Category: Education

Silicon Valley Bank Rescue and Wandisco Discussion

Silicon Valley Bank (SVB) has been rescued both in the USA and UK. In the UK HSBC has taken over the business for £1 and put in some more cash. But bank share prices are still being negatively impacted as doubts about their stability remain.

The problem at SVB was in essence a failure to manage interest rate risks on bonds they held as security which they could not sell to meet depositor redemption requests without recognising big losses. It demonstrates the knife edge that most bank balance sheets sit on, which is why I don’t invest in banks. Lending long and borrowing short as all banks do is a recipe for disaster unless very carefully managed.

Last night there was a panel discussion of the problems at Wandisco (WAND) at the Mello event. I gave my view of the likely problem at the company which is likely to have wiped out investors in a company that was worth £905 million before the shares were suspended.

This company has been reporting numerous very large “orders” in recent months but if you read the last annual report it says this: “Commit-to-Consume contract structure to be widely utilised across all future clients, where a customer is contracted to move a minimum amount of data over a given time” and reports several new deals using that structure. What exactly were the implied commitments in terms of cash by these “orders” is the key question which is not apparent. The company revenue forecasts were probably based on more than the minimums committed and probably inherently too optimistic. We will no doubt learn more in due course.

Who was to blame for this fiasco? The sales person or persons involved as the company suggests or the CEO and CFO for not being more sceptical about the likely future cash flows? The latter I suggest. The announcements made by the company were in my view misleading and hence effectively a fraud on investors.

Can the company recover? As I said in the meeting, the company does appear to have some good technology but avoiding administration is not going to be easy. The company may need more funding urgently to meet its customer commitments but who would invest in the business as confidence in the management will have been lost and investigating the problem will take time? It may take weeks if not months to resolve and the longer the company shares are suspended the more difficult it becomes.

There was a general discussion at the Mello event on how to avoid frauds which lose investors their money. Can you spot likely frauds was one question discussed. I think you can in many cases. There were warning signs at Wandisco such as never reporting a profit since they listed which is why I never invested in it. But sometimes it’s very difficult as at Patisserie Valerie where the audited accounts were fictitious.

One of the speakers mentioned a good book on the subject entitled “Lying for Money” by Dan Davies. I have ordered a copy. I would also recommend “The Signs Were There” by Tim Steer and I cover some of the things to look at when researching companies in my own book entitled “Business Perspective Investing”.

What should be done to avoid investors losing money from frauds?

Tighter regulation of announcements was one suggestion and tougher penalties for convictions was another. In general the UK legal regime is much too weak and the FCA has historically been very lax although they have been improving.

David Stredder suggested that companies that list should contribute to an “insurance” fund in case the company suffers fraud that would compensate investors (it’s rarely possible to recover funds from the fraudsters). This is an interesting idea but it would need to be a large fund to cover the likely cases.

Note that relying on non-executive directors or Nomads to pick up and stop problems does not work. Investors need to do their own due diligence.

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

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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 )

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FCA on Getting to the Gamers

On Friday the Financial Conduct Authority (FCA) published a fascinating article on the views of people on the risks of investment offers under the title “Getting to the Gamers”. It included these comments:

“Consumers can now easily invest in high-risk investments. Some of these promotions use popular ‘gamification’ techniques to encourage people to participate. Gamification uses elements of game playing, like score-keeping, competition and league tables, to encourage people to take part. High-risk investments can be a valid part of well diversified portfolios, but we are concerned that many investors don’t recognise all the risks involved”; and:

“First, we had to find out more about these investors, what attracts them to these offers and where they see them. Our research found they tend to be aged 18-40 and are often driven by emotional and social factors. They enjoy the ‘thrill’ and feeling of ‘being an investor’. 78% said they relied on their gut instincts to tell them when to buy and sell. 

But nearly half of them – 45% – didn’t realise that losing money was a potential risk of investing, and over 60% relied on social media when researching investments. They were also disproportionately attracted to offers and platforms that used gamification”.

See FCA article here: https://www.fca.org.uk/about/getting-gamers

Comment: it is certainly plain to see that in the last few years a lot of new investors have been attracted into stock market investment. They have never been through a bear market and their perceptions of risk are therefore inadequate.

What can the FCA or anyone else do about this? Encouraging investors to get some experience before making big bets on shares is one thing to do and more education before they even start to invest are surely the things to look at. Some education should be a pre-requisite before being allowed to invest in the stock market.

Warnings about reading or listening to social media posts on investment topics would also not go amiss and tougher regulation in general of investment web sites would help.

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

The Outlook for Stock Markets and Bank Runs

It’s that time of year when financial commentators like to pontificate on the future for the stock market in the coming year and tip sheets give their hot share tips for the New Year.

As regards economic forecasts and how the stock market will perform I can do no better than quote John Littlewood in his book “The Stock Market”:

“The sequence of bull and bear markets in the 1950s shows a reasonably strong correlation with changes in the direction of Bank rate. This most simple of yardsticks has been underestimated as a guide to the direction of equity markets. It was to prove to be the perfect indicator in 1958 when there were 4 further reductions in Bank rate, in half-point steps, to 4% on 20 November 1958, and the FT Index established a new all-time high of 225.5 on literally the last day of the year, passing its previous peak of 223.9 set 3.5 years earlier in July 1955.

The reason for a correlation between changes in direction of Bank rate and the occurrence of bull or bear markets is simple. Bank rate sets the interest rate for money on deposit and the yield earned on government securities. If it falls from, say, 4% to 3%, yields will settle at lower levels, prices of government securities will rise, and money on deposit will earn less. Conversely, if Bank rate is increased from 5% to 7%, as happened late in 1957, yields rise, the prices of government securities fall sharply and money on deposit earns more.

Two consequences follow for equities. There is always some broad correlation between the yields on equities and government securities, and equity yields will move upwards or downwards in the same direction as government securities. Second, if money on deposit earns more, it will make equities seem less attractive and cash more attractive, or if it earns less it will make equities look more attractive and cash less attractive. Subsequent changes in Bank rate will also tend to move in the same direction, upwards or downwards, and will further enhance the strength or weakness of equities”.

I shouldn’t need to tell readers that we are in a period of rising bank interest rates as the Bank of England tries to clamp down on inflation. That does not bode well for stock market indices although some of this has already been anticipated. The S&P 500 is down 20% over the past year which tends to lead the UK market and the FTSE-Allshare is down 2%.

Another consequence of rising bank interest rates is that high yielding shares will be favoured over those yielding little or nothing. We have already seen this process at work.

With more rises in bank rate forecast (as it should be as it is irrational that it should be lower than the rate of retail price inflation) this process is likely to continue. But readers are warned that all economic forecasts are subject to gross error so the key is to simply follow the trend. In other words, this might not be the time to be putting more money into stock markets.

I am not suggesting that investors should move wholesale out of equities and into gilts and bonds. Equities provide the best long-term hedge against inflation while fixed interest bonds lost value in high inflation periods.

As regards share tips these are subject to even bigger errors than economic forecasts although they can be worth reviewing. As someone who always falls for a good story I know not to plunge into large purchases of new share tips. I might buy a small holding and wait to see the direction of travel while I learn more about a company and its management. In other words, I buy more of the winners while selling the losers in my portfolio. This might not maximise my returns but it ensures the avoidance of big mistakes which can be so damaging to one’s wealth.

For similar reasons I never publish share tips. If I do comment on companies, it is simply to report on news, good or bad, not to try and predict the future.

Bank Runs

One of my favourite films was shown on Christmas day television. Namely “It’s a Wonderful Life”. It stars James Stewart as the manager of a small town savings and loan bank which runs into a cash flow crisis as an employee mislays $8,000 on the day a Bank Examiner visits. A run on the bank follows as news spreads around and folks queue to withdraw their savings. Stewart has to tell people that their money is not in the bank but is out on loan to people to buy their houses. Bank runs are still taking place but latterly on cryptocurrency exchanges.

The film reminded me of a seminar I attended during the crisis at Northern Rock which likewise faced a temporary cash flow problem. The panel of speakers from the financial media, including Andrew Neil, were opposed to any Government bail-out. But one member of the audience asked “would they have let Bailey savings and loan go bust? This question stumped the panel as they did not understand the reference which was a pity because the answer from anyone who had remembered the film would have been “NO” because the bank was clearly a positive contributor to the community and was only suffering from temporary problems.

James Stewart aims to commit suicide but is rescued by an angel when shown the negative consequences if he had never lived. It’s an emotionally warming story that is marvellously well acted and directed. One of those films one can watch several times over the years and still weep with joy at the happy ending. The outcome at Northern Rock was much sadder of course as the Bank of England chose not act.

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

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AEW UK REIT, JGGI Merger and ShareSoc’s investor Basics

Yesterday I watched a presentation by AEW UK REIT (AEWU) on the Investor Meet Company platform. This is a property investment trust which I hold but like many property companies the share price has done badly in recent weeks and it’s now on a discount to NAV of over 24%. The portfolio manager, Laura Elkin, explained that the company’s objective is to achieve a high income for investors through active management.

One of the main concerns of investors in such companies is that with interest rates rising, property investing may become less attractive as they typically have significant amounts of debt used to finance property purchases and may need to refinance their debt at more expensive levels. But AEWU have fixed their debt at 2.9% p.a. for the next 5 years and they have a high current cash holding. Their loan to NAV ratio is only 31%.

The current dividend yield is 8.7% although that is not covered by current earnings. This arises from some property disposals resulting in a high cash holding but they expect the dividend will soon be covered again.

There are apparently opportunities arising to buy properties at good prices and they are having conversations with open-ended property fund managers who are having to dispose of assets after falls in the property sector and pension funds having to realise cash.

Another question was whether their property leases were indexed linked. Generally not. Indexed linked leases often have a cap and collar which provides only limited protection and AEWU’s leases are generally fairly short term anyway so can often be relet at higher prices. But that does surely mean that if the economy grinds to a halt then vacancies might increase and pressure to reduce letting prices will rise.

One interesting comment was that the office market is being hit by the ESG agenda. Prices are being affected by the quality of the property in that regard and this is meaning some improvement of properties is required to make them more attractive before reletting.

This was a useful presentation and a recording is available. AEWU have a good long-term record but property trusts are currently out of favour. Taking a long-term view, commercial property is looking to me to be quite an attractive sector at current price levels and AEWU seems to be nimble enough to take advantage of opportunities.

There was news today of a proposed merger of JPMorgan Global Growth and Income (JGGI) trust with JPMorgan Elect (JPEI) trust. The latter is a rather peculiar investment trust with three classes of shares – Growth, Income and Cash. Holders of any of the latter can switch between the classes without incurring tax liabilities.

Total assets of Elect are relatively small at £341 million in comparison with JGGI’s £1446 million so it is certainly a rational move so far as Elect holders and the manager are concerned. Is there any benefit for JGGI holders? There is some minor advantage of a larger asset base reducing overall costs so I will probably vote in favour as a holder of JGGI.

Investing Basics: ShareSoc has launched a series of videos. See https://www.sharesoc.org/investor-academy/investing-basics/ . It’s a meritorious attempt to educate people on the basics of investment in an easy-to-use format and in a few short sessions. It may help some people although this may not be a good time to encourage people to take up stock market investment. The markets are volatile at present with poor returns in the short-term discouraging new investors.

But shares are beginning to look cheap particularly in the small cap sector and where can one get an income of 8.7% which is what AEWU is paying in dividends? No instant access bank or savings account is paying more than 2.5% while gilt yields are higher but still nowhere near 8.7%. There is a capital risk in investing in REITs but there is also in gilts. Corporate bonds may be another alternative to look at but information on those is quite limited.

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

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Financial Stability It Ain’t

With the appointment of Jeremy Hunt as Chancellor, we have now had four different Chancellors in a matter of a few months. What will overseas investors who dominate the markets make of this?

It will surely not instil confidence in the stability of the UK and its financial management. Liz Truss has not helped by apparently backing tax cuts and then now back-tracking on those commitments. Corporation tax will now rise as originally planned making the UK a less attractive place to invest. The Truss “high growth” strategy is floundering.

The gilt market is gyrating as the Bank of England planned to halt further QE and then changed its mind to stabilise the market while the FCA has allowed pension funds to pursue risky investment strategies which led them into panic selling of property funds and other assets.

Let us hope Mr Hunt can halt this merry-go-round. But what future is there for Ms Truss as Prime Minister? Not a long one in my view. She has not demonstrated confident leadership and her public statements have been quite dire. In a few months I think she will be gone.

I have decided to join the Conservative Party so I might get some say in who will lead the Party in future. I have supported the Party in the past – for example I helped Boris Johnson become Mayor of London although that turned out to be a questionable decision after London became the cycling capital of the world and the road network was severely damaged. But I never joined as a Member.

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

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How to Protect Your Wealth When Wars Threaten

I mentioned in a previous blog post a book entitled “Wealth, War and Wisdom” by Barton Biggs which covers how the turning points of World War II intersected with market performance. I have now read it and I am surprised that this book is not better known. It’s a very good analysis of how the wars of the 20th century impacted stock markets and the wealth of individuals. It probably should be essential reading for residents of the Ukraine at this moment in time, but it’s worth everyone reading it.

Does the stock market predict wars and their impacts is one question he tackles. The answer is yes and more accurately than political commentators it seems in many cases.

Here are some tips from the book that might be helpful:

  • Stock markets recover when the news stops getting worse, and before good news appears.
  • Equity markets have been a good protection against loss of wealth even in countries that suffered defeats, particularly in the long-term. The economic recovery of Japan and Germany after the Second World War soon offset their losses during the war.
  • Bonds are a losing investment in real terms whether you are on the winning or losing side. Inflation erodes their value because Governments print money to finance wars.
  • Buying gold only works if you bury it in the back garden, as otherwise it’s likely to be confiscated.
  • Property, particularly farms you live on, or small businesses you operate, are good investments even in the worst times.

The author actually covers the history and battles of World War II in some depth and it’s a refreshing and well researched analysis even for someone like me who is old enough to have read about a lot about the era in the 1960s and since. It provides some wonderful anecdotes and facts about how those wars created suffering for many millions of people.

The book was published in 2007. The author, Barton Biggs, was born in the USA and was an investment manager and strategist for Morgan Stanley. He made his name by forecasting the dotcom boom and bust which he called “the biggest bubble in the history of the world”. There is a fuller biography on Wikipedia.

Altogether a very original book which I highly recommend.

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

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How the World Really Works – Book Review

It is important for investors, and indeed for everyone, to understand what factors are driving the world’s economies. This is particularly so when there are concerns about global warming and the alleged degradation of the environment as the world’s population continues to increase.

A good primer on this subject is a recently published book by Prof. Vaclav Smil entitled “How the World Really Works”. The author covers wide ranging topics from energy supply to food supply in a very analytic way based on established facts rather than polemics which he criticises as being far too common in the modern world.

His chapter on food production is particularly interesting and he shows how we now manage to feed 8 billion people reasonably well which would have been inconceivable 100 years ago. How do we do it? By using energy supplied mostly from fossil fuels to create fertilizers and by manufacturing farm machinery and road/rail/shipping transport to distribute the products efficiently. The author points out that if we reverted to solely “organic” farming methods we would be lucky to feed half the world’s population.

He covers the supply of key products such as steel, plastics and cement which are essential for our modern standard of living and how they are not only energy intensive in production but that there are few alternatives. He clearly supports the view that the climate is being affected by man’s activities but points out that the changing of energy production, food  production and the production of key products cannot be easily achieved. Certainly it will be difficult to achieve that in the timescales demanded by European politicians when the major carbon emitters of China, India, USA, and Russia are moving so slowly.

Meanwhile any forecasts of the use of oil declining or reserves running out should be treated with scepticism as the price of oil reaches a 7 year high of $95 per barrel. Perhaps investors in oil companies (I hold none) should not be too keen to exit the sector rapidly particularly as the book teaches you that forecasts of economic activity are notoriously difficult.

The author looks at the risks in the future for the world, many of which are uncertain. He mentions the risk of a big “Carrington event” – a geomagnetic storm occurring today would cause widespread electrical disruptions, blackouts, and damage due to extended outages of the electrical grid. If that is not enough to scare you he suggests that another pandemic similar to Covid-19 is very likely as such epidemics have happened about every 20 years in the past and might be more virulent in future. But planning for such events, which were historically well known, was minimal and continues to be so.

He does not propose solutions to global warming other than that we do have many tools to enable us to adapt and cope with the issue. For example, farming could be made more efficient and wasted food reduced. Electrification of vehicles might help in a minor way and he is particularly critical of the increase in the use of SUVs in the last 20 years which has been particularly damaging (I cannot but agree with him on that point). But this is not a book containing simple remedies to the world’s problems. It is more one that gives you an understanding of how we got to where we are now and where we might be going.

For example, the use of coal in energy generation can be much reduced, and oil/gas also to some extent. Nuclear fission is a good source of clean energy and fission is a possibility even if he was not aware of the latest announcements on the latter. But it is inconceivable that there will be short-term revolutions in energy supply.

Altogether the book is worth reading just to get an understanding of how the world currently works – as the book’s title suggests.

Incidentally some of the events covered in How the World Really Works are also discussed in my own recently published book entitled “A Journal of the Coronavirus Year” which covers not just the recent pandemic but the changes that have happened in the last 75 years of my lifetime. It’s now available from Amazon – see https://www.amazon.co.uk/Journal-Coronavirus-Year-2020-2021-Biographical/dp/0954539648/ for more information.

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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A Book to Cheer You Up

We are in one of those depressing moments of the manic-depressive cycles of the stock market. Invest-ability just told us that the FTSE 250 has now lost over 7 per cent this month and I can quite believe it with my portfolio certainly heading downhill. With the gloom of winter fast arriving, I can only recommend the book “Where are the customer’s yachts?” by Fred Schwed.

This book was first published in 1940 and the author had experienced Wall Street at its most extremes. He was a trader but lost a lot of his money in the crash of 1929. It’s a cynical look at the practices and people on Wall Street of which the author clearly had a fine understanding. One might conclude that the financial world has not changed much since.

It’s both witty and educational. As the introduction to the 2006 edition by Jason Sweig spells out: “The names and faces and machinery of Wall Street have changed completely from Schwed’s day, but the game remains the same. The Individual Investor is still situated at the very bottom of the food chain, a speck of plankton in a sea of predators”.

The title of the book refers to the apocryphal story of some out-of-town visitors to New York. On arriving at the Battery their guides indicated some handsome ships riding at anchor and said “Look those are the bankers’ and broker’s yachts”. “Where are the customer’s yachts?” asked the naïve visitor.

Here’s one educational paragraph from the book after he comments that “pitifully few financial experts have ever known for two years (much less fifteen) what was going to happen to any class of securities – and that the majority are usually spectacularly wrong in a much shorter time than that”:

“Still he is not a liar; nor is our other friend. I can explain it, because I have not only had lunch with economists, I have sometimes had dinner with psychiatrists. It seems that the immature mind has a regrettable tendency to believe, as actually true, that which it only hopes to be true. In this case the notion that the financial future is not predictable is just too unpleasant to be given any room at all in the Wall Streeter’s consciousness. But we expect a child to grow up in time and learn what is reality, as opposed to what are only his hopes. This however is asking too much of the romantic Wall Streeter – and they are all romantics, whether they be villains or philanthropists. Else they would never have chosen this business which is the business of dreams”.

On the subject of trusts he says “There has been a good deal of thoughtful, searching legislation enacted against trust abuses in recent years, and all of it favors the investor. The sad thing is that there can be no legislation against stupidity”. The recent events at Woodford come to mind.

The writer also comments on the detachment of the investor or speculator from the real businesses represented by pieces of paper – and “with these pieces of paper thrilling games can be played……this inability to grasp ultimate realities is the outstanding mental deficiency of the speculator, small as well as great”.

He points out that one of the agendas of the S.E.C. is to work towards the ideal of a completely informed investing public. A laudable effort he says but then points out that then “everybody would know whether to buy or sell, and whichever it was, everybody would try to do the same thing at once”. Orderly markets exist on differences of opinion. This view is worth pondering now that we have such instant dissemination of financial news and analysis on large cap stocks.

There is a much wisdom in this book which is both relatively short and readable. Highly recommended for those new to investment for the education and to experienced investors for the levity.

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

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