Category: Economics

Inflation Not Under Control

Back in March I said: “As I suggested in my comments on the budget, the probability of inflation falling to 2.9% by the end of the year is a grossly optimistic forecast”. And so it has turned out to be. Instead of inflation falling below its 2 per cent target within a year, which the Bank of England had forecast, the Bank now thinks it will only hit the goal in 2025. So Bank Rate has been raised again to 4.5%.

It really brings into question the competence of Andrew Bailey and Bank of England forecasters when an amateur financial commentator like me can be more accurate.

Inflation is always very sticky. When people see prices rising they adjust the prices they expect to pay and the wages they demand. And companies pay little attention to the exhortations of politicians.

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

You can “follow” this blog by entering your email address in the box below.  You will then receive an email alerting you to new posts as they are added.

A New National Purpose?

The Tony Blair Institute for Global Change has published a report, jointly authored by Tony Blair, William Hague et al, which has received wide media coverage. It recommends a “radical new policy agenda” that will transcend the current fray of political ideology.

It’s worth reading (see link below) and I will pick out some of the important points in it:

It recommends “building foundational AI-era infrastructure”. This should include: 1) Government-led development of sovereign general-purpose AI systems, enabled by the required supercomputing capabilities, to underpin broad swaths of public-service delivery; 2) A national health infrastructure that brings together interoperable data platforms into a world-leading system that is able to bring down ever-increasing costs through operational efficiencies; 3) A secure, privacy-preserving digital ID for citizens that allows them to quickly interact with government services, while also providing the state with the ability to better target support.

To encourage investment in “growth equity” it suggests encouragement of pension scheme consolidation by limiting capital gains tax exemption to funds with over £20 billion under management (it argues that there are too many small schemes).

It suggests Increasing public research and development (R&D) investment to make the UK a leader among comparable nations within five years, coupled with reforms to the way our institutions of science, research and innovation are funded and regulated to give more freedom and better incentives. Investing in new models of organising science and technology research, including greatly expanding the Advanced Research and Invention Agency (ARIA), and creating innovative laboratories that seed new industries by working at the intersection of cutting-edge science and engineering.

Comments:

The proposals for a “national health infrastructure” seems to be reviving the old concept of a single monolithic patient record system which was abandoned after unsuccessful implementation and the waste of many billions of pounds. Trusts and hospitals now have disparate systems but interoperability is the key while the Government is funding “digital transformation” and having some impact on improving systems. We don’t need a new “big bang” approach with the enormous costs incurred with chosen consultancy firms.

The report appears to suggest that technology can solve all the problems in the NHS by improving productivity. But this is nonsense. Management is the problem, not lack of technology.

The report has a touching faith in the possible impact of AI. So it says: “As a general-purpose technology, AI has the potential to make an unprecedented impact that will exceed those of the steam engine and electricity combined during the industrial revolutions. These previous revolutions focused on the harnessing of energy to mechanise physical labour, but our current revolution is the first in history to automate cognition itself”.

AI is improving but it so far has limited applications. The fact that products such as ChatGPT can help students to write essays (albeit with frequent factual errors) by completing sentences based on internet word frequencies does not herald a revolution in productivity.

The report strongly promotes digital identities. So it says: “Today, many of us can set up a bank account in minutes and pay for shopping at the tap of a watch or phone. For the generation now entering middle age, this level of digital simplicity and streamlining is expected as a default while those in their 20s have grown up in an entirely digital age. Despite this, government records are still based in a different era. The debate over digital IDs has raged in the UK for decades. In a world in which everything from vaccine status to aeroplane tickets and banking details are available on our personal devices, it is illogical that the same is not true of our individual public records”.

I personally would welcome a digital ID. At present I have over 500 separate log-ins for different organisations which I have to record and manage with some help from technology. But I still occasionally have to prove who I am by submitting copies of a passport or driving licence and proof of residence by a copy of a utility bill. This is archaic nonsense when companies such as Experian or GB Group can already verify my identity from their records.

But the NHS and Government bodies like HMRC have separate systems which still require separate log-ins. The report suggests personal data should be shareable between organisations but that should only be permitted for digital IDs when a user permits it.

The report says: “Governments are the original issuers and source of truth for most identity documents, from birth certificates to passports. Rather than creating a marketplace of private-sector providers to manage the government-issued identity credentials of citizens, the government should provide a secure, private, decentralised digital-ID system for the benefit of both citizens and businesses. A well-designed, decentralised digital-ID system would allow citizens to prove not only who they are, but also their right to live and work in the UK, their age and ownership of a driving licence. It could also accommodate credentials issued by other authorities, such as educational or vocational qualifications. This would make it cheaper, easier and more secure to access a range of goods and services, online and in person. A digital ID could help the government to understand users’ needs and preferences better, improving the design of public services. It would make it simpler and easier to access benefits, reducing the number of people who are missing out on support they are entitled to. It could even help the government move to a more proactive model, meeting people’s needs before they apply for a service, tailoring the services and support they are offered to their individual circumstances and reducing administrative burdens on both individuals and the public sector”.

Some of that goes far beyond what is necessary or wise. But giving everyone a digital ID from birth is surely a good idea. Almost everyone already has a National Insurance Number so this is not a new concept but it needs extending to provide digital ID verification. Other countries such as Finland and Ukraine are ahead of the UK already in this regard.

The report has some interesting things to say about the lack of investment in the UK. For example: “Despite startup financing being the focus of several government reviews and new funds, the UK has continually struggled to deliver a sufficient scale and volume of patient and growth capital to the country’s startup companies. The UK’s DB pensions industry is fragmented, with over 5,300 schemes with an average size of £330 million. Their investment strategies, driven by risk-averse corporate sponsors and finite investment horizons, have typically pursued a zero-risk approach. According to Michael Tory, co-founder of the advisory firm Ondra Partners, the UK is one of the only major economies where domestic pension funds have in effect abandoned investment in UK companies. The proportion of UK pension funds invested in bonds increased from less than 20 per cent in 2000 to 72 per cent in 2021, even as their investments in UK equities dropped from 50 per cent of their asset allocation in 2000 to just 4 per cent in 2021”.

This is certainly an area that the Government should look at. Effectively pension funds have become risk averse due to the imposition of regulations that require limitation of risk.

In conclusion the report suggests that technology can solve many of the UK’s economic and social problems. It is way too optimistic in that regard but it does contain a large number of suggestions for where improvements could be made.

Full Report: https://institute.global/policy/new-national-purpose-innovation-can-power-future-britain

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

2022 Was Not So Bad

In a previous blog post I mentioned the book “The Stock Market” by John Littlewood after reading the first few chapters that covered the years 1945-1960. I have now finished the rest of the book which covers the years 1961 to 1990.

If you think the 1950s were bad for stock market investors, then the 1970s were even worse. Shares lost roughly a third of their value in 1973. In January 1974 the Arab countries announced that oil prices were to be doubled for the second time. Meanwhile the miners went on strike and a “hung” Parliament with no overall control was the result of a general election. Dennis Healey increased both personal and business taxes with the top rate of income tax being set at 83%, or 98% on investment income. The Government tried to impose price controls but that did not stop rising inflation which was over 16% in mid-1974.

To quote Mr Littlewood: “The experience of 1974 is visited on investors perhaps only once in a lifetime, but, when it happens, it leaves behind deep scars that last for many years. Many private investors abandoned the stock market for good”.

The market did recover in the 1970s although in 1979 Russia invaded Afghanistan without warning and there were wars in the Middle East which disturbed markets. There was a long bull market until the crash in October 1987 at the same time as the great storm in southern England. Over two days the UK All Share Index fell by 20%. There were similar falls in other international markets.

The UK was dogged by strikes in the 1970s with businesses often becoming uncompetitive in comparison with other industrialised countries. Nothing much changed until Margaret Thatcher became Prime Minister in 1979. Thereafter she stood up to the miners, changed strike legislation and embarked on a period of privatisation (or de-nationalisation as it could be otherwise called) plus adopted a sound money policy.

The 1970s show strong parallels with the last two years. Rising inflation worldwide due to lax policies on money supply (called QE recently) and wars affecting the supply of basic commodities such as food and oil/gas.

This is what Mr Littlewood had to say about Mrs Thatcher and her policies: “Margaret Thatcher led from the front on privatisation. For the Labour party and the trade unions, she was plunging a knife into the heart of deeply held beliefs. Many in her own party would have left well alone, and many in the City were unable to comprehend the scale of her ambition or recognise the confidence she was placing in the capitalist system, but her analysis was impeccable.

In State-owned businesses, the discipline of the threat of bankruptcy is absent. The threat of takeover is also removed, and there are none of the sanctions of reporting to shareholders or being judged on performance by fund managers and investment analysts. Capital requests for investment are judged more by the political whims of government expenditure targets than by an objective assessment of the merits of the project. In Britain, the nationalised industries had become sheltered havens for the producers and the unions at the expense of customers. It was not until some years after the completion of privatisation, that the extent of over-manning and over-charging became apparent as, at one and the same time, prices fell in real terms and profits rose”.

This is a very good summary of the ills of the UK in the post-war years some of which can still be seen in some sectors of the economy such as the railways and the NHS.

On a personal note, the Lawson household has been disrupted since xmas by medical problems. Both younger grandsons got infections and daughter-in-law ended up in hospital for a few days – after waiting for a vacant bed for more than 24-hours.

The NHS is a nationalised industry that demonstrates all the ills mentioned above. More money gets ploughed into it with little obvious impact while the service level declines. In my opinion it needs to be privatised (and I am a big personal user of it so have seen it first-hand).

To conclude, Mr Littlewood’s book is a great analysis of the economic and political factors that drove the stock market in the years covered. It explains in detail the market changes such as the impact of  “Big Bang” and how investors were affected.

You will realise after reading the book that the 2020s have been a relatively benign period in comparison with the last century and that all stock markets are in essence highly volatile even if equities are still a better long-term bet than bonds. It should be essential reading for all investment managers and politicians.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Interest Rate Rise, Strikes and Xmas Reading

I am still hoping for a Santa rally in share prices but they are certainly not happening today. The Bank of England raising interest rates by 0.5% to 3.5% has surely had a negative impact. These are some of the depressing comments made by the Bank:

“Bank staff now expect UK GDP to decline by 0.1% in 2022 Q4, 0.2 percentage points stronger than expected in the November Report. Household consumption remains weak and most housing market indicators have continued to soften. Surveys of investment intentions have also weakened further”; and “The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response…..The majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target”. In other words, more interest rate rises are likely to follow.

With major strikes by train staff, NHS staff and postal workers, you can see why there is gloom in the market. Are the strikes justified? My personal view is that NHS nurses deserve some increase to reverse the erosion of their real pay over the last ten years and to make the job more attractive. I visited my renal consultant on Monday and she was not happy to be providing cover for striking nurses in the next few days. But will I need to cross a picket line for my next appointment? It’s almost 50 years since I had to last do that when HM Customs & Excise staff were on strike but it was all very civilised in reality.

As regards train staff I am not convinced that they are justified in disrupting another essential service for a pay rise and for their demands over working practices. They are already highly paid in comparison with other workers and they should not be trying to dictate how management run the operations. There are also suspicions of a political undertone to their actions.

I issued a tweet saying the strikers should be give an ultimatum to work normally or be sacked. Rather surprisingly I got a response from the RMT which said “In your haste to sound draconian you’ve not considered who would staff the railway or train the replacements if you’ve fired them all? Nothing would move for years!!”.

My response was “Well it worked when Ronald Reagan did it for air traffic controllers, did it not?”. This refers to the events in August 1981 in the USA. To quote from Wikipedia: “After PATCO workers’ refusal to return to work [over a pay dispute], the Reagan administration fired the 11,345 striking air traffic controllers who had ignored the order, and banned them from federal service for life. In the wake of the strike and mass firings, the FAA was faced with the difficult task of hiring and training enough controllers to replace those that had been fired. Under normal conditions, it took three years to train new controllers. Until replacements could be trained, the vacant positions were temporarily filled with a mix of non-participating controllers, supervisors, staff personnel, some non-rated personnel, military controllers, and controllers transferred temporarily from other facilities”.

The US airlines continued operations with minimal disruptions and the Reagan move had a significant impact on union activities in other organisations effectively resetting labour relationships in the USA. Strikes fell in subsequent years. From 370 major strikes in 1970 the number fell to 11 in 2010, and it had a positive effect in reducing inflation.

Just as Margaret Thatcher handled the coal miners in the UK, Reagan’s firm resolve on facing up to the unions created a new and better culture.

As regards postal workers the picture is not so clear. The average postman salary in the United Kingdom is £47,500 per year but the average for all postal workers is much less. But there is one thing for certain, Royal Mail Group will be badly hit by the strikes and customers will reduce the number of letters they send even more and switch parcels to another provider. Postal workers are cutting their own throats by continuing strikes. Here also the dispute is not just about pay but also working practices.

This is another essential service which should not be disrupted. Legal notices get delayed, dividend cheques go missing and letters re hospital appointments and medication deliveries are held up.

It’s all gloom on the political and economic fronts at present. But I am getting ready for the xmas holidays by stocking up on books to read. In fact I have already started reading “The Stock Market” by John Littlewood which covers how capitalism has worked in the UK in the last 50 years. Not well in summary is the answer as it has been driven by political dogma from one extreme to another. The author points out the difference from the USA where the major political parties have always supported capitalism rather than socialism.

Other books I have ordered are “Fall” – a biography of arch fraudster Robert Maxwell, “The Anglo-Saxons: A History of the Beginnings of England”, “Power Failure: The Rise and Fall of General Electric”, and “The World: A Family History” by Simon Montefiore. They should occupy me for a few hours!

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

More Cheap Labour Required? And Results from Intercede and Telecom Plus

Both the CBI and the CEO of Next have called for a relaxation of immigration rules so as to provide more workers. There are desperate shortages of staff in some sectors of the economy such as retail and hospitality, particularly in low-paid unskilled jobs. With a booming economy it has proved very difficult to recruit staff at wage levels that companies want to pay.

The problem has been compounded by a rise in “inactivity” levels, i.e. people who could be employed but are not. Some of them are suffering from long-term sickness but others have simply dropped out of the workforce because they can survive on benefits. The Covid epidemic has encouraged these trends but in essence there are underlying factors such as demographic changes that are a major cause. As the population ages people are less keen to work and are more likely to suffer from medical complaints that the NHS cannot fix quickly due to mismanagement of that service of late.   

Do we need to allow more immigration to help businesses? I suggest not. A tight employment market encourages companies to invest in improving productivity when if they can hire labour easily they do not. Poor productivity is one of the major problems in the UK economy and has been for years.

Even Labour leader Keir Starmer is opposed to unrestricted immigration and has said “Let me tell you: the days when low pay and cheap labour are part of the British way on growth are over”.

The UK needs to look at fixing some of these problems via Government policies on social security benefits including pensions and helping those suffering from illness by improving the NHS while companies need to invest more in productivity improvements. That means more equipment and better training.

Two more sets of results from companies I hold in my portfolio came out this morning. Recession? What recession?

Telecom Plus (TEP) reported revenue up by 51.5% and adjusted profit up by 22.5% with dividends up to match in its interim results. Reading this company’s results helps you understand the impact of the energy crisis on household bills and the impact of government interventions to cap prices.

Not only has the company increased the number of customers signed up to its services because they now have a very competitively priced offering for energy supply, it has also meant that more people have been signing up to sell their services as their household budgets have come under pressure due to the rising cost of living.

The rising cost of energy has also meant customers have reduced their energy consumption by 10% over the summer with a larger reduction expected over the winter months. Customer churn remains at record low levels and bad debt provision seems not to be a problem although that might rise. Forecasts for full year profits and dividends have been increased.

As both a customer of Telecom Plus as well as a long-term shareholder, but not a reseller, I am happy with the progress made.

Intercede (IGP), a company specialising in digital identities, reported revenue up 24% in their interim results and net profits up 124%. Again there is a positive outlook statement and it looks like the strategy to grow by acquisition is paying off. The share price may not have been buoyant of late as small cap technology stocks have fallen out of favour but the company seems to be doing the right things. That’s solely my opinion as a long-term holder of the shares of course.

Both companies demonstrate that there are still profits to be made, even in the tricky energy sector where the government has been interfering.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

The Economy, Politics and Financial Fraud

With not a lot happening in my stock market portfolio today, I have some time to comment on wider issues. With the USA Federal Reserve raising interest rates and the Bank of England doing likewise, there is clearly a commitment to tackle inflation aggressively. This will undoubtedly put a damper on the economy in due course and lead to a recession in the UK as has been widely forecast anyway.

Is raising interest rates wise at this time? I think it is because the era of cheap money (i.e. when it was possible to borrow money at less than the rate of inflation) should never have been permitted.

We still have very low unemployment rates from a historic perspective while the Government is still handing out money in the form of energy support cash which it has to borrow to fund. The Government also remains committed to the “triple-lock” on state pensions to protect the elderly such as me which I find simply unjustifiable when the rest of the population have no such protection from a rising cost of living.  

The concept of a “balanced budget” where taxation matches Government expenditure has been forgotten and the excuse of keeping the economy afloat in the face of the Covid epidemic has been used to justify excessive spending.

Meanwhile the cost of asylum seekers and illegal immigrants is enormous with as many as 1 million illegal immigrants in the UK. Nearly £1.3 billion per year is now being spent housing asylum seekers, with costs likely increasing as dinghy arrivals rocketed over the summer

The rise in small boat crossings in the English Channel is driving the migration figures with at least 40,000 arriving that way in the current year and claiming asylum. A large proportion are young men from Albania who are economic migrants. See this BBC analysis for the data: https://www.bbc.co.uk/news/explainers-53734793

The Government seems incapable of stopping this “invasion” as the Home Secretary recently called it despite the UK having historically a strong navy. In reality the UK navy has spent billions of pounds on large aircraft carriers (£7.6 billion for two) which are white elephants in modern warfare while it has insufficient border patrol vessels or is unable to use them effectively.

Other parts of the UK economy are in a parlous state with the transport network being horribly congested while as much as £45 billion is being spent on Phase 1 of HS2 alone – another expensive white elephant. At the same time terrorist organisations aiming to achieve their objectives by undemocratic means such as “Just Stop Oil” are allowed to disrupt the transport network and divert police operations at enormous cost.

The NHS is at breaking point with costs rising but simply having enough staff, hospital beds and ambulances seems to be incapable of being provided.

The level of fraud and crime in general is rising and it’s worth reading the recent report of the Parliament Justice Committee on fraud in the UK. Here are some brief extracts:

“Justice response inadequate to meet scale of fraud epidemic. Prioritising traditional forms of crime has left the justice system ill-equipped to deal with continuing rise in fraud, the Justice Committee has found.  

The Committee finds that the level of focus from policing is inadequate to deal with the scale, complexity and evolving nature of fraud. Only 2% of police funding is dedicated to combatting fraud despite it accounting for 40% of reported crime. Lines of accountability are confused with responsibility split between local and national forces. Action Fraud has proven itself unfit for purpose and while a replacement reporting system is expected in 2024, victims should not have to wait this long to see improvements in the service they receive.  

In addition to a lack of investigation of fraud crimes, there is also a lack of prosecution. The ONS estimates that there are an estimated 4.6 million fraud offences each year, but in the year ending September 2021 just 7,609 defendants were prosecuted for fraud and forgery as the principal offence by the CPS.  

Chair of the Justice Committee, Sir Bob Neill MP said:

Fraud currently accounts for 40% of crime and the figure is growing. People are losing their life savings and suffering lasting emotional and psychological harm. But the level of concern from law enforcement falls short of what is required.

We need the criminal justice system to have the resources and focus to be able to adapt to new technologies and emerging trends. The current sense of inertia cannot continue, we need meaningful action now.”

There is currently an epidemic of fraud in England and Wales. The number of cases has grown steadily over the past decade and accelerated rapidly to unprecedented levels during the pandemic. This trend has shown no sign of abating as the country returns to normal life. Around 875,000 cases are reported each year, however the Office for National Statistics has estimated that the real number could be as high as 4.6 million. 40% of recorded crime is now fraud and is calculated to cost society £4.7 billion a year”.   

It’s altogether a quite depressing picture of the UK economy, and of our legal and democratic systems that seem unable to respond to these problems in any reasonable timescale. Meanwhile UK politicians seem happy to focus on trivia such as woke issues.

Even the weather has turned bleak and life is thoroughly downbeat.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Financial Stability with Sunak?

It looks like Rishi Sunak has a good chance of becoming Prime Minister after Boris Johnson withdrew his challenge with a judicious and well phrased statement. I welcome Sunak who I always thought was the best candidate and his financial background should at least mean that he understands how to manage the economy and stabilise markets – the same cannot be said for Penny Mordaunt.

Liz Truss and her Chancellor did not seem to comprehend that the UK cannot plough ahead with massive tax cuts and increases in Government borrowing without considering the international reaction from the IMF and those who would need to finance the borrowing.

Neither they nor the advisors in the Treasury and the Bank of England seem to have learned from history. Back in 1974 after a boom generated by Barber the Conservatives lost an election to Labour but by 1976 Harold Wilson had resigned and James Callaghan faced a run on the pound, The UK Government had to go to the IMF for a massive loan obtained with promises of budget cuts.

The moral is that the UK cannot make financial decisions about the economy and Government debt without taking into account the reaction of lenders. The Prime Minister and Chancellor might have thought they were masters of their own destiny but they were grossly mistaken about the real world we now live in.

Barber’s tax-cutting boom also generated high inflation so you can understand why the international financial community ran scared in the face of another similar result. That raised the spectre of falling gilt prices and higher gilt yields thus destabilising both gilt and equity markets. Pension funds were badly affected because of the LDI investment strategies used by pension funds which caused them to dump property funds.

Liz Truss does not seem to have realised that the UK is a small player in international financial markets. The UK cannot act regardless of the opinion of others however attractive it might be to play to the home crowd by pushing for a “growth” policy.

Perhaps she was badly advised by those too young to remember past events in history. But Rishi Sunak had a different plan which we will no doubt now fall back on.

Some people have called for a general election at this point in time but the last thing we need is several months of political knock-about theatre. That would not inspire international confidence. Sunak should help to stablise markets even if he has some tough problems to cope with such as the ongoing energy crisis, war in Ukraine and high inflation. But my view is that a Sunak premiership should be good for the UK stock market.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Queen Elizabeth, Energy Caps, Verici DX, Equals and Paypoint

The sad death of Queen Elizabeth reminds me of my own mother’s death at the age of 100. They looked similar in later life. Both managed to die in their own home which is the best place from which to leave. Will Charles III make a good king? We will have to wait and see but his name is not propitious bearing in mind the track record of the previous two. As I am not a monarchist I will say no more.

It was interesting to see an open coal fire in use in the photographs of Liz Truss with the Queen. Balmoral does not have central heating apparently while Buckingham Palace does have a CHP plant. But the bill to run the later was about half a million pounds per annum before the projected price increases. So King Charles might welcome Truss’s announcement to cap the maximum price of gas and electricity.

This is a cap on prices, not on overall cost so people with big houses with large gas consumption will still pay more. But at least it will replace the OFGEM price cap which was an irrational policy that would not encourage people to reduce energy consumption. Fracking is also being permitted to boost local gas production.

Truss did not give in to calls for this largess to be funded through a windfall tax. She said this would undermine the national interest by discouraging the very investment we need to secure home-grown energy supplies. You can’t tax your way to growth she said. So it will be funded by more Government debt in essence.

Is this wise? I believe it is the lesser of evils as it will help to bring inflation under control which is essential to keep the economy healthy and avoid a severe recession. These decisions by Truss and her new cabinet are positive in my view and should help the stock market.

But she is still committed to net zero by 2050 which is simply an unrealistic and unachievable objective.

I attended a couple of interesting results webinars this week. The first was from Verici DX (VRCI) who provide pre and post diagnostic technology for kidney transplants to avoid rejection. This is a subject in which I have a strong interest as a transplant patient and I do hold the shares which were acquired free as a scrip dividend when they spun off from EKF. The company is making progress but revenue is some way off and profits impossible to forecast so I would not purchase the shares at this time.

I did attend a two-hour seminar at Guys Hospital recently for pre-transplant patients as I need another. It was apparent that transplant procedures have not changed much in the last 25 years. Back then there was hope of xeno-transplantation but that faded away. More recently a bioartificial kidney has been developed (see  https://pharm.ucsf.edu/kidney ) but that could be years away from clinical use.

The other webinar I attended was that of Equals Group (EQLS) which I have held in the past. Financial figures are improving and a focus on the SME sector has clearly helped. It’s a complex payment business though and the webinar only helped in some degree to understand it. It might be another UK technology business vulnerable to being acquired by a trade buyer who understands the technology and regulatory environment. The company has been tipped recently by Simon Thompson in Investors Chronicle.

One company I do hold which is also looking cheap in the payments world is Paypoint (PAY) – probably because it operates in the retail sector and has been around a long time. There is a good write-up on the company in the latest Techinvest newsletter. But like Equals it is a complex business providing a number of different services. Both Equals and Paypoint could do with better communications on their business activities.

All of Verici DX, Equals and Paypoint have one advantage – they are not affected by the price of energy except very indirectly!

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Brompton Bikes – The UK Productivity Explanation

One of the big UK economic problems is the lack of productivity in the workforce. We compare badly with most of our competitors. Last night (5/9/2022) I watched an interesting BBC programme which covered production at Brompton Bicycle Ltd.

Brompton are now the largest UK manufacturer of cycles and specialise in folding bikes. Their products range in price from £1,000 to £3,700 while you can buy an imported folding bike from Halfords for £375. Brompton are clearly focussed on the “premium” market sector.

Their main factory is in west London and the view of the shop floor showed lots of people building bikes manually with not a robot in sight – they claim “All Brompton bike frames are built by hand”. Even painting the frames was shown as being done via a manual spray gun while the frame is built by using brazing rather than welding – this requires a lot of manual skill and time.  

As a former production engineer this strikes me as a horribly labour intensive and inefficient process. They can apparently recruit relatively unskilled people in west London to do the work who then require lengthy training. You can see why productivity is in essence so low.

Brompton may have built a business on good technical innovation and clever marketing but they are likely to remain a niche producer in world markets. Their business model is probably only viable because of the availability of cheap labour in London.

While this kind of business can succeed in the UK, productivity and wages will remain low.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

Book Review: The Price of Time

The Price of Time is a recently published book by Edward Chancellor. Its subtitle is “The Real Story of Interest” which makes it very topical as bank interest rates are being raised in both the USA and UK in an attempt to damp down inflation. After an era when interest rates have been at their lowest levels in the last 5,000 years, and have even gone negative in some countries, a historic review of the impact of interest rates through booms and busts is certainly worth reading. But this is a difficult book in some ways.

It’s too long at 400 pages for one thing for all but the most avid reader of economic history. Why do publishers (in this case Allen Lane part of Penguin) insist on their authors padding out their manuscripts to such length? This book would have been much better at 200 pages than 400. It attempts to cover too much ground and in too much detail while not getting the key messages across.

It covers some ancient history but really gets going in a good explanation of how Scotsman John Law rescued the French economy in the 1700s by lowering interest rates and issuing paper money – similar to the modern Quantitative Easing. But thereafter that economic experiment ended in tears. The book covers the economic booms and busts in the Victorian era forward through the depression in the 1930s to the banking crisis in 2008, and the reaction of Governments.

The book attempts to answer the question of whether there is a natural rate of interest, i.e. one that would apply if the Government did not intervene as they have persistently done throughout history – from the imposition of usury laws, through debt forgiveness to modern central bank base rates.

Why is interest paid? Because an investor holding cash needs some return for the uncertainty of being repaid when money is lent. If the risk is higher then the interest paid has to be higher to attract lenders. In times of economic uncertainty such as wars, interest rates are raised.

Historically when there was a surplus of cash in the economy, interest rates would fall as there might be more lenders than borrowers. High interest rates are likely to reduce economic activity as borrowers are put off from investing in new developments such as buildings or machinery. Low interest rates should encourage economic activity and the circulation of money as opposed to the hoarding of assets.

Governments have taken a stance in recent years that lowering interest rates must be good to maintain a healthy economy but the result has been asset inflation. From stock market booms to house price inflation, if you can borrow money at very low rates it encourages speculation and the borrowing of money to buy assets.

Lenders also need a return to cover the future value of the money lent. If inflation is high, then interest will be high. Recently the Bank of England has had an inflation target of 2% while interest rates have been less for many borrowers. That made little sense. Inflation has now got out of hand but real interest rates are still effectively negative. That is essentially irrational.

The book covers the history of Government and central bank interventions in interest rates and the economy, often with unintended consequences. In that regard, it is a good education on what should or should not be done. One message is clear – artificially low interest rates are as bad for the economy as high interest rates.

The book is very well researched with numerous apposite quotations. I would recommend it to anyone interested in economic history and the trends that have made the modern world. But it could do with being shorter and having a more defined structure.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.