Gas Prices, Price Caps, Reckless Pricing and Telecom Plus

There was a lot of coverage of the impact of rising gas prices in the media this morning, particularly on retail consumers. The wholesale price of natural gas has been shooting up for a number of reasons – up 17% alone on Monday for example.

The Government imposed “price cap” has protected consumers to some extent, but it has meant that many companies that supply consumers have been losing money. There are as many as 55 companies that supply gas to retail consumers but a number have already entered administration and the forecast is that only 10 might survive.

The price cap is only reviewed every six months and that is clearly insufficient to keep up with the rapid change to open market prices. The price cap was introduced to protect consumers from big companies who had many long-standing customers on fixed expensive tariffs. Many were reluctant to switch to other suppliers which is now very easy. Government action might have been laudable to protect the most vulnerable from exploitation but when you start interfering in markets, the outcome is usually perverse.

As a shareholder in Telecom Plus (TEP) I have some interest in this issue. They have repeatedly complained about new entrants to the market who were promoting prices so low that they were bound to lose money. But they were doing this to build a customer base.

This is what TEP said in their last Annual Report in June: “The level of the energy price cap increased by almost £100 at the start of April, a substantial rise that reflects both rising wholesale prices and higher covid-related costs. Since then, wholesale costs have remained at an elevated level, which makes the switching market particularly challenging for all market participants.

Despite this, many independent suppliers are still setting their retail prices at whatever level is required to attract new customers on price comparison sites, irrespective of the impact it will inevitably have on their profitability and cashflow; as a result, we continue to see them reporting significant and unsustainable losses in their latest published accounts. A number of further suppliers have left the market over the last 12 months, with further insolvencies likely in the event that the current Ofgem consultation (designed to prevent suppliers using customer deposits as a substitute for shareholder capital) becomes effective”.

Business Secretary Kwasi Kwarteng has said that the Government “will not be bailing out failed companies” which is good to hear because it is the companies own fault that they have got into this parlous situation. Gas prices are always volatile and companies that had not hedged the price nor had long-term supply contracts were very likely to come unstuck.

A meeting of supply company leaders with Mr Kwarteng apparently encouraged dropping of the price cap, but he was adamant in retaining it. That is a great pity because this problem would never have arisen if a free market was allowed to operate.

There are other possible ways to protect vulnerable consumers and nobody ever has their gas cut off because their supplier goes bust.  

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

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Raising Taxes Was Inevitable

The Prime Minister’s statement yesterday primarily provided an excuse to raise taxes to help the NHS and support social care funding. But this was surely very predictable. In March I said this after the Chancellor published his budget: “Reaction to yesterday’s budget was generally negative, but nobody likes higher taxes. The general view is that the Chancellor has just kicked the bucket down the road. More borrowing in the short term to finance the recovery and keep people in employment, but much higher taxes later. I think the budget is a reasonable attempt to keep the economy afloat and could have been a lot more damaging for business if he had taken a tougher line”.

You only have to consider the many billions of pounds being expended in the NHS to counter the Covid-19 epidemic and to support businesses which had to shut down to see that higher taxes were inevitable.

We are now getting the predicted higher taxes. The main points announced were:

  • National Insurance rates for both employees and employers will rise by 1.25%. Mr Johnson said he “accepts that this breaks a manifesto commitment, which is not something I do lightly. But a global pandemic was in no one’s manifesto”.
  • Those over 60 but still employed will also pay National Insurance for the first time from which they were previously exempt.
  • Taxes on dividends will also rise. Dividends are taxed based on your income tax rate. Basic-rate payers will now pay 8.75% tax on dividends, up from 7.5%, higher-rate payers will pay 33.75%, up from 32.5%, while top-rate payers will pay 39.35% up from 38.1%.
  • The “triple-lock” on state pensions will be suspended which will reduce the anticipated income rise for pensioners.
  • Pensioners will also be hit by a proposal to raise the limit for when obtain free prescriptions from age 60 to 66.
  • In total it is suggested that the total tax take will be the highest it has been since the Second World War and undermine the Conservatives claim to be a low tax party.

What do we get in return?

The extra £12 billion a year raised will mainly be spent helping the NHS recover from the Covid-19 pandemic and, eventually, on protecting people from extortionate social care costs. But there are few details on how the money will be spent. However there is a claim that the extra taxes raised will be hypothecated as a “health and social care levy”, i.e. cannot be spent on anything else, although the rules can be changed later of course.

One specific commitment is to introduce a lifetime social care cost limit of £86,000 per person from 2023. This may help people to avoid having to sell their homes if they have to go into residential care. But it only applies to basic care costs not to food and accommodation.

There will be a new means test if people live in their own homes. They will get all their social care funded by taxpayers if they have less than £20,000 in assets — excluding the value of their home. They will be partially funded if they have assets worth up to £100,000.

Comments:

  • The advantages of the self-employed paying themselves via dividends rather than in salaries will be further reduced. For those who receive dividends on investments it is important to try and reduce those by moving the investments into tax free ISAs, SIPPs or VCTs. Clearly it will also increase the relative value of companies that are growing their retained profits or doing share buy-backs rather than paying out profits in dividends.
  • Will the extra money for the NHS actually improve the services? As a big personal user of the NHS I welcome it but will more money make a difference? The service has certainly declined in the last year with waiting lists for operations growing to millions nationwide (I had to pay privately to get one done for example). There is a shortage of doctors and nurses and that is not easy to fix quickly as training takes a long time as does building new hospital facilities. The total funding for the NHS is now comparable to other European countries but the level of service provided is not as good – just compare the number of hospital beds, particularly intensive care ones, or doctors per head of population. This is where the NHS proved to be so sub-standard during the pandemic. This is a management problem which more money might not cure.
  • Social care likewise needs wider reform but will more money help? It is not clear.
  • The media comments lauded the ability of those who need to go into care homes from avoiding selling their homes. But why should they not be forced to do so? This looks like a sop to the wealthy home owners in the shires who want to pass on their homes to offspring. I do not consider it fair that young workers should be subsidising such funding by rises in taxes on them. So far as I am concerned, I am quite happy to erode my personal wealth to pay for the medical or social care costs I need. My offspring should not be relying on collecting big inheritances.
  • Is it a good idea to impose extra costs on businesses and deter them from employing more people? This is surely a damper on economic activity generally and will reduce returns to investors. But employment levels are high and increasing the cost of employing people might encourage higher productivity. At this point in time, I therefore do not oppose it, but I am not one of those in employment who will be paying the higher NI rates.

The key question is what else could the Chancellor have done to raise taxes? The alternatives are probably no better.

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

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Why the Germans Do it Better

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

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

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

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

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

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

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

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

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

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The Population Issue and Historic Evacuations

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

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

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

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

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

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

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

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

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

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

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Mining Companies, Takeovers and a Journal of the Coronavirus Year

The usual stock market gyrations are taking place in August and this year it seems to be the turn of big mining stocks. Rio Tinto (RIO) is down 20% since its recent peak in May and Anglo American (AAL) fell sharply after it recently went ex-dividend. BHP Group (BHP) is also down but not by as much as might be expected after it announced that it was intending to unify its corporate structure and this will mean it will no longer be a FTSE-100 stock so some tracker funds will have to sell it. The downward move was probably limited because this company is dual listed in the UK and Australia and there was a discount in the UK versus the A$ price which will be eliminated.  

The reasons given in the media for declines in mining stocks are numerous – some profit taking after a long rise, worries about Covid infections rising, US stimulus measures being cut back, a slow-down in economic growth in China and several other reasons. All of this is probably just “noise” that can be discarded as financial news tends to be thin during the summer so media tend to invent stories.

As regards the BHP move, where I hold the stock, I do not oppose the simplification. It will still be listed in the UK but as a FTSE-250 stock. However the one-off costs of US$500 million to do the unification seems to be unreasonably high. I hope we see a good justification for the move when it comes to a vote. But it has been suggested that one motivation is a more relaxed corporate governance environment in Australia. As I have pointed out in previous blog posts, excessive regulation in the UK is providing an incentive to list elsewhere or not list at all.

Other market news is a recent spate of takeovers in my portfolio such as at Avast (AVST) and Ultra Electronics (ULE). The Avast proposal is not at a great premium but I have only held it for a short while so I will not oppose. It’s a good opportunity to simplify my portfolio which still has too many holdings in it.

As regards Ultra this is another short-term holding and the agreed offer price is at a very good premium so I will support. The Government has required the competition watchdog to assess ‘national security issues’ over the sale but the share price barely moved after that announcement so it seems the market expects this will not thwart the deal. With UK and US defence companies now so intertwined it would seem pointless to object.

On a more personal note, in March 2020 I started a diary because the coming year seemed likely to be a momentous one. With the Covid epidemic spiralling out of control and our departure from the EU (Brexit) having happened but no free trade agreement yet in place which was forecast to be a disaster by some people, it looked likely to be an interesting year economically and politically. And so it turned out to be.

My life in the period has been somewhat mundane as meetings have been cancelled and travel much restricted. But I thought it might of some interest to my offspring in due course. My father wrote a diary covering the years before, during and after the Second World War which proved to be fascinating reading when it came to light over 50 years later even though he was in a “reserved” occupation and the nearest he ever got to fighting was in the Home Guard.

I have now finished my diary as I consider the epidemic to be substantially over and Brexit has turned out to have minimal consequences on our daily lives. But some aspects of our lives have changed. My diary has been printed under the title “A Journal of the Coronavirus Year” and is comparable to “A Journal of the Plague Year” by Daniel Defoe published in 1722.

I have published other books in the past – the most recent one via Amazon which is relatively simple to do. But I only wanted a few hard copies for my family so I used a company called BookPrintingUK (https://www.bookprintinguk.com/ ). This I found to be a very good low-cost service which I can recommend it you have a similar need. It is easy to use and they can include colour photographs.  Photograph of completed volume of 400 pages is above.

The current book contains both personal information and commentary on the financial world – the latter often taken from my blog. Is it worth turning it into a publication that the general public, or at least the investment community, might find of interest? Let me know if you think that would attract any demand. As a history of the epidemic and other events from March 2020 to June 2021 and how life has changed in that period it may be of some interest to historians.

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

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IPCC Report – The Implications for Investors

The Intergovernmental Panel on Climate Change (IPCC) have published a report that predicts in stark terms both the historic and predicted changes to the earth’s climate from human activities. This is what they say in the accompanying press release: “Scientists are observing changes in the Earth’s climate in every region and across the whole climate system, according to the latest Intergovernmental Panel on Climate Change (IPCC) Report, released today. Many of the changes observed in the climate are unprecedented in thousands, if not hundreds of thousands of years, and some of the changes already set in motion—such as continued sea level rise—are irreversible over hundreds to thousands of years”.

However they also say that “strong and sustained reductions in emissions of carbon dioxide (CO2) and other greenhouse gases would limit climate change. While benefits for air quality would come quickly, it could take 20-30 years to see global temperatures stabilize”.

Although there are a few people who do not accept the scientific consensus in the IPCC report, Governments are likely to accept the findings and implement policies accordingly. This is already happening with the UK being at the forefront of measures to reduce carbon emissions which are seen as the main cause of global warming. With the UK Government’s “net zero by 2050” policy we are already seeing major impacts and the imposition of enormous costs on many aspects of our life. All of this is reinforced by media coverage of floods and wild fires that are typically blamed on climate change.

Many such reports are anecdotal in nature – they may simply be random events that occur for non-specific reasons, while reporting of such events is now more common in the modern connected world. But the IPCC report does say “It is virtually certain that hot extremes (including heatwaves) have become more frequent and more intense across most land regions since the 1950s, while cold extremes (including cold waves) have become less frequent and less severe, with high confidence that human-induced climate change is the main driver of these changes”. They also say that heavy precipitation events have increased since the 1950s over most land areas and it is likely that human-induced climate change is the cause. It has also contributed to increases in agricultural and ecological droughts.

The IPCC report is effectively a call for action and that will no doubt be reinforced by the upcoming COP26 summit in Glasgow in November where politicians will be promoting their virtuous visions no doubt. Whether they turn into actions remains to be seen – the past experience suggests they may only turn into token gestures. Economic decisions often thwart the best policies.

What happens if we don’t cut CO2, and methane and other carbon emissions? The IPCC report gives a number of scenarios based on scientific models of differing levels of emissions. Under the high and very high GHG emissions scenarios, global warming of 2°C (relative to 1850– 1900) would be exceeded during the 21st century. Global warming of 2°C would be extremely likely to be exceeded in the intermediate scenario and under the very low and low GHG emissions scenarios, global warming of 2°C is unlikely to be exceeded.

That might seem to be good news, but because of the time lag of the impact of changes in emissions, under the high emissions scenario their best estimate is of a temperature rise of 2.4 °C by 2041-2060 and 4.4 °C by 2081-2100. The latter would be disastrous for many parts of the world with increases in the intensity and frequency of hot extremes (heatwaves and heavy precipitation). The Arctic might become ice free in summer under all the scenarios and sea levels will rise “for centuries to millennia due to continuing deep ocean warming and ice sheet melt”. This could mean a rise of 2 to 3 metres in sea levels if warming is limited to 1.5 °C or 19 to 22 metres with 5 °C of warming!

With so many of the world’s cities on seaboards you can see that flood defences may be totally inadequate to cope with such rises and incapable of being built to resist them. Investments in City of London property would be one casualty. The current Thames flood barrier may be overwhelmed in future years even if GHG emissions stop growing.

The changes will likely affect the Northern Hemisphere more than the Southern, and there is some good news. For example, the reports says that the growing season has lengthened by two days per decade since the 1950s in the Northern Hemisphere. Farming might extend further north and unproductive land brought into use, but droughts might also remove a lot of marginal land from farming activity. These impacts will be greatly affected by the increase in GRH emissions.

Who can really affect the emissions? Only the big emitters such as the USA, China and Russia can have much impact. The UK produces less than 2% of world emissions.

Does the decarbonisation of transport, particularly in the UK, help at all? In reality not. For example, converting users to electric cars is likely to have minimal impact because the energy requirement and associated CO2 emissions to construct the batteries and make the steel for the car bodies offsets most of the likely benefit. The cost of building a network of charging points and enhancing the electric grid to cope will also be high. Investing in electric car makers or buying electric cars is not going to save the planet.

Is it worth considering investing in disaster insurers, although there are now few such listed vehicles? Munich Re produced a good report on this area which you can read here: https://www.munichre.com/en/risks/natural-disasters-losses-are-trending-upwards.html . An interesting point they make is that less than half of all losses are insured and it is even less in developing countries. It is very clear that poorer countries in less developed markets are those that are going to suffer from more extreme weather events and rising sea levels.

The big problem which the IPCC report does not cover is that GRH emissions are directly related to the size of the human population and their activities. Particularly what they consume, where they live and how they earn an income.  

Unless there is a concerted effort to halt the growth in population and to restrict urbanisation, I doubt that the growth in GRH emissions will be halted. More population means more farming to feed the people and that is a big contributor to methane emissions which is a significant GRH factor (this is highlighted in the latest IPCC report). Similarly construction of homes and offices is a big contributor. Nobody has yet figured out how to produce cement without generating carbon. Hence the suggestion that we should revert to constructing houses out of wood. Investing in growing trees for timber might be one interesting investment approach to look at. But that is a 20+ years project and it can take 50 years to grow to harvestable size for timber, or longer in northern latitudes.

In conclusion, it’s worth reading the IPCC report (see link below) and pondering how you think the Government should deal with these issues. Please don’t fall into the trap of encouraging your local council to declare a “climate change emergency” as some have already done. Their initiatives such as closing roads to restrict traffic and persuading everyone to cycle will have no impact whatsoever. Gesture politics is what we do not need.

Even the UK Government alone will have no impact unless they can persuade other major countries to take suitable steps. But will they is the key question?  If they don’t all we can do is to try to mitigate the impacts by weather proofing our properties and the transport network while purchasing air conditioning to cope with the heatwaves.

I am sure some readers of this article will consider that I am being too defeatist and that we can all contribute to reducing the problem by eating less meat, looking at the food miles of what we consume, cutting out long holiday flights, changing your central heating boiler, reducing investments in oil/gas/coal producers and other peripheral affectations. But only Governments can really tackle the problem which we should all encourage them to do.

IPCC Sixth Assessment Report: https://www.ipcc.ch/assessment-report/ar6/

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

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Government Powers Ahead with Decarbonising Transport

An announcement from the Government yesterday spelled out the world’s first “greenprint” for decarbonising all modes of domestic transport by 2050.

Plans include a ban on the same of all new “polluting” road vehicles by 2040 and net zero aviation emissions by 2050. The former includes the phasing out of all petrol and diesel HGVs by 2040 – subject to consultation. Consultation will be very important because the practicality of HGVs that need to go long distances without repeated refuelling is important economically. LGVs can probably be electrified but HGVs need to use alternative fuels.

The 2050 commitment applies to aviation emissions and a consultation on that is also launched under the “Jet Zero” banner. It is clear that new technologies and aviation fuels need to be developed to achieve a major reduction in aviation emissions. Whether such changes to reach zero emissions are achievable is not at all clear and the cost, which might be very considerable, is not given.

Similarly, the costs of electrification of all rail transport is likely to be enormous as the UK lags far behind other European countries in that regard. Less than 50% of the UK rail network is currently electrified. For example the cost of electrifying the Great Western mainline to Cardiff was estimated at £2.8 billion.

The Daily Telegraph has speculated on a new system of road pricing to replace the £30 billion currently raised through taxes on petrol and diesel. But the latest Government announcement leaves out any mention of how that issue is to be tackled.

As with all good political missives, the Government document contains lots of fine words about how the environment will be improved while not inhibiting us from travelling when or where we want (for example, taking holiday flights). It’s a policy statement in essence that leaves out all the detail of how this nirvana is to be achieved and at what cost. It ignores a lot of the practical difficulties. But it’s worth reading to get an impression of what might happen in the next few years.

Where is the cost/benefit analysis that justifies this revolution in transport modes? It’s nowhere to be seen. It’s as if the Government has signed up to the global warming religion so as to save humanity while ignoring the fact that reductions in UK emissions, particularly those that are only transport related, will have very little impact on worldwide emissions. The UK generates about 1% of global emissions while transport related emissions are an even smaller proportion. The UK appears to aiming to be a saint among sinners which may make us feel good but may make us economically poor.

What are the implications for investors? It’s clear that many billions of pounds will be spent by the Government to achieve this new world. But there is one simple message to take on board. The UK will be impoverished in comparison with countries that have not become quite so committed to the new religion. So investment in China, India, even the USA, in fact anywhere except the UK and the rest of Europe, might make more sense.

Government GreenPrint Paper: https://tinyurl.com/8ymtap38

Telegraph Article on “Road Toll Confusion”: https://tinyurl.com/edxxh4rp

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

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Collecting Your Personal Health Data – Should You Object?

There seems to be quite a furore developing over the plans by the NHS to make your personal medical data available for research to a wide range of organisations, including commercial companies. It is no doubt true that the NHS has an enormous amount of medical data on the UK population which is unrivalled anywhere else in the world except possibly in China.

That data which might be as simple as weight and blood pressure, through to blood tests and even DNA samples, could be exceedingly useful by using “big data” analysis techniques to identify possible causes of disease. It would of course include past diagnoses and treatments including medication.

But there have been a number of protests raised about the risk of loss of confidentiality and the fact that it might not be completely depersonalised (i.e. the data released might enable people to be identified). Even some of my neighbours on the App Nextdoor have been advising people to opt-out.

This is a complex area and I remember discussing it with my GP some years ago when it was first contemplated. He had concerns but I do not while I think such data could be enormously useful in diagnosis and the development of new treatments. The Investors Chronicle ran an informative article on the subject last week and covered some of the companies active in this area.

For example it mentioned Alphabet (parent of Google) partnering with hospital chain HCA Healthcare to develop algorithms using patient records. As I have recently been treated in an HCA facility (they own London Bridge Hospital) that might include me. The article pointed out that even your Apple Smartwatch will be recording some medical data such as heart rate exercise data.

A number of companies are developing partnerships with hospital groups to collect and analyse the data they have on patients. For example, AIM listed Sensyne Health (SENS) is doing so. They recently announced an agreement with the Colorado Center for Personalized Medicine which will extend their database by 7.3 million patients to over 18 million. They obviously plan to “monetise” that data by supplying it to other companies for research purposes. I do hold a few shares in Sensyne.

What are the concerns? Insurance companies would certainly like to know who might be bad risks by looking at patient data. They are unlikely to be able to do that, particularly as any data released will be depersonalised. But will it be impossible to identify people as some might enable linkages to be made? Perhaps not totally impossible but the risks seem low to me and personally I could not care less who knows my medical history. Others might disagree on that point but the benefits of having a good database of medical data to help with research, much of which is done by commercial companies, is surely invaluable.

There are opt-out provisions for those who have any concerns.

See https://digital.nhs.uk/data-and-information/data-collections-and-data-sets/data-collections/general-practice-data-for-planning-and-research for more information.

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

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Great British Railways Plan – But Will It Be Great?

The Government has published the Williams Review of proposals for how Britain’s railways should be reformed. The existing franchise system for the train operating companies with a separate company managing the tracks which was introduced in the 1990s has proved to be a dismal failure.

Network Rail went bust and although the franchise services have been improved in some regards, the recent collapse in ridership due to the Covid epidemic has meant the Government had to step in to keep franchises afloat. The franchise system was also exceedingly complicated with horrendously complicated contracts to supposedly provide the right incentives to train operators. It did not stop arguments over who was to blame for delays to services. But the Government (i.e. you and me via taxation) ended up providing even bigger subsidies and in ways that were not that obvious.

Train delays are common. The report says that one third of trains were late in 2019/20 and this has barely improved in the past five years.

Now the Williams-Shapps Plan is now proposing a brave new world of Government control. Grant Shapps, the Transport Secretary, said: “Great British Railways marks a new era in the history of our railways. It will become a single familiar brand with a bold new vision for passengers – of punctual services, simpler tickets, and a modern and green railway that meets the needs of the nation.”

That sounds remarkably like the ambitions of the old British Rail does it not?

New flexible season tickets are promised that will help those who are now only commuting into offices a few days per week and simpler and less confusing tickets are foretold. Paper tickets will disappear and there will be a new app to enable easy booking. This will compete with companies such as Trainline (TRN) on the web whose share price has dropped by 25% since the announcement. There were lots of people shorting the stock even before the news broke, probably because the company has never made a profit and looks financially to be somewhat unstable. Trainline issued some soothing comments including: “The Company believes the proposals will provide Trainline with new opportunities to innovate for the benefit of customers and further grow its business” but it’s clearly a major threat.

The Williams report says that train operating franchises will be replaced by “Passenger Service Contacts”. It is not clear how that is different though. More fine words from the report are: “Under single national leadership, our railways will be more agile: able to react quicker, spot opportunities, make common-sense choices, and use the kind of operational flexibilities normal in most organisations, but difficult or impossible in the current contractual spider’s web”. One claim is that Great British Railways will make the railways more efficient, long the complaint of those who have looked at the finances of the system.

Comment: There is certainly a desire for change as the existing franchise system and separate rail track maintenance system was clearly inefficient. Rail passengers still do not pay for the real costs of running the trains and building/maintaining the tracks except on heavily used commuter lines in the London area. But the essential problem is that the cost of operating trains is high when passenger usage is concentrated into a few hours per day while the public expects a service 18 hours per day or longer. Another problem is that the cost of building and maintaining the tracks and signalling is enormously expensive in comparison with roads.

For example, according to articles in the Guardian (a keen supporter of railways), the cost per mile of building a motorway is £30 million per mile. Does that sound high? But the cost of a new railway such as HS2 is £307 million per mile!

Railways are old technology that intrinsically require expensive track and expensive signalling systems to maintain safety. If a train breaks down or signals fail the whole network is disrupted while this rarely causes a problem on roads. The breakdown of one vehicle on a road makes little impact and traffic actually flows through broken traffic lights quite easily while they are easier to repair.

There is a very amusing section in the report on the “blame culture” that operates at present, and how arguments thus generated are resolved. That’s very worth reading alone.

Changing a rail timetable normally takes 9 months apparently and there have been some big problems as a result in the past. For example in 2019 Northern Rail missed more than a quarter of million stops allegedly after a botched timetable change and generated thousands of customer complaints. You don’t hear of such problems with bus services which are intrinsically more flexible.

How will Great British Railways affect services in London, where commuter surface rail lines are operated by separate companies at present. This is what the Williams report says: “In London and the South East, a new strategic partnership will be established to support housing, economic growth and the environment across the highly interconnected transport network in that part of the country. This will bring together Great British Railways, TfL and local authorities and businesses to coordinate timetabling and investments and to provide a consistent passenger experience in areas such as accessibility, ticketing and communications”. Sounds wonderful does it not, but the devil is surely in the detail.

Ultimately the Government will still be in control of the railways under this plan, so it’s effectively a renationalisation under a different name. That may please some but no nationalised industry has ever been an economic success or pleased their customers. I foretell disappointment.

You can read the full Williams report, which is a panegyric to the future of rail travel in the country here: https://tinyurl.com/3rhcd8e5

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

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Rampant Speculation, Cryptocurrencies, Buffett Meeting and Ridley Blog

With a long weekend for the May bank holiday, I took the opportunity to prepare the information required by my accountants to submit my and my wife’s tax returns (it’s many years since I completed my own Self Assessment tax returns – my financial affairs got too complicated).

After reading a good article in this weeks Investors Chronicle on Inheritance Tax (IHT), entitled “Eight things executors need to know”, I think I should have simplified my financial affairs long ago! My executors are going to have quite a job on their hands. But IHT is just ridiculously complicated. It looks like a “make work” scheme for accountants.

I have of course tried to simplify matters recently by consolidating two SIPPs on different platforms into one. The process was started on the12th January and is still not complete although most of the assets have now been transferred. As I have said before, the time and effort required to move platforms is disgraceful so I will be preparing a complaint to go to the Financial Ombudsman this week.

Having reviewed my income and expenditure figures for last year, it’s also a good time to review the state of the market. Should I “Sell in May and Go Away” as the old adage goes? Not that one can go far these days without a lot of inconvenience and expense.  

My portfolios contain a mix of individual shares and investment trusts, with a strong focus on technology stocks and small cap stocks. I certainly have some concerns about small cap technology stocks which seem to be fully priced at present, even if their futures look rosy. There are a large number of new IPOs of late where the valuations seem very optimistic. Meanwhile there is rampant speculation being pursued by inexperienced investors, particularly in cryptocurrencies and NFTs.

This is what Warren Buffett’s partner Charlie Munger said at the recent Berkshire Hathaway Meeting: “Of course, I hate the Bitcoin success and I don’t welcome a currency that’s useful to kidnappers and extortionists, and so forth…Nor do I like just shuffling out billions and billions and billions of dollars to somebody who just invented a new financial product out of thin air. So, I think I should say modestly that I think the whole damn development is disgusting and contrary to the interests of civilization. And I’ll leave the criticism to others”. That’s very much my opinion also.

Government debt has been ramped up to meet the Covid epidemic and interest rates are at historic lows. The concern of many is that inflation will increase as a result requiring Governments to clamp down on the economy to stop it overheating. This was a useful comment recently from the editor of Small Company Sharewatch: “The solution to the problem of lower interest rates is self-evidently higher interest rates. But the US Federal Reserve is having none of it. In the 1970s. inflation of around 15% was the problem. This was cured by higher interest rates, which got inflation down, and allowed interest rates to fall – for the next 40 years! The problem has now flipped. Low interest rates are the problem. Debt is encouraged: complacency grows; savers take on more risk; and investor mania grows. These are all likely to persist until the Fed acts”.

The economy is certainly buoyant. I learned today from attending a webinar of Up Global Sourcing (UPGS) that even pallets are in short supply. Commodities are also increasing in price as a result. I have not lost faith in technology stocks but perhaps it is best to look for new investments in other sectors of the economy – and certainly UPGS is a very different business which I now hold.

For another topical quote, here’s one from Matt Ridley in an article in the Telegraph (he always has something intelligent to say):

“The whole aim of practical politics, said HL Mencken, ‘is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.’

It is hard to avoid the impression that officials are alarmed rather than pleased by the fading of the pandemic in Britain. They had a real hobgoblin to hand, and boy did they make the most of it, but it’s now turning into a pussy cat. So they are back to casting around for imaginary ones to justify their draconian – and deliciously popular – command and control over every detail of our lives. Look, variants!

And yes, the pandemic is fading fast. The vaccine is working ‘better than we could possibly have imagined’, according to Calum Semple, of the University of Liverpool, based on a study which found that it reduced hospitalisation by 98 per cent……”.

If the pandemic and the associated fear of the population is over, no doubt the Government will ramp up the concern about global warming despite the fact that we had the coldest April for almost 100 years. Government actions in this area are already having a significant effect on some sections of the economy and I have been putting a toe into that pool. No I am not buying electric car stocks but the power generation area is certainly of interest. How to avoid the speculations and just buy good businesses that are not totally reliant on Government funding is surely the key.

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

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