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....

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...

5 Mar 2023

When I talk of stupidity I do not refer to my own which, save in painful retrospect, is an unknown unknown. For better or worse I am limited to my own perception of the stupidity of others.  My proposition is that when some people are wrong, others can profit. Like all judgements, observations of stupidity need to be subjected to a probability test.  Warren Buffett says that sometimes prices are “foolish”, absolving people of some responsibility for the valuations of “Mister Market” but he is a kindly man and evidently much nicer than me.  One advantage of our publicly-traded segment is that – episodically – it becomes easy to buy pieces of wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect Warren Buffett, Berkshire Hathaway shareholder letter, February 2022 THE LONELINESS OF THE LONG DISTANCE INVESTOR It makes sense that the greater the number of people that are wrong, the greater the potential rewards for those who know better. If you haven’t read The Big Short by Michael Lewis, or watched the film made of it, you should. It was a lonely life, defying consensus ahead of the great financial crisis of 2008 and it is never easy. As Keynes said, most investors would rather fail in the comfort of a crowd than risk standing out.  Holding a minority opinion can be worse than lonely. For some reason, rejecting consensus appears to provoke hostility, particularly at times of perceived emergency (see my last post). After Neville Chamberlain agreed to Hitler’s annexation of the Sudetenland in Munich in September 1938, Winston Churchill denounced the deal (“England…has chosen shame and will get war”). This may look like a historical footnote but Churchill’s own constituency party attempted to have him deselected and very nearly succeeded. The appeasers of 1938 were in a large majority and the idea that Hitler could be bought off was treated as believable because people wanted “peace in our time” so much. Stupidity is surely the eager and dangerously loyal...

5 Feb 2023

“Power tends to corrupt, and absolute power corrupts absolutely. Lord Acton, 1887 On 6 May 2020 I published ECONOMIC SHUTDOWN! EMERGENCY!!. This has aged quite well, in my opinion. I forecast a form of stagflation; essentially economic slowdown and rising prices. At the time, in common with almost everybody else, I took the government’s need to exercise emergency powers for granted. The Public Health Act of 1984 was supplemented by The Coronavirus Act, hurried through after four days of whatever passed for Parliamentary scrutiny in March 2020.  The act allowed the government to detain anyone suspected of having the virus (a pretty alarming negation of civil liberties by itself), to close borders, to record deaths without inquests, to restrict the right of assembly, to close schools, to suspend elections. As I recall, it did all of those. Legislation, which normally needs to be laboriously passed through Parliament, is not practical in an emergency. Obviously the question of what constitutes an emergency is a matter of opinion. And a perpetual state of emergency is ideal for anyone who wants to restrict or compel the behaviour of others. This explains why the language of crisis (catastrophe, extinction, mass murder) is employed by Net Zero enthusiasts. There is a website that monitors the progress of extinction claims over time. So the Thunberg team knows what it is doing. But while we may fend off the most extreme demands, the plausibility of Lord Acton’s words was supported all too well during the pandemic.  The leaders of Canada, New Zealand, Scotland, Wales and many other places appeared to relish the power and to believe that authoritarianism was a measure of responsibility.  LABOUR’S FIRST YEAR I recently read a book, published in 1947, about the parliamentary debates of the first year of the post-WWII government. In July 1945, Labour was elected with a dominating 150 seat majority on a manifesto of stunning radicalism. Almost everything that moved was to be nationalised; coal, coking, railways, airlines, healthcare and the Bank of England.  During the war, an Emergency Powers Act was renewed by Parliament annually. Given that the country was fighting the most notorious dictator the world has ever known, who passed...

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...

8 Oct 2022

The FTSE 250 fell by 8.0% in Q2 and is down by 25.5% year to date. The FTSE100 is down by just 2.7% year to date, a massive and, in my experience, unprecedented outperformance. On average FTSE 100 companies are larger and more international meaning that they are typically earning dollar revenues, a very good cushion in recent months. UK ten year government bond yields began the quarter at 2.06% and ended it at 4.1%, a rout that was ludicrously attributed to a trivial mini budget. As I wrote recently, this has been coming for a long time and the cause is a combination of relentless excessive borrowing, to which the nation appears to be addicted, and blundering behaviour by the Bank of England which naturally fails to accept responsibility. The overdue correction in government bond yields was certainly not confined to the UK. Ten year German Bund yields soared from 1.2% to 2.1% and US Treasuries more modestly from 3.02% to 3.8%. As those yield movements imply, Europe has a bigger inflation threat because most commodities are priced in dollars. Stock investors in the US have seen most commodity prices well off their highs and are disappointed that the Fed appears to be set on continuing to dampen an economy that appears to be slowing down quite nicely. It is worth mentioning that most US commentators see a bad recession across Europe as a given. I have been buying two year Gilts yielding above 4% in the knowledge that these represent a very viable alternative to stocks, at this difficult time, as they say when flags are flying at half mast. There is no doubt that many share prices are very low and some of them may even be cheap. I have been looking at retailers. Sainsbury, Tesco, Halfords, Kingfisher and Pets at Home all have solid balance sheets and yield between 4.5% (Pets) and 7.5% (Sainsbury).Marks & Spencer, which must be selling hair shirts, pays no dividend for some reason but its historic free cash flow yield is 33%. Barring serious management blunders, which are of course quite possible, these companies are long term buys. I am tempted to write that there...

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...

2 Sep 2022

Fifteen months ago I pointed out that ESG (Environmental, Social and Governance) investing would make a few people rich (via the vast public subsidies directed their way) and many people poorer. I tried to appear even handed without disguising my characteristic scepticism. Subsequent events have proved to me that I was much too restrained. ESG is not only rubbish but it is toxic rubbish. It fills up companies’ financial reports with box ticking nonsense that replaces facts that investors need to make decisions based on, you know, the financial outlook. Tom Kerridge is a “celebrity” chef who owns three successful gastropubs. He says that his energy bill is about to rise from £60,000 to £420,000 a year. The UK hospitality sector, having spent the best part of two years in imposed lockdown, is now staggering out of control towards a new disaster. All UK businesses that need significant retail outlets have seen their share prices dive because investors fear that rising energy costs will push them into loss or worse.  On 16 June Halfords released upbeat results for the year to April 2022. The dividend was 9p a share and the dividend policy is described as “progressive”. Today the shares are at 130p, down 60% this year, offering a theoretical yield of 7%. So I turned to Halford’s annual report and accounts to seek some clue about the company’s sensitivity to energy costs.    It seems that for Halfords risk management is based around a Task Force on Climate-related Financial Disclosures (“TCFD”). As the lights are about to go out Halfords’ ESG committee is meeting monthly to discuss the effect of climate change on the business between 2030 and 2050. The significant risk to Halfords retail sites is said to be extreme weather that results in flooding across the UK.  This might be the stuff of satire were it not for the fact that it replaces rather than supplements useful analysis.  Sainsbury’s shares are down 30% this year and the dividend yield appears to be 6.5%. As with Halfords, investors probably have visions of winter shopping in mittens by candlelight. Sainsbury’s annual report has seventeen pages of risk assessment. The company is watching out for...

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...

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...

7 Nov 2021

Q3 was again quite calm in the equity markets. The FTSE rose by 0.7%, quarter-on-quarter, and the domestic orientated FTSE 250 by 2.9%.  It is the bond markets that are relatively volatile. After a rather surprising rally in Q2 (when yields fell) the official message that inflation will be transient began to met with scepticism again in Q3.Government bond yields began to rise again – US treasuries from 1.3% to 1.6% and gilts from 0.6% to 1.1%. At present there is much speculation about whether the Bank of England will raise the Bank Rate from 0.10% to 0.25%. So what? Is a reasonable question. The Bank Rate is the interest that the Bank of England pays to commercial banks when they deposit money with it. The long years of near zero rates are part of a policy to encourage banks to lend. In addition, QE has swamped the private market with cash. The Bank Rate is classically raised in order to discourage excessive lending which leads to overheating and inflation. As a Fed chairman once said, you take away the punchbowl just as the party is getting going.  I find it hard to imagine that interest rates play any significant role in commercial bank decisions at the moment. If the Bank Rate is effectively an opportunity cost of lending it is going to have to be much higher than 0.25% to make any difference. Perceived counterparty risk must be the dominant consideration. The most important factor for the Treasury and the Bank of England is their own borrowing costs. At some point, surely, the government will have to stop borrowing from itself and will need to raise money from savers and investors who will need inducements. Keeping the Bank Rate low will be an irrelevance and won’t stop long dated yields from rising. Roll on the...

30 Jul 2021

It was another tame and friendly quarter in the equity markets. The FTSE rose by 4.6% and the domestic orientated FTSE 250 by 3.8%. Rising commodity prices are more likely to be good for large international businesses than for domestic companies that often have to import raw materials or finished goods. Year on year, it still looks like boom time for the FTSE 250 (+31%) while the FTSE 100 was up by a more restrained 14%. The major story since Q1 has been the austere message from the bond markets. Once again the only direction for yields has been downwards, a strange reaction to forecasts of rising inflation and post-Covid consumer recovery. US 10 year treasuries which started the quarter at 1.7% and apparently looking to break 2.0% are back down to 1.3%. And UK 10 year gilt yields are down from 0.8% to 0.6%. What is going on? One point to make is that the post-pandemic bounce is being restrained by cautious or possibly panicked government intervention. In the UK, the official opposition, such as it is, is keen to accuse the government of lifting restrictions too quickly and eager to blame it for causing extra deaths in quantities and for reasons yet unknown. The leisure industries have become used to having to incinerate their plans at a moment’s notice and economically this is of course disastrous. In Australia, to take one painful example, a zero tolerance of Covid allied with a snail pace vaccination roll-out has led to huge and endless lockdowns that make Australia and New Zealand seem as if they are now situated on another planet, possibly the birthplace of Jacinda Ardern, who has declared herself the sole source of truth. Traditionally, the bond market is a better predictor of economic direction than the stock market (though to be fair the stock market generally has the predictive capacity of a dog chasing a car). There is also a spreading realisation that governments cannot afford to pay higher interest rates on their extraordinarily high debts. If there could be said to be a consensus it is that all the central banks know this and are trying to send signals that they...

6 Apr 2021

It was an amiable quarter in the equity markets, despite some warnings of bubbles and the occasional bankruptcy. The FTSE rose by 4.1%, the All Share by 4.5% and the domestic orientated FTSE 250 by 5.2%. Year on year, it looks like boom time because the end of March in 2020 was more or less the bottom of the market. A salutary reminder, in case we needed one, that stock markets try to discount news as quickly as possible. Once the pandemic and the lockdown measures had sunk in, it was panic by sundown.   With this flattering point of comparison, the FTSE rose by 18.8% over twelve months, the All Share by 23.8%% and the FTSE 250 by a drool-making 43.3%. Bond markets were stirred from their seemingly endless slumber. Those terrible twins of inflation and currency debasement might be intruding into investors’ thoughts. US 10 year Treasury yields popped from 0.9% to 1.7% over the quarter. UK gilt yields rose from 0.2% to 0.8% – not exactly a compelling offer but a serious price move. German yields “rose” from -0.57% to -0.32%.  It seems that people are beginning to believe in the vast libraries of money that central banks are printing. They expect recoveries in spending and government-inspired investment and equities are the obvious way to play the trend. If your portfolio performed disappointingly in the quarter it’s probably because you owned sensible shares that survived and prospered in lockdown. Sentiment began to move in favour of “reopening stocks” though most of the reopening that we have seen so far has come from a few US States dubbed by President Biden as “Neanderthal”. So far, the throwbacks appear to be doing rather well. As we said, stock markets try to discount news as quickly as possible, even if it’s...

26 Mar 2021

INFLATION – WHAT THEY TEACH YOU AT SCHOOL I remember from economics lessons at school that there were supposedly two categories of inflation, namely cost-push and demand-pull. This was simple enough for anyone, even a pubescent schoolboy, to understand.  Now I can see that this was something of an oversimplification (for which I was no doubt grateful). Supply and demand do not happen in isolation. They respond to each other over time. It is instructive to remember that the price of anything will rise when the current supply is insufficient to satisfy demand and of course it works in reverse.  Yet the demand element of inflation is what occupies most “informed” chatter. That’s probably because we have a more immediate feeling for it. At present there is said to be a dam of spending waiting to spill out as soon as the first world countries are released from lockdown (I’m assuming it will happen one day – stock markets are impatiently celebrating it already).  Consensus says that this will give a transitory boost to inflation which will then subside because private sector unemployment is too high – in short, the poor sods who have been screwed by lockdown will exert a deflationary effect that prevents the economy from overheating. This in turn is offered as a justification for the probability that central banks will not raise interest rates. Well, yes. Given that the US, European, UK and Japanese economies are all funded by the state balance sheets, I think we can reasonably act as if the date for the next increase in official interest rates is approximately never.  SUPPLY SIDE INFLATION But supply side inflation – now that’s a story. Energy, commodity and shipping prices are really moving this year. Given that most of the world’s major economies are still in recessionary territory that’s quite impressive.  SAMPLE OF PRICE CHANGES IN THE LAST SIX MONTHS   Carbon steel 107.8% Container rates 81.4% Oil 49.2% Lumber 44.7% Soybeans 39.8% Iron ore 38.8% Copper 31.7% Coal 31.4% Cotton 31.3% Sugar 23.1% Aluminium 22.9% Natural Gas 21.1% Wheat 12.9% Rice 8.1% IN THE PAST, TECHNOLOGY HAS BOOSTED EFFICIENCY AND CUT COSTS So what is going on? I...

22 Feb 2021

The notion of “consensus” makes active investors drool in the manner of Pavlov’s dogs. This is because predicting correctly when consensus is wrong can be profitable. Consensus in itself is useless, a passive snooze, devoid of critical thought – if it were a dog it would be asleep, heart-warming to see but catching no rats and barking at no burglars. Given that consensus is essentially unprofitable, it’s current popularity is somewhat perplexing and even alarming. Everywhere one looks it is providing comfort to those who do not wish to ask difficult questions. LOCKDOWN CONSENSUS The advocates of lockdowns to combat Covid in the UK have achieved consensus and have been able to abandon any pretence of distinguishing between correlation and causation. Covid cases rise and fall – whenever they fall after a lockdown (and there’s always a lockdown) , post hoc ergo propter hoc triumphs unchallenged. If cases continue to rise it is always because lockdown was too late, too light or too short.  There is no opposition from any political party on this point, despite the probability that the lockdown of the economy is making the poor relatively poorer and it was once seen as the role of Labour to stand up for the underprivileged. HOUSE BUILDING CONSENSUS The last time I saw this level of political consensus was before the 2015 general election when every political party demanded that greater and greater numbers of houses (in practice, mostly flats) needed to be built – this on the basis of a collective mistaken understanding of the Barker report of 2003, the proposal of which was to reduce property prices by creating an oversupply.  The oversupply began enthusiastically but destroyed the middle-sized privately-owned house building industry after the financial crisis of 2008-9. Yet things soon picked up again, albeit with the big housebuilders now in full control. The consensus to build survived the crisis (presumably because it was characterised as an extraneous event) and those blocks of flats, with or without cladding, have continued to rise like willowy magic mushrooms. INTERVENTIONIST CONSENSUS In early 2021, consensus in all its manifestations is being carried through the streets on the shoulders of a cheering mob.  I...

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....

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...

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...