WENN DU LANGE IN EINEN ABGRUND BLICKST

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.

DIRE STRAITS

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.

 

NO DEMOCRACY

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.

 

EU

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.

 

 

 

 

 

 


Skipped - what will 2024 look like?

May I say we told you so? In "Skipping Along" before the summer break we called the end to rate rises, and by the November Fed meeting, we were well on board for a "rip your face off" rally. Feeling ripped? Anyone coming to the equity party in December, has just not been paying attention.

And our powerful MomentuM model had investors buying Japan and European Indices LAST December, so they have milked that entire rally. It also signaled buying back into the NASDAQ from May, arguably a bit late, but still very effective.

Jerome Powell said nothing new this week, and the New Year still looks bright for the beaten-up stocks, regions and sectors, as rates decline. I suspect prospects for the perennial winners to keep on winning are not too bad. Although economic growth will suffer (and so will earnings), but valuations still have some space to catch up amongst a lot of this year's losers, as discount rates keep swinging lower and bond yields dwindle.

 

A RED CHRISTMAS – Looking forward a year.

A year ahead, politics looks more interesting: so, what will the newly elected British House of Commons do next Christmas? What are the choices and likely outcomes?

The new Labour prime minister will care relatively little about political opponents, and quite a lot about holding party discipline.

Nor, we are told, will he seek early solutions to some of the more intractable constitutional problems (Second Chamber, Proportional Representation, Party Funding etc.), as based on his predecessor's experience, that just wastes precious time.

For all that, when it comes, his manifesto will (at last you may say) be festooned in clear deliverables, a plan to govern, at least for the next year.   While Rachel Reeves is influential, the drive will be legislative, not economic. But as ever The Chancellor will have to then deliver the possible.

 

A DOLLOP OF BORROWING

So, more debt, extra tax, spending cuts are the options facing her, to fund that manifesto along with a cursory fig leaf for growth. The latter is needed (like the absurd Tory public spending targets) to get the Office for Budget Responsibility on side. Albeit responsibility is what you take, whereas the OBR offer simply a comptometer's sign off on specious forecasts.

For all that the Treasury thinks Gilt markets pay attention to the OBR, although I doubt it. So very early on, the rather too stringent self-imposed spending and funding restraints the Tories have adopted, will be quietly reconfigured. The rise again of a few PFI like schemes to keep stuff off the books is likely; Labour does not do fiscal hawks.

Falling interest rates and lower indexation provide small windfalls, and binning the 'irresponsible' Tory promises of tax cuts, won't hurt the numbers either. So yes, more debt, low tens of billions at least will be used.

 

A SPLASH OF TAX

What of tax? Can the pips be made to squeak. Yes, again, I am sure they will be, although not really on income tax, and I think for employed staff not on NI either. Labour has no love of the entrepreneur, who is too poor to hire lobbyists or to make donations. So, a bit more squeezed there off the self-employed and small business owners.

I expect a big hike in fuel tax, especially petrol and aviation fuel, under a green cloak, generating another £10 billion. Consumption taxes remain rewarding: VAT rates, thresholds, and exemptions are all likely targets. And if they are inflationary, just adjust them away in your numbers. Nothing new – claiming them to be a 'one off' (of course).

UK property taxes are low in the South East, due to a long-standing failure to re-rate, so there is some scope there. With more housing coming, this will likely be punitive. But there are other enduring loopholes, that make little sense: REITs, Limited Liability Partnerships, a lot of EIS, VCT, Freeport stuff, albeit none of that is big ticket. I guess some simple populist tariffs may arrive as well. Labour is at heart protectionist.

All in all, I expect Labour to get enough from extra debt and taxation to provide a budget to tackle (rather than just top up deficits in the funding of) some long-standing reforms. I'd also expect seizures of assets. The Treasury seems to have a taste for balancing the books illegally, and there is little judicial protection.

 

PRESENTS FOR SOME

I don't expect infrastructure or defense budgets to be much loved – that's some of the cuts. The undoubted green spend will likely benefit (or keep on benefiting) China's manufacturers, more than the UK, but do still expect energy prices to go on up. They are the modern sin tax.

But higher tax, debt and spending can be pretty good for the economy, as Biden has shown, it all depends on how long you can get others to fund you for, and at what price.

Much as I am sure Labour don't want to crash the pound, they normally eventually find a way to do so, and for all my glib assumptions, they will be starting far closer to the edge than most new governments, for some while.

THE HANGOVER

How useful is that analysis? Well don't expect the FTSE to collapse, this will be a spending regime, but do expect stock specific damage, although arguably a lot of that is in the price of impacted sectors, or indeed the long standing (and ongoing) flight from UK equities overall.

The FTSE is mired in a twenty-year stagnation, from 7,000 in 2000 to well, 7,000 now, although not to altogether discount the medium-term Tory inspired rally. Note what Labour, even Blairite Labour, gives you.

From: Tradingeconomics

 

On the other hand, sitting, duck-like, waiting to be hit, or worse buying into vulnerable areas, feels quite high risk.

The election outcome is (and has been for a while) clear. Nor is this a safe European coalition of the sane and less sane.  It will be red through and through.

Given so many other options, and that some of the pain will be direct on pensions and property, it seems a good time to start planning on the investment side.

The MP's pension fund invests only 1.7% in UK listed equity. Do they know something?

Have a magnificent Christmas and thank you for reading.

 

We will be back on January 14th.

 

 

Charles Gillams

17-12-2023


By their works . . .

The November bounce in markets was a bit of an illusion, as interest rates may no longer matter, but foreign exchange still does. Inflation in commodities is probably sorted.

Meanwhile, Jeremy Hunt tinkers.

EQUITY MARKETS and the FABLED FIRST RATE CUT

The dramatic November rally, only looks that way if you are a dollar investor and for some weird reason the archaic Gregorian calendar matters to you. Sticking with the even older Julian one would have made October's performance much better and leave us ten days more of November to enjoy. Plus, lots more shopping days to Christmas.

While it was great for the big US indices, almost (but not quite) hitting the year's highs, in the UK, it was rather less so; the FTSE hit 8,000 in March and has slid down since, back to pre-COVID levels around 7,500.

The November US rally was also dented for sterling investors by a dramatic 4% slide in the dollar.

So, while it feels attractive, the fascination with the first rate cut date is pretty spurious. That is not the market driver. Markets have so far given us nothing this year for avoiding a global recession and seeing the last rate hike of the current cycle.

Surely that is worth something?

AND LONG BONDS

In a like fashion long dated bonds are giving us very little for having nailed inflation, and having (at least in the US) a credible inflation fighting stance again. So those, if you trust the US Government's credit, are not looking bad. This patch of inflation may have stretched the meaning of transitory, but it clearly remains just that, not a 30-year phenomenon.

Instead we see the recent fall in yields as being more driven by relief that rates have topped, and a desire to lock in nice returns in the global reserve currency, attributes which seem likely to overwhelm domestic US worries about high levels of issuance.

COMMODITIES

Commodities are where economics in the raw is most visible, especially soft commodities. High prices will always bring in marginal land, and there is no shortage of land on the planet. It may take a planting cycle or two, but food inflation always was transitory. Corn is now below pre COVID prices, let alone pre-Ukraine.

We believe the same is true for energy, for two long standing reasons: the first is that sanctions don't work, certainly not against enormous blocks like China and Russia. The second is that high prices create supply and in a highly tradeable commodity, they do so quite fast.

So, the idea of shutting in energy to manipulate the market price, is in the end self-defeating. It has to be. So however much the anti-carbon lobby and OPEC desire high prices, they are not sustainable. Indeed, it feels as likely that we get one of those crushing late spring drops in prices designed to flush out over-geared operators. That weapon works best, when interest rates are high and storage tanks are full. So why not use it?  I remain far more nervous about the oil patch than most, it has yet to see the post COVID, overstocking crisis, that has rippled through so many sectors. Held off by the Ukraine war, oversupply is still around.

The World Bank October commodities forecast base case is for continuing declines.

Here is the full report

Look at Healthcare stocks, still suffering from the COVID bubble deflating, despite new wonder drugs.

A stock like Worldwide Healthcare Trust, peaked in summer 2021 and has then slid remorselessly lower.

A LOOK AT HUNT'S TAX FANTASIES

Well, why bother, his tax give back is rightly mocked as trivial. His vague attempts to get welfare under control are painted as draconian, when they are anything but. While his games around a set of unrealistic self-defeating assumptions that he gives the OBR to produce nonsense projections in return are just absurd.

Full expensing for corporation tax is clever in only one sense, it is certainly not a tax cut, whatever he says, it is just bringing forward deductibility from after the next election, so off his watch. It is not changing what is deductible at all, and there will be loads of complex rules against deductions still, as ever.

While to most sensible cap ex modelling, the tax treatment remains damaged by last year's massive corporation tax hike. The long-term tax profile simply does not change, so it does not encourage investment, whatever he claims.

Oddly the real tidying up, as ever, is handled by Gove, quietly putting in place critical and very welcome new political funding measures, which reverse some of the long slide into democratic absurdity inflicted by inflation.

And he pops up in odd places as the fixer still, like Dublin trying to get the Ulster Assembly back in action - a vital if unpleasant piece of plumbing too.

Those are late but worthy actions, as a career ends.

The efforts on investments, while welcome and overdue are still tinkering, and the games with ISAs are as boring as ones with capital allowances. We see no real effort to simplify matters for domestic investors. The joke slashing of capital gains allowances (far from indexing or freezing they are still going down) shows a profound dislike of investors and investment.

Instead, a we get a work round to help UK investors buy fractions of Nvidia, - really?

 

Charles Gillams

3-12-23

 


Blowing through the Jasmine

What is happening in the offshore wind market? Come to that what is happening in the onshore hurricane blowing round Westminster? And even after this market rally, arriving much as we expected last time, what should we still worry about? Valuations, recessions and inflation, all matter even if rate rises don't now.

A Feeling of Unreality in Westminster

One year in, Rishi looks incompetent and chaotically inconsistent. I simply can't explain Cameron's grinning re-emergence, it feels like a bad dream or worse joke. I hope he could never be selected again as an MP, after his murky financial dealings. The House of Lords is clearly less constrained. The arrogant indifference and heavy taint of sleaze can't be in the interest of voters.

There is a feel of an echo chamber inside Downing Street, of a puppet leader being strung along by unseen forces. Just last month the whole theme of the Party Conference was a fresh start, the last thirty years were apparently rubbish. Then we have this.

To the country and investors, it does not matter, although a half-awake opposition, or slew of oppositions, will be desirable in future; even if opposition politics is now easiest if you just wait for the other side to foul up and social media to rip them apart.

Zero-carbon? Can't Do it Yesterday?

A lot of notable recent shifts in the offshore wind sector, not surprisingly, as with so many zero carbon panaceas and the rush to do it all yesterday, the wheels are starting to come off. It is nothing like as cheap, or job creating, as the green zealots claimed or hoped. Protectionism is not helping either.

As Platts shows, for September, the more you make, the lower the price, just like real farming. UK offshore wind power is the least desirable in the entire European market.

Nothing wrong with the idea of offshore wind, and experts like SSE in the UK do well on big arrays in shallow waters, planned slowly, at least so far. Although even those are pricey and tend to need massive connecting grid structures.

Both Siemens and Orsted, to a degree newer entrants (at least compared to SSE), have taken a battering. Siemens had acquired a Spanish maker, but during the COVID fall out something came adrift, and it has hit big capacity and quality problems, resulting in billions in write offs – now it is restructuring – with a € 7BN subsidy from a group of banks. Heavy rotating machinery is always engineering hell; sticking it up a windy pole in salt water, is never that wise.

Orsted, the Danish developer, lopped 50% off its share price after ditching projects off Rhode Island and New Jersey - further billions written off. The idea you can put these things up off rocky coasts in areas of strong ocean currents and loads of shipping is quite interesting (and very New York, form over substance).

What torpedoed those projects was funding. The political desire for easy answers to high energy consumption made for poor outcomes (as ever), if everyone rushes to do it all at once, you simply create a cost bubble.

The single unit cost is never the same as for a thousand units; scaling up is always the tough part of any new technology.

Orsted share price - sourced from Yahoo finance - sharp focus on data

So, while Xi and Biden proclaim they will still save the planet, Biden rhetoric meets cost inflation once again, and cost inflation (and higher energy prices, a speciality of his) wins. Toss in protectionism, so that a Danish company is disqualified from his WTO busting subsidies, and the numbers no longer worked.

The Germans meanwhile find their own green funding trick ruled out by their own Constitutional Court, it involved taking a pre COVID funds surplus, and applying COVID emergency rules (on excessive deficit funding) and then spending it all post COVID. Isn't it odd that didn't really work? All three parts seem wrong.

Finally, the UK got no takers for this year's wind farm licences, as the guaranteed power price was too low. Next year the price has shot up, again guaranteeing higher energy prices for UK consumers (and industry) in the process.

Recession, Inflation and Valuations

Of the trio of recession, inflation and valuation, each investor has a particular fear. To me the nasty one remains inflation, and its friend rationing and stagnation. A lot simply can no longer be done. So that the modern solution (see above) of just throwing more money at it, from higher taxation and debt is largely pointless. Indeed, any farmer knows if you quadruple the inputs, it is still quite easy to halve the outputs.

We are deep into public service rationing now; we don't call it that, but persistent planned under delivery is rationing.

So, service sector inflation with declining 'outputs', is the issue. And that's the funny number 'outputs' we still record in GDP, so turning up, and being paid is an output, even if nothing (increasingly the case, both on turning up and doing anything) is actually done.

Recession? Well, I guess so, basic logic still says it must arrive some time; yet I still don't see big credit defaults or strain and a cooling labour market is clearly beneficial anyway.

And finally, valuations, well nearly everything looks cheap, outside big cap tech in the US, which somehow always feels pricey.

As rates fall through 2024, and funds flow out of cash and fixed interest, and M&A picks up, valuations still appear attractive. Albeit 2024 will (once more) be politically rather interesting.

Still, we could end up with some big questions answered and indeed big characters finally, finally, leaving the stage.

 

Maybe a summer breeze does lie ahead.

 

 

Charles Gillams

19-11-23

 


Stop Making Sense

 

The benign Powell’s fireside chat has left us all very happy, while I have been pondering the Yanis Varoufakis saga from afar. So how did Greece survive the doom and gloom after the Euro crisis?

An apposite topic, as high state debt, unproductive spending, and uncertain or burdensome credit, pretty much all over the West, apparently beckons once more.

The Song of Chairman Powell

We start with Chairman Powell in his recent Q&A: he could hardly have been nicer, the equity markets loved him, the bond markets sweetly retreated, and the dollar fell away.

It was not so much the repetition of ‘data dependent’, a seemingly meaningless phrase, or the deft swerves around repeated questions about the path of rates.

It was more the extra lengths he went to, to dismiss the data outliers, particularly on much faster GDP growth (4.9%) in the US economy, for Q3 and the sharp upward shift in longer term inflation expectations. The bond markets had found both metrics spooky.

The GDP number was dismissed, rather airily, as related to strong consumption, which in turn was linked to high employment and rising real wages on the one side, but more importantly to COVID savings balances. Although he admitted no one really knew what these were, but somehow, they were still contributing.

The inflation expectations got dissed even faster: Powell thought it an outlier, more recent data was far more consistent. Suddenly the evil portents were gone.

It would be wrong to think he knows what he is talking about (why start now?) but right, to know how he is feeling; that’s it. Sure, he keeps the rate rise out in the open, like an old dog, but the chain is lax and rusted, the beast benign.

It would take a lot to make the US raise rates again and he was happy with tighter monetary policies. Even nicer for the long end, while Powell is not sure where the “neutral” funds rate was (who is?), it was certainly a lot lower than where we are now. You might even choose to quantify a gesture; I’d say his was in the 3% area.

So, I feel like crisis-driven prices should not really apply. While the VIX?  Down 25% in five days.  Game over?

Search Results from MSN

Yanis, Right or Wrong?

Politically Yanis got lured by the old trap of supporting a party without a history, after sudden promotion, as a technocrat.

A rookie error.

But how does History see the Global Financial Crisis?

I looked at GDP from 2007 to 2022, for Bulgaria, Greece, France, Germany, UK, and the US. Here is the World Bank Chart of GDP growth rates. You can see Greece tumble out of the bundle, but it was also gathered back in, quite fast.

By 2007 the Eurozone was apparently out of control, spending was too high, it needed debt write downs, balanced budgets, selective privatisations and a war on tax evasion.

And Yanis felt Greece was being unfairly picked on to trial that medicine.

Size Counts

So, it is perhaps more instructive to look at levels, not growth rates. Here the damage is clearer, Greece has a GDP still substantially below the 2006 level. Bulgaria a neighbouring Balkan state, has doubled (and more) in the time. So Yanis has a point there.

Elsewhere France grew a shade faster than the UK, but from a slightly smaller base, so really little change.

But the US added almost twelve trillion dollars to its economy, which is like bolting on a new economy the size of the UK, France, Germany and Italy in just two decades.

We could adjust for currencies, population, different data points, calculation bases, of course and it is non-linear, inevitably. But we are looking big picture here.

Was The Left Right?

Gordon Brown was quite keen on the Yanis theory, and to some extent that adoration survived the subsequent dilettante Tory rule. Seizing big banks, attacking tax evasion at any cost, and aiming to balance budgets (Yanis was big on the primary surplus then) all crept into UK policy. The first two are oddly very non-Tory, especially when used to destroy economic growth by over-regulation. The third is quite sensible by comparison, but it was ignored.

Greece has since taken its medicine, with a steady swing to the Centre Right. Yanis finally lost his seat (for his new party) early this summer.

If the pain was indeed all inflicted to help the struggling IMF, no one told the US. If it was all done to save the Euro, I ask myself why did France go nowhere fast? It didn’t obviously hurt other Eastern European countries.

So, Greece remains an outlier, vastly reduced in wealth by the whole episode. It saved the Euro; it did not save Greece.

Where Next?

In the end, all national budgets work better with a growing economy, and in the long term that is essential. Flat or declining economies are the real crisis, especially without flat or declining state spending.

My highly selective period – (2007 being the pre-crash high) finds considerable upsides in both Trump and Biden’s expansion and in Obama’s reconstruction.

While if you need to know why the US stock market dominates in that period after the GFC, it is because GDP growth was twice that of Germany, and on course to double from 2007 quite soon.

Elephants can’t dance, they say, but when they do, the world shakes.

Insert Media here

Although Yanis, indeed has stopped making sense.

 

 

Charles Gillams

4.11.23