Its Not Harry

Comment and opinion for retail investors in the UK

Rants

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!

Nikol-ess?

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The strange title of this post is a cross reference to my post/rant entitled ‘Emporer’s New Clothes’ in June 2020.

This is about Nikola, the start up electic vehicle business into which GM invested a calculated 2 BILLION dollars, according to media reports.

By September 10th a major documented report (67 pages of it) was published by a researcher and market shorter called Hindenburg – look at hindenburgresearch.com – claiming Nikola’s founder Tevor Milton and associates were lying in their teeth. The founder had already built a track record of dubious dealing and misrepresentation and his brother, the named director of hydrogen technology, is reported to be well qualified in pouring concrete and maybe projecting fantasies but not as a hydrogen fuel scientist.

The up and running hydrogen powered trucks for which so many orders were claimed to have been placed (the same orders more than once) were of course fakes. This much had already been suggested by Bloomberg. Nikola’s first effort (in 2016) at a hydrogen truck was actually powered by gas, but CNG, not hydrogen. Natural gas powered buses are of course already in widespread use.

In the chaos that resulted GM appointed a new chairman (the guy who did the investment deal). They are still involved, but with probably not much money or even time really spent and they may have acquired a potential research facility. They probably got good publicity from the coverage of the ‘investment’ and there has not been much general publicity about the Hindeburg report and its consequences.

The quoted 2 billion investment was based on the supposed valuation of the Nikola business, not an actual amount of money spent.

The fuller story presented by Hindenburg is an entertaining story by itself if you are interested in the not uncommon blatant corporate deceit that pops up in the US in particular but also in the UK; those of you with Hampshire connections may recall a major IT con being perpetrated on the Wessex Regional Health Authority by a newly formed business.

The nugget of human behaviour that I collected from this tale was the willingness of people who should know better to take as fact presentations that are quite plainly suspicious or even obvious lies. They do this because they are ‘primed’ to do so and to act sceptical would risk opprobrium from their fellow humans.

Much as the Andersen tale warns. Good sense has always been around if you looked for it. Companies that never make profits and maybe not even any products are NOT worth a cent in reality. But plenty of money may get made trading their shares on fantasy valuations before the small child (or market shorting specialist) blurts out the truth.

The 5 rules of business – the reason IFAs promote multi-asset funds

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These 5 rules were told to me about 35 years ago by a colleague just back from a management course. You may know them:

  1. What’s
  2. In
  3. It
  4. For
  5. Me?

I am reminded of this by reading an article by Jamie Farquhar, who is business development director at Square Mile Consulting and Research.

Noting large inflows into multi-asset funds reported by the Investment Association, he writes:

‘This strategy is central to driving enterprise value for their [advisers’] businesses by further de-risking the balance sheet and delivering increased operational efficiency.’

(Professional Adviser 05/11/20)

He also mentions an old tale of the IFA profession: the head of sales of a large UK fund management operation was heard opining: “I don’t care what the question is, the answer is multi-asset”

Multi-asset funds may well suit some investors and Vanguard have led the way in constructing low cost reasonably transparent offerings, but don’t think your multi-asset proposition was the result of your adviser looking after you better – other interests came higher up the priority list!

Monday mashup – stupidity or dishonesty?

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No, this is not about the US President’s recent remake of Driving Miss Daisy because if it was the word ‘or’ would be inappropriate.

I am referring to the way in which many governments of the developed world are dealing with the pandemic. Any one who has spoken with me over the last few months will know that I believe the phrase “second wave’ is unhelpful and probably a mispreprestation of the facts.

Ignoring the obvious facts that happen to be inconvenient is a speciality of the human race.

It implies, I think, that the course of the pandemic is predictable based on what has been observed in the past with other viruses. That is possible, maybe even a reasonable way of preparing, but should not be an excuse for failing to observe what is actually happening and acting decisively.

Some facts

Here are what I think are the facts as we know them now and which are not being bluntly (honestly?) put in front of the public of many of he world’s most developed nations. Especially those where politicians raise a lot of money from vested interest groups on all sides of the political spectrum.

  • The virus spreads virulently between people in enclosed spaces who are not widely separated. Like workplaces, nursing homes, police stations, party function rooms, packed baseball stadiums and I guess hermetically sealed presidential cars.
  • Full lockdowns slow the virus spread to a very low level. These are psychologically difficult for many people and severely restrict normal life for part of the population.
  • When the virus is spreading at a low level, contact tracing is easier and helps keep the lid on things.
  • A relaxed attitude to containment is possible in rich countries with well resourced health services and an educated, socially responsible population, but at a cost of more deaths, especially of older people.
  • At this stage the long term impact on those who have recovered from the virus is not well understood, nor is the transmission rate amongst children.

Economic consequences

Those are some of the established facts about the virus. Other facts that are pretty obvious relate to the economic consequences:

  • Complete lockdowns will quite quickly (in a matter of months) wipe out whole sectors of the business community. A few businesses will benefit.
  • Government money pumped out to keep businesses solvent is putting future generations into ‘hock’ by gigantic amounts.
  • Government bail out money is going to sometimes be fraudulently used, will in many cases be only a sticking plaster and will eventually drain into the ‘pots’ of investment speculators.

What is an honest assessment?

A sensible person would conclude:

Governments must admit that there is no feasible balancing act in which the maximum number of lives are preserved and an economic shock is avoided.

There are really 2 options only:

  1. No lockdowns (the Sweden option and apparently what is happening in some US states and maybe the default in large less developed countries in Asia). That will result in more deaths, especially of the elderly, but limited economic damage locally. In many countries, this may see extreme stress applied to health services and that may have unpredictable consequences in itself.
  2. Full lockdowns and tight control of the population (the New Zealand and China examples are obvious ones). This will have economic effects that will be painful in the short term, but which richer countries may be able to tolerate in the hope of a much faster return to normal.

Any other approach is a fudge, a pretence that some sort of half baked lockdown, switched on and off, revised, dropped, localised and so on after a crisis has arisen will save the most lives and keep businesses open. Anything that is not option 2 is option 1 with a misguided attempt to fit some airbags and crash impact zones.

Those countries that opted for option 2 for just long enough to see their numbers improve and then relaxed have really just wasted all the advantages they built up and reverted to option 1 without telling anyone. During that time, the populations of those countries have become disillusioned and are less likely to do what they are asked.

OK, it’s only my point of view….

Double rant warning

Maybe you disagree, or maybe you would say you know all that already.

My point would remain that the politicians in the Western world that I hear from via the (now broadcast and electronic) news media are not displaying leadership, are pretending that all will soon go away magically (especially Trump but also many others) and in the meantime policy making is shambolic, confused and ineffective, frequently reacting to events.

That is like crashing a car in the rain because all four tyres were bald and just replacing the airbags and driving off again.

This matters firstly because more people will get ill and die without any obvious gain. It is tough to suggest that there is any gain in more people dying, but wars have taught us that the process of human existence means that at times some people die because humanity is fighting for a civilised future. What adds to the pain is if they die because of totally incompetent leadership, rather than in the pursuit of the general good by the most effective means.

For us as investors, this matters a great deal as well.

The feeble, half-witted, misdirected and plain dishonest management of the pandemic response in countries accountable for a very large proportion of global economic activity will in due course feed through to a recession that will compare with the one between the Wars.

I started by saying this was not about the US President, but he features!

As then, the very rich will come through in pretty good shape, but I doubt if the rest of us will avoid some severe pain if we are not prepared.

Rant over!

Monday mashup – 50 years of Friedman

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On September 13th 1970 an essay was published in The New York Times Magazine that was to serve as the ‘permission’ for a generation of executives and politicians like Margaret Thatcher and Ronald Reagan to encourage the free market to operate solely for the benefit of the people that theoretically funded it – shareholders.

The rant warning – but this is a bit deeper

Half a century of Friedman

The essay is summarised by the current chief executive of Salesforce, who read it when he was in business school a few years later, in these words – ‘the only business of business in business’.

Training in the late 1970s to be a Chartered Secretary – the company officer charged with keeping a business legal in the UK and many former British colonies – I was taught a different line: that companies were part of the fabric of the economy and therefore of society, so ought to be accountable to other stakeholders, like employees, the government and the consumers.

What I was taught was not, as some still argue, some leftist permission for lazy managers to avoid focusing on profit generation, but an understanding that the profits of a company were generated by the utilisation of other resources apart from capital. That is really just traditional basic economics.

I would argue that to suggest that out of the contributors to profits in a democratic world, only the capitalist should be rewarded is in fact very specifically American and indeed represents right wing liberal philosophy.

The role of companies in society

Much more recently, in his books about humanity (Sapiens etc,), Yuval Noah Harari suggest that some corporations are now so large that they have become a new form of maybe everlasting life, whose influence will forever impact on humanity as a whole.

It is reasonable easy to demonstrate the governments are now at times the servants, not the controllers, of business. The allocation of tax payers’ money to bail out banks, the printing of money (the cost of which will be serviced by the population as a whole, not corporations) and the control of political process (which only the most naïve could deny happens in the US and probably in Europe) by industry paid lobbyists are all examples.

Even in dictatorships and communist countries, the corporation is the favoured entity for corruption. The state assets stolen from the population at the end of te USSR generally went into corporations owned by a few shareholders who used to be party officials.

I would suggest that because ultra large companies offer the opportunity for a few people to acquire almost unlimited power and they will probably use that to their own advantage (not surprisingly), some checks and balances are appropriate in a democracy. This has been recognised by anti-trust law in the US and competition law in Europe, but that only addresses part of the issue and not that effectively when it comes to the ultra large businesses.

If you don’t agree with the last sentence, you must be running your PC on Linux and viewing this page in Firefox – good on you!

I was also not at all surprised to see that Daniel Loeb (an ultra capitalist) defends Friedman by suggesting that the law requires companies to focus on profits only: since the 1960s, US corporations have had the ability to influence the law to their satisfaction, most notably to eliminate foreign competitors. Did I you just think Huawei and Tic Toc?

In fairness, Mr Loeb’s main claim for shareholders is that they should eliminate poor management. Managers (I mean directors and executives) are a sub-class of the employee stakeholder group who might well be accused of acquiring too big a slice of the pie.

As investors, perhaps we should be happy to see profit maximisation as the sole focus of company boards?

That would miss one important point – those who support the Friedman argument often want to create the maximum amount of wealth for themselves, not shareholders in general. In fact, if a takeover or merger that was in their interest would wipe out our investments in a good profitable company, it would not worry them at all!

In their world, the few are supposed to win and the many lose and we, sorry to tell you, are amongst the many.

Sharks or dolphins?

It is obvious that at a basic level, indeed it is a human right, we all need to eat good food. The most efficient and ruthless eaters are maybe sharks, or wolves, or locusts. Should the world seek to adopt their feeding process? I think not.

Most people, because of what humanity is, understand that companies should be run with ethical governance, in a way that sustains the human race and shares wealth with those who are less powerful contributors to its creation, like employees.

The rise of ESG investing and the evidence that well governed companies actually make more profits from normal business operations – quite a different idea from making money for those who are rampant market manipulators and speculators – suggests to me that 50 years down the road Friedman’s proposition is at last being consigned to history. I really hope so.

Wot, no IFA?!

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Research published by Aegon reveals that 53% of wealthier (not exactly defined) individuals are confident managing their own finances.

The most common reason stated for not employing an adviser was cost (33%) then lack of trust (24%). 21% said they no longer needed financial planning advice.

Although NotHarry, of choice, has far too few subscribers to carry out a similar survey and get meaningful results, the discussions I have had with people over the last couple of years have included all of the above reasons for discontinuing an IFA relationship.

Not Harry

The function of this web site is to give those who have advisers some insights that allow them to keep an eye on the value for money they are getting, or not as the case may be. Beyond that, the material available offers insights from a long time investment professional that are intended to be helpful to those who are running their own portfolios.

In fairness to advisers, the same survey reported that of those wealthy individuals who had an adviser (17% of the survey group), 94% were happy with the service they received.

I would always a maintain that good investment and financial planning advice from an experienced and well qualified professional is worth paying good money for. The problem I have noted is that the really good value advisers all have full client books.

The remaining vast majority who do a rather inadequate job of filtering people into centralised investment propositions that have no obvious merits in return for excessive fees have also become rich on the back of consumer naivety. That is partly because we have had more or less rising (bull) stock markets since 2008. All that will change before too long.