Its Not Harry

Comment and opinion for retail investors in the UK

Economics

Midweek Mashup – Money For Nothing

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Global stock markets have reacted as expected to talk of inflation and potential central bank actions but I have already written about that a couple of times. Most markets are around 2% off recent peaks and Sterling has returned to strength after a short pull back. Both these factors will impact the bottom line of our portfolios but only in a way that is part of the normal daily volatility of markets. In my opinion, nothing out of the ordinary, especially in May – remember ‘sell in May and go away’?

In the absence of anything else of significance to investors having come my way recently, I am going to dig into the reasons why things like NFTs (non fungible tokens), Doge coin, neglected old sports cars with worn out engines and even someone’s less than box fresh sports shoes are apparently worth improbable amounts of money – for now.

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Monday mashup – what to say?

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I was of course tempted to put Christmas greeting is the heading and I do of course hope all my readers will have a healthy, peaceful and reflective break.

Some presents may not be getting delivered as planned this year

However, most of you will like me have families and would have been looking forward to seeing children, nieces and nephews, grand children and other family members, and that may not be possible now. The international news this morning is especially gloomy about the Covid-19 situation in the UK with some news media extracting (arguably out of context) the health minister’s phrasing that the situation is ‘out of control’.

Actually Covid infection rates are much worse where I live and the situation is being controlled (hopefully – not much evidence so far) by really tight quarantine measures. They may have been left to the last minute in the UK, but my guess is that the stricter measures are the right action and will need to last a while. At least vaccination programmes are getting under way

In terms of prospects for economies and the long term future of certain types of business, we have serious cause for concern. That is compounded by the approach of January 1st because whatever terms the UK will be applying to trade and other forms of necessary collaboration with mainland Europe after that, there will be more friction.

The news is rarely positive but at the moment it is almost apocalyptic some days

The processes of trade are used to spinning at high speed, like a well oiled machine that never switches off. Any engineer will tell you that even a small increase in friction, or a loss of lubricants, will cause overheating, unpredictable performance and even breakdown of sophisticated machinery.

But, as we know, investment markets and the economy are only connected in a complex and indirect manner, like the weather and the price of your morning coffee.

There are plenty of purely financial reasons for betting on stock markets continuing to rise – accommodative central banks, the rise of SPACs, digital money trends and much more. This I will address in more detail in my comments next month.

So, what to expect? The Spanish Inquisition? But nobody expects the Spanish Inquisition :-). (non-Monty Python fans please indulge my whim!).

My point is that markets are overvalued in many sectors and regions by a large margin on conventional measures, but nonetheless one can still make money riding the momentum.

Such unusual times require a thoughtful and intelligent approach to investing. I hope that in 2021 I can help you follow such a course!

Monday mashup – ‘It’s the economy, stupid’ – except it isn’t

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Economics – the art of educated guesses

The quote in the heading is a well known slogan from Bill Clinton’s campaign strategist James Carville, with the addition of the word ‘it’s’ to what he actually wrote as one of 3 key messages on an office door sign for fellow campaign workers.

I usually recall this quote when reading or hearing economists expounding on the prospects for financial markets by sourcing data and theory from their world. I am a general sceptic of economists, loving the quotation that ‘economists are people who will tell you tomorrow why what they predicted yesterday did NOT happen today’!

I have seen more wrong economic predictions than bad weather forecasts.

I studied some basic economics in my youth and whilst micro economics is a good way of explain aspects to human behaviour, macro economics is more like weather forecasting: immense computer resources are devoted to predicting what will happen in the future, and then a butterfly flaps its wings somewhere in Latin America and it all turns out to be wrong (a premise put forward in an explanation of chaos maths which I once read).

Even ignoring my economist-ism, it is widely understood and very easy to prove that in the near term, investment markets do not in any consistent way perform in line with economies. In some ways, equity and bond markets act as predictors – for example, adjusting in anticipation of prosperous times. At other times, they anticipate recessions, but more often than not a recession has to be proved to be both set in and long term before a raging bull market will correct.

At this very moment, we have august bodies of economists predicting recessions of catastrophic proportions in many global economies, central bankers looking into very empty tool bags and yet many stock markets are at records highs

So is economics useful to investors?

Yes – but not as a basis for deciding what to buy and sell in the short term. We have to remember that the main driver of market prices is supply and demand (some micro economics there) with a good mixing in of human behavioural biases.

Some times and to a greater or lesser extent, macro economic trends that are well set in (like anti-cyclones with the weather) will have an obvious impact on the profitability of companies. If investors can see a major change (eg the reaction to global warming) as being certain to change the way some things will be done (in this case, the slow demise of petrol and diesel cars), they will make investment decisions to try and own shares in those businesses that will profit from such a change.

Note that they will often be wrong, as investors in Clive Sinclair’s C5 must recall, even though he was exactly right in seeing a future for vehicles driven by a big electric motor.

My observation is that the decisions to follow economic trends are driven not by dry data or economists’ modelling, but by an understanding of a well developed story that every one knows. Investors, even the most specialist and experienced are only ordinary human beings like we are and it is a sure thing they have no better knowledge of the future than we do. I appreciate that is a generalisation and some of us, and some specialists, will be a bit more insightful than others.

Big fund managers do employ strategists (a sort of specialist economist). That is like the rulers of old employing soothsayers and magicians. Today they may use computers as opposed to examining the entrails of a sacrificial goat, but I doubt that their success in making predictions is any better.

Economists as social scientists do help us understand how the world works to distribute money and resources and we benefit from that understanding when applying different techniques, mostly to do with the concept of value and risk, when selecting our investments.

Finally, it is only fair to say that some people we know to have been influential economists were, after some practice, great investors – most famously John Maynard Keynes. But some footballers are great golfers, so one has to be careful not to assume a correlation!

Monday mashup – what are CBDCs?

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As I got not a single question from subscribers, I will consider the Q&A idea to be a non-runner!

I will turn the tables.

My question: who knows what the above initials stand for?

I suspect no-one, yet the introduction of CBDCs has the potential to undermine the operations of every private sector bank in the world and change the whole balance of power in both democratic and autocratic countries.

I think it is possible that the wholesale introduction of CBDCs could be the best opportunity in around 150 years for governments to wrest back the power they have steadily lost to corporations since the late 19th century.

What is CBDC and does it matter?

The acronym stands for Central Bank Digitised Currency.

Digital currencies are an interesting and current topic, but like most new ‘products’ have all sorts of hidden risks at the early development stage. Maybe that is why the UK Regulator the FCA is banning the sale and promotion of digital currency derivatives (the most risky way of ‘playing’ with an investment or commodity) to retail investors from next year.

Serious Bitcoin fans who want to take out hedges and so on will get around this by dealing on overseas exchanges, I guess.

And you may know that Facebook thought having a digital currency – Libra – was a good idea and that the G7 nations were seriously opposed to that, rather supporting my proposition that controlling currency will be the new battleground between states and mega corporations.

The news is that China is encouraging Hong Kong residents to get their hands on a chunk of Chinese government digital money by giving away lottery tickets and Shenzhen residents are already able to open digital Renminbi accounts with e-wallets. China is where about a quarter of all the people in the world live, so what happens there is significant.

Would you want to put your money with a government bank?

Any of you that have National Savings Certificates or Premium Bonds have already taken that decision and many did so because they thought it was the most secure option.

That makes me think that a government sponsored e-wallet account would quickly take market share from commercial banks.

The institution that has all your money and also controls the legislative process may be one to worry about. What do you think?

Monday mashup – adrenaline junkies.

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As a child I was severely asthmatic. This generally meant missing a lot of school but in my case did not stop me exercising. One day, on a walk with my parents, wheezing heavily due to pollen, I tripped and fell off a style. My asthma vanished instantly and I was breathing better than I had all Summer.

The reason was the adrenaline boost from the fall. It is the body’s sure-fire instant booster when it detects a threat (my clumsiness no doubt triggering messaging similar to being struck by a hostile entity!).

Performance boosting drugs may help for a short time, but….

The money being poured into global economies by various organisations authorised to invent credit, most recently the European Union, is adrenaline for stock markets. In these times the stimulus feeds through to share prices as instantly as adrenaline gets to widen your blood vessels.

The relief and feeling of well being can be addictive, but in the end the treatment has to stop or the patient dies from other causes. So it will be with stock markets.

I expect either a stalling or maybe something more dramatic, likely the ‘taper tantrum’ that occurred after the US fed started talking about shutting down the money junkies’ supplies in 2013.

Another possibility this time is that the patient is accustomed to the drug in question and seeks higher doses. You can speculate about where that will take us!

So, enjoy the kicks for now but prepare for some cold turkey.

The Great Depression of the ’20s?

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That means this century, not the 1920s, according to Professor Nouriel Roubini. He is sometimes described as ‘Dr Doom”, although he is not the first commentator to earn that title.

Here is a link to his latest comments as published in The Guardian newspaper:

https://www.theguardian.com/business/2020/apr/29/ten-reasons-why-greater-depression-for-the-2020s-is-inevitable-covid?CMP=Share_AndroidApp_Email

What he says is evidence based and he is a professor at a top university in the US, so I am not going to dismiss his projections, although many people will: they are too unpleasant to contemplate. When the ancient Israelites heard Jeremiah’s projections, they decided it best to keep him out of sight underground and for 40 years, we are told, that seemed to have been a good call. No-one likes a sour-puss. But the story ends with a nation being wipe out.

But equally, I know that projecting the future based on what we know has happened in the past can be unreliable, so one might take a more positive view without being accused of ostrich like optimism.

However, investors need to remember that as recently as 20 years ago, we had awful stock market conditions for over 2 years (2000-2002) when a recession came on the heels of a stock market crash and markets fell back badly after a solid looking initial recovery.

I repeat my current mantra: buying equities has to be a very careful process at the moment and I for one am doing all I can to hedge out the risks of a serious recession. As I explained in my post yesterday (Monday mashup), the valuation of many shares is not currently based on an assessment of quality and likely dividend earnings, but in time, I believe reality will return to take control of market valuations.