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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Coronavirus Impact on Supply Chains

There was an interesting review by Paul Scott in his Stockopedia Small Cap Report of the impact of the Coronavirus on Chinese supply chains yesterday. As readers are probably aware, many companies have shifted the production of electrical and mechanical products to the Far East in the last 30 years. Paul covered announcements from three companies who may be affected by problems of production or transport in China – namely Up Global Sourcing Holdings (UPGS), Tandem (TND) and Volex (VLX). All three companies made announcements yesterday that gave some coverage of the issue.

Up Global, producer of branded household products. said that the majority of its manufacturing was in China. The extension of the Chinese New Year holiday is expected to cause production delays but it gave positive noises about having experience of similar disruptions in the past.

Tandem, a distributor of leisure and mobility equipment (e.g. cycles), said the virus outbreak was restricting the movement of raw materials and labour throughout China and had been delaying orders. They said they had no ability to forecast how big or how long the problem will last.

Tandem was already on a lowly valuation before this and had even been tipped by some investors as due for a re-rating, but has now slipped back to a historic p/e of about 6. Amusingly the departing Chairman who is leaving after ten years at the helm had some negative things to say about internet posters and suggested that the change in the share price during his tenure from 110p to 205p should not be disparaged. But is that good enough? It actually equates to a growth in the share price of about 5% per annum which is not what I like to see in any small cap company with growth ambitions. Sure investors have also received generous dividends but the share price went nowhere for a long time in that period.

Volex said it had four manufacturing plants in China and although they are not in Wuhan only one of the four sites has resumed operations at a reduced capacity. The Volex share price has also been on a roll of late after the company was rerated by analysts and tipped by various sources, but has now fallen back recently. As with the other companies, details provided are sparse, but that may simply be because the companies do not know the impact in detail or have any good view of the future. But Paul Scott criticised all of them for just providing “bare, disjointed facts, with zero interpretation”. It certainly makes it difficult for investors to decide whether to hold on or bale out.

It definitely appears that the vigorous steps taken by Chinese authorities to halt the spread of the disease is disrupting supply chains and my guess is that they are likely to do so for some time. Investors in companies that rely on such supply chains from China, particularly of the “just-in-time” variety need to consider what the impact might be. But it also seems likely to me that the virus will spread outside China and have some impact worldwide. But the actual impact on commercial operations might be small. The likely deaths might be tragic but it seems no worse than any other flu epidemic and we might simply learn to live with it. The best hope is probably the development of a vaccine before the disease becomes very widespread.

In the meantime, I won’t be buying shares in the aforementioned companies until the picture is clearer (and I don’t hold them already).

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

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