Population Growth Problem, Trump at Davos and More Bad News at Ted Baker

 

7.7 Billion and Growing. That was the subtitle of a BBC TV Horizon programme last night on population. Chris Packham was the presenter. He said the world’s population was 5 million 10,000 years ago but by 2050 it is forecast to be 10 billion. He showed the impact of excessive population on biodiversity and on rubbish generation with lots of other negative impacts on the environment. It is surely one of the most important things to think about at present, and will have major economic impacts if not tackled.

The big growth is coming in countries such as Brazil and Nigeria. Sao Paolo is now 5 times the size of London and it’s running out of water. So are many other major cities including London. The growth in population is being driven by better healthcare, people living longer but mainly via procreation. A stable population requires 2.1 babies per family, but it is currently 2.4. In Nigeria it’s 5!

In some countries it is lower than that. It’s 1.7 in the UK (but population is growing from immigration) and it’s 1.4 in Japan where an ageing population is creating social and economic problems.

The FT ran an editorial on the 14th of January suggesting population in Europe needed to be boosted but it received a good rebuke in a letter published today from Lord Hodgson. He said “Global warming comes about as a result of human activity, and the more humans the more activity.  This is before counting the additional costs of the destruction of the natural world and the depletion of the world’s resources. In these circumstances suggesting there is a need for more people seems irresponsible”.

I completely agree with Lord Hodgson and the concerns of Chris Packham. The latter is a patron of a campaigning charity to restrain the growth in population called Population Matters (see  https://populationmatters.org/ ). Making a donation or becoming a member might assist.

For a slightly different view in Davos President Trump made a speech decrying the alarmist climate views and saying “This is a time for optimism, to reject the perennial prophets of doom and their predictions of the apocalypse”. He was followed by a 17-year old with limited education who said just that and got more coverage in some of the media. I believe Trump and moderate environmental writers like Matt Ridley who suggest we can handle rises in world temperature and that the future is still rosy. But we surely do need to tackle the problem of a growing world population.

Chris Packham reported how this was done somewhat too aggressively in India and China but there are other ways to do it via education and financial incentives. Just ensuring enough economic growth in poorer countries will ensure population growth is minimised. Let’s get on with it!

On a more mundane matter, I have previously commented on the audit failure at Ted Baker (TED). The latest bad news today after an independent review it has been discovered that the inventory problem is twice as worse than previously reported. The company now states that inventory in January 2019 was overstated by £58 million. The share price has fallen by another 7% at the time of writing.

This is not just another example of a minor audit failure. Stock value in the Jan 2019 Annual Report was given as £225 million so that is a 22% shortfall. Auditors are supposed to check the stock and its valuation so this is a major error. It will reinforce the complaints of many investors that audit quality in the UK is simply not good enough and the Financial Reporting Council (FRC ) has been doing a rather inept job in regulating and supervising auditors. But will we see the proposed replacement by ARGA anytime soon, which will require some legislation? It seems this is not a high Government priority at present.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Speedy Hire and Burford Capital

There are a couple of interesting articles in this week’s Investors Chronicle. One of their share tips for 2020 is Speedy Hire (SDY) which I own some shares in after attending a presentation by the company at a ShareSoc meeting in October. I was somewhat impressed by the apparent turnaround in the business that the management has achieved. You can read a write-up of the presentation here: https://roliscon.blog/2019/10/04/speedy-hire-presentation-burford-analysis-and-treatt-trading-statement/

Another very good article in Investors Chronicle was on the subject of fair-value accounting. It should be essential reading for all Burford Capital (BUR) investors. It explains how Enron used mark-to-market accounting to value long-term contracts. Their reported profits surged as they recognised future profits but the cash did not appear so the management then went from creative accounting to downright fraud by the use of off-balance sheet vehicles.

In reality it was using “mark-to-estimate” accounting as there were no public markets for the assets that could provide a sound valuation. How is this relevant to Burford? That company is in the same position in that the majority of its profits come from fair value gains on the value of the legal cases it is pursuing. As in Enron, the cash flows are very different to the reported profits. In 2018 the reported operating profit was $344 million but the cash outflow was $198 million.

As I said in my blog article mentioned above, I have always been doubtful about the merits of the company and one reason is the answer to the question “Do profits turn into cash?” The answer is “Not in the short term at Burford”. They are effectively recognising what they consider to be the likely chance of success in current profits. But winning legal claims is always in essence uncertain. I have been involved in several big cases and your lawyer always tells you that you have a very good chance of winning as they wish to collect their fees, but even if you win collecting any award can be uncertain”. In essence the accounts of Burford rely to a large extent on management’s estimates of the chance of winning cases and hence the future profits.

Incidentally a few respondents to my mention of my portfolio performance last year in a previous blog post and tweet requested details of my portfolio holdings and investment strategy. My response was that I don’t like disclosing the details mainly because listing all my holdings and providing reasons for them would be tedious but clearly one reason for success is avoiding companies such as Burford where profits do not turn into cash. As regards my investment strategy this is well covered in my book Business Perspective Investing https://www.roliscon.com/business-perspective-investing.html.

As I point out in the book, attending presentations by management or attending Annual General Meetings can give you useful information and the ShareSoc events are very relevant to that objective so I recommend them.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )