Category: Stock market

Lifting the Gloom, But Not at Halfords

I think I have been suffering from Seasonal Affective Disorder (SAD). It seems to have been raining and cloudy since before xmas and the stock market did not perk up until the last few days.

Even today one of my holdings, Halfords (HFD) issued a profit warning which caused the share price to drop by 20%. But the losses on that were offset by significant rises in a number of my other holdings including some technology stocks and property REITs.

Is this the end of the bear market? I don’t know but I doubt it. The economic prospects are still poor. However I have cautiously purchased a few small AIM company shares including GB Group (GBG), Eckoh (ECK) and RWS (RWS). These are not share tips but more a strategic move to increase my holdings in smaller companies which now seem good value when I have a large cash balance at present.

What was the problem at Halfords? Softer than expected cycling and tyre markets was one aspect but enthusiasm for cycling is bound to fall in very cold and wet weather. Another problem was difficulty in recruiting skilled labour in Autocentres.

These might both be temporary problems so I am not planning to reduce my holding which was mainly purchased before the recent ramp up in the share price after it was enthusiastically tipped in several publications. That shows the danger of following the crowd.

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

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Fundsmith Annual Investor Letter

Terry Smith has published his thirteenth annual letter for investors in the Fundsmith Equity Fund (which I hold). As usual it’s a good mixture of sound analysis of market events and witticisms. I’ll cover a few significant points:

The fund underperformed the MSCI World Index with a total return of minus 13.8%, which was better than my own portfolio. As he points out the only way to beat the market last year was to hold energy stocks and nothing else. But both I and Fundsmith have a focus on growth companies so we have been under-weight in the dinosaurs of the investment world.

As Terry says: “Whilst a period of underperformance against the index is never welcome it is nonetheless inevitable. We have consistently warned that no investment strategy will outperform in every reporting period and every type of market condition. So, as much as we may not like it, we can expect some periods of underperformance” which is a fair comment.

Terry points out that we have gone through a period of “easy money” when central banks ignored the consequences of their actions. He says “One of the problems of easy money is that it leads to bad capital allocation or investment decisions which are exposed as the tide goes out”.

He is particularly critical about the management of Paypal and Facebook  (Meta) plus makes negative comments on Alphabet and Amazon and their expenditure on non-core businesses. He is scathing about the failure of some companies in which the fund has holdings to engage or even to provide information about the return they are getting on investments. He says: “What I am complaining about is the bipolar response some companies have to long-standing shareholders versus newly arrived activists”.

He has a particular attack on Unilever as in previous years and makes this acerbic comment on their marketing of soap: “When I last checked it was for washing. However, apparently that is not the purpose of Lux, the Unilever brand, which apparently is all about ‘Inspiring women to rise above everyday sexist judgements and express their beauty and femininity unapologetically”.

Lastly he attacks the exclusion of share-based compensation from financial reporting which can completely distort comparisons with other company’s figures.

In summary, another thoughtful report from Terry Smith and I am happy with the funds continued focus on investing in companies with a high return on capital and high margins with good cash conversion.

The Fundsmith EquIty Fund letter can be read in full here: https://www.fundsmith.co.uk/media/bm0lyc22/annual-letter-to-shareholders-2022.pdf

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

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Year End Portfolio Review of 2022

As I have published in previous years, here is a review of my own stock market portfolio performance in the calendar year 2022. I’ll repeat what I said last year to warn readers that I write this is for the education of those new to investing because I have no doubt that some experienced investors will have done a lot better than me, while some may have done worse.

It’s worth bearing in mind that my portfolio is very diversified across FTSE-100, FTSE-250 and smaller company (e.g. AIM) shares listed in the UK. I also hold a number of UK investment trusts which gives me exposure to overseas markets, and some Venture Capital Trusts (VCTs). Although I have some emphasis on AIM shares, they are not the very speculative ones.

I have a relatively large proportion in smaller company and AIM shares with a strong emphasis on growth technology stocks. This explains my relative poor performance this year.

One feels wary of publishing such data because when you have a good year you appear to be a clever dick with an inflated ego, while in a bad year you look a fool – this year it is certainly the latter. Here’s a summary of my portfolio performance which turned out to be a very poor year. Total return including dividends was a negative 19.3% which matches exactly my positive return in the previous year. In other words I managed to completely wipe out the previous years’ gains!

This is my worst yearly performance wise since 2008. The chart below showing capital returns on our portfolios since 1997 versus the FTSE All-share highlights the impact:

The negative return last year compares with the FTSE All-Share down 3.2%, the FTSE Small Cap down 30.6%, the FTSE AIM-100 down 30.5%, the S&P 500 down 14.2% and the NASDAQ down 27.7%.

The FTSE All-Share is dominated by FTSE-100 companies – the dinosaurs of the financial world in many cases – of which I hold relatively few.

I sold a significant proportion of the portfolio during the year as prices declined and moved into more defensive stocks such as big miners and oil companies. This resulted in total dividends rising by 29% over the prior year so at least income is keeping up with inflation!

I also purchased more holdings in property trusts and REITs which proved to be a mistake as they fell substantially although that contributed to the increase in dividends received. The enthusiasm for warehouses and self-storage companies disappeared during the year. SEGRO, Urban Logistics, Safestore and TR Property Trust were big fallers, but I continued to hold them.

VCTs tend not to move with the market in most years but not this year. They also fell substantially because their AIM holdings fell and unlisted holdings were revalued down to match, but dividends held up.

Smaller technology stocks were a very mixed bunch –DotDigital fell substantially as did GB Group after a possible bid was rejected. Bids for EMIS and Ideagen helped to offset the otherwise broad-based losses in the portfolios mainly in my small cap holdings.

Large technology funds such as Polar Capital Technology and Scottish Mortgage were big fallers. My investment trust and fund holdings were all affected by the depressed US markets.

Note I am not giving up on small cap or technology stocks – just buying a few at opportune moments until market prejudice changes.

What does the future hold? This is what I said a year ago: “Inflation is rising as Governments pump money into the economy in response to the epidemic while interest rates are still at record low levels. It’s certainly no time to be holding bonds or other fixed interest stocks. It’s a return to the good old days when you could buy a house that was rapidly inflating in price when the mortgage cost was much lower than the inflation gain”.

And so it turned out except in the last few weeks we have had an abrupt U-Turn in Government and Bank of England policy to try and tackle rampant inflation. This has dampened the housing market and house prices are forecast to fall substantially this year (not a concern to me as we paid off our mortgage after I retired from a proper job over 25 years ago).

Interest rates may still rise further until we near the next general election when economic stimulus and more QE may look attractive, but I have no urge to move into bonds in a big way. Not until the Government stops trying to manipulate financial markets.

Postscript: Interesting to note that the CFP SDL Buffettology Fund managed by Keith Ashworth-Lord achieved a return of -23.4% for the year. This is an “unconstrained” fund with a focus on growth stocks and with a good historic record. Similarly reports on the web of the performance of private investors indicate a very mixed outcome. Perhaps my performance was not so bad in comparison after all.

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

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The Outlook for Stock Markets and Bank Runs

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

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

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

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

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

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

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

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

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

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

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

Bank Runs

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

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

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

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

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PRIIPs Consultation Response, Market Close and BHP Legal Case

With the market winding down I have had the time to write a response to HM Treasury’s public consultation on the PRIIPs regulations. They include the requirement for KIDs (Key Information Documents) which I now completely ignore because there are better sources of the required information on funds and trusts.

My consultation response is present here: https://www.roliscon.com/PRIIPS-Consultation-Response.pdf . I agreed with most of the recommendations.

There is a complementary consultation on the “Future Disclosure Framework” from the FCA which I may or may not get around to over the holiday period.

The UK stock market has just closed for Christmas. If there was a “Santa Claus” rally it was barely perceptible in my portfolio. There was a minor hiccup after the announcement that there will be a court hearing next April to determine whether BHP Group should face a trial over the damn burst in Brazil many years ago.

There are 400,000 Brazilian claimants and it will be the largest group litigation in English civil court history if the case proceeds. BHP said: “BHP fully refutes the claims made by the English plaintiffs and will continue to defend itself in the case, which we believe is unnecessary as it duplicates issues already covered by the existing and ongoing work of the Renova Foundation — under the supervision of the Brazilian courts — or are objects of legal proceedings in progress in Brazil”. Looks like a beanfeast for lawyers that will run for years.

As a holder of BHP shares I doubt BHP will have a problem with this lawsuit so I will continue to hold until more information comes to light.

I will probably give a full analysis of my stock market portfolio later in the New Year as I do a calendar year analysis and it takes me some time to do a full analysis.

I look forward to the New Year with my usual perennial optimism and I hope my readers have a good Xmas.

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

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Review of the Year – But It Could Have Been Worse

Not many stock market investors will have come out ahead this year. At the time of writing, the FTSE-250 is down 17.5% over the past year, the FTSE-AIM index is down 30% and the FTSE-100 scraped in a small rise of 1.8%. The last one was driven by rises in commodity prices which benefited oil/gas companies and big miners which dominate the index.

With war in Europe, political turmoil at home, inflation that grew out of control, strikes by nurses, train staff, postmen et al, the country is grinding to a halt. Interest rates are rising to levels not seen for years meaning mortgages will soon be a lot more expensive and house prices therefore forecast to fall killing off the buy-to-let market. And taxes are rising sharply to pay for pandemic costs and wage inflation.

It’s all very depressing. But before the gloom overwhelms you here’s a reminder that the country has been in a far worse position in the past but did recover.

I have mentioned the book “The Stock Market” by John Littlewood before and have just finished reading the first few chapters that cover the years 1945-1960.

In 1945 the country was hugely in debt due to paying for the Second World War. From a position of having massive overseas investment assets they were wiped out and more by debts incurred. The country was effectively bust and was only rescued by loans from the USA. Then surprisingly a Labour government got elected with a very socialist mentality. Company dividends were anathema and companies were persuaded not to raise them under threat of legislation. Any increases in company profits were discouraged by an “excess profits tax” on any rises. With income tax and surtax, the wealthy could be paying 95% tax on their incomes.

The Government then proceeded to nationalise whole swathes of the economy including coal mining, railways, gas and electricity distribution, and the steel industry. The country ran a massive balance of trade deficit as imports exceeded exports and rationing of basic commodities was in place for years as a result. Petrol was rationed and the ration for private motoring was nil. The pound was eventually devalued making exports more competitive but raising the price of imports.

Borrowing by individuals was severely limited and foreign exchange controls meant foreign holidays were effectively constrained. Stamp duty was doubled to 2% which damaged the stock market.

Nationalisation actually strengthened the unions because they had to combine to negotiate with the new company owners as opposed to the previous fragmented company and union structures leading to two decades of strikes and restrictive working practices that damaged industrial competitiveness.

A good film on this subject is “I’m all right Jack” which is a satire on the lunacy of UK industrial relations. When I was a student at Birmingham University I lodged with a landlady whose son was a toolmaker. He got a new job at the Longbridge car factory. When he turned up for work on the first day he found he was on strike.

In 1946-47 there was a very cold and snowy winter. The country was heavily dependent on coal for all heating and electricity generation and supplies ran low plus distribution on railways was disrupted. Power stations shut down and many industries were disrupted or moved to short-time working.

Unlike today the Labour Government chose to keep Bank interest rate at 2% despite the run on the pound and rising inflation, preferring to use taxation to limit personal expenditure and dampen inflation.

There were some popular moves including the foundation of the NHS to provide universal health care, effectively nationalising hospitals, but in reality it established a very large and bureaucratic organisation that formed the basis of our current problems in the NHS. As in other nationalised businesses, targets and controls managed by many thousands of bureaucrats became the norm instead of the profit motive being used to incentivise people.

Reading the book “The Stock Market” makes you realise how our current economic problems are not nearly as bad as they looked in the post-war years. But it does show how damaging socialist dogma was in that period while other countries rapidly recovered from the war.

It’s a very educational book which helps to put our recent difficulties into perspective.

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

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Interest Rate Rise, Strikes and Xmas Reading

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

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

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

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

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

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

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

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

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

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

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

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

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

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The Death of KIDs

HM Treasury have announced plans to revoke the PRIIPs regulations which will likely mean the death of KIDs (Key Information Documents).

KIDs are imposed and regulated under the PRIIPs regulation as devised by the EU for packaged investment products such as funds and trusts. KIDs give basic financial information, risk indicators and likely future performance based on past performance. Those who purchase investment trusts for example will be asked to confirm they have read the KID before purchasing a holding. But in reality KIDs are grossly misleading for many investment trusts.  This is because their estimate of future returns are based on short-term historic data. This has caused many fund managers of investment trusts to suggest that they should be ignored and investors should look at the other data that the companies publish to get a better view of likely future returns. This writer certainly ignores the KIDs for the investment trusts I hold and I doubt most retail investors took much notice of them.

KIDs were a typical example of complex financial regulations that were misconceived by EU bureaucrats while imposing substantial costs on investment trusts which they no doubt passed on to investors.

The Treasury have issued a public consultation on what might replace KIDs – see https://www.gov.uk/government/consultations/priips-and-uk-retail-disclosure . It explains exactly why KIDs need scrapping.

I may respond in some detail to the consultation as I might have time over Xmas to do so.

In the meantime I am still waiting for the usual Santa rally in share prices. Perhaps I am just being impatient and Santa Claus may arrive in the last few days before Christmas. I hope so but the market has already gone quiet with prices stabilising. I guess folks might be too busy attending parties and doing Xmas shopping to spend time on share trading.

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

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Holmes Sentence, Diploma Results, TRIG Announcement, Office Space Surplus and Gamification of Trading

It was good to see that on Friday Elizabeth Holmes, former CEO and founder of Theranos, was sentenced to 11 years in prison for fraud. The US company claimed to have a revolutionary blood testing device and raised $900 million when the product never worked and investors and customers were deceived. This is the kind of sentence that we should see in the UK but never do for companies that mislead investors.

This morning Diploma (DPLM) published their Final Results for last year. Both revenue and profits were ahead of forecast. This is a diversified engineering company which has grown both by acquisitions and organic expansion. With a bland company name and a low profile, this can be an under-appreciated business while it also benefited from a high proportion of export sales last year (a 5% benefit to revenue from foreign exchange movements).

Another announcement this morning was from The Renewables Infrastructure Group (TRIG) which is one of those alternative energy suppliers which the Chancellor recently targeted with a new tax as they were making too much profit. The detailed impact is now spelled out.

The new tax is a 45% levy on revenues in excess of £75/MWh. TRIG estimates this will reduce the company’s NAV per share by 8.3p per share, i.e. about 6%. But the company expects electricity price increases to more than offset that. The company will also see a positive impact from inflation but that is offset by a similar decrease in asset valuations which are discounted at a higher rate as a result.

The overall impact on the share price today at the time of writing is negligible but many of these changes were already forecast of course. This is an example of the problem of investing in companies or sectors where the government is interfering in the market. In this case the government decided to incentivise renewable electricity generation but then decided that companies were making too much money as a result.

An interesting article in the FT has highlighted the rise in empty office space as working patterns changed with more people working partly or fully from home. Occupancy levels have plateaued at about half pre-Covid levels and new construction has slowed. Offices can be repurposed to meet the housing shortage but that is not always easy the article reports. You can see why the commercial property sector is in the doldrums and that is surely not likely to change soon. I doubt people will return to the old working patterns now they have enjoyed the benefit of a lot less commuting, particularly in London. Personally I always hated commuting and avoided it so far as possible. Even after setting up a business initially in the West End, that was soon moved out to the suburbs freeing up two or more hours extra working time.

Lastly the FCA has warned against the “gamification” of trading apps. This is where product features are added to encourage activity. The FCA is right to look at this issue but as usual it is closing the stable door after the horse has bolted. It has been clear for many months that some share trading platforms are encouraging speculation as opposed to long-term investment.

Note: I hold shares in DPLM and TRIG.

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

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Market Trends, WeWork, Cryptocurrencies, Passive Saturation

Last week was a remarkably one for my stock market portfolio. Share prices were up on almost all my holdings. This was no doubt sparked by good news from the USA – inflation seems to be under control with CPI falling to 7.7%, and the war in Ukraine is looking up as Russia withdrew from the west bank of the Dnipro River. Stalemate in the latter war is looking increasingly likely which may encourage both Russia and Ukraine to reach some accommodation.

I also get the impression that stocks were being bought back in a panic after previous sales as they fell sharply in previous months. This particularly affected less liquid small cap and AIM stocks.

But this is surely only temporary relief from the gloomy economic prognostications. Interest rates in the UK still need to rise further as inflation is still high and real interest rates still negative. Political stability may help over the next few months but it looks like we are all going to be significantly poorer from aggressive tax rises. This will not help the UK economy one bit.

I watched an interesting TV documentary on WeWork yesterday. WeWork was essentially a company that rented out office desk space, i.e. it was a property company but ended up being valued as a high flying technology business valued at a peak $47 billion before it crashed. Led by Adam Neumann as CEO in a messianic style it developed into a cult which became further and further detached from reality. As profits were non-existent they redefined the word profit.

It’s a great example of how investors can be suckered into backing dubious companies led by glib promoters simply due to FOMO (fear of missing out). There is a good book on this subject entitled “The Cult of We: WeWork and the Great Start-Up Delusion” which I have ordered and may review at a later date.

Cryptocurrency exchange FTX became bankrupt last week. At the end it looked like a typical “run on a bank” as folks rushed to take their money out. FTX reportedly had less than $1bn in easily sellable assets against $9bn in liabilities before it went bankrupt. This has also affected other cryptocurrencies as traders take their money off the table.

Can cryptocurrencies survive? Only if backed by the state I would suggest. I am reading an interesting book – the Travels of Marco Polo which covers his time spent in the Mongol empire including China circa 1300. It describes how paper money was widely accepted in the Mongol empire which covered most of Asia at the time. But it was backed by gold or silver for which it could be exchanged. One advantage of their paper money was if you wanted a lower denomination note you could simply cut up a larger one. Paper currencies do rely on public confidence which is why state backing is so essential and also confidence that holdings are not going to be devalued by excessive printing of more money. Cryptocurrencies have tackled this issue in more than one way including the need for large power consumption to create new coins. But the whole structure still seems unsound to me.

An interesting article in the Investors Chronicle this week covered the subject of passive investing under the headline “Passive Saturation”. There has been concern expressed for some time that a high proportion of the stock market is held by index tracking funds that simply follow the herd. This might magnify trends and not relate to the reality of fundamentals in the companies they buy and sell. This was previously not thought to be a problem because the “passive percentage” of the market was estimated to be only 15%. But a new academic report suggests the real figure is more like 38%.

A very high passive percentage means that stock pickers can do well, and better than the indices as they ignore trends and look at the fundamental merits of companies. I prefer actively managed funds even if you do pay more for them in charges. Funds that rely solely on momentum may have done well historically but they are likely to exaggerate trends both up and down and the higher the percentage of the market held by passive funds, the more dangerous this becomes.

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

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