Altitude sickness

Do ‘higher rates for longer’ matter?  Is China doing anything different? Has the UK election become a one-horse race?

So far, both the markets and Central Banks have acted as if rate rises matter far more than they do, in real life. High interest rates are simply a pot stirring device, they don’t take any money out, they just shift it from borrowers to savers at a higher speed. The net effect is that they don’t matter to the totality of an economy as such, although the government takes a slice (as ever), and the exchange rate may shift.

It can also change investment decisions, affect confidence, restrain borrowers. But these are generally quite gradual influences. And the pile up in savers’ cash offsets them. It is a change of content, not of quantum. Meanwhile, in order not to move the ‘confidence’ needle, governments get spooked and start giving more handouts in compensation.

Investment decisions focus as much on corporate tax rates, costs and technology as on interest rates. While the evidence of resulting restraint by borrowers, where the dominant one is actually the government, appears a bit thin and is longer duration. Even the UK mortgage market has perked up.

Where rate rises may matter more, is if the winners (savers) don’t spend, and the losers (borrowers) default, creating value destruction, rather than simply price movements. Not much of that is evident yet, as loan underwriting has (generally) been good, and neither the level of rates, nor their duration, has eaten far into the big credit buffers still in place.

Defaults on bank loans, set against the greatly increased rate differential’s impact on earnings, have been minor. Bank provisions for purely economic reasons are not rising fast.

Overall, given the dominance of the ‘vote buyers’ in most markets, I am not that worried by consumption, and judging by London theatre prices, the high end is not showing much restraint either. While all those second order effects don’t matter much this year.

It is no surprise to us that the world has now drifted back to ‘not many rate cuts’ nor is it clearly a disaster, for all the sudden market noise. The political imperative for a rate cut to throw before the electorate (justified or not) still leaves June in play.

It is fairly clear where the froth is, where any nosebleeds are due; also that this market response is all sentiment, unrelated to actual economic forces.


What of China? For a while in the un-investable box, and I think still largely so for the mainland indices. Reasons? political risk, both internally and externally, growing sanctions, unequal treatment of overseas investors, disappearances etc – same as ever. So why look again? Well in part if globally the UK looks cheap, China looks even cheaper, right at the bottom of the pile.

The mists seem to be clearing on their economic strategy : manufacturing is still at the heart of it, which implies so is exporting and hence some engagement with the wider world. Not just high-volume low-cost production, although recent trade statistics do show falling value on rising volume. But a clearly and often stated desire to move up the value chain, seems to be coming off.

China’s factories have a lot going for them, they are still building coal power plants (306, yes three hundred plus, currently in the works) and nuclear, (150 plants planned over the next decade) at high speed, plus plenty of renewables, providing abundant cheap energy.

From this site


Labour laws are to them just an amusing Western concern. Also noticeable is that Chinese universities still study real science, based on academic merit – they are the world leaders in many areas – just ask your university professor buddies.

Plus, they have no interest in electoral cycles.

If China wants to stay at the core of global manufacturing, it can. A flat rate 10% tariff seems to barely touch the existing and growing price advantage. There is also a point at which consumers will baulk at the price of domestic protected production, even in the US.

So, if China is simply the old ill tempered, paranoid, Communist dictatorship, flooding the world with cheap goods, stealing intellectual property and manipulating currency, then the problem is at least familiar.

In that case, it is not throwing its lot in with Russia and going back to Stone Age military adventures as yet.

So, when fund managers hang on to well researched individual stocks, knowing all that background, I am inclined to at least listen. Trade needs cash, wants cash, uses cash, needs investment and therefore some global engagement.


We have long predicted the loss of the Tory Red Wall seats, one term rookies as we called them. Under 200 Tory seats left in six months, seems well-nigh inevitable as well. So yes, it is a one-horse race. And is Starmer really going to say anything substantial (and in truth there are quite a lot of plans and approaches on the table already)? I doubt it, he has no need to.

It is just the older and far tougher problem of working out how to pay for it all, without raising taxes so high no one wants to work, invest in the country or indeed live here. Given the record of the last century or so, expecting things to change now, is delightfully naïve. They won’t.

It needs radical reform of regulation, entitlements and cost bases. No more salami slicing, no more buying off vested interests. There is some of that from Wes Streeting, but a lot more would be needed, the new ministers must do more with less, not less with more.

Looking at how the UK and US markets have performed this year, tells you a lot about those expecting such a grown-up approach. A backstop approach is to plan for the change.

Where many people choose to live and work, will be decided within this year.




What would Trump’s high tariff isolationist world look like? What would the mirror image be in Xi’s China? Not now, not next week, but rolling into the next decade.

And whatever portfolio theory says, and whatever the optimistic investor believes, 80% of my own portfolio is flotsam, drifting up and down on Pacific tides. Stocks I both like and which have compounded over decades are remarkably few. Oh, and a brief word on African housing.


But first, to give it the grand name, autarchy, or self-sufficiency. A bit of a joke - the Soviet Union tried it, Iran tries it, China famously only revived after ditching it.

But it is back in fashion, and not just in strange places. The EU industrial and agricultural policy is starting to look like a version; beyond their four walls they need carbon and chemicals, but within them they don’t, nor will they allow imports of them (or products including them). Quite fantastic.

Trump is on his 60% tariffs line. Xi clearly wants to cut off foreign capital, as it arrives infected with democracy and transparency, and the associated foreign reporting or verification.

So, could they? Yes, the US could - it is big enough, can do most things, and largely trades internally. While at least in Trump’s imagination the commercial borders are sealed, and so enforceable.

What goes wrong? Well at some, quite distant, point people stop expecting to trade with the US. So, at its most extreme, if China can’t sell to the US, it won’t buy from them either. But that is decades away, most Chinese production can probably take a 300% tariff, and still sell at a profit.

The flip side of the tariff is the huge salary for a barista, or a trucker. The latter is not so far away. Prices of domestic US production must rise, to allow the blue-collar Mid-West to rejuvenate. US consumers of course (including that barista) will pay vastly more for US goods, or will get hit with the import tariff; this of course is a tax on them.

Source: Statista

What about Xi? Well again it is possible - that’s how China ran for much of his life, with a lot of new infrastructure, industrialization, since installed. He can do it all again. There, unlike in the US, the issue is capital. As a big net exporter, an area that will itself be under pressure, money will be harder to find; it already is.



Countries that go through this closing cycle typically also do default (as the Soviets did, as US (and UK) railways did,). Folly, but it can be done.

The US has been going down this route since Obama, Trump talked a lot about it, but Biden too sees the resulting wage inflation as a good thing. So, it is the next US President’s policy either way.

Obama was keen on hitting capital markets (FATCA was and remains both a non-tariff barrier (I am being polite here) and a tariff on external capital) and I suspect a Biden administration must do the same, to balance the books.

While Xi never really left protectionism, WTO and GATT were mainly honoured in the breach.

And Europe? There is quite a strong strategic need to expand to the East, although as that goes through (and we are talking the mid 2030’s here) Ukrainian farmers, like Polish farmers today, will buckle under the rules; it barely matters about the Donbas, the EU will shut those heavy industries down too.

So, I think autarchy can work for all three, it will support a large uncompetitive labour force, and consumer choice will vanish. In many cases there will be lower quality and high prices. All three will attack (or in some cases keep attacking) capital flows.

And in the end, the entrepots will survive, those not in any such block, like the UAE or Singapore today, Amsterdam in the 17th Century, Yemen under the Romans and Victorian Britain.

The winners will be flexible, a tad amoral, assertive, in fluid alliances, but reliant on gold not steel to survive. And they will suck in entrepreneurial talent too. At a strategic level, that feels the place to be looking. Although buying uncompetitive heavy industries before their brief period of tariff induced profitability, has a short-term allure.



The ludicrous halving of CGT allowances, based on some fantasy “yield” number from the equally ludicrous HMRC, via the OBR, means once again the tiresome process of harvesting losses is upon us. No longer can they sit unloved at the back, snoozing; out they must come.

And what a tale of dross they reveal, and scattered amongst them so many once “good ideas” and busted yield stocks. Well, it sticks in the throat, but perhaps sticking it in a US wonder stock for six months is better?

Of course, if I knew when I acquired them that the FTSE was moribund for two decades, I would never have bothered. Seems it is time to simplify.



And lastly African housing. It was one of Gordon Brown’s (and the PRA’s) great achievements to get UK banks out of overseas assets, far too volatile, currency? foreigners?- Who needs them? Bring it all home and inflate the UK housing market with safe, cheap, mortgages.

So, Citizens went, Barclays were hounded out of South Africa, and so on – although their post-sale performance has really not been great either. Africa now just does not have proper mortgage financing for the vast bulk of the population. This is at a level I had failed to fully comprehend.

You think that despite everything, Africa must have got better. But no housing, so less health, less stability, no financial security. Safe recycling of profits in the continent is still hard. Aid can’t create institutional reform, but that’s the need.

If you look for the breakout into developed status, it starts there.






We look briefly at China, not as an investment, but more an existential threat. And we finish the lessons of the Greek coup in 2015. While little else surprises? Except perhaps the pessimism apparently shown by the long bond.

But even that might have a good reason.


I looked idly at a certain pink paper’s New Year quiz and asked my companion for views, and on most topics, we had one, or could find one. But on one, ‘will Xi invade Taiwan?’ I had no idea.

Not because after Ukraine there is any doubt it would be mindlessly stupid to do so, and plunge China back into the dark ages. That much is obvious. There is no way China can “go it alone” - without Western markets, capital, and innovation, it heads back to where Iran, Pakistan, Congo, and Argentina have been.

But a distant echo tells me that I don’t know for certain. Perhaps my confidence that Putin would not be so stupid as to invade Ukraine, tints my view; I was wrong there.

I am also largely assuming any military contest is unpredictable, so I tend to focus on the long-term economic impacts alone.  But I still don’t know that Xi won’t try, which will clearly crash world markets.

I will deliberately not gaze into that abyss, but I can’t ignore it. The best response I have is where two stocks are equally attractive, and on like valuations, I would buy the one with the lower Chinese exposure. Maybe my limited action says that I think it is possible, but really not that likely. The other option of course is adding to gold and safe haven currencies.

Looked at a Swiss Franc graph of late?

From : Google Finance currency page

Most investable firms can shed China, just as many have shed Russia, but at a much higher price. The reciprocal asset seizures will be vast.

And although it won’t cripple Starbucks, Tesla or Apple, it will be a big slice of asset destruction for them.



Back to Greece - when we last wrote it was to note the ravages imposed by the EU and IMF on the Greek economy, and how the scars still remain. But completing Yanis Varoufakis and his seminal tome, other contexts are clear.

As an academic his note taking and indeed voice and video recordings were quite an exceptional contemporaneous record. Not just of Greece, but of how Europe really worked, in a crisis.

We forget now, that Ukraine also needed a big bailout in 2015, and a choice was made as to which mattered more to, in effect, Germany. The answer in 2015 was Ukraine, with the late Wolfgang Schauble wanting Greece out of the Euro, and Angela Merkel seeing that as a lesser evil, for Germany, than the collapse of the Ukrainian economy.

There is very little ‘EU’ in this incidentally, Germany was the dominant and controlling creditor. The IMF largely sat safely behind its super creditor status. As Yanis notes the IMF funds itself on interest, and that mainly comes from having plenty of distressed debt. Not an attractive feedback loop, however logical. And of course, it largely stood back from Greece – inactivity is often an action taken.

Moving on, the Greek crisis was closely followed by Brexit, at the time we thought that was chance. It is clear it was not, and both sides had learnt a lot from the prior event, to take into the next battle. The EU and Merkel in particular had no interest in rational arguments, having waded through all that guff in Greece; you can see Cameron may have been useless, but he really had no hand to play in his “re-negotiation”. Simply ‘nein’ had worked well in Greece, so Merkel pressed repeat.

The old apparatchik’s argument about “reform from the inside” was clearly flannel; popular mandates are for the birds. As a result, the Brexit faction knew it had to be a clean exit, with one shot to the head. Sadly, Theresa May failed to realise that, and when the EU subsequently realised she had thrown her majority away, they had no reason to agree any deal, or not to expect another craven capitulation.

What of Greece now?

Well, it simply lost a big chunk of its economy (circa 20%) to creditors and demolished welfare payments and entitlements, for a generation. Was that fatal? Not really, life expectancy rose through that decade, as elsewhere in Europe.

The left largely destroyed its high-water mark, one-off advantage, but remains a mid-teens political faction.

The October 2023 regional elections saw even more regional governorships fall to the centre right New Democracy. This was along with a rip-roaring stock market in 2023 as the long rebound continued.



And in Europe? Well, those June Parliament elections are getting interesting, Syriza will suffer more losses, and the gains by the centre right in Italy, Holland etc. are likewise yet to show up in Strasbourg. This provides context for this week’s defenestration of the French prime minister, for a near novice (at ministerial level). It seems this was a poisoned chalice for the big guns of En Marche, as the party are well behind Le Pen in the polls.

The European Parliament is such a mash-up of parties, and with limited real power, no change can be dramatic, but for once it could be at least interesting. The super-spending high regulating internationalist left, may get a setback.


Financial markets

Markets? I don’t think they ever get going till after Martin Luther King’s birthday is celebrated on Monday. Despite the need for news, the decline in global rates is baked in, and remains positive for equities, especially rate sensitive stocks.

You can stare into the Chinese abyss, but be careful that is does not stare back at you, you will see what you most fear or least know, as Nietzsche knew.




Happy New Year.







Not what it seems?

Housing, China and Big Tech – all are regarded as ‘un-investable’ - ending last year the above three sectors were all under a cloud, but one broke free, why?


Plus, Powell scares the market by thinking too loudly.




Well let’s start with housing. UK residential property prices are holding up fairly well given the magnitude of rate rises, while UK housebuilder share prices look fairly awful. There is a confusing mix of income and capital issues to examine.


Housing itself holds up well – many reasons: demand of course, high levels of employment, heavy net migration and the normal new household formation provide a base demand level well above new build levels. At a time when it is unattractive to fund speculative new build (so units not pre-sold before commencement) because of finance charges, and with a planning system that is both over prescriptive and under resourced, supply will stay slow.


So, the logic of fairly steady prices for existing housing stock holds, buyers will need more cash, but with (in real terms) falling house prices, that can be done. It moves funds from (largely UK) borrowers to (largely UK) savers, but leaves total disposal income in the country (after HMRC takes a cut) largely unaltered.


While rising rentals, reflecting pent up demand and the pressure on debt funded landlords, adds to new build demand and provokes more supply at the institutional level, at least. So, we don’t see a price crash (however desirable in some areas) at these levels.


So why then are housebuilders so disliked? Sales of houses will indeed slow, so reducing dividend cover, but the core business itself is fine and the capital value holds steady, albeit discounted by more.



China? Here we have almost the same issue, fundamentally sound, but politically hard to justify investment. That taint spreads to companies that sell into China too. It is very hard to ignore this vast market, and the undoubted speed of innovation and high productivity of a command economy. When so many other places fall back, China is tempting.

China has the size, finance skills and levers to deliberately act counter-cyclically, stepping out of sync with the global economy. So (on that narrative) it has ducked the blight of post COVID reopening inflation, by a deliberately slow exit, stockpiling commodities, and then stepping out of the market to defuse price spikes.

Arguably even with foreign capital, it was happy to load up when it was cheap with few restrictions, on both equity and debt, but equally happy to step back when prices and restrictions start to apply. Choice or circumstance? In an opaque system who really knows. . . But a China slowdown is not the same in type or duration as a free market one.

Like housebuilders it remains uninvestable, but for all that, there is value.



So, to the third of the trinity, large cap tech. These are all US based, highly profitable, with not a lot of debt, but typically appear overvalued. In the old free money days, fast growing tech was enough, so the layer just below, also profitable, simply fed off the reflected glory of the mega caps, and so on all the way down to the start-ups and chronic loss makers. That link has broken, values are now about both size and sector. This is odd. Normally if you broke (say) Microsoft into ten equal parts the total value would go up. This year suggests it would now fall.

So, what are investors doing, if they are ignoring fundamentals? It seems the cash generating highly liquid stocks do enjoy excess market demand in tough times. Some of it is momentum following, some is a falling share count, but mainly it seems investors just really like the name recognition and deep liquidity, to trade the market.

From this website.

If so, it may be dangerous to write this group off. In a market going sideways they provide the price action, and it seems they are so big, so well entrenched and global, that the typical stock specific risk can almost be ignored. You need to be nimble; they fell hard in 2022, but their dominant recovery this year, providing nearly all of global equity performance might be the true reversion to the mean, rather than their sudden collapse when everything was being sold off last year. But that process does guarantee future volatility for them too, and history suggests it will not last.




We have nothing to add on what seems a be a new set of forever wars, beyond sadness and dismay. While whoever wins the 2024 elections on either side of the Atlantic, will be forced to do an “Erdogan turn”, or 360 spin. This could happen fairly soon after the polls close.




The markets seem not to like Jerome Powell’s musings on the vast range of things he does not know, at The Economic Club in New York this week. Does his calendar suddenly show his exit date, albeit over two years away? You could almost hear the soft polish of his resume to concede errors and some failed guesses. He even, twice, called US fiscal policy “unsustainable” although he was careful to say that was not now, but only in the future (after he’s left office that is.)


But the long run neutral rate? No idea. The Philipps Curve? No idea. Interest rate transmission rates? No idea. That’s not new, though - it is pretty much what “Data Dependent” always has meant, and markets were previously fine with that.


We will know soon enough, if rates are still rising globally. It certainly makes markets jittery, especially on Friday afternoons.






About Influence – American and Russian, mediated by the Chinese

So, to start with what does worry us: That is the slide to a hot war with the powerful Eastern autocracies, fueled by the EU with Napoleonic tendencies, an old man in the White House and a curious sense of ‘crusades’ with no consequences.

For those with long memories of American imperialism, the latest drama even fits neatly as a modern Gulf of Tonkin, a key moment in the slide to war. In that case (south of Hanoi) the clash was naval not aerial but was still notable as one directly between the warring parties and not just their local proxies.

While elsewhere the pieces move, China can not let Russia fail, nor descend into chaos, their long-shared border must stay intact and secure. They no more want the US there than the Russians do. The first step after his confirmation as ruler for life, by Xi, was indeed to go to Moscow.

And the bitter battles in the Middle East of Persian against Arab, Sunni against Shia have cooled abruptly, under Chinese influence. The world once more understands that the US is the threat to peace and stability, not just their fractious neighbours.

For Biden it is an easy fight, the Pentagon so far has played a blinder, what can go wrong? While, for now, France is Europe, no other large state has anything like their stability, Italy is led by the unspeakable, Germany has free market liberals in a bizarre ruling alliance with Greens, Spain is wrapped in its own forthcoming general election, the UK both distinctly detached and under a caretaker government.

The UK budget said nothing, incidentally.

Main influences in France.

Poster photographed in france last week by charles gillams

While the left in France, as the above photograph shows, are very alive to Macron’s ambitions, to add more territory to the EU, arrange more protectionism for French goods and to suck the labour force out of adjacent states to serve the Inner Empire. Just like Bonaparte tried (and failed) to do, with dire consequences for the French nation.

For all that, the domestic fracas in France (which makes our own strikes look rather tame) was inevitable. Raising (by not a lot) the pension age from 62 to 64, against our own 67 looks small, but it was a clear campaign pledge.

The absence of any minor party wishing to self-destruct, by supporting it in the French legislature, is no great surprise either. So, he has implemented it by decree and Macron has dared the opposition to now either remove his prime ministerial nominee, or shut up.


Banking On Nothing

So, what of markets? Well, the end of SVB is no great loss, it had several policies that had to implode if rates rose, especially on the lending side. It was painfully ‘woke’; I can tell you more about the Board Members sexual orientation, gender and ethnicity than their banking experience, the former just creeps into the end of their latest Annual Report, the latter was invisible to me.

SVB’s long list of ESG triumphs and poses (and it is long) at no point included not going bust. It did commit an extra $5billion to climate change lending, which I guess has all gone up in smoke now. Still apart from all being fired, the bank insolvent, the remnants rescued by the hated Washington mob, under investigation by the DoJ, all the rest of their “G” was superb, and so, so, cool.

I don’t see Credit Suisse as a danger, although it may be in danger. It has had an appalling run of misfortunes, with musical chairs at the top, but it remains a cornerstone of Swiss identity. To let it fold would be highly damaging and cause shockwaves in derivatives markets.


Influence on the markets

So, I do understand the Friday sell off (who wants to be weekend long with regulators on the loose). And we do understand markets needed to go down, after the big October bounce, indeed it was a key reason for our building up over 33% cash or near cash at the previous month end. We knew the winter rally was fake.

But I don’t see this as much more. Retest of the S&P 500 October low? It should not be. I take a lot of heart from bitcoin soaring (63% YTD); if liquidity was short, that would not have happened.

But for all that, I don’t like March in financial markets, too much is uncertain. So, this is more a time for cautious adding, rather than hard buying, but if we get to Easter (and hoping to be wrong on the Tonkin analogy) it does seem a better prospect.

Nor do I see how the various central banks can justify a pause in rate rises, at this point, but nor will they go in hard, that would be folly.

This Fed has made enough mistakes already.