Keynes Biography and Engines That Move Markets 

 As I am still in hospital I have had the opportunity to continue with my reading. The first book I tackled was a biography of John Maynard Keynes a very famous economist and stock market investor. He helped to found the IMF and the current international banking system. The book was highly recommended by Barton Biggs as I mentioned in a previous blog post and was written by Robert Skidelsky, It’s a biography of a famous person that nobody has ever heard of to quote my wife. But he really was important in influencing government financial policy after the Second World War.

At 1020 pages it’s quite a heavyweight and that’s just the “abridged” version. But I gave up on it after 200 pages. It’s way too long and too tedious. Not recommended.

The next book I am reading is “Engines that move markets” by Alasdair Nairn. This is no lightweight tome either at 545 pages. It’s a historic review of technology investing from railroads to the internet. The authors object is to teach us when to get in and out of tech stocks and how to avoid ones that are likely to fail after the typical market euphoria for a new technology,

It makes for an interesting read but is too long and could have done with some aggressive editing. But it may be of interest to tech investors.

I shall persevere with it as I have time on my hands.

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

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Is the Investment World Changing?

With the war in Ukraine continuing and inflation hitting over 6% (and likely to go higher), it seems a good time to review one’s investment strategy. My thoughts on this were prompted by watching the panel discussion at the Mello Trusts and Funds webinar on Tuesday. Some members argued that now is the time to move into commodities and out of the high growth technology stocks that have been such winners in the last few years. Is growth going to go out of fashion?

It’s certainly very clear that high inflation in basic commodities such as food (likely affected by the war in Ukraine who are a major producer) and oil/gas (also affected by the war and the associated sanctions on Russia) will have a big impact on consumers in the UK in the coming year. We are already seeing this in the shops and in on-line stores from my brief shopping experience yesterday.

As the Chancellor’s Spring Statement indicated yesterday, the UK is facing its biggest drop in living standards on record as wages fail to keep pace with rising prices. His measures to relieve this by raising the National Insurance threshold and cutting fuel duty will help a few people but not the retired or those not in work. The basic rate of income tax will fall slightly in 2024 in time for the next general election but the country will remain a high tax environment. Perhaps the Chancellor has decided he cannot protect people from the world economy which is undoubtedly true so he has just made a few gestures.

Economies might grow less rapidly or recessions hit as a result of these adverse economic winds, or we might see the dreaded “stagflation” return to the UK. But does this mean I should change focus on the types of companies I invest in?

I don’t think so and I shall repeat what Investment Manager of Smithson Investment Trust (SSON) said in their Annual Report which I was reading today: “One might then ask, if interest rates are so obviously on the rise, and this so obviously creates a more favourable environment for value companies rather than quality or growth companies, shouldn’t we adapt our strategy to buy the companies which stand to benefit? Well, no. Owning high quality companies with sustainable growth is a winning strategy over the long term, has been shown to work through several economic cycles, and is one which we know we can execute successfully. Whilst other managers may be able to run a value strategy, we believe it is inherently more difficult, as you cannot hold value companies for the long term if all you are doing is owning a poor quality company at a low price, which you hope will re-rate in the future. If this does happen (there is no guarantee), you then have to sell the company to find another such investment, and so on. This means that unlike our strategy, time is not your friend, because the longer you are holding the company and waiting for it to re-rate, the lower your annualised returns become, and if you’re particularly unlucky, the worse the company becomes. On the other hand, it matters less if it takes more time for the market to appreciate the value of the type of companies we hold in our strategy, because the highest quality companies are constantly getting better, or at the very least bigger, owing to their growth. So, once we have found the right companies, all we have to do is wait. We think that patience is one of our competitive advantages, because with the strategy we employ, it tends to pay off”.

Commodity companies go in an out of popularity as their profits depend on the commodity demand and prices. But the production of most commodities responds to price changes so in a year or two the boom is over and the bust follows as over-capacity has been created. Chasing these rotations requires a large amount of time and effort when I prefer to purchase companies that one can stick with for many years.  

The impact of high inflation does mean that one has to be careful in selecting companies with high margins and pricing power, i.e. the ability to raise selling prices when their costs rise. But that is a truism in all economic circumstances. Those are two factors that differentiate quality companies from the pedestrian ones.

Companies that have index-linked contracts with their customers might be worth looking at now that inflation is heading to 10%. That applies to many infrastructure investment companies for example and another sector is property companies who often have inflation linked rent reviews. I hold a few shares in Value and Indexed Property Income Trust (VIP) which is one such company.

Incidentally Smithson noted they had sold their holding in Abcam (ABC) which I also commented on negatively recently. They are concerned about the uncertain paybacks on the investments being made which I completely agree with.

Changing my investment strategy which has developed over the last twenty years and has made me an ISA millionaire does not seem to be wise. There was an interesting article published today in the Daily Telegraph on ISA millionaires of which there are apparently over 2000 in the country now according to HMRC. There may be more than that as Hargreaves Lansdown alone claim to have 973. See article here: https://www.telegraph.co.uk/investing/isas/meet-millionaires-made-fortune-using-isas/

The average age of ISA millionaires is apparently 71 and the article reports that the top three stocks favoured by these investors are pharmaceutical company AstraZeneca, insurer Aviva and oil giant BP. Popular funds include Artemis Income, Fidelity Global Special Situations and Fundsmith Equity. That tells you that you don’t need to be a speculator to become an ISA millionaire. You just have to invest the maximum possible every year in a diverse portfolio and stick with it.

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

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Ukraine – A More Balanced View

I attended a meeting of investors on Sunday and the main subject discussed was the war in Ukraine. Most attendees clearly had a gloomy prognosis for the outcome mainly because of a belief that Vladimir Putin was a lunatic who desired to restore the USSR, i.e. he would not stop at Ukraine but would thereafter move into Moldova, Estonia, Latvia, Lithuania, Romania et al.  This view is very much reflected in the Western media with concerns that the war could very rapidly develop into a nuclear one.

President Zelensky is clearly a masterful politician. He came from nowhere to win the election for President when historically he was simply a comedian who pretended to be President. There are few more unusual biographies. He also became a master of social media and has won the hearts and minds not just of Ukrainians but of most of the western world – the British do of course love underdogs. Meanwhile Putin has failed in terms of public relations by not putting his case well and has even publicly suggested that Ukraine should not be considered an independent country.

I take a somewhat different view to the popular consensus although I would not want this to be seen as an apology for the acts of the Russian military. As in any war it is unfortunately the civilians who are suffering the most. A peaceful solution needs to be found because if the war is escalated, with more sanctions being imposed on Russia, then the economic damage will be severe and widespread on both Russia and many European countries.

I think when looking at political conflicts which lead to war then it is best to look at the conflict from the point of view of the enemy when pursuing a solution.

Ukraine has historically been closely linked to Russia after being dominated by Poland. To quote from Wikipedia by the Treaty of Perpetual Peace [surely a wonderful name for a peace treaty], signed in 1686, the eastern portion of Ukraine (east of the Dnieper River) came under Russian rule. As a result a large proportion of the population (about 30%) speak Russian, particularly in the Eastern region and the Crimea. In fact President Zelensky was brought up in a Russian speaking family. In other words there are strong cultural ties with Russia. Ukraine was also a founding member of the USSR until that was dissolved in 1991.

Russia is clearly concerned about the encroachment of NATO and the EU eastwards that could both militarily and economically threaten Russia. Only Belarus, Moldova and Ukraine are not in the EU but Zelensky has indicated his desire to join. There is also the problem of the insurgency in the Donbas region which was long-standing before the latest events plus the takeover of the Crimea by Russia which Ukraine wants back. The longer the war goes on, the more difficult it will be to reach an amicable solution as attitudes harden on both sides and people look for revenge. As has been pointed out, Russia might be able to achieve a complete occupation of Ukraine but that might be followed by many years of constant insurrections and guerrilla warfare against them.

Russia has now offered to cease fighting on the following conditions: Ukraine changes its constitution to enshrine neutrality, acknowledges Crimea as Russian territory and recognises the rebel-held areas of Donetsk and Luhansk as independent territories.

This appears to be a reasonable basis for a settlement that would halt the damaging fighting and cease the escalation. If all military forces were withdrawn by Russia from the rest of Ukraine and Ukraine itself committed to the above (including no applications to join the EU and NATO), then a modus vivendi could be achieved.

Many people suggest that Putin might be removed as sanctions bite and his economy collapses or the war goes against Russia. But that seems very unlikely to me. Opposition to Putin in Russia is quite small and exaggerated by western media. Putin re-established Russia politically and economically after the collapse of the USSR so many people respect him for that. The war in Ukraine will not undermine the regime in Russia unless it broadens into a much wider conflict with bigger military losses which seems unlikely to me. NATO is not likely to get involved and quite rightly because to do so would simply damage western European countries even worse as Russia retaliated by halting exports of gas and oil. Sanctions on Russia will not halt the fighting alone and will take too long to have an impact – they can only encourage Putin to reach some kind of settlement.

A settlement that gives time for countries like Germany and Italy to wean themselves off Russian gas is a better solution. There are many worse options.

Here’s a good quotation from the book by Barton Biggs I mentioned in a previous blog post:

“ Disregard the ranting and raving of the self-proclaimed elite thinkers and alleged experts on wars, economies, politics, and, above all, the stock market” and “History doesn’t evolve in a slow and orderly way; often it leaps forward in disorderly, chaotic jumps. People with wealth should assume that somewhere in the near or far future there will be another time of cholera when the Four Horsemen will ride again and the barbarians expectedly will be at their gate”.

So far as Ukrainians are concerned, those circumstances have already arrived.

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

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A Week to Forget in the Stock Market and DotDigital

Last week was certainly one to forget with Friday particularly bad for most portfolios (the FTSE-100 was down 3.5% on Friday and tech stocks were again hit – Nasdaq was down 1.7% on the day). With the war in the Ukraine continuing the economic outlook looks bleak. We already had sharply rising inflation and sanctions against Russia are driving up the price of oil and gas which is never good for the economy. As anyone who has received a utility bill of late will realise, consumers and industry are going to be hit by sharply rising prices in the next few weeks which will affect many businesses.

There was already a downward trend in the market and I expect this will continue unless peace breaks out in the Ukraine which does not look likely until Russia has achieved its objectives which might take some weeks, if ever. Taking over a country where the population is totally opposed to you is never easy, particularly when outside assistance is being provided and sanctions are biting. Ukrainians are not apparently going to accept defeat.

One of my investments which was worst hit last week was DotDigital (DOTD) but not because of the war. The company provides an “omnichannel marketing automation platform” as they call it (email and sms messaging). The share price fell by 60% after an interim announcement on Wednesday that suggested the forecasts for the second half were not going to be met. In addition the CFO and Chairman are departing (the latter on health grounds).

This is a company I have held for some years first buying at around 8p in 2011 and selling some at around 200p in 2021 when enthusiasm for technology stocks drove the price up to unsustainable levels. The price now is 58p.

The company is profitable, has no debt and lots of cash on the balance sheet and has shown steady growth so there is much that is positive about the company. But clearly the expansion of US operations on which forecasts relied has gone seriously wrong. I attended the results webinar on Friday and submitted the following question:

“Clearly one of the reasons for reduced forecasts is the disappointing figures from the USA. Why after several years has DotDigital not established itself well there? Why has the management of that region not been changed as a result?  There does not seem to be anyone on the board with experience in the USA. As you are looking for a new Chairman could you please ensure that a suitable person is appointed with some knowledge of operating in the USA”. The question was not answered but there was enough information disclosed to make it clear that all was not as it should be.

A question on margins got a response that margins will be lower in the second half because marketing spend will be going up. As regards the US management issues, it was indicated that a couple of management teams had been poached by competitors offering higher salaries. Lots of money from VCs and private equity was going into competitors. It was mentioned that “customer attrition had stabilised” which was a remarkably negative comment. With this kind of product (which I use myself) where there is high recurring revenue people are generally reluctant to change platforms. They should not be losing customers! But the figures suggest they are losing some customers and gaining very few new ones in the USA.

So it would seem that after some years of trying to make a success of the US market they are back at square one with a new management team. It looks like another example of a UK business entering the USA but falling flat on its face in terms of marketing approach.

I will try and find out more next week but I have not quite given up on the company completely as yet. These issues might be minor ones if they take appropriate steps.

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

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Baronsmead VCT AGM and P.J. O’Rourke Obituary

This afternoon the Baronsmead Venture Trust (BVT) is holding its Annual General Meeting. I made some very negative comments about corporate governance at this company in a previous blog post – see  https://roliscon.blog/2021/12/24/baronsmead-vct-more-corporate-governance-issue/ . But the good news is that long-standing Chairman Peter Lawrence is stepping down in March according to a recent RNS announcement. And about time too, one might say.

Unfortunately I will be unable to attend the AGM as it is only being held as a physical meeting so will be unable to raise the other issues mentioned in my blog post. I hope somebody else will.

The bad news yesterday was the death of wit and comic writer P.J. O’Rourke from lung cancer at the age of 74. A writer on a wide range of subjects including politics and economics and it’s not many writers who can make those topics amusing. He wrote a digest and analysis of Adam Smith’s book “The Wealth of Nations” which I commented on previously and he wrote on the war in Iraq and on motoring stories in such books as “Give War a Chance” and Holidays in Hell” which are also worth reading.

A sad loss to the world indeed and it always makes one feel depressed when someone younger than you dies – but his lifestyle certainly did not encourage an extended career.

There are lengthier obituaries in the national media which you can find on the web and which shows how influential and popular he was.

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

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New Book Published – A Journal of the Coronavirus Year

This is a war story, but it is not a story of heroic deeds. It is how an ordinary family faced the Covid-19 epidemic that killed millions of people in 2020 and 2021. The battles were fought in hospitals and other medical facilities but the fear of infection spread panic among the population and Governments took aggressive steps, often misguided, to try and control the pandemic.

This journal was commenced in March 2020 after the Government advised the author to stay at home and not associate with anyone at all as he came into the category of someone who was especially vulnerable to the coronavirus. It provides an interesting record of events in the following eighteen months as recorded at the time, and his reactions to them, in what was a particularly historic period in more than one way.

It focuses to some extent on the impacts on the stock market and the economy in which the author had a particular interest as an active private investor, but also covers how his family and others survived the epidemic and the way life changed as a result for many people. And it gives some insights in how the author became an active and successful investor by adding some biographical notes including the successes and failures in his life in the last 70 years and other events that will be of interest to readers.

For more information and to purchase a copy go to: https://www.roliscon.com/journal-coronavirus-year.html

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

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Why People Hate the BBC

There is an active campaign to “defund the BBC”, i.e. strip it of its license fee. Having watched a programme they broadcast on the 25th of January one can understand why. The programme was entitled “The Decade the Rich Won” and its key proposition was that the effect of QE following the banking crisis of 2008 was to make the rich richer while the poor suffered.

This joint BBC/Open University production pretended to be a documentary of the financial crisis and subsequent events. It included a number of interviews with major personalities involved such as Mervyn King, Alastair Darling, Nick Clegg, George Osborne and Guy Hands but also a few nonentities. It appeared to have been carefully edited to present a slanted view of history and in effect an attack on capitalism.

The purpose of QE was to increase economic activity by providing more liquidity to banks and this is what it did. As Mervyn King said it prevented a great depression as we had in the 1930s. Guy Hands said it was the right decision but it had unintended consequences. The problem was it inflated asset values as money was pumped into the economy.

That of course meant that those who owned assets such as buildings or company shares became wealthier. But it is wrong to suggest that just benefited the rich and hedge fund managers as the programme implied. In reality anyone with a pension scheme or who owned a house tended to benefit, i.e. a large percentage of the population. And those who did not at least had their employment protected by the economy being supported rather than being allowed to decline with job losses following.

There was a clear attack on the big banks and their owners although nobody mentioned that the owners of banks such as RBS and others suffered from full or part nationalisation (i.e. confiscation of their assets).

There was no discussion about what else the Government and Bank of England could have done instead.

This programme was a polemic against the bankers and asset owners of all kinds. It was likely to encourage a very distorted view of history as opposed to being an unbiased analysis of the financial difficulties of the era covered.

It looked like a left-wing socialist manifesto in essence by implying the rich toffs escaped the economic crisis while everyone else suffered. That’s not the reality.

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

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It’s a Champagne Budget

It’s a champagne budget – or at least one to celebrate for investors as there are no really negative changes in it that were widely rumoured. At least that is apart from the rise in dividend taxes and freezing of allowances previously announced.

Here’s a list of the key points:

  • The National Living Wage is being increased.
  • The Government is substantially increasing funding for R&D.
  • The bank corporation tax surcharge is being reduced.
  • There will be some relief for business rates.
  • R&D tax relief will be focussed on domestic expenditure.
  • There will be more investment in tech skills and in schools.
  • Alcohol duties will be reformed and simplified with lower rates on lower alcohol products – champagne and beer will be cheaper.
  • Proposed rises in fuel duty are cancelled.
  • There will be minor changes to the taxation of REITs (details not yet clear but probably positive for investors) and there will be a levy on property developers to finance a fund to remove dangerous cladding.
  • The economy is now expected to grow by 6.5% this year (up from 4%) hence the generally positive tone of Rishi Sunak’s speech and new spending commitments.
  • Borrowing as a percentage of GDP is forecast to fall from 7.9% this year to 3.3% next, then 2.4%, 1.7%, 1.7% and 1.5% in the following years.

Comments:

This is generally a sensible budget with no abrupt changes in taxation, which are always to be deplored.

The emphasis on more education spending is surely wise, and on the NHS of course although whether the extra money will be wisely used remains to be seen.

Cancelling the rise in fuel duty may please some car drivers but it does not seem consistent with the aim to reduce carbon emissions and certainly will not help reduce congestion on our roads. Is this a two fingered gesture to Insulate Britain protestors who were active again this morning? But more prisons are being build to hold them if the courts put them away for a stretch.

It does not look like there will be any big impacts on particular sectors. The share prices of REITs have risen this afternoon so the changes may be positive but the rise in the National Living Wage will hit large employers such as retail store chains. There may be some benefits to large banks in the reduction in the bank surcharge on corporation tax but that will be offset by the general rise in corporation tax previously announced.

The changes in alcohol duties are a welcome simplification and may be of some benefit to pubs while encouraging healthier drinking. But it might negatively impact wine and spirits producers.

The UK stock market has not reacted significantly to these announcements although gilt prices rose on anticipated reductions in Government borrowing.   

More details are present in this document: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1028813/Budget_AB2021_Print.pdf

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

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Why the Germans Do it Better

One of my summer reading books was “Why the Germans Do it Better” by John Kampfner. The book is somewhat mistitled because much of it is taken up with the history of political developments in Germany since the Second World War. That is interesting but it does also cover why Germany has been so successful in developing its economy since it was destroyed in the war years.

This is a short extract from the book: “On the eve of the currency reform and lifting of price controls [by Ludwig Erhard], industrial production was about half of its level in 1936. By the end of 1948 it had risen to 80 per cent. In 1958, industrial production was four times higher it had been just one decade earlier. By 1968, barely two decades after the end of the war that had left the country in ruins, West Germany’s economy was larger than that of the UK. The trend continued remorselessly. In 2003, it became the largest exporter to Eastern Europe. In 2005, it surpassed the US as the leading source of machinery imports into India. It is the largest exporter of vehicles to China. Most impressively, in 2003, Germany overtook the US to become the biggest total exporter of goods in the world”.

Why do we in the UK import so many German cars and other products. Just looking around my own house we have a Siemens refrigerator, a Bosch kettle, dishwasher and washing machine, an AEG cooker and I just bought a Braun electric razor. Like many readers no doubt, all of our domestic appliances are German apart from a Japanese bread maker.

The UK used to be a leading industrial manufacturer and although our car industry is not as moribund as it used to be, it is still only below tenth in the world for vehicle production while Germany is fourth.

Why has the UK become deindustrialised and in practice become primarily a service economy? Education is part of the problem but as Mr Kampfner makes clear, it is also an issue of how we organise our companies. Comparative productivity shows we have fallen well behind with GDP per capita now only 85% of Germany’s.

In Germany there seems to be a stronger consensus between management and employees with employee representatives on the supervisory boards. The culture of companies is different in essence.

Mr Kampfner’s book highlights many of the differences and points to how the UK should rethink some of its educational and corporate structures if we are improve our productivity. It’s well worth reading for that alone.

But it is also a good primer on political developments in Germany, written by someone who knows both Germany and the UK well.

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

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The Population Issue and Historic Evacuations

Roman Withdrawal from Britain – From Cassell’s History of England

My previous blog post on the IPPC report on climate change generated a number of comments. Here’s a good one in the past from Sir David Attenborough that is very relevant: “All our environmental problems become easier to solve with fewer people, and harder – and ultimately impossible – to solve with ever more people”. That’s certainly an area where Governments could take a stronger lead.

While the stock market is relatively quiet, it’s a good time to ponder the subject of evacuations as is currently happening in Afghanistan. Was it necessary and what might happen in due course are the key questions?

Evacuations after military withdrawals are quite common in history. Britain suffered such an event in the years 405-410 when the Roman Empire withdrew the legions to fight off attacks on the continent. The Emperor Honorius finally told the Britons to “look to their own defences” in 410 which marked the effective end of Roman rule. After 400 years of Roman administration and cultural dominance in Britain it rapidly disappeared. All we have left now are a few straight roads.

The USA gave the same exhortation in Viet Nam after a failed attempt at establishing a western style democracy in the South to thwart Communist expansion. Militarily the war in Viet Nam was a disaster with much gold and lives lost to ultimately no purpose. The regime they established was a puppet one ridden by corruption and without widespread popular support. Despite heroic efforts by the US military, support from the US public eventually withered away. Joe Biden is old enough to remember that failure of US policy when the war was continued for far to long. It is hardly surprising that both he and Donald Trump were keen to withdraw from Afghanistan as soon as possible. Viet Nam is now a peaceful and commercially vibrant country.

Britain faced the same problems in Afghanistan in the 19th century when we invaded twice to thwart suspected Russian influence. The first Afghan war was a military disaster and after the second we rapidly withdrew having learned our lesson. In the 1980s Russia invaded the country but after 10 years withdrew after effectively suffering military defeat. The history of Afghanistan and the reasons why it is so difficult for foreign armies to gain control was well covered in a TV documentary by Rory Stewart in 2012 under the title “The Great Game” – it was rebroadcast this week and acted as a good reminder why military success in the country is always a mirage.

Ultimately the US and UK’s efforts in Afghanistan followed the same problems as in Viet Nam. The regime they established was corrupt and only kept afloat by oodles of money while the western culture they attempted to establish was not accepted by most of the population. Afghanis looked on western armies as invaders of the wrong religion. This was never going to work.

Ultimately, and when otherwise facing a military situation that could not be won, withdrawal was clearly the best solution after the original reason for the US invasion was forgotten after 20 years of war (originally intended to stop terrorism promoted by al-Qaeda).      

Could the withdrawal have been better handled? That is debateable. It is clear that all the “hangers-on” to the US, UK and other foreign forces might want to depart but with tens if not hundreds of thousands of such people this was hardly very practical. A date was set of the end of this month and Joe Biden does not wish to stretch it out. They claim to have already evacuated 70,000 refugees. There was sufficient time given to remove military forces and the Taliban have promised an amnesty for others. It is clear that Afghanistan faces a very difficult time in the next few years both socially and economically as Viet Nam did. But extending the withdrawal by a few weeks or months will surely not help much while militarily it makes no sense. Kabul airport cannot be defended easily if the Taliban choose to block a time extension. The West should concentrate on coming to an accommodation with the new rulers and helping them to develop the country, not attacking them for perceived undemocratic failings.

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

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