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....

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,...

21 Dec 2017

The causes of the financial crisis have not been properly addressed. In particular, the perpetrators are widely and correctly seen as having got away with it. This, in my view, lies behind the populist behaviour that keeps giving us “anti-establishment” election results like Brexit, Trump and Corbyn. That’s the conclusion of this essay. Here are my arguments, looking at what happened in the US, the EU and the UK and the common failures of leadership in all three territories. WALL STREET AND THE FINANCIAL CRISIS I think we all know that the financial crisis involved junk debts being packaged by rogues as AAA and sold to idiots. Faults on both sides, no doubt. US officials are relatively good at hammering those considered dispensable. (Bernie Madoff was sentenced to 150 years at the age of 71. That showed him). But the biggest banks were considered “too big to fail”. They operated with an implicit guarantee that, no matter what, they would be bailed out by the state. This was extended to the claim that they were “too big to jail”. It has been said that it would be destabilizing to the financial system if the senior management of a major institution were taken on the “perp walk”, handcuffed in front of a global TV audience. At the same time, the alumni of US investment banks seem to penetrate government at the highest levels. The original bailout was presided over by the Treasury secretary Hank Paulson, once of Goldman Sachs. Also from a Goldman career is the current Treasury secretary, Steve Mnuchin (there are limits to President Trump’s populism). You can read plenty about Goldman Sachs here. US politicians who complain about the big banks tend to stand out because they are unusual. Bernie Saunders and Elizabeth Warren are portrayed as “progressive liberals” (that’s an insult in establishment parlance) and possibly anti-capitalist or un-American. It is estimated that the US banking lobby spends more than $100 million a year fighting attempts to regulate it.    In 2011 the Occupy Wall Street movement claimed to represent “the 99%” against income inequality and corporate influence. President Obama said perceptively that: “I think it expresses the frustrations the American...

6 Jul 2015

In Q2 the FTSE 100 fell by 3.3% but the FTSE 250 was up by 2.8%. In the first half year of 2015, the FTSE 100 was flat but the 250 was +9.2%. This divergence is probably indicative of two factors. The FTSE 100 is heavily weighted with banks and resource and mining stocks, few of which have looked like attractive investments for some years. The 250 is more reflective of UK PLC. Second, despite nervous headlines about (in no particular order) Greece, China, the interest rate cycle and the various consequences of terrorism, large companies have not benefitted from any move to perceived safe havens. Blue chip oil and pharma companies yield 5%+ but the average investor doesn’t seem to care. To put it another way, investors are not particularly nervous. European bond markets have normalised to some extent. The UK 10 year gilt yield has risen from 1.6% to 2.1%. Way back in September 2103 I recommended (and bought) a gilt, UNITED KINGDOM 1 3/4% TREASURY GILT 22. It was trading at 92. Having touched 103 in Q1 it now trades at just under 99, yielding 1.9%. This is not yet tempting me to get back in but it’s movement is worth following. Very little happened to the share prices of the major food retailers in Q2. They have all begun to tackle their structural problems. My view is that the market is now ignoring a trickle of good news. While Tesco is taking small steps at the start of a very long road – because Tesco needs to overhaul its financial structure – Sainsbury reported that the performance in its large stores had improved in June. It implied that the appeal of discount stores like Aldi and Lidl was waning slightly. Wishful thinking, perhaps, but Sainsbury is making an effort and its new joint venture with Argos is interesting. Morrisons has a new chief executive, David Potts, who seems to be making the right noises. When the (dull) Q1 numbers were released he said: “My initial impressions from my first seven weeks are of a business eager to listen to customers and improve“. He seems to be as good as his...

12 Feb 2015

Quantitative easing is a process by which a central bank buys relatively safe assets (mostly government bonds) and thereby puts cash into the hands of the newly-ex owners of those assets. In the early years of the financial crisis, this was effectively a life-support system for financial institutions which, post-Lehman Brothers, looked like they might fall domino-style. As the central bank bids up asset prices it creates a rising tide that floats many boats. One side effect of this is that the wealthy become wealthier. QE is quite tricky to justify from this point of view. If it is necessary to prevent the collapse of the banking system it is a jagged pill that needs to be swallowed. As I have written before, this is broadly how the Bank of England justified QE in 2009. “Purchases of assets by the Bank of England could help to improve liquidity in credit markets that are currently not functioning normally.” But gradually, while the music remained the same the lyrics changed. Expressing an idea that was essentially imported from the US, the justification from the Bank in 2011 was quite different. “The purpose of the purchases was and is to inject money directly into the economy in order to boost nominal demand.” You see what they did there? Once again, it was party time in financial markets. Bonds and equities were rising nicely. Bonds were rising because the Bank was buying them and other people were buying them because the Bank was buying them and equities were rising because they looked cheap compared to bonds. And property in the areas where financial people live began to go up again, despite the fact that prices appeared to require mortgages that quite high incomes could not plausibly service and that damaged banks could not reasonably be expected to offer. My friends and I have done splendidly from this once we had “got it”. And although I don’t know any influential people, some of my friends do. Call me a conspiracy theorist if you want but these influential people soon popped up all over the place saying how brave and wise central bankers were to extend QE. THE HIGH MORAL...