INNOVATION AND DEFLATION – THE END OF THE AFFAIR?

INNOVATION AND DEFLATION – THE END OF THE AFFAIR?

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...

CHANGE AND THE SEDUCTIVE PROMISE OF CONTROL

CHANGE AND THE SEDUCTIVE PROMISE OF CONTROL

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...

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...

PANDEMIC POLITICS

PANDEMIC POLITICS

20 Apr 2020

Just as I failed to forecast the 30% fall in stock markets, I also never expected the reaction to Covid-19 to begin to diverge along traditional political lines. Life is just one bloody surprise after another these days. It turns out that people on the right, among whom for this exercise I number myself (though see below) think that national lockdown and uniform loss of personal liberty is a dangerous and irrational reaction to a pandemic that primarily targets the old and medically vulnerable. The economic cost is probably both huge and beyond the understanding of the people who are taking medically-driven decisions. People on the left are more likely to worship the NHS and to think that protecting it is worth any cost. They think that complaining about job losses and more trivial inconveniences is in extremely bad taste and that “we’re all in it together” is the right spirit. Though we’re not all in it together because the virus discriminates against some groups that the left favours, including, of course, frontline medical workers and ethnic minorities. The numbers say that the real victims of viral discrimination are the elderly and particularly elderly men. Unfortunately their care is not funded by the NHS and even a 99 year old man walking around and around his garden is not raising money for them. These are not groups that appeal much to the left because, on average, they tend to vote the wrong way. Remember the calls for a second Brexit referendum in 2019 because it was felt that enough Leave voters might have died to reverse the decision? These are all relatively (I use that word carefully) mainstream views. Criticisms of China and the WHO, though contentious, fall under the same heading. But there are plenty of extreme conspiracy theories. Round up the usual suspects. “Since the beginning of the COVID-19 pandemic, there has been a significant rise in accusations that Jews, as individuals and as a collective, are behind the spread of the virus or are directly profiting from it.” Moshe Kantor, president of the European Jewish Congress. Some people seem to think Covid-19 is our punishment for screwing with God’s planet, which...

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...

NO TAXATION WITHOUT REPRESENTATION

NO TAXATION WITHOUT REPRESENTATION

18 Oct 2019

This is a follow up to “The crumbling social contract”, written in March 2017. A government that is answerable to the people who elected it has a critical peacetime power that depends entirely on its perceived legitimacy. The power to impose taxes. Where would all those generous spending promises come from if they didn’t have the right to confiscate our money? The UK Parliament’s obligation to pass all taxes into law was conceived as part of the 1689 Bill of Rights which constrained the power of the monarch (James II). The quid pro quo was that the populace would give their consent to be taxed. In practice this means that the people have to believe that the parliament represents them. The slogan “no taxation without representation” is associated with the American Revolution. The colonists objected to paying taxes to the British government which seemed to them, and which was subsequently to become, a foreign power. The debate over the 2016 EU referendum was sometimes claimed (by those who wanted to leave) to be a similar question. They take our money and spend it without consulting us very much. The slogan that helped to win the day was “Take back control”. I think that most of the British public were not particularly concerned about the money. Didn’t Mrs Thatcher get us a rebate once? The attempt by the Remain campaign to turn the referendum into an economic debate, though it continues to this day, was a failure. LOOTERS Recently, though, our MPs have been daring themselves to reinterpret the meaning of democratic representation. They are like looters in the aftermath of a riot. Someone else broke the windows. Surely reaching through and nicking something isn’t such a big crime? If I don’t, someone else will. Some have merely abandoned or if you prefer reinterpreted the manifestos on which their parties stood in 2017. Others have actually changed sides and not one has taken the honourable course of offering themselves back to their voters in a by-election. Every conceivable legal chance has been taken to force through, block, delay or reverse the result of the referendum. No doubt our MPs would say that all’s fair in...

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....

The real estate “bubble” is global

The real estate “bubble” is global

21 Mar 2019

In my round-up of Q4 2018 I mentioned three risks that I intended to keep an eye on. 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. Numbers 2) and 3) remain of great interest but now I want to update myself on the developing story of property prices. Two observations are becoming quite well known: the apparent insanity of new high rise apartments shooting up all over Zone 2 London and the decline in turnover of the traditional property market. FLIPPERING HELL The FT had a good article on 20 February entitled “London’s property ‘flippers’ forced to sell at a loss”. Flippers are speculators who buy flats off-plan before construction has begun. It seems that they are often individuals either originating from or actually still living in Asia. They are probably rather ignorant about what they have agreed to buy. According to the FT, someone lost £770,000 buying and selling an uncompleted apartment in One Blackfriars, a monstrous glass eyesore (obviously that’s just my unsophisticated opinion) towering over the Thames (which has surely been punished enough). “In 2014, 21 per cent of resales in recently completed developments were sold at a discount, according to property research company LonRes. Last year that number had more than trebled, to 67 per cent. At the same time, the size of discounts has ballooned. From an average of 2.2 per cent in 2014, to 13.1 per cent last year.” To be brutally frank, most Londoners just find these stories of burnt speculative fingers quite satisfying. Some might say that it’s payback for despoiling our historic city with your greed and ignorance. Others might suggest that this attitude is somewhat hypocritical, given that mutual self congratulation about how much everyone had made on their houses was the backbone of London dinner parties for about three decades. PENSION PURGATORY Over those years many representatives of...

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...

Report on Q3 2018

Characterised by such slogans such as “sell in May and go away”, the third quarter of any financial year is often expected to be cautious. This year saw a mild confirmation of that view – the main UK indices in Q3 fell by +/- 2% compared to Q3; year on year there was an increase of around 2% leaving shares year-to-date down marginally (-0.25%). This is something of a relief in view of the political noise that irritates us on a daily basis but we should note that the US S&P is +8.5% year-to-date.  Whether it is the combination of tax cuts and trade deals or something else, the US is showing either where we could be going or what we are missing, depending on your view. US government bond yields are still inching rather than exploding upwards. US 10 year treasuries are now hovering just above 3% and 10 year gilts are just above 1.50%. These started the year at 2.4% and 1.2% respectively. Perhaps this is a trend. But we should not forget that although there are plenty of Britons who remember inflation, it is 25 years since it was last a problem. I think that wage inflation is worth keeping an eye on but there again it seems that so many of today’s new jobs are relatively unskilled – the more that technology leaps ahead the more we seem to need people who can drive a car or ride a bicycle. When pricing power reaches sellers of that kind of labour then inflation might be off to the races. At the end of the quarter there was another bout of panic about Italy being rebellious against the decrees of the EU/ECB. The premium of 10 year Italian yields over Bunds is climbing. If it continues it will politically disruptive in Europe and could conceivably affect the Brexit deal, though whether it would make the EU negotiators more conciliatory or more obstinate is anyone’s...

Report on Q2 2018

Report on Q2 2018

5 Jul 2018

In Q1 the main UK indexes fell by between 6% and 8%. In Q2, they rose by 7% to 8%. The chart of the first six months is a “V” or perhaps a two-fingered salute to all the financial commentators who claim knowledge of the future. Bond yields again did almost nothing.   I have written elsewhere about the prevailing mood that seems to try to put a pessimistic spin on everything. As a result I would imagine that most people would be amazed to know that shares were so strong in Q2. How could they be in the turmoil of the imminent collapse of international trade, courtesy of the hardball tactics of Mr Trump and M Barnier, l’homme who loves to say “non”? The sole purpose of trade rules is to prevent trade from taking place and that these two gentlemen are both happy to use that threat as what I suppose we must call a negotiating tactic, if we could only tell what it is that they are trying to negotiate. Never mind that. The stock market doesn’t seem very concerned about it. Last quarter I listed thirteen everyday UK shares with markedly high dividend yields. Unsurprisingly, in view of the market performance, you would have done quite nicely if you had bought them. Not a single one of them went bust between April and June, I am pleased to say and the shares of none of them declined. It is better to look at valuations and to ask what they are telling us than to listen to what commentators are actually telling us. How about the yields on government bonds? I have said that there was little change in Q2 (despite innumerable predictions of falling prices) but are there trends and what do the absolute levels tell us? Germany is the benchmark bond for the EU. The ECB will continue its asset buying programme until the end of this year. It is still boosting asset prices by its own version of QE, implying that the crisis that started in 2008 continues. A year ago, 10 year Bunds yielded 0.5%. Now they yield 0.3%. Not many signs of imminent recovery there. Bond yields...

DEFEATISM – THE DISPIRIT OF THE AGE

DEFEATISM – THE DISPIRIT OF THE AGE

11 Jun 2018

When making investment decisions I try to employ pragmatism and to avoid behaving emotionally or irrationally. As a rule of thumb, most other words that end in “–ism” are not useful. Optimism, pessimism, idealism – these are all attitudes that we find appropriate or inspiring in our daily lives but when it comes to making decisions supposedly based on evidence, they load us with confirmation bias. I read a good piece about The Psychology of Money which points out no fewer than twenty common mistakes that can damage your wealth. One that I particularly liked was titled: “The seduction of pessimism in a world where optimism is the most reasonable stance”. Brexit, or the contemplation of it, appears to have plunged half of the UK into some kind of collective nervous breakdown. It is group-think of the most destructive kind and its victims wallow in anything that can be spun as bad news. Bluntly, they see pessimism as a virtuous scourging exercise because the people must pay for their sins. This is a phenomenon that is far from new. Gilbert & Sullivan wrote the Mikado in 1885. The song “As some day it may happen” is a “little list” of “society offenders” which reads rather oddly in 2018 (lady novelists?; seems harsh). But 133 years on, we are still very familiar with: “The idiot who praises, with enthusiastic tone, all centuries but this and every country but his own.” The current leader of the Labour Party, anyone? Moreover, anyone who is upbeat today is liable to be seen as deluded or laughable or even dangerous and fanatical.    The current President of the United States, anyone? In my report on Q4 2017, just after the Trump tax cuts had been implemented, I wrote that: Almost all the reporting in the UK mocks Donald Trump and strains to suggest that he is incompetent and dangerous. This remains mostly true though some people are beginning to contemplate the idea that Trump’s thoroughly unfashionable bullishness may be effective. He is bullish and he is demanding: put those two words together and you might come up with the word bullying – just how unfashionable can this man get?...

FALSE CORRELATIONS

FALSE CORRELATIONS

26 Jan 2018

POVERTY AND INEQUALITY Listening to Radio 4’s Today (aka NHS Daily) I heard a professional lobbyist from Oxfam explaining that poverty and inequality are inextricably linked. Most of us are against poverty and inequality and, if we suffer from neither, probably feel slightly guilty about both. The counter argument, which is fairly obvious, is that economic growth is the only practical way to relieve poverty; that economic growth is best served by liberal democracy or free market capitalism, (if you think that term is more honest); and that inequality is always promoted by such growth. Reading its latest polemic about the “inequality crisis” I learn that Oxfam broadly agrees with the argument that economic growth is the answer to poverty. Between 1990 and 2010, the number of people living in extreme poverty (i.e. on less than $1.90 a day) halved, and has continued to decline since then. This tremendous achievement is something of which the world should be proud.   Reward work not wealth: Oxfam January 2018 It goes on to say that we would have done even better if we had eradicated inequality. This is the big contentious and unknowable point and is therefore the object of lobbying rather than reasoned argument. Oxfam’s lobbying might be more convincing coming from an organisation that rewards its executives less lavishly. The president of its US operation was paid a package of $504,000 last year; its CFO $258,000. Oxfam UK’s eight directors averaged £113,000 having received an inflation beating 3.7% rise. What first struck me about the Today item was that I heard the Oxfam lobbyist say that “we (Oxfam) know more than anybody else the power of enterprise to help overcome poverty” – this is bragging worthy of Donald Trump and is perhaps evidence of how his influence is becoming pervasive, even among those who presumably despise him. On reflection I was more taken with the casual way that poverty and inequality were conflated. Dodgy correlation is everywhere. Take two facts or convincing assertions and smoothly merge them into one conclusion that appears plausible because the two original statements can be presented as truthful. PRIVATE EDUCATION AND UNIVERSITY PLACES 7% of UK pupils are privately...

Populism explained!!

Populism explained!!

21 Dec 2017

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

Report on Q2 2017

Report on Q2 2017

5 Jul 2017

The UK stock market was on a rollercoaster ride to nowhere in Q2. The FTSE 100 fell by -0.3% and the 250 managed a rise of +1.8%. Given that we had a shock election, a shock result, a hung parliament and that the shadow Chancellor thinks that democracy has failed, you could say that the stock market has been amazingly calm. Likewise the government bond market. The 10 year gilt yield was 1.23% at the end of Q1 and 1.26% at the end of Q2. This is the dog not barking in the night time. We are widely told that the pale imitation of austerity that has been attempted for the last eight years is to be abandoned but the bond market is not panicking yet. Here is a picture of gilt yields since 2007.    One of the lessons of the election was that voters under the age of fifty or so are not frightened of the things that made the 1970s rather messy. Inflation, double digit interest rates and labour unions challenging the government’s right to run the country to name but three. It remains the case that the return of inflation is what bears warn about most frequently. In the 1970s the best way to protect oneself against inflation was to buy property. House prices rose by 492% over the decade. I wouldn’t advise the same strategy now. In fact I would consider doing the opposite. The world still seems pretty deflationary to me. You can choose your own explanation and file it under “uncertainty” but it still seems to me that listed companies are still being very cautious about capex and expecting their shareholders to approve of this caution. Here are five domestically exposed UK companies that have reported March or April year-end results recently. Halfords cut capes by 11% and raised its dividend by 3%. Dairy Crest cut capex by 62% and raised its dividend by 2%. M&S cut capex by 25% and kept its dividend unchanged. Stage Coach cut capex by 18% and raised its dividend by 4%. Royal Mail cut capex by 16% and raised its dividend by 4%. All these are behaving in a risk averse...