Report on Q1 2022

Report on Q1 2022

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...

WHY TAX INCREASES WON’T GO AWAY

WHY TAX INCREASES WON’T GO AWAY

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...

Report on Q4 2021

Report on Q4 2021

4 Feb 2022

The FTSE 100 outperformed (+4.2% in the quarter) the other indices (250 and All Share) because big resource shares (oil, gas, metals) did well as the market began to realise that high commodity prices promised outstanding profits. Free cash flow would be enhanced by the fact that the environmental lobby has bullied these businesses out of making the investments that would once have been expected. Instead the likes of BP (sorry, bp) have begged for forgiveness by bidding up the price of offshore wind licences.  For the full year, all the main UK indices rose by just over 14%, perhaps a sign of a fairly indiscriminate wall of money looking for a home. This was not a great result by international standards: the S&P 500 returned 27% in 2021. Meanwhile UK gilts began to show some signs that the Bank of England Asset Purchase Facility was nearly full, meaning that 2022 gilt auctions would be offered to an unrigged market. In December the 10 year yield rose from 0.82% to 0.97% and (spoiler alert) in January was set to soar up through...

CONSPIRACY THEORY OF THE DAY

CONSPIRACY THEORY OF THE DAY

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...

Report on Q3 2021

Report on Q3 2021

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...

Report on Q2 2021

Report on Q2 2021

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...

Report on Q1 2021

Report on Q1 2021

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...

PROBABILITY IS THE BASIS OF REASON

PROBABILITY IS THE BASIS OF REASON

8 Feb 2021

As far as I remember, the word “philosophy” means “love of knowledge”. Some of the philosophers whose books were in my college library tried to prove that God knew all the answers and others that truth lay in empirical observation or the meaning of words. “Whereof we cannot speak, thereof we must pass over in silence” – Wittgenstein. Somewhere buried in their philosophical texts one might find a grudging reference to probability. John Locke wrote that probability “is to supply our want of knowledge”. In the search for certainty, probability was to some, it seems, as admission of defeat, a last resort. A brief disclosure: the only thing written by me in the college library are the letters zzzzz carved into the leg of a table. The fact that I couldn’t see what Locke, Descartes and Wittengenstein were so exercised about was confirmed by my examination results. But I value the awareness of probability as highly as anything else. PROBABILITY – MAN’S BEST FRIEND?  Some people point to the fact that humans initially learn by imitation and get hung up on the observation that animals do that too. The ability to observe that, if A, then B, puts animals on the first step of logical thought. When I pick up my dog’s lead she immediately starts to celebrate her forthcoming walk. You could say that she thinks the probability of a walk is 100%. In Locke’s terms, the sound and sight of the lead being picked up has supplied her want of knowledge.  The weakness in my dog Hattie’s understanding of probability is her failure to appreciate that there are any numbers between 0% and 100%. Her world is essentially binary. But she should not be too despondent. Humans sometimes think in exactly the same way. The easiest example of probability is 50/50. When we toss a coin we know, assuming no skullduggery, that a head or a tail is equally likely. (Dogs always expect tails, obviously). We should also know, though gamblers sometimes don’t agree, that no matter how many times the same side comes up in a row, the odds do not change for the next toss.  For what it’s worth, this...

Report on Q4 2020

Report on Q4 2020

2 Jan 2021

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

Covid ’20 – a personal diary

Covid ’20 – a personal diary

28 Dec 2020

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

Report on Q2 2020

Report on Q2 2020

9 Jul 2020

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

AFTER THE PLAGUE, THE FAMINE

AFTER THE PLAGUE, THE FAMINE

26 May 2020

Despite the fact that the UK government appears, like Gilbert’s Duke of Plaza-Toro*, to be leading from behind, I suppose that this fearful fog of indecision will eventually dissipate and some kind of hobbled phoenix will stumble out of the smoking ashes of the economy. In passing, I would like to bestow their share of responsibility on the political opposition, including the trade unions, who constantly urge caution and demand something called “safety” for all, in the calculated knowledge that the worse the economic consequences of lockdown, the worse for the government.  Can they really be that cynical? Oh yes. THE DAMAGE DONE But whether you believe that lockdown was a) catastrophically late or b) completely unnecessary, (and history may one day deliver a verdict but you won’t find it on Twitter this afternoon), a vast amount of economic damage has been done. And the longer paralysis continues, the worse it will be.  And given that the government is now a follower of international decisions rather than a decision maker itself, we must look at the US, Germany, France (!), Sweden and pretty much anywhere else you care to name to see how our future might look.   Donald Trump has an election to win in November. (Ladbrokes still has him as the marginal favourite, which seems surprising). Naturally, he is desperate to get America back to work and, as his son says, make it great again, again. Whether you think he is gambling with people’s lives or trying to save them from destitution actually doesn’t matter. What matters is what has already happened.  The US unemployment rate jumped from 3.5% in February to 4.4% in March to 14.7% in April. That’s 23 million Americans out of work. But it will be more than that. The total of initial unemployment claims is at nearly 39 million by the end of last week. That looks like an unemployment rate closer to 25%, an utterly unimaginable number.  If it turns out that “it’s the economy, stupid” then Trump’s Thanksgiving turkey is cooked unless there is a near-magical recovery. Whatever you think of Trump, and there is no need to say or even think it out loud, a...

ECONOMIC SHUTDOWN! EMERGENCY!!

ECONOMIC SHUTDOWN! EMERGENCY!!

6 May 2020

Things are starting to get serious. The SAGE committee is vast and its remit is the virus and nothing but the virus. It has saved the NHS to the extent that the new Nightingale hospital near the O2 in London is shutting after four weeks. Job done except that most of the public is either scared out of its senses or, more worryingly, preferring a life of leisure on 80% wages. The government is now directly supporting more than half the adult population. Normally I would say that a minority of taxpayers is bearing the burden of the rest but that is nowhere near the truth. Taxpayers are being furloughed too. The printers are rolling and the government is set to borrow from itself. The question is, how long will people be able to live on these new government tokens (once known as sterling currency)? CURRENCY DEBASEMENT My son Leo has just written about the use of the first ancient coins. Greek traders who knew nothing of coinage were happy to use them, even though the gold/silver content was lower than natural bullion of the same weight. Leo was puzzled as to how items of lower intrinsic value continued to be accepted. My answer was that a coin’s real intrinsic value is the belief that if you accept it in return for a “real” good you will be able to pass it on to someone else in return for goods of the same value. But once that belief falters the coins will be swiftly debased. The debasement of our currency will manifest itself as inflation. If you weren’t an adult by the 1980s you will not remember a time when people bought assets today for fear that they would cost more tomorrow. I knew a couple in about 1985 who agreed to buy a small house off the King’s Rd. It was suddenly withdrawn from the market and re-listed at a £50k premium. To their credit, I guess, they did not blink and paid up at once. The US is issuing $3 trillion of debt this quarter. (That’s $9146 for every man, woman and child, or $11,363 for every adult). The US can get...

Report on Q1 2020

Report on Q1 2020

4 Apr 2020

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

Report on Q4 2019

Report on Q4 2019

6 Jan 2020

The last two weeks of 2019 were a good year for equity markets. The immediate cause was of course a decisive majority for the Conservatives and the apparent dispatch of Corbynism to the library shelf marked “Historical Fantasies”, perhaps one day to be studied by students who feel that their knowledge of the Venerable Bede is as complete as it will ever be. From 13 December, the day the results were known, the FTSE 100 rose by 4% to the end of the month, having been down in the quarter up to that point. The star performer in Q4 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. Year on year, all the indexes were stars due to a meltdown in Q4 2018 which offered a generous comparison. For 2019 as a whole, the FTse 100 was +12%, the 250 + 25% and the All Share +15%. Wow. The US 10 year yield was stable at 1.79%. 10 year gilt yields rallied from 0.55% to 0.74%, perhaps reflecting very small worries about more government borrowing. A year ago when things looked bearish I wrote the following: Here are three really bad things that could happen in 2019 or preferably later. 1) London house prices fall by 20% rapidly or 40% gradually (or both) 2) A major issuer of government debt suffers a catastrophic collapse in confidence or actually defaults (will the person who said “China” see me afterwards?) 3) A neo-Marxist garden gnome becomes Prime Minister of Great Britain. At the time I said that I was bored by politics and Chinese trade wars. On those fronts the noise has remained much the same. Donald Trump is a year closer to re-election, subject to the Democrats deciding to try to defeat him democratically rather than with the law. Climate change activists have got louder and sillier, though following COP 25 in Madrid, at which 27,000 delegates achieved very little, there was some overdue acknowledgement of the tension between the economic demands of poor countries with hundreds of millions of people living in poverty and the schoolgirl demands of...

Left hand down, hold on for the ride

Left hand down, hold on for the ride

14 Nov 2019

On 9 November, Prof. Brian Cox who is a professor of particle physics and a TV and radio presenter responded to the news that credit rating Moody’s downgraded the outlook for the UK’s debt with this Tweet: “Neither Labour nor the Conservatives will be able to borrow all the money they are pledging if international investors take fright.” Pausing only to note that anyone who relied on Moody’s credit ratings probably got wiped out years ago, Prof. Cox’s view does not seem outrageously controversial to me. Yet he was buried by a landslide of comments such as: “Don’t you just love it when experts step out of their areas of expertise and talk bollocks.” In essence the message is that if Brian Cox thinks that interest rates might rise, then he must be an economic dumbo. But the important point is not whether the professor is a financial simpleton or not but that the crowd is so emphatically behind a view that would quite recently have been unthinkable. Groupthink now knows that interest rates will never rise and that governments can borrow whatever they like. Happy days. And talking of financial simpletons, Donald Trump keeps criticising the Federal Reserve because other countries have negative interest rates on their government debt.  “Give me some of that. Give me some of that money. I want some of that money. Our Federal Reserve doesn’t let us do it.” Source: Speech to the Economic Club of New York 12 November 2019 The remarkable fact is that Brian Cox is regarded as the one who “doesn’t get it” whereas President Trump thinks that he is espousing “the new normal”. HOW DID WE GET HERE? How did we get here and what happens if the consensus is as wrong as usual? “I am concerned that this emerging anti-austerity consensus, driven as it is by the desire for perceived “fair” outcomes, could get messy. Meddling is in the air. An outbreak of doing the wrong thing cannot be far off.” Source: CrowKnows “Prepare to turn left” I wrote that exactly two years ago in the post “Prepare to turn left”. It is surely time to follow up because the steering wheel...

Report on Q3 2019

Report on Q3 2019

1 Oct 2019

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

Report on Q2 2019

Report on Q2 2019

2 Jul 2019

Falling bond yields continued everywhere in Q2. US 10 year yields are now just over 2%, UK at 0.86% and Germany at a record low of -0.3%. In the report on Q1 I wrote: “Perhaps by the end of Q2 we will be able to guess what people were worrying about.” The short answer appears to be world trade. President Trump believes that holds all the cards and, ignoring the fact that he doesn’t seem to know or care that import tariffs are a tax on his own citizens, he is not far wrong. His hostility to China is well known. Some people suspect that he next wants to turn his fire on the EU which to him essentially means Germany. Of course by implication it could also mean the UK. Assuming that Donald Trump is capable of deferring a threat, it might just be that he is waiting for the UK’s exit from the EU before firing his cannons. In the 29 quarters since the start of 2013, the average quarter-on-quarter GDP growth in the US has been 0.59%, in the UK 0.46%, in Germany 0.34% and in the euro countries (the EU 19) just 0.27%. It appears that some combination of factors – demographics, the ECB, the euro itself, the EU’s insular anti-trade practices – has produced an era of disturbingly low growth in the EU and hence the lowest, deadest interest rates since the invention of money. Many people these days are spooked by “uncertainty”. They needn’t worry. There is nothing on the horizon to rouse the economies of Europe from their slumber. When I hear endless warnings about what will happen to the UK economy when or if it separates from the EU (three and a half years of “project fear” so far – keep it up, guys) I don’t know whether to laugh or guffaw. The UK stock market indices rose by 1.9% in the quarter. They are down by 3-6% over the last year and around 1% higher compared to two years ago. So it has been hard going. There is little easy money to be made and those who try too hard can easily come a cropper....

Report on Q4 2018 – full of sound and fury

Report on Q4 2018 – full of sound and fury

5 Jan 2019

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

£££ The case for the pound £££

£££ The case for the pound £££

10 Nov 2018

  When I wrote recently about financial  contagion I pointed out that holding cash is an investment. It is effectively a bet against inflation and for political and economic stability. Moreover, holding any currency involves a potential hidden opportunity cost – that of not holding a different currency. On a couple of occasions in my lifetime, the British government has had to abandon a policy of maintaining the level of sterling against another currency; in 1967 against the dollar and in 1992 against the deutschmark. GREAT STERLING DEVALUATIONS OF OUR TIME On the first occasion, following a 14% devaluation, the PM Harold Wilson attracted a certain amount of ridicule for addressing the nation in the following terms. He acknowledged that sterling was worth less “abroad” but said: “That doesn’t mean, of course, that the pound here in Britain, in your pocket or purse or bank, has been devalued”. Essentially he said that the pound hadn’t been devalued against the pound. In truth, it wasn’t much of an argument but it relied on the fact that currency losses are largely invisible until people are obliged to make some kind of foreign transaction. I don’t remember the devaluation of 1967 but in 1992, on (Black) Wednesday 16th September I was sitting in a dealing room listening to an open line from the Bank of England’s dealer who repetitively intoned the price at which he was prepared to buy sterling. One of my colleagues told me that the Bank of England dealer always closed for the day at 4.30pm (presumably to catch the 5.07 to Sevenoaks) and wondered what would happen then. What happened is that he did indeed bid everyone a good afternoon and no doubt picked up his briefcase and headed for the door. In the time the world’s only buyer of sterling could have walked to the station, the dam had burst and he had pissed away £3.3 billion, which was real money in 1992. If that sounds like a story of pinstriped establishment incompetence from ancient British history, I must mention that the Bank of England is sitting on paper losses of some £49 billion (my estimate) from the gilts that it has bought...