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 In my mind this apocalyptic image has been replaced by that of infant school pupils wearing masks and for hours recycling their own breath back into their lungs.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...

26 Jan 2024

I forgot who it was who said that he wasn’t afraid of flying but of landing. The same philosophy may be applied to borrowing. Borrowing is rather like flying – rewarding, useful and even exhilarating. The scary part is landing the debt and returning it to its hangar. It is worth asking why the US seems uniquely able to borrow with impunity compared to other countries which feature at various stops on the slope downwards to habitual insolvency. I would argue that the three main impediments to foreign investment anywhere are distrust of a government, distrust of its currency and, recently, distrust of the reliability of energy supply. There is one policy that Presidents Trump and Biden appear to share – that if you want to sell in America you need to manufacture in America: and according to UN investment data, the rest of the world is happy to fall in line. Despite apparently going along with the COP religious movement, Biden’s government has been careful to continue America’s pursuit of cheap and independent energy and to be a willing exporter of LNG to the world. In 2022 the US became the leading exporter of LNG and, to the horror of the lobbying organisation Covering Climate Now, a “massive expansion” of export terminals is proposed. “Taken together, if all US projects in the permitting pipeline are approved, they could lead to 3.9 billion tons of greenhouse gas emissions annually, which is larger than the entire annual emissions of the European Union,” wrote a group of scientists in an open letter to Biden in December urging the president to halt the expansion. . Source: coveringclimatenow.org STOP PRESS : President Biden has just “paused” new export licences. Lobbying works, sometimes. Financing public spending by borrowing feels irresponsible. Politicians rarely dare to advocate it. Instead, they do it stealthily. In the US the Biden administration launched the comically named Inflation Reduction Act to lend a sense of responsible purpose to its continuing accumulation of a debt pile now standing at $34 trillion (it was $10 trillion in 2000). Before we believers in prudent finance throw up our hands in horror we must be quite clear about why...

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...

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...

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...

10 Feb 2022

The rising cost of living is suddenly all over the news. The Bank of England is forecasting that inflation will rise to 7.25%. Transparently ineffective and arguably misleading measures have been taken to mitigate the raising of the ridiculous energy price cap. Talking of ineffective, the Governor of the Bank of England is calling for pay restraint. Excellent. Political commentators have called for the abandonment of April’s proposed rise in the rate of national Insurance on the simplistic grounds that people will actually have to pay it. This is not unusual in the case of taxes. No one wins votes by being in favour of them. For some reason the Chancellor seems to have persuaded the Prime Minister to hold his nerve, for now. It’s almost as if Rishi Sunak understands the state of the nation’s finances.  The nagging feeling that something is wrong and that “something must be done” causes excitement when there appears to be the chance to raise someone else’s taxes. Currently there is a call for windfall taxes for the oil companies who have had the effrontery to recoup in 2021 what they lost in 2020. BP and Shell are preparing to pay $16 billion in tax between them as it is (not all to the UK treasury) and the dividends they pay will be received by the pension funds that most of us own, directly or indirectly.  The truth is that the scale of the national debt is too intimidating for proper public discussion.   At the end of December the value of gilts in circulation was £2,011 billion (just over £2 trillion, as people like to say now when they want to intimidate with numbers that are nearly impossible to contemplate) of which 28% have been issued since March 2020 i.e. in large part due to the cost of the response to the pandemic. Over the twenty one Covid months government expenditure has exceeded its receipts by £467 billion and £563 billion has been raised in gilt sales.  It may be that the treasury decided to take advantage of exceptionally low interest rates to sell as many gilts as possible. The reason why rates have been so low for...

28 Dec 2021

Post hoc ergo propter hoc, or after this, therefore because of this, is a well known logical fallacy. A sequence of events does not guarantee that there is a causal relationship between those that precede and those that follow.  Wise investors know to beware of confusing correlation with causation. A famous and surely harmless example is the Super Bowl indicator that claims that the stock market has a good year when a team from the NFL triumphs but falls if an AFC team is victorious.  Nevertheless, retrospective explanation for the movement of asset prices is a serious industry that seeks to establish an understanding of the past and, by implication, of the future, available only to a select few. I have written about this before. To an investor it doesn’t or shouldn’t matter why an asset rose or fell in price. All that matters is being aligned with the outcome. Occasionally a company that has been performing badly gets taken over at an agreeable price. Shareholders who had invested because they thought that the managers of the business were competent discover that this was not the case but ultimately are rewarded for being wrong. They give thanks and move on, as unelected leaders of their own portfolios, to their next idea without embarrassment. (Or maybe that’s just me). The so-called nonpharmaceutical interventions (NPIs) to deal with Covid-19 have elevated “post hoc ergo propter hoc” from a fallacy to the foundation of policy. Imposing lockdowns, shutting schools and destroying businesses are all actions that I consider cowardly as well as destructive, though it seems that the majority were willing to go along with them as long as the government would drive itself to the edge of insolvency to compensate them. What is, I think, beyond dispute is that the advocates of these NPIs must appear to be supported by convincing evidence that they made a positive difference. Issues of liberty, free speech, mental health and the treacherous Swedes can be relegated to background noise as long as the narrative holds.  Karl Popper proposed the Falsification Principle. It states that for a theory to be considered scientific it must be able to be tested and conceivably...

15 Dec 2021

There seems to be a puzzling disconnect between the available facts from South Africa about Omicron (that it spreads quickly but has relatively benign health consequences) and the gloomy and even panicky reaction in the UK from the government, the self-appointed “science” and the political opposition, such as it is.  It is almost as if the establishment, if that’s the right word, has an ulterior motive in keeping the fear going, even at the expense of the usual suspects such as children, people with undiagnosed conditions like cancer and, of course, the leisure and travel industries.  As this website is about money, I will speculate about financial motives. Fighting Covid has been extraordinarily expensive. The UK government has borrowed more than £550 billion since April 2020. Clearly this money has gone to some obvious recipients like vaccine manufacturers and the rapacious “approved” PCR testers but also to the NHS, to local councils and in the form of furlough payments to employers of the temporarily unemployed. I don’t suppose that many people associated with any of these groups, the pharma companies aside, actually want the pandemic to continue. But be aware that this is potentially a very big week for the UK Treasury. In March 2020 it was agreed that the Bank of England’s Asset Purchase Facility could be increased from £445 billion (it was full at the time) by £200 billion and later in the year by another £100 billion and again (in November) by a further £150 billion for a total of £895 billion (popularly known as QE or quantitative easing).  Since April 2020 the Bank has duly bought gilts steadily from institutional holders. We have only the detailed figures up to the end of September but at the consistent rate at which it was operating it should have reached its £895 billion target this very week (13th December). Over that period the Bank purchasing arm has bought £3 of gilts for every £4 that it has issued on behalf of the government. In other words, 75% of this extraordinary borrowing has been funded by what one might call an elaborate accounting trick.    Unless the QE facility is ramped up again, the government...

17 Sep 2021

The company once known as British Petroleum (a name revived by President Obama when he wanted to stick it with all the blame for the Deepwater Horizon oil spill) has quietly rebranded itself in the lower case though almost nobody seems to have noticed. As if it is the corporate embodiment of white privilege, bp can only apologise and beg forgiveness for its own existence.  The splendidly named CEO, Bernard Looney (who will soon rebrand himself as Nigel Neurodiverse) has pledged to reinvent the company as a provider of multi energy customer solutions. My opinion is that if he thinks this is going to keep the eco warriors at bay he needs to change his medication, but never mind.   What interests me now is the entertaining contrast between the reinvention rhetoric and the grim reality that bp is probably having a stupendously profitable year due, of course, to the rises in the prices of oil and natural gas. How embarrassing could this get? I will save you the trouble of ploughing through bp’s 2020 annual report (tagline: “Performing While Transforming”) and take you straight to page 183 where you can get an idea of how the company actually earns its money. Essentially it is 94.5% from oil, oil products and gas. There was little bp could do in H1 2021 to avoid the surge of cash that resulted from the pop in gas prices in Q1 and the stronger crude oil price in Q2.  In its presentation about Q2 it was careful to say that it expected gas supply to remain tight and refining margins to remain roughly unchanged. In fact the natural gas price (Henry Hub) which averaged $2.9 in Q2 is now (17 September) at $5.37. And industry refining margins which for bp were strong at $13.7 per barrel in Q2 seem to be sharply higher again across the industry. It seems probable that bp will experience another embarrassingly strong quarter when it reports in late October.  The share price of bp would surely be higher were it not for the armies of Net Zero shamers whose abuse will only increase in volume as the delightful prospect of that orgy of UN...

8 Aug 2021

Back in 2014 I delivered a presentation on “Turning a good idea into an investment”. Among the precious jewels of advice was this observation.  Milestones should be plausible and realistic. We should feel that a start-up company knows what it hopes to do next week, next month, next quarter. If someone tries to interest me in a business that has invented a device that makes perfect poached eggs, I don’t want to be shown a graph of estimated global egg consumption up till 2020. I want to be shown a poached egg. I hardly need to point out that today’s politicians love to announce targets that are a long way into the future.  COVID 19 – HEADLESS CHICKENS GO VIRAL The Covid-19 pandemic has given us the rare sight of politicians made to take short-term decisions with quick measurable consequences. It has been their ultimate discomfort zone. It has not been pretty to watch but it has been instructive.  Responsibility has been outsourced with urgency – decision-making has effectively been devolved to rolling committees of the unelected who might or might not have the necessary scientific qualifications.  More surprising to me has been that the terror has spread to opposition parties whose positions have been as difficult to nail down as a smack of jellyfish at high tide. Perhaps it is not surprising, though it is certainly not admirable, that the leaders of nations prefer to bask in the warm waters of the infinity pool. BEING BRAVE AND DECISIVE ABOUT THE YEAR 2100 If future targets were awarded Oscars, the winner of best picture would be that one about the global temperature in 2100. Essentially it seeks to restrict the temperature rise between two dates; the first being when no one alive today had been born and the second where all today’s decision makers will be dead. It is a fine example of something that is beyond accountability due to lack of proper data.  I doubt if one person in fifty realises that the self-congratulatory COP 2016 Paris meeting was promising something to be realised 84 years into the future.  Given that there is little sign that China and India (for example) are taking...

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...

7 Jun 2021

When money and virtue share a bed, strange and disturbing things tend to happen.  I have written before (in 2014) about the ethical contradictions concerning the destination of the UK’s Oversea Development Aid budget. Seventy three percent of it went to countries where homosexuality was illegal but if there was ever any debate about that I never heard it. Like a Christmas sweater, the giving is more important than the receiving. Once the donation box has been ticked we can pat ourselves on the back and tell ourselves that to enquire about how the money is spent would be colonial and racist. Seven years later, the shadow of virtue casts a much longer and no less contradictory shadow. Here is a brief case study. THE ETHICS OF TOP LEVEL SOCCER I have found the current season of the English Premier League quite hard to watch. The team with the biggest financial backing won easily. Three brave and impoverished strugglers were relegated long before the end of the season. In stadiums empty of fans (who might well have reacted with displeasure) the clubs and officials all participated in “taking the knee”, originally a show of disrespect for the US national anthem, despite it seeming obvious that the anti-capitalist vibe of Black Lives Matter could hardly be further from the realities of club ownership.  These realities came to a head when some of the owners, acting as if they thought the clubs belonged to them, tried to create a breakaway super league. The result was a mob of multi-millionaires, who, unlike the owners, owed their personal wealth to football itself, rushing to denounce the idea that money should be allowed to ruin the game, as they saw it. Many people, unless they happen to support the clubs funded by wealthy foreigners, would say that that ship sailed a long time ago.  While UK football constantly pledges to “kick out racism” and to take women’s soccer seriously there is not a whisper on the subject of sexual orientation. In the past, fans have been notoriously homophobic. They may not be now but we have no way of knowing because, as luck would have it, not one of...

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...

24 Jan 2021

Change is inevitable and continuous. It is the journey of human life. We can try to preserve what matters to us – our fitness, for instance – but change has an unbeatable ally – time. In the end, change is both inevitable and fatal. For that reason, the promise that change can be controlled is very seductive. Convincing us that this promise is deliverable attracts those who would exercise political or financial power over us.  POLITICS AND CHANGE Some politicians and campaigners pledge to deliver change as an improvement – others to block or reverse it where they see it as bad for us. In each case they are almost certainly over promising by implying that controlling change is in their power.  Nonetheless, at times the public has an appetite for the idea that a government can deliver destiny. Then, perhaps, disillusion sets in. There certainly appears to be a cycle by which the message of change becomes more and then less popular. In the UK 1959 election the incumbent Conservatives campaigned on the slogan “Life is better with the Conservatives, don’t let Labour ruin it”, often summarised as “You’ve never had it so good!”. The voters agreed. But the change hounds, who can come from left or right, were back in the game in 1964. The Labour manifesto was titled “The New Britain” and its leader Harold Wilson became associated with the phrase “The white heat of technology”. In 1970 Labour was expected to win for the third time in a row and was by now warning against change. “Now Britain’s Strong – Let’s Make it Great to Live In” failed to make the grade, even against a pretty bland Conservative party (slogan “A better tomorrow”). In 1979 the Conservatives were undeniably the party of change with the famous “Labour isn’t working” poster.  Fast forward to 1997 and the Conservative were in full change denial again. Their slogan was “New Labour, New Danger” and they were obliterated by Tony Blair and his campaign song “Things Can Only Get Better”. For a while politicians like Blair and Barack Obama sold change as something progressive. The implicit message was that we are all sinners who...

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...

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....