On the Wealth of Nations

The stock market’s in the doldrums and August is coming up when everyone goes on holiday. But I would guess many of my readers will not be going far, or not at all. You may need some lightweight tome to read on your sofa or on the beach though, so here is a book I have just finished and can recommend.  

It’s called “On the Wealth of Nations” by P.J. O’Rourke. First published in 2007 and claiming to be a New York Times Bestseller, it’s a digest and analysis of that venerable book of the same title by Adam Smith which was published in 1776. I tried reading that book many years ago but found it heavy going. It’s long and in a somewhat archaic style but it was the foundation of much subsequent thought in economics. For anyone interested in the worlds of business and finance, it provides a primer on the division of labour, productivity, and free markets.

P.J. O’Rourke is a very unlikely person to take a stab at popularising Adam Smith’s book but he makes a very fine job of it. He is a comic writer and wit whose reporting on the war in Iraq and in motoring stories in such books as “Give War a Chance” and Holidays in Hell” are also worth reading.

O’Rourke relates much of Smith’s adages, aphorisms, epigrams, insights, observations, maxims, axioms, judicious perceptions and prejudiced opinions (which Smith produced in large numbers) to the modern world. Here’s one example: “The freedom of the market, though of uncertain fairness, is better than the shackles of government, where unfairness is perfectly certain”.

Smith lived before the rise of modern capitalism and the importance of the joint stock company. But he wisely had this to say (as O’Rourke quotes) that as the result of an immense capital divided among an immense number of proprietors [shareholders]:  “It was naturally to be expected therefore, that folly, negligence, and profusion should prevail in the whole management of their affairs”. That’s still true of many companies is it not?

O’Rourke relates two very amusing anecdotes about Smith and his absentmindedness. He is supposed to have gone out into the garden in his dressing gown and, lost in thought, wandered into the road. He walked to Dunfermline, fifteen miles away, before steeple bells broke his reverie and he realised he was wearing his robe and slippers in the midst of a crowd going to church.

At another time, deeply involved in conversation over breakfast, he put bread and butter and boiling water into a teapot and then pronounced it was the worst cup of tea he had ever had.

Some of the issues that Smith discussed in his book such as whether to support free trade or not, what are good taxes or bad taxes, and what level they should be at, are still the subject of topical debate.

In summary O’Rourke’s book is easy reading but still prompts much thought on the world of business, economics and politics.

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

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Chancellor’s Statement – Eat Out to Help Out

I just watched the statement by Chancellor Rishi Sunak. He made some good rhetorical points which I pick out here:

He said the Government is “doing what is right” and is focused on job protection and creation. We are in the “second phase of our economic response to the virus”. The economy has contracted by 25% and we face significant job losses. But with the furlough scheme winding down to October, the measures are:

  1. A job retention bonus of £1,000 for each person who comes back from furlough (if all 9 million return, a cost of £9 billion).
  2. A new “Kickstart” scheme will pay employers for 16-24 year old staff for 6 months.
  3. Funding for new apprenticeship and trainee schemes
  4. £1 billion for the DWP to provide more support.

The Government is also investing in infrastructure to create jobs including £2 billion in green investment – for example in grants to improve the energy efficiency of homes. To improve confidence in the housing market, stamp duty is being cut temporarily as from today.

As our economy relies on “social consumption” (cafes, restaurants, etc.), there will be a cut in VAT from 20% to 5% on that sector for the next 6 months – at a cost of £4 billion. In addition, for August you will be able to eat out at a discount of 50% on Mondays to Wednesdays, funded by the Government. The Chancellor concluded with the phrase “Eat out to help out”.

There was a weak response from Shadow Chancellor, Anneliese Dodds who focused on the medical responses to the epidemic rather than the Chancellor’s statement.

Comment: It looks like the Chancellor wants us to put on even more weight by eating out. Encouraging folks to eat out may improve their “feel good” factor but this is a very temporary gesture. As regards the job protection and creation measures, these may help some people but will they really boost the economy?  

The hospitality sector, and companies in it, will clearly benefit from these measures, and it might encourage people to eat out. But I fear that many people like me will be reluctant to take the risk until it is clear that the epidemic has really disappeared.

The encouragement for people to return to work and the clear intention not to extend the furlough scheme is surely a sound policy as otherwise it would be too expensive while people would get out of the habit of working.

In summary I would suggest these policies may assist, but what really matters to improve the economy and employment is more confidence that the epidemic is fading away, and that will take time.

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

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Boris’s “New Deal” and Events in Hong Kong

It’s summer and normally this is a quiet period for both financial news and stock markets, but not this year. Economic news is consistently terrible with job losses mounting rapidly, Government debt is rising to record levels (over 100% of GDP) and Brexit negotiations are still not concluded. The Covid-19 epidemic is still rampant in some locations even if overall UK deaths are falling but there is still no clear evidence of a workable vaccine to stop the disease and the available treatments are still not a certain cure.

Boris Johnson has revealed a “New Deal” in imitation of President Roosevelt. He hopes to use this to enable the UK to build its way out of the recession. This is what he said yesterday in an announcement by the Conservative Party which was headlined “Boris Johnson unveils a New Deal for Britain”:

“Because we have already seen the vertiginous drop in GDP and we know that people are worried about their jobs and their businesses. And we are waiting as if between the flash of lightning and the thunderclap, with our hearts in our mouths, for the full economic reverberations to appear.

And we must use this moment – now – this interval to plan our response and to fix of course the problems that were most brutally illuminated in that COVID lightning flash. The problems in our social care system. The parts of government that seemed to respond so sluggishly, sometimes it seemed like that recurring bad dream when you are telling your feet to run, and your feet won’t move. And yet we must also go further and realise that if we are to recover fully, if we are to deal with the coming economic aftershock, then this COVID crisis is also the moment to address the problems in our country that we have failed to tackle for decades”.

This is all stirring stuff is it not? He goes on to say:

“I can tell businesses that next week the Chancellor will be setting out our immediate plan to support the economy through the first phase of our recovery. But this moment also gives us a much greater chance to be radical and to do things differently. To build back better. To build back bolder.

And so we will be doubling down on our strategy. We will double down on levelling up. and when I say level up, I don’t mean attacking our great companies or impeding the success of London – far from it – or launching some punitive raid on the wealth creators.

I don’t believe in tearing people down any more than I believe in tearing down statues that are part of our heritage, let alone a statue of our greatest wartime leader. I believe in building people up, giving everyone growing up in this country the opportunity they need, whoever you are, whatever your ethnicity, whatever your background”.

You must admit he writes interesting prose. You can find the whole document on the web. It includes a good snipe at HS2 which he says is going to cost the equivalent of the GDP of Sri Lanka! One of my least favourite projects.

Usage of railways has fallen dramatically as people have been avoiding public transport. But unbelievably some London Councils such as Lewisham have been closing roads and forcing people to get on buses or trains, or even better, cycle while TfL are narrowing Park Lane and Euston Road by removing lanes – a couple of the key roads in London. All this is justified by the emergency of the virus epidemic and “social distancing” which the Government has encouraged with rushed through regulations. It’s not helping at all, just making matters worse.

All this rhetoric may not quieten the social unrest in the country though because the lower paid are the ones that are most likely to be losing their jobs. This country is suffering from a bout of mania about imagined wrongs – to black people, to those of different sexual inclinations, to those of every other kind of minority. This is going to be damaging to the economy unless some control is re-established by the forces of law and order soon.

Hong Kong is an example where the demand for more democracy and even independence finally caused China to clamp down. The riots in Hong Kong were threatening the economy and major companies actually support the new laws that China has imposed. The reaction of Western democracies to these events has been extreme to say the least. The UK is even willing to allow 3 million Hong Kong residents to migrate to the UK. Do we not have enough people already in this crowded country?  When immigration and overcrowding in our major cities brings pressure on housing and jobs which is one of the causes of social unrest, this seems a most bizarre decision. And I bet they will all wish to live in London!

Hong Kong was leased by the British from China and we have always conceded that the lease had to end and that Hong Kong was and is part of China. The Chinese will never concede otherwise. There was an agreed transition period to retain some local autonomy so as to not undermine the economic success of the territory, that was all. But the riots were destroying the basis of that so it’s not surprising that China intervened. The UK should have accepted that and not indulged in damaging steps just to show our displeasure.

I don’t often write about politics but some aspects of the current political situation are very important for economic prosperity in this country. Firm leadership is certainly one thing that is required at the moment. Will Boris’s New Deal revive the economy? On the principle that having people in employment, even if the state effectively has to pay for it rather than having them doing nothing is a good thing, then it is a sensible policy. It might actually work.

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

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Wirecard Cash Missing and Black Reparations

I always have pleasure in reporting major accounting frauds as it backs up the argument in my book Business Perspective Investing that the accounts of companies cannot be trusted and you need to look at other things to judge the quality of a company. But investors in German payments company Wirecard will be very disappointed that €1.9 billion has gone missing. It seems that information on “spurious cash balances” had been provided to their auditors (EY) by a third party (a trustee supposedly holding it).

The Financial Times has been running a series of articles over several months questioning the accounts of this company, but the shares are now down another 50% and it raises questions as to whether the company can survive.

Another story in the FT today was of organisations such as brewer Greene King and the Lloyds insurance market offering donations to charities supporting “diversity and inclusion” and were apologising for their past involvement in the slave trade. That’s for events before 1807 in Britain and 1865 in the USA when slavery was abolished. Greene King left the stock market in 2019. I just hope none of the companies in which I hold shares participates in this nonsense. Trying to rectify historic wrongs from 200 years ago is just unrealistic and totally unjustified when the persons affected are long dead. History is full of past injustices and it’s simply impossible to compensate for all of them.

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

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Babcock Dividend, Ocado Placing, AGM Reform and Why Are People So Angry?

To follow up on my previous blog post about Babcock (BAB) and the possibility of it “skipping” its final dividend, the company issued its Final Results this morning and spelled it out. This is what it said about the dividend: “Given the current level of uncertainty over the impact of COVID-19, the Board has decided to defer the decision on our final dividend for the year ended 31 March 2020. We recognise the importance of the dividend to our shareholders and the Board will keep this under review during the financial year as the impact of COVID-19 becomes clearer”. That is not what Shore Capital suggested at all.

Although the company appears to have met forecasts for last year, and says it has a record order book, the share price has fallen 5% at the time of writing. The market in general is down considerably also though.

Ocado (OCDO) announced an institutional placing yesterday together with an offer via Primary Bid to retail investors. Like the one for Segro I commented on yesterday, this is a fund raising for expansion and is at a relatively small discount and dilution. These arrangements are now becoming common but I still don’t like them. They give private investors very little time to decide whether they wish to take up the offer and they do not know what price is being offered. As a holder of Ocado, this is another one I declined to invest in. Ocado share price is down 5.7% this morning at the time of writing which is exactly the same as the discount in the offer to the previous closing price, i.e. you could pick up shares in the market just as cheaply. I suggest companies should do proper rights issues rather than this dubious method and that the FCA should regulate this area more robustly.

There was a good article in the Financial Times today under the headline “Coronavirus casts doubt on the future of AGMs”. It describes the debate over the reform of AGMs and the use of virtual AGMs. It also covered an initiative by organisation ShareAction who are raising money to fund research into the issue. They quote Catherine Howarth as saying “We hope to co-develop a robust framework for AGMs that would still include shareholder votes and which would also help companies interact with a wider range of their important stakeholders including employees, customers, suppliers and communities”. That may be a worthwhile initiative if it makes AGMs more vibrant and useful than they are now but bearing in mind the funding of ShareAction it may not be a totally unbiased proposal.

What we do not want is AGMs dominated by “stakeholders” with political views as happens already at some companies – such as oil and mining company AGMs with endless complaints from environmental activists or defence industry company AGMs dominated by those who believe the company should not be involved in that industry at all. Companies are not in business to right all the social wrongs in the world, but to provide a financial return to their shareholders. They just need to operate within the laws set by national governments. Company law in the UK already requires the company to take the wider interests of stakeholders such as employees or customers into account and they can be represented at AGMs easily enough now by just buying a few shares – you only need one share to attend an AGM.

The FT article does make some good points about virtual AGMs, one of which I commented upon yesterday (EKF Diagnostics). But it suggests that it might cost £10,000 to hold a “hybrid” meeting at a small company. That is surely a grossly excessive estimate if voting is done on a poll. It’s trivial to set up a Zoom meeting for the number of investors likely to attend such a meeting (only a dozen at EKF).

I don’t often comment on general political or economic issues, but I find the current hysteria about the death of George Floyd and the resulting demonstrations over “Black Lives Matter” in the USA and UK totally out of proportion. George Floyd was a very tall and heavy person who it is alleged resisted arrest. He had a past criminal record and was a drug user. The full facts of the case have not yet been revealed and it is way too early to say whether the police used excessive force or not, even if the result was very sad.

As to whether there is wider discrimination against black or coloured people in the USA or the UK is also doubtful. From my experience of working in the USA, there appeared to be very little direct discrimination. Did not Colin Powell become head of the US Army and Secretary of State? Did not Barack Obama become US President? But as in the UK, black people are disadvantaged often by the social and cultural backgrounds of their families. Righting that can only be done by education not by demonstrations or laws. Demonstrations actually make matters worse, and the recent violent ones and attacks on property such as historic statues actually make people less sympathetic to the cause. Meanwhile the failure by the police to stop these events undermines law and order in general, just as happened with the Extinction Rebellion demonstrations.

Why are people so angry that they feel the need to take part in such demonstrations, including many people who are not black and hence could not have personally suffered from any prejudice? You can see the same problem in the divisive politics of Brexit where rational debate soon flew out of the window and it degenerated into personal slanging matches on social media. In fact social media and national media reporting of news has actually coarsened political life. The BBC in particular has often seemed to be more interested in stimulating outrage to improve their readership or programme viewing and web site clicks than in reporting the facts in a neutral and unbiased way. This is not a useful national broadcasting service. It has become a medium for slanted propaganda and for stimulating social unrest. This is a problem that responsible politicians will need to tackle sooner or later. But in the meantime those such as Sadiq Khan in London seem more interested in stimulating political division over trivia with the objective of gaining a few votes.

As investors, my readers will have to face up to these issues sooner or later because when the social fabric of a country crumbles as the result of poor leadership, sooner or later the economy crumbles also.

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

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Dividend Cut at Elecosoft, Dignity Trading and Public Transport Problems

Many investors are suffering from dividend cuts by companies. The latest one in my portfolio is Elecosoft (ELCO), a company that produces software for the construction sector. In their announcement of the full year results this morning they indicated revenue and earnings were much as forecast to December, and cash flow was good enough to put them in a net cash position.

Normally these results would not have caused any concerns that the dividend would be reduced or cancelled, but not this year. Even though they only previously paid small dividends and half the “cost” as a scrip dividend, this year’s final dividend has been cancelled. This is what the company had to say:

“Proposed Dividend: Elecosoft’s strong trading performance and cash generation in 2019, and, ironically, the strong start to trading in 2020, would normally have warranted the payment of an increased final dividend. However, having regard to the uncertainties created by the Coronavirus situation and the need to conserve our cash resources, the Board has decided to not recommend a final dividend”.

I don’t normally like to challenge the wisdom of management, who may know more than me about the trading position of the company and future revenue, but this does look at first glance to be excessively cautious. That is particularly so bearing in mind they could have paid it as a scrip dividend if they wished to conserve cash. ShareSoc has published some comments and written to the FRC, FCA and BEIS on the problem of dividend cuts suggesting they should issue some guidance. That seems to be a sensible suggestion because at present we don’t know whether this is just management panicking or being simply prudent.

One company that should surely be benefiting from the coronavirus epidemic is funeral provider Dignity (DTY) – I do not hold the shares. More deaths surely mean more business for them. But in their trading update today they show that it is not that simple. The company says the following:

“The absolute number of deaths increased by approximately one per cent to 161,000 from 159,000 in the comparative period last year. Sadly, since the end of the quarter, the UK has witnessed in excess of 20,000 deaths in a single week, the highest since the beginning of 2000. The number of possible incremental deaths as a result of COVID-19 is a matter of substantial speculation. Should 2020 witness a large number of incremental deaths, beyond the 600,000 originally anticipated by the Office for National Statistics, then it is possible that 2021 and 2022 could experience a lower number of deaths than in 2019. The Group will not speculate on the most likely outcome”.

In addition there is the problem that as many people cannot attend funerals, some funerals are being postponed or executors are opting for lower cost funeral packages. Dignity was already suffering from aggressive price competition which had prompted a strategic review before the latest crisis arose.

The company had previously decided to suspend dividend payments. Like Elecosoft they apparently are simply unable to forecast the likely impact of the epidemic on their business. So no guidance for 2020 is being provided.

On Saturday the 9th May Grant Shapps, Transport Secretary, said that only 10% of former public transport capacity will be available in some locations if social distancing is to be maintained. It seems likely that will be so for many months even if people are permitted to go back to work. This will clearly cause major problems in London where almost all commuters use public transport such as trains, the underground and buses.

After the Prime Minister spoke on the 10th May, Mr Shapps issued this tweet: “Speaking this evening the PM was clear – if you’re going back to work in a job that cannot be done from home, please avoid public transport if possible. Go by car, or even better, cycle or walk. To help, we’ve announced more than £2bn in the biggest ever boost to cycling and walking”.

An example of how problematic London transport has become is a report in the Times that says Transport for London (TfL) has asked the Government for £2 billion. To quote: “TfL is down to its last £1bn, which is being burnt at a rate of £21m a day — leaving it less than two months from emptying its coffers and illustrating the intense pressure on local authority finances”. The article suggests the Government will attach some strings to any funding.

Mr Shapps was clearly right to point out the public transport capacity problem, but his apparent remedy to get everyone walking and cycling makes little sense. It is a typical view of politicians who can afford to live in central London. But for the vast majority of London commuters who travel many miles to get to work, it’s simply impractical even if they are keen cyclists.

Mr Shapps also justified his proposals by saying the epidemic is a great health opportunity to encourage active travel with the objective to double cycling by 2025. He also proposes to implement at least one “zero emission” city, and argues that one of the few positives will be improved air quality. He actually said there are “more than 20,000 extra deaths a year attributed to NO2 emissions”.

This figure is nonsense. It repeats the past allegation of 40,000 deaths from air pollution in the UK which has been shown to be simply wrong and a corruption of statistical evidence. In reality, there may be a few months shortening of life expectancy from all air pollution sources, a lot of which cannot be removed such as natural sources. But the figure is essentially uncertain and it is clear there are no deaths directly attributable to pollution. To specifically indicate NO2, which mainly comes from transport, as being the problem is also wrong when the Government advisory body COMEAP could not even agree that NO2 contributed to the negative impact on health of air pollution from particulates.

Mr Shapps clearly knows little about air pollution and its impact on health but is using his ignorance to put a positive spin on his actions in response to the transport crisis.

Just to show how there is no direct correlation between traffic levels and air pollution, this is what the London Air Quality Network (LAQN) recently reported: “Levels of the pollutant nitrogen dioxide (NO2) has reduced significantly during lockdown, research from King’s College London has found. Concentrations of NO2 have lowered as much as 55% due to less road traffic. However, levels of PM10 and PM2.5 were higher after lockdown than at any other time in 2020, due to easterly winds and pollutants from northern Europe”. The reduction in NO2 is perhaps not surprising when measurements by the LAQN are often taken at the roadside so will be heavily influenced by adjacent traffic. But as particulates (PM10 and PM2.5) are of much greater health concern you can see that Mr Shapps’ spin on the air pollution issue is somewhat misleading. Other UK cities have also shown no direct correlation between traffic reduction from the epidemic and air pollution – at least to date.

The air pollution problem is much more complex than can be solved by encouraging walking and cycling alone.

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

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Why I Am Optimistic

The UK death count from the Covid-19 virus is now 25,785 and continues to grow, albeit at a slower rate. There is a lot of bad news about the economy still being reported – new car sales have fallen to the level last seen in 1946 and according to the Daily Telegraph the state is now paying more than half of all adults. The same dire economic picture is also seen in the USA and most other countries. But I am still optimistic for the following reasons.

Apart from being a naturally optimistic person, which is a required attribute for any entrepreneur, the medical scene is looking better for several reasons. Below is a chart issued by the Government today which shows the daily number of confirmed Covid-19 cases.

Reported Covid19 Cases 2020-05-05

It is clear that the spread of the disease is falling rapidly and hence the “R” (reproduction) rate is probably less than 1. If the same conditions persist then the disease will gradually die out. Emergency “Nightingale” hospitals are already closing because of a lack of patients. With fewer new cases, the spread of the disease declines. Tracing of infected people and ensuring they are isolated, plus the new phone App to help identify contacts, are two ways the Government hopes will assist in this process. That’s ignoring the potential vaccines or medical treatments on which a lot of money is being expended worldwide at present. It has even been suggested that taking Vitamin D supplements might avoid the worst symptoms of the disease.

But the Government is concerned that if the “lock-down” restrictions are relaxed to enable people to get back to work then the virus may stage a resurgence and we will be back at square one.

Bearing in mind that the current very severe restrictions are causing enormous financial damage to the economy and costing the Government (and by implication, you and me) billions of pounds in paying the wages of furloughed staff and providing loans to companies, the question is how to make a rational decision on when to relax the restrictions and by how much. One way to look at this is how much you value a life. If you know what that value is then you can do some calculations to see what the cost might be and whether it is justified to relax the restrictions.

The Government already has that figure. For example, when calculating the benefit of road safety measures a figure of about £2 million is put on the benefit of saving one life. That is a somewhat optimistic figure though because it not just includes the cost of lost economic contribution and the cost of medical treatment but also what people say they would pay to avoid the loss of life, i.e. it’s a subjective figure to a large extent. However, it is a good starting point.

In the case of Covid-19 deaths, many of the cases are of the elderly or those with existing medical conditions who cost the state money rather than contribute. So the loss might be much less than £2 million from a Covid-19 death. Maintaining the existing strict lock-down might actually be causing some deaths from lack of attention to the early symptoms and treatment of some diseases such as cancer.

You can see therefore that it might make some sense to do some calculations on the impact of relaxing the restrictions to enable the majority of people to get back to work even if it means the deaths might increase. I won’t even attempt to do such a calculation but the Government should.

Those people who are particularly vulnerable could of course choose to continue to self-isolate but there is no reason to have a lot of the economy shut down. It would also be wise to have a phased relaxation of the restrictions so that meetings of people in confined spaces are still banned until the picture is clearer.

There would still be some sectors of the economy that will be severely affected. So restaurants other than those providing take-aways would need to remain closed and hotels be very restricted. Even if they opened they might have few customers. Airlines and trains would also suffer and it’s perhaps no surprise that Warren Buffett has sold all his shares in airlines. He had acquired stakes of about 10% in American Airlines, Southwest Airlines and United Airlines in 2016 which rather surprises me as surely he used to say these were typically bad businesses. I would guess he lost a few billion dollars on that punt. It seems most people don’t expect airlines to recover for at least a couple of years and aircraft leasing companies are in major difficulties as are aircraft and engine producers such as Boeing and Rolls-Royce. Nobody will be buying new planes for a while.

But a lot of the economy can surely get back into action over the next few months if the Government makes some sensible decisions which is surely good news for investors – so long as you are selective about the companies you hold.

In conclusion the panic should be over. We are not all going to die from Covid-19 although a few of us might do so. But in comparison with the normal hazards of living it may not be significant. For example, about 6,000 deaths happen each year from accidents in the home which is many times the figure for accidents on our roads but little attention is paid to the former mainly because the cost of preventing them would be very high and they do not attract much public attention. Average UK deaths from common influenza are 17,000 but it can be as high as 30,000 in some years.

The Government just needs to take some rational economic decisions on lifting the restrictions.

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

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Extreme Weather Events – Are They a Problem?

Before the national media became dominated by coronavirus news, the most common news story was about global warming and how it was causing extreme weather events such as fires, heatwaves, tropical storms and floods. Fires in Australia and floods in the UK were the headline stories in the past year.

As investors it is clearly something that you need to be informed about. Such natural catastrophes won’t just affect insurance companies but the economy overall if such events are becoming more common. But are they?  The following note has been recently published by Paul Biggs, an environmental scientist and writer on the subject.

It shows that media coverage of national disasters makes for good news stories but the comments on it by journalists and broadcasters are often inaccurate. We probably have a lot more to fear from global pandemics.

Abbreviations: IPCC: Intergovernmental Panel on Climate Change, SREX: Special Report on Extreme Weather.

Weather Disaster Losses

Peer-reviewed science does not support any claim that disaster losses have been increasing due to climate change, man-made or otherwise (Reference 1).

Hurricanes and Tropical Cyclones

The detection and attribution in trends due to human-caused climate change in Tropical Cyclones, including Hurricanes, has NOT been achieved (1) (2).

Floods

UN IPCC AR5 concludes: “In summary there continues to be a lack of evidence and thus ‘low confidence’ regarding the sign of the trend in the magnitude and/or frequency of floods on a global scale.” IPCC SREX authors helpfully conclude that “the problem of flood losses is mostly about what we do on or to the landscape and that will be the case for decades to come.” (1)

Tornadoes

IPCC SREX: “There is ‘low confidence’ in observed trends in phenomenon such as Tornadoes and Hail…the data are suggestive of an actual decline in Tornado incidence..” (1)

Droughts

IPCC/SREX: “There is ‘low confidence’ in detection and attribution in changes in drought over global land areas since the mid-20th century. (1)

Extreme Temperatures

High temperatures are not a big driver of disaster losses. The IPCC says that there is ‘medium confidence’ that globally the length and frequency of warm spells, including heat waves, has increased since the mid-20th century. The IPCC believes that it is ‘very likely’ that human influence has contributed to these changes, but this relies heavily on climate models that are unable to pin down the exact climate sensitivity to CO2. The extreme 6C model known as RCP8.5 is now generally regarded by more rational scientists as ‘implausible.’ The range is now effectively 1.5C to 3C, with recent published evidence supporting a sensitivity below 2C. (3)

(1) The Rightful Place of Science: Disasters and Climate Change: https://tinyurl.com/yx5kfyos

(2) New WMO Assessment of Tropical Cyclones and Climate Change, Lee et al 2020: https://tinyurl.com/wgqoxm6

(3) Climate sensitivity in the light of the latest energy imbalance evidence: https://tinyurl.com/sawhd28

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

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No Budget Surprises from Rishi Sunak

Budget box 3

Chancellor Rishi Sunak just delivered his first budget speech. Bearing in mind how short a time he has had in the job, it’s perhaps not odd that there are no great surprises or revolutions in it.

There are a number of short term measures to counter the economic impact of the coronavirus epidemic on top of the recently announced cut in bank base rate from 0.75% to 0.25% which is surely more of a political gesture than anything because such changes take time to have any impact on the real economy.

There will be a long-term review of business rates but there will be short-term relief for retail and leisure businesses to counter the epidemic impact. The Chancellor is also committing £175 billion to improve economic growth.

The National Insurance threshold will be raised to help the low paid and the planned increase in spirit duty has been cancelled. Fuel duty will remain frozen, when many people expected it to be raised. However red diesel tax relief will be abolished for most sectors other than farmers (it’s news to me that anyone else could use it legally).

Entrepreneurs tax relief will be reformed as widely forecast as it costs the exchequer £2 billion. The lifetime limit will be reduced from £10 million to £1 million. Will that deter entrepreneurs from setting up new businesses? I doubt it.

Twenty-two thousand civil servants will be moved out of London with new Treasury offices in the regions. That will come as a shock to many. Will the Chancellor come under attack from his civil servants like Priti Patel one wonders? But it is surely a positive move to offset the excessive London-centric nature of the economy and the pressure on housing in the South-East.

Some £27 billion will be invested in the strategic road network, including on the A303 that passes Stonehenge.

VAT on digital publications will be abolished so you’ll be able to buy my book “Business Perspective Investing” even cheaper from Amazon – but it’s damn cheap already so I think this may have limited impact except to some educational publishers. It is sensible reform though to align it with paper books.

There is more funding for housing which may help housebuilders and their suppliers and a more general reform of the planning system is forecast. There will be a stamp duty surcharge though for non-UK residents which might affect expensive homes in London but that was widely tipped as something the Chancellor was expected to implement.

For those only aspiring to afford such homes, HMRC is being given more funding to tackle tax avoidance. But the pension tax relief taper relief limit will be raised to £200,000 which may assist many high earners such as NHS consultants. More money is also being given to the NHS although it is not clear whether that and the promise of 40 new hospitals were new commitments or the old ones rehashed.

A closer study of the red book which covers the budget details is required to see if there are any surprises in the small print (see https://www.gov.uk/government/topical-events/budget-2020 ).

Postscript: One announcement snuck in behind the budget is a consultation on changes to the calculation of RPI by the UK Statistics Authority – see https://www.statisticsauthority.gov.uk/consultation-on-the-reform-to-retail-prices-index-rpi-methodology-2/ .

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

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Venture Capital Trusts, the Baronsmead VCT AGM and Political Turmoil

Yesterday (26/2/2020) I attended the Annual General Meeting of the Baronsmead Venture Trust (BVT) held at Saddlers Hall in the City of London. It was reasonably well attended. I will just report on the major issues:

The Net Asset Value Total Return for last year I calculate to be -2.7% which is certainly disappointing. Note that it is annoying that they do not provide this figure in the Annual Report which is a key measure of the performance of any VCT and which I track for all my VCT holdings. I tried to get in a question on this issue but the Chairman (Peter Lawrence) only allowed 15 minutes for questions which is totally inadequate so I will be writing to him on that subject.

The company does give a chart on page 3 of the Annual Report showing the NAV Total Return for the last ten years. There was also a fall in 2018 according to that chart although I am not sure it is correct as my records show a 6.9% Total Return. I will query that as well.

The main reason for the decline in the return was a disappointing result from the listed company holdings – mainly AIM shares. However it was noted that there was an upturn after the year end and it is now up 17.2%. Major AIM company losses last year were in Crawshaw and Paragon Entertainment – both written off completely now – and a bigger loss in Staffline which was one of their major holdings. However they did realise some profits on Ideagen and Bioventix which were still their largest AIM holdings even so at the year end.

There was criticism from two shareholders about the collapse in Staffline with one asking why they did not exit from Staffline and Netcall (another loser) instead of following them down, i.e. they should have invoked a “stop-loss”. The answer from Ken Wotton who manages the listed portfolio was that there were prospects of recovery and they had sold some Staffline in the past so were still making 4 times the original cost. Comment: Losing money on an AIM portfolio in 2019 is not a great result – certainly my similar portfolio was considerably up last year. They seem to be selling the winners while holding onto the losers – not a sound approach. However it would certainly have been difficult to sell their large holding in Staffline after the company reported accounting/legal problems. Selling such a stake in an AIM company when there are no buyers due to uncertainty about the financial impact is simply impossible at any reasonable price.

One shareholder did question the poor returns from AIM companies when they might have made more from private equity deals. The certainly seem to have ended up with a rag-bag of AIM holdings which could do with rationalising in my opinion. The fact that the new VCT rules will impose more investment in early stage companies may affect the portfolio balance over time anyway.

Robin Goodfellow, who is a director of another VCT, asked why they are holding 20% in cash, and paying a management fee on it. Effectively asking why shareholders should be paying a fee on cash when the manager is paid to invest the cash in businesses. The Chairman’s response was basically to say that this is the deal and he did not provide a reasoned response. This is a typical approach of the Chairman to awkward questions at this company and I voted against his reappointment for that and other reasons. The Chairman is adept at providing casual put-downs to serious questions from shareholders as I have seen often in the past.

Another reason to vote against him was the fact that he has been a director of this company and its predecessor before the merger since 1999 (i.e. twenty-one years). Other directors are also very long serving with no obvious move to replace them. This is contrary to the UK Corporate Governance Code unless explained and likewise for the AIC Corporate Governance Code which says “Where a director has served for more than nine years, the board should state its reasons for believing that the individual remains independent in the annual report”. There is no proper justification given in the Baronsmead Annual Report for this arrangement.

I have complained to the Chairman in the past about them ignoring the UK Corporate Governance Code in this regard so that’s another item to put in a letter to him.

All resolutions were passed on a show of hands.

ShareSoc VCT Meeting

In the afternoon I attended a meeting organised by ShareSoc for VCT investors – they have a special interest group on the subject. VCTs have generally provided attractive and reasonably stable returns (after tax) since they were introduced over twenty years ago and I hold a number of them. In the early days there were a number of very poorly performing and mismanaged funds and I was involved in several shareholder actions to reform them by changes of directors and/or changes of fund managers. Since them the situation has generally improved as the management companies became more experienced but there are still a few “dogs” that need action.

Current campaigns promoted by ShareSoc on the Ventus and Edge VCTs were covered with some success, although they are still “works in progress” to some extent. But they did obtain a change to a proposed performance fee at the Albion VCT.

However there are still too many VCTs where the directors are long serving and seem to have a close relationship with the manager. Baronsmead is one example. It is often questionable whether the directors are acting in the interests of shareholders or themselves. There are also problems with having fund managers on the boards of directors, with unwise performance incentive fees and several other issues. I suggested that ShareSoc should develop some guidelines on these matters and others and there are many other minor issues that crop up with VCTs.

There also needs to be an active group of people pursuing the improvements to VCTs. Cliff Weight of ShareSoc is looking for assistance on this matter and would welcome volunteers – see https://www.sharesoc.org/campaigns/vct-investors-group/ for more information on the ShareSoc VCT group.

Political Turmoil Ongoing

Apart from the disruption to markets caused by the Covid-19 virus which is clearly now having a significant impact on supply chains and consumption of alcohol as reported by Diageo, another issue that might create economic chaos is the decision by Prime Minister Boris Johnson to ditch the political declaration which the Government previously agreed as part of the EU Withdrawal Agreement, i.e. that part which was not legally binding.

The Government has today published a 36 page document that outlines its approach to negotiations on a future trade deal and its ongoing relationship with the EU – see https://tinyurl.com/tlhr3pk . It’s worth a read but there are clearly going to be major conflicts with the EU position on many issues and not just over fish! Needless to say perhaps, but the Brexit Party leaders are happy.

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

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