The stock market trend that began in Q4 accelerated in Q1. The FTSE 100, with its big oil, gas and mining shares, rose by 1.8% while the FTSE 250, mostly populated with companies that use those products as raw materials, lurched down by 9.9%. I cannot recall such a divergence between those two indices in a single quarter. Despite this, the bond market action was more dramatic still. Ten year UK Gilt yields rose from 0.97% to 1.6% as purchases by the Bank of England ceased. In the US, 10 year Treasuries yielded 1.51% on 31 December and 2.34% at the quarter end. The German 10 year Bund yield rose from -0.18% to 0.56%. Despite the serious risk that Putin, net zero and raw material prices will combine to send us back to recessionary times, the main message from government bonds is that inflation is a problem that historically demands high interest rates. The theory that the cost of borrowing should rise in order to discourage speculative investment looks rather thin in today’s circumstances but markets are not famous for looking around corners to see what might lie just out of sight. . Rishi Sunak’s spring financial statement contained the inevitable tax increases that many seem to find unbelievable and the reason for them. The government is now expected to pay interest of £83 billion in 2022/3. This may include losses on its stock of redeeming gilts but even so it is a shocking number implying that the nation is now paying 4% to borrow, which is roughly twice as much as its more solvent citizens. Though the latter can only expect their mortgage rates to rise in turn. The time may have come for the idea that the credit worthiness of all governments is something that must be factored into the usual calculations about the relative cost of...