Friday, 27 January 2012


If ever there was a sign of the times it must be this story. A group called Republic are questioning the legality of a school cooking competition related to the Queen's Jubilee. To my mind this story encapsulates everything that is wrong with our collective consciousness.

I had to learn more about Republic so I visited their website and read some Wikipedia . It turns out they may have as many as….14,000 members! That would mean approximately 0.02% of the British public support this organisation. This is quite ironic for an organisation decrying greater democracy. Yet through some crafty PR they have got themselves in the news for something so absurd it beggars belief.

It would seem that the members of Republic are suffering from something which can only be described as a 'sense of proportion’ failure. We are talking about a school cooking competition! But it seems that in the age of decadent entropy any random event is an open wagon for all sorts of absurd and irrelevant viewpoints to have their day in the sun.

My favourite quote from a member of the Republic website has to be this one;

To think that our future Head Of State will get the job as a family hand me down makes me want to scream. I want our Head Of State to have a mandate of the people and a real job.

- Greg King”

Well Greg, if this is the most emotive issue in your life you have a serious problem. I recommend you stop screaming, go outside, see all the suffering that is real in the world and get a sense of proportion and start doing something meaningful with your time.

What next for Republic? A reminting of all British coins for the school tuck shop as they endorse the monarchy? A blanket ban on school trips to anything with 'royal' in the name? A ban on programmes mentioning the royalty before the watershed.

Is Britain better off without a monarchy? Frankly I quite like the bizarre British system of a gelded monarch with absolutely no real power but lots of stately positions of power which acts as a great safeguard against a real dictatorship. A dictator is something we have miraculously avoided during the lengthy era of constitutional monarchy. Remember people vote for dictators.

Plus the Royals bring in yankee dollars and sells mugs which is definitely worth the costs of the civil list.

What is the real motivation behind this highly unpopular movement?  Most of the prominent members of Republic are current or former labour MPs and most of the pleb member quotes seem to be rallies against inherited privilege rather than any innate repression suffered under the monarchy. I think Nietzsche described it as ‘ressentiment.’ Afterall this isn’t Swaziland.

"While the noble man lives in trust and openness with himself, the man of ressentiment is neither upright nor naive nor honest and straightforward with himself. His soul squints; his spirit loves hiding places, secret paths and back doors, everything covert entices him as his world, his security, his refreshment; he understands how to keep silent, how not to forget, how to wait, how to be provisionally self-deprecating and humble. A race of such men of ressentiment is bound to become eventually cleverer than any noble race; it will also honor cleverness to a far greater degree: namely, as a condition of existence of the first importance."

- Nietzsche "On the Genealogy of Morals"

Thursday, 26 January 2012

Alex Salmond and political sophistry

"No man is an island entire of itself; every man
is a piece of the continent, a part of the main;
if a clod be washed away by the sea, Europe
is the less, as well as if a promontory were, as
well as a manor of thy friends or of thine
own were; any man's death diminishes me,
because I am involved in mankind.
And therefore never send to know for whom
the bell tolls; it tolls for thee. "

- John Donne

The political genius that is Mr Salmond has managed to craftily construe an excellent question for his Scottish referendum. As a person of the United Kingdom with blood from both sides of Hadrian's Wall I would like to say that I could not care less about the whole debate. The political rhetoric on the issue has brought out all the usual racism one would expect on both sides. It is quite striking that racist slurs made against the Scots would be unheard of if we were debating Jamaica's desire to drop the Queen as head of state with the same fervour. But alas I digress.

"Do you agree that Scotland should be an independent country?"

This is a brilliantly crafted question. One which a whole team of rhetoricians must have slaved over for days. It collapses all the conditionality from Scottish independence into one elusive and emotive sentiment. A voter could rightly ask "well, what will this 'independent' Scotland look like if it doesnt have its own currency? Will this independent Scotland have all the oil? What will be the role of this independent Scotland be in the EU?" But alas your sole option in this fine and elevated democratic debate is this incredibly reductive question.

Note also that the question is formed as if the one asking the question were implying that others already believe Scotland should be this way and thus you should join them. Otherwise the question would be;

"Should Scotland be an independent country?"

So more clever politics for Salmond and less democratic power and legitimacy to the Scottish people. If you ask a question on a divisive issue you should at least outline the proposed vision for your independent country. Hence the question should probably read something like;

"Should Scotland be an independent country under the terms presented in the attached manifesto?"

Obviously with a little help from the team of rhetoricians you can make that phrase somewhat less cumbersome or further you could add five or six other questions allowing a popular vote on how the new independent country should be structured. The likelihood of this happening is approximately zero.

Power to the people.

Wednesday, 25 January 2012

Bond Misconceptions

The article today on SmartMoney offers a perspective on bonds questioning the efficacy of weighting an index according to debt outstanding suggesting instead that the new Citi RAFI index will provide a better weighting system as it factors in GDP, energy consumption, population and resources.

Now certainly merely investing at the total weight of debt in an index is a dumb way to invest. However a lot of conclusions in the article are far too simplistic. The 4 key factors are all flawed. GDP is a simplistic measure of economic output, population as a proxy for labour ignores demographics (compare Japan’s labour force to that of Bangladesh), resources as a derivative of land mass ignores economically useless land (Russian and Canadian arctic tundra) and energy consumption ignores production; the Saudis use as much energy per capita as the Americans but its basically free and abundant.

There are several key factors beyond these 4 basic filters which really influence global bond markets;

There is a reason why people buy US treasuries beyond the typical solvency arguments. It is because the UST market is the most liquid bond market in the world. We can all see quite clearly the relative attractiveness of a Chilean government bond; debt to GDP is miniscule, strong central bank, lots of natural resources but guess what; there is hardly a market. The Chileans issue government bonds principally to create a market for their banks as they don’t even need the money. So according to the above 4 factors the Chilean bond market would look great. Until you try and actually buy the bonds and blowout the price.

What the article totally ignores is the impact of central banks and currency on global bond markets. Lending to Japan, the US or the UK is not dangerous from a solvency perspective simply because a country borrowing in its own currency can effectively do whatever it wants. There is a reason emerging markets have had more debt crises and are a much smaller proportion of global debt; they like to borrow in dollars. They borrow in dollars but they can’t print dollars so they can go bust. As Pettis explains this causes emerging central banks to hoard dollars (US treasuries) and by implication the US must continue to issue debt to fund the entire system of global trade. 

Further the article severely overestimates the impact of global bond index investors on the market;

“The current system enabled Greece to borrow cheaply money that it cannot and will not ever repay, and yields barely half a percent above Germany's. It means investors pouring money into global or international bond funds are inevitably lending truckloads of money to Japan, for no obvious reason and at minuscule interest rates.”

Greece is in dire straits now because it ran a huge trade deficit with Germany for a decade and needed a way to fund that deficit. Index funds were not the holders of Greek bonds; French and German banks are and that is what moved the market.

Japanese bonds appear a bizarre and awful investment to outsiders because of low yields and a huge debt burden. What people miss is that Japan has been undergoing two decades of deflation so 0.5% return and 100% capital protection looks a safe bet; if you are Japanese. Hence the domestic market supports this environment.

Foreigner indexers clearly do not move the Japanese bond market. If they did yields would be way higher.

My conclusion on bond investing is if you don’t like investing at a dumb index why not just buy a low-cost active managed fund? Putting layers upon layers of filters on an index just makes it more active but still ultimately unresponsive to change.

My conclusion on bond indices by size is that in bonds size is everything. A sovereign debt is not like a company or an individual because the sovereign can change the rules. The bigger you are the more you can bend the rules; the reason for this is that if you are the US treasury you know people have to hold your bonds to finance trade. This is also why nobody cares if Greek bonds collapse but Italian bonds would destroy the Euro. Now the irony is that at first blush this isn’t good for investors who get repressed or burned but on the other hand what could be safer? Sure the government can change the rules but it’s the flexibility to do so which makes these bond markets attractive.

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

-Charles Darwin

Monday, 23 January 2012

Into the Wild?

I enjoyed watching the film last night which I have to say is wonderfully directed with some excellent cinematography. I read a little about the background to the ‘true’ story behind the film one finds two popular criticisms. The first is a somewhat irrelevant speculation over exactly how McCandless died. More importantly there seem to be two camps of opinion regarding his Alaskan adventure. For some he is a martyr to the wilds but for other he was a moron.

I think the impulse McCandless felt for the wilds is something many of us share. In my own experience trekking around Kejimujik for just three days on my own the wilds are truly an alien place for mankind. The beauty of nature was breathtaking but also it felt very impersonal. Nature is in many ways an alien and indifferent force for a modern man. After three days in the wilderness the comfort and company of society certainly has appeal despite all of its hypocrisy and superficiality.

What I think the two schools of thought on McCandless capture is two sides of the human psyche. To enter the wilderness with minimum preparation forces one to act and think on one’s feet. It exposes the individual to the life and death reality from which our social and technological artifice cloaks us. The desire to experience this is strong and primal. On the other hand we live in this abstract world and are able to protect ourselves and to think and rationalise by ourselves. To ignore the rational side of our existence is also to ignore a part of our humanity. My own conclusion is McCandless should be admired for his drive but equally his quest was na├»ve;

“A man goes to knowledge as he goes to war: wide-awake, with fear, with respect, and with absolute assurance. Going to knowledge or going to war in any other manner is a mistake, and whoever makes it might never live to regret it”

-          Carlos Castaneda

The most revealing fact about his true story was that when his body and bag were found it was revealed that he in fact had $300 in cash and all of his IDs hidden deep on his bag. To my mind this is a perfect symbol to show how we can try to deny and escape our rationality but its seed always clings on somewhere deep inside.

Friday, 20 January 2012

Why I do not buy the rally.

“In the short run, the market is a voting machine but in the long run it is a weighing machine.”

- Benjamin Graham

The recent rally since the start of 2012 has caught many participants unawares. Myself included of course. The trouble is the longer all of last years top underperformers keep outperforming the more people get sucked into the massive squeeze. I do not have a strong directional view (see my portfolio) and am neither feeling too bullish or bearish. But....

How quickly things change from the doom and gloom of Q4 2011. Or maybe they do not. The fundamentals are still in place. Europe is heading for a decade long debt depression due to a misdiagnosis of a balance of payments issue (excepting Greece and perhaps Portugal). The US seems to be doing ok and China still has a US sized housing bubble to cover up.

Suddenly though the great market lagging indicator known as the brokerage houses have had to go on the offensive with a slew of upgrades and positive spin. They might even stop the layoffs if it continues!

In 2011 a slowing China meant difficulties for the world economy. Now it means stimulus will come and we are all saved. Before no news on the Eurozone meant bad news. Now it means good news. It seems all it takes is a run up in the market to shift the rhetoric. This to my mind is the crux of the issue. The market moves themselves are colouring investor perceptions.

I'd just like to point to one more Graham idea courtesy of Morningstar;

"The lesson behind Graham's Mr. Market parable is obvious. Every day the stock market offers investors quotes on thousands of businesses, and you are free either to ignore or take advantage of those prices. You must always remember that it is not Mr. Market's guidance you are interested in, but rather his wallet."

Thursday, 19 January 2012

The Pot calling the Kettle black?

"Care about people's approval
and you will be their prisoner."

- Lao Tzu

Ed Miliband is out in force today at the FT with his new mandate on responsible and long-term capitalism. Clearly criticising the deficit was not working with voter focus groups so our very own Labour muppet (you know he is the spitting image or Bert) has decided to change tack and try to win over the ephemeral 'middle England.'

In his FT piece Ed says;

"the rules that encourage wealth creation focused on short-term returns, fail to reward productive behaviour and skew distribution towards the top."

Now I have a bone to pick with this statement. There is nothing more damaging the the economy and long term wealth of Britain than the electoral cycle. If there is one arbitrary, destructive, short termist impulse pervading all the decisions made on this economy it's the fear of not getting elected. Any politician will try to push the bad economic impact into the next political term with any means necessary.

"If markets are to operate properly and competition is to flourish, consumers need to understand – at the point of purchase – how much they will eventually have to pay."

Now equally I call the government out on this one. There is nothing more opaque and misleading to the populance than the tax system of Britain. How many ordinary people can work out what their marginal tax rate is between National Insurance and Income Tax? Then throw in Child Tax Credits and the personal allowance? In what way, shape or form is the UK tax code anything but deliberatly misleading.

I read once that a Chimpanzee when threatened by the group will lead a charge on a weaker Chimpanzee in order to divert the aggressors away from itself. It seems we have not evolved that much.

The tone starts at the top Ed. How about some responsible politics.

Tuesday, 17 January 2012

Thoughts for the Chinese Leadership

The Illuminati?

Over the past year much of the sentiment on China has started to shift from absurdly positive to extremely negative as anecdotes of empty towns, airports and railways indicate a pretty extreme case of malinvestment which makes Japan in 1989 look fairly benign.

However many commentators also talk of a ‘soft-landing.’ One can bet with near certainty that when the sell-side consensus becomes so narrowly focused that it even agrees on a pleasant aeronautical allusion to describe a controlled and smooth transition to a lower economic growth rate they will be entirely wrong.

I don’t want to bore myself going through the oft repeated arguments about transforming the economy from investment to consumption. I want to critique the widely held view that the Chinese leadership are an omniscient circle of illuminati able to deftly control the direction of the economy. This is a fallacy and is illustrated clearly by the move of credit out of the state owned banks and into all kinds of quasi banking private 'businesses'. The state repression of lending sees lending find its way into the economy from other sources. This kind of repression is like the never ending “War on Drugs.” So long as there is demand for drugs there will be drug dealing. So long as there is demand for credit it will come forth. Much the same as with drug dealing this credit is not legislated in these shadow banking channels so the quality is extremely dubious. The Chinese government is clearly no longer in control of credit in the economy.

Some commentators take the view that the Chinese government’s state controlled and repressive political and economic model will be stronger than the west because it can inflexibly drive through change without special interest groups. This is illustrated by their growth as they have been able to build high speed railways at an astonishing rate which is unheard of in the developed world today where there are endless consultations.
However I would argue that this perceived strength is really a weakness, the exact kind of weakness which has and is being swept away across the Arab world. Perhaps China should apply its penchant for a special destiny when considering its oldest philosopher's words;

“Men are born soft and supple;
dead, they are stiff and hard.
Plants are born tender and pliant;
dead, they are brittle and dry.

Thus whoever is stiff and inflexible
is a disciple of death.
Whoever is soft and yielding
is a disciple of life.

The hard and stiff will be broken.
The soft and supple will prevail.”

-   Lao Tsu

Monday, 16 January 2012

We are all Shareholders

"We don't believe our problem is too much capitalism - we think it's that too few people have capital.

We need more individuals to have a real stake in their firms. More of a John Lewis economy, if you like.

And what many people don't realise about employee ownership is that it is a hugely underused tool in unlocking growth.” 

- Nick Clegg

I have a few problems with this Clegg special piece of reasoning although his idea to cut down red tape on share schemes would be helpful for everyone as its horrendously complex. As usual this is one of those emotive political points which sounds nice and cuddly but is relatively irrelevant.

Perhaps the first thing to do is compare share ownership in an SME to share ownership in a Plc. Now share ownership in a SME could spur growth as individuals have clear incentives to drive forward the business as they have visible stake in a small business. However for people working in a Plc the vast bureaucracy of modern corporations leaves people feeling very disconnected from the outcome of their labour. Its the difference between Mark Zuckerberg offering you 5% of Facebook in 2004 for programming a new platform and Tesco offering a checkout operator a share matching scheme for a microscopic proportion of the company's equity. The former is a strong incentive the later is merely a token perk of the job.

In my experience these share schemes have a minor influence on my job performance. My employer provides a matching scheme whereby you can purchase £x of shares up to a monthly limit and they match those shares with an equal contribution. The shares are held in trust for three years. This is a nice perk as effectively the matching contribution is free money unless the shares fall by more than 50%. However given that I work for a large, public, listed company the idea that this is any kind of incentivise rings false. The reason for this is simple. I know nobody at my work outside of my immediate department. If you offered me departmental equity that would be an incentive as I would have the perception that I could influence the outcome. However if you offered me departmental equity I would have a new problem; illiquidity.

This is the catch for equity stakes. Equity in an SME probably is a strong incentive but then one faces the difficulty of marketability. If you leave who can you sell the shares to? Most likely back to the company at a fire-sale price. In this way share schemes can actually limit economic growth as the 'golden handcuffs' of locked up or unmarketable shares prevent workers from moving jobs and being more economically productive due to the loss of personal wealth.

I do not think that too few people have capital. Most workers now in the private sector have a defined contribution pension scheme. Through this scheme they own funds which in turn own equities. We rely on this capital for our retirement. However in many ways this is better than owning equity in a company as effectively a large equity stake in your employer means doubling up your risk; if they go bust you lose your job and your equity. This is a real fear for most employees who are not at the executive level of management and so feel they are a prisoner to the outcome. For instance if you worked at the counter in the Halifax in 2007 it was hardly your fault the bank went bust. If you had done the sensible thing and turned away all the 100% mortgage applicants you would have been out of a job. Instead you just lost all your equity value.

The modern capital markets bear no resemblance to the 'capitalism' of the industrial age. In many ways capital has been socialised via the holdings of personal pensions and investments. If you look at most FTSE 100 companies the majority of equity is held in small pieces by hundreds of asset managers that means it is held; by us all! This means that the next time you bemoan the greedy profits of your utility supplier or your bank you would do well to remember you also want their dividends and share prices to rise to fund you pension.

It is also worth acknowledging that today wealth is arguably more unequally distributed than ever before. Much of this has to do with modern technology, the free flow of capital and networking effects. Facebook is a prime example of exponential growth and personal fortune which would have been impossible for Rockefeller to imagine. Facebook required hardly any financial capital; rather the capital of Facebook is almost entirely intangible and it is formed from the profiles of half a billion users. Capital is more accessible now than ever before in all of its forms. Any individual can open a brokerage account online with a debit card and start buying investments in 20 minutes at historically low commissions. However this would require something quite different which might really go to explain our lack of economic growth; Savings.

Thursday, 12 January 2012

Invasion of the Philistines

“. . . saw a movie this year called Basic Instinct.

Now, Bill's quick capsule review: piece of shit. Thank you. . . . Anyway, after I saw it about eight times . . . come to find out, after seeing this film, all of the lesbian sex scenes were cut out of this film because the test audience . . . was turned off by them!

Boy, is my thumb not on the pulse of America. I don't wanna seem like Randy Pan the Goatboy. . . but that was the only reason I went to that piece of shit film. Sorry.

If I had been in that test audience, the only one out front protesting that film woulda been Michael Douglas demanding his part be put back in.”

-Bill Hicks

So David Cameron wants to see the UK make more ‘commercially viable’ films. This is a serious piece of arse-backwards logic as I can guarantee you that any film as a sop to a specific audience will probably be a commercial failure and will certainly be an artistic failure.

Cameron's viewpoint is supported by one Julian Fellowes of Downton Abbey fame;

"When you actually analyse that it means it should only go into films that nobody could conceivably want to see and there's no logic in that - you want to make a film-friendly, audience-friendly industry.

It's not a question of not having minority films, it's just opening it up so we're also getting behind films that people might want to see."

Now Julian appears to have a decent artistic record but his viewpoint is I am afraid completely *retarded*

I find it staggering that an accredited screenwriter can make the assumption that someone, somewhere is making a film which they think nobody will want to see! Presumably Julian assumes that some screenwriters unlike himself purposefully set out to make deliberately obscure and unpopular films as some sort of sadistic act. Julian would probably argue that Picasso should paint his figures properly as nobody likes funny shapes.

Commercial success is elusive and it relies on artistic integrity. If you disagree with this statement you are basically saying that people are stupid and we should cater to their stupidity.

The slightly annoying man with Britain's largest vocabulary (Mark Kermode) has a better viewpoint;

"There are loads of great British films made every year and only a fraction of them actually find a foothold in cinemas. If you really want to address the way the British film industry works address exhibition and distribution - that's the answer."
I must agree that most cinemas (especially outside London) play nothing but the usual Hollywood drivel such as Alvin & the Chipmunks, The Last Airbender or another fucking superhero remake. The fact that Hollywood distribution rams this stuff down our throats shuts out the possibility for people to seek out more fulfilling and challenging Cinema. This endless marketing of films devoid of artistic merit has seen some somewhat bizarre policy responses elsewhere.

The reality is that great art always needs a patron and often it is not recognised in its time. In classical times patronage came from the King or nobles or the Church and today it comes from arts groups and government funding. We should be supporting all kinds of film which develop our culture and push the boundaries of what that means. By definition ‘mainstream’ suggests repetition of the obvious, the banal and the same tired stories.

This kind of reductionist message is mirrored in music where we have the constant stream of vacuous, trite replicants appearing in our charts perennially singing the same, tired ‘mainstream’ songs. Do we really want our film industry falling to the same populist tides where people phone in to decide the most appropriate ending or the casting of the leading lady?

Film is at its best a fantastic art capable of changing our perspective and enriching our lives. Why should we wish to stunt the growth of our consciousness by encouraging an artistic race to the bottom. We can never know what great art is until it is beheld by people. However I can tell you that great art comes from the heart and not the head therefore if one can ‘think’ that one will make something successful one will most certainly not do so. All this reminds me of the excellent British film “Exit through the gift shop” which highlights quite succinctly the difference between a great artist and a someone trying to think like one.

Tuesday, 10 January 2012

Why should you always have more?

Here is a basic analogy for how the economy works. We have two men and they both work 1sq km of farmland each. They spend all their working day farming and their evenings cooking and cleaning and they create enough food to survive. One day one of the men invents a tractor and fertilizer and the other one retrains in domestic services so they decide to specialize. Since they are specialised and have a tractor they manage to do their jobs at 2 x the previous productivity.  Now tractor man works 2sq km of farmland all day while services man cooks and cleans both their houses all day. Now they both have enough food and clean homes so in the evening they can relax and write songs, paint their walls or worship satan.

Economic growth is therefore not a zero sum game. We can each end up with more by specialising and using capital (machinery) in order to increase the productivity per person. So if we take my simplistic analogy and then extrapolate it out to our highly specialised modern society we can see that by each person doing their own specialized thing in the economy we can all do more, achieve more and have more in our lives. As we invent new technologies and working practices which allow us to do more we can expand our economy (GDP) which is simply an estimate of the total value of goods and services produced in a nation.

However a lot of people seem to have mistaken the drivers of economic growth (productivity, technology) for a sense that economic growth is a process which has its own momentum. There appears to be a popular view that standards of living should always rise due to some exogenous factor. This my friends is called ‘entitlement.’

There is a certain irony that in the west for many years we have decried the pitiful poverty of those in emerging markets and yet today as they grow and become more productive we decry the loss of our living standards. Again economic growth is not a zero sum game – we have enjoyed cheap Chinese goods for decades now – but when those Chinese workers start to demand more meat and fuel that hurts our living standards as those resources are finite (unlike services for instance.) Globalisation as a process has brought great benefits in trade to the west with cheaper goods and a more competitive global marketplace. But guess what – it’s a two way street. This means that all western workers are now in competition with those in the emerging world as the shipping container has flattened the geographical constraints present in manufacturing before 1970. So if you want rising living standards you need to work harder for them; be more production, bring more technological change.

There is a whole other philosophical question of how much is too much? As Seneca is oft quoted “To greed, all nature is insufficient.” However as we decry the loss of our living standards we should remember just what it is that supports these standards; Ingenuity, creativity, challenges and hard work. When George Stephenson pioneered the steam locomotive or Bell invented the telephone or Steven Jobs pioneered the iphone or Aneurin Bevan founded the NHS they had visions which changed our world and allowed us to do more, achieve more and live longer thus perpetuating economic growth. We certainty do not have a divine right to more things and ever higher standards if we are not willing to assign the effort and make the sacrifices necessary to achieve them.

The first soap was made from the ashes of heroes, like the first monkey shot into space. Without pain, without sacrifice we would have nothing”

-          Fight Club

Friday, 6 January 2012

My Portfolio

I thought I might take a moment today to get stock specific and talk my own book on my current personal positions and the why I hold them. I try and run a kind of long/short strategy to avoid being totally market directional and I look for a hurdle rate which is basically a return better than cash with maximum capital preservation.

SCOP: This is a short ETF which tracks in the inverse of the DJ/UBS copper index. I started building my position in June with prices around $4.14/ib and kept adding as copper rose to $4.40 in late July. This has worked out nicely since then but it does leave me wishing I took profits in October as copper has mysteriously bounced back to $3.40/ib. I like the position because I acknowledge all the global supply issues but think there is way more copper out there which is not being officially counted in inventories and the process of this stockpiling has overstated apparent demand for several years. You can also add that a Chinese slowdown should have a big impact on demand and the fact the ETF is denominated in dollars means an extra boost from bearish sentiment in GBP terms from USD strength. Risk to the position in ongoing deterioration in supply due to weather and labour issues globally and easing in China.

SAP3: This is a short ETF which gives 3x the return of a long GBP and short AUD position. I hold this for similar reasons to the copper position but you can add iron ore exposure, leverage to Chinese commodity demand and an overpriced housing market to the downside for AUD. AUD is trading at historic highs against the GBP but I have been wrong so far having got into the trade with the AUD at around 1.53. Looking back I really should have bought the 3x long USD short AUD position due to the doubling up effect of bearish commodity sentiment and dollar strength but alas. Risks to the trade are pretty similar to copper.

SBRY: I bought some Sainsburys shares at around the £3.25 mark in June which was clearly too early ahead of the market selloff in August. I like SBRY for the following (i) Cheap valuation and underperformance against peers (TSCO/MRW) (ii) decent dividend yield ~5% (iii) defensive profile from consumer staples (iv) in my opinion the best quality and layout of stores in the mid-market bracket of supermarkets. So Im sticking with the stock for now and might look to add more if it falls below the £2.80 mark again. Risks to the investment are a lack of free cash flow for the dividend, falling UK retail sales and an irrational UK supermarkets price war.

Pandora A/S: I got interested in Pandora back in May after it suffered a hefty fall in price to the 150Dkk mark. Fortunately I didnt buy and then a shock announcement that the CEO was getting the shove and guidance for the year was revised way down sent the stock down 60% in a day to just 50Dkk. I decided then to buy at 51Dkk the next day looking for a dead cat bounce which never came. Instead the stock continued to sink to the point where I bought some more at 37Dkk.

I just could not see why the stock was so cheap. Even assuming flat growth for the next few years it was trading at 7x forward P/E with a 9% dividend yield. Now the dividend could be cut but this was no Thomas Cook; Pandora was still making money, generating cash and had no obvious debt problems. To my mind the stock was a classic 'fat pitch' where negative sentiment on slashed 'great expectations' meant it got dumped across the board driving the shares well below fair value. Needless to say it has been my best investment this year and I sold down some shares yesterday given the recent phenomenal rally. I think I will keep the rest for the longer term as I can see this company being around for a while albeit with much more modest growth than anybody expected at the IPO in 2010. Risks to this investment centre more around the brand which could be a fad, the outlook for precious metal prices in particular silver (upside/downside risk) and the ability of the new management to regain credibility with investors.

Caveat: Clearly I have a financial interest in these investments and this post relates solely to my personal investment positions. It is in no way a solicitation to buy or sell these investments nor does it constitute advice to do so.

Thursday, 5 January 2012

This is Necessary

“In fact the reality is we are one with God and He loves us. Now, if that isn't a hazard to this country... Do you see my point? How are we gonna keep building nuclear weapons, you know what I mean? What's gonna happen to the arms industry when we realize we're all one? Ha ha ha ha ha! It's gonna fuck up the economy! The economy that's fake anyway! Ha ha ha! Which would be a real bummer.”

- Bill Hicks

Rogoff is out with a tasty piece questioning why we need economic growth at all. Perhaps this is a kind economists existential crisis akin to a priest questioning why we need to believe in God? Even some of the blogosphere agree. In fact I pretty much agree with the premise. The problem is that economic growth is now necessary rather than desirable.

The reason growth is now necessary is the entire global pension/welfare Ponzi scheme requires growth in order to maintain itself. Calling it a Ponzi scheme may seem harsh but the wiki definition is:

“A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation.”

This is a pretty good definition of public pensions at least in the UK since there are no productive assets and all current pensions are paid out of current taxes. This works fine with economic and population growth; more taxpayers at the bottom paying for the few retirees at the top. However without economic and population growth + longer life expectancy the burden falls on an ever shrinking base of productive workers.

So growth is no longer desirable in fact it’s necessary to maintain the status quo.

The idea presented by Deus Ex Macchiatto is woefully inadequate with regards to Italy. Italy is a case in point of how zero growth can wreck your society. On the surface things may appear fine but youth unemployment is high and young people are living off the savings of their parents which may also explain the declining birth rate and household formation. Much of the talent of Italy is currently in countries like Germany and the UK where there are jobs and flexible labour laws. Italian employers all game the system giving young workers short term contracts to avoid having to pay various benefits such as pension contributions. Such an environment might look nice when you go on holiday but it’s no place for a ‘dolce vita.’

So whilst I agree with the philosophical sentiment of Rogoff I can’t see a way to easily change the present course of growth of our western growth oriented economies in the medium term. It’s easy to question why we need growth from an ivory tower but the societal setup is obvious – look at what we have without growth; mass unemployment. Now we could start to change the whole relationship of jobs and people, we could all job share our existing jobs to bring about total employment. You go first Ken and part the monetary Red Sea. Show us the way to the Promised Land of economic contentment.

Wednesday, 4 January 2012

Rabble Rousing

“Throughout human history, as our species has faced the frightening,
terrorizing fact that we do not know who we are, or where we are going in
this ocean of chaos, it has been the authorities, the political, the
religious, the educational authorities who attempted to comfort us by
giving us order, rules, regulations, informing, forming in our minds their
view of reality…
To think for yourself you must question authority and
learn how to put yourself in a state of vulnerable, open-mindedness;
chaotic, confused, vulnerability to inform yourself.
Think for yourself.
Question authority.”

- Timothy Leary

There is a fairly stock piece of UK journalistic moaning on the BBC website 
which reads like a PR release from the associated charity. This time the sacred political buzzword “family” is out in force.
Unsurprisingly a charity which is engaged in making “the UK a better place for families and children” has designed a survey model which purports to show how families with children are going to be the worst off due to government cuts and tax policies. "This research confirms that families with children are shouldering a disproportionate burden," said Katherine Rake of the FPI.

Now I am no heartless conservative and having had a quick read of the FPI research paper it shows some fairly reasonable assumptions and appears well presented. What I find irritating is the way the report is being presented. A case in point being Ms Rake’s comment that the research ‘confirms’ anything. It is research. Based on a model. That ‘confirms’ nothing. It may suggest or indicate but it does not ‘confirm’ anything because its not empirical it is a projection. I am certain I could conduct a model showing that I alone am the most impacted individual in the UK from government austerity but that would just be my own propaganda not a confirmation.

Ms Rake is quoted again "As a result of the changes being introduced between January 2011 and April 2014 families are set to lose more than pensioner households and working-age households without children." The issue here is she means more impacted in relative percentage terms not in absolute terms as I am positive that parents with children receive far more benefit in absolute terms than the single unemployed. The changes are summarised on the following graph;

It seems that those who will be worse off at least by 2015 are the unemployed, the single parent unemployed and the unemployed couple with Children. Now I think a lot of people might actually agree that that is fair. Why should they 'earn' more when they are unemployed!

The worst part of the article to my mind is the political discourse which highlights a stock government statement defending its record and some inflammatory comments from the opposition in time honoured style;

“Yvette Coooper, says the research is a "damning verdict" on the coalition's family policies and she accused the government of being "out of touch" with the pressures on families.”

Apparently now a research model has grown from a confirmation to a damning verdict!

"The government is taking more from children than from the banks. Women and children are paying the highest price.”

This is just a horrendous piece of rhetoric. Children and unemployed people do not pay any tax. Therefore the government is at best giving them less not taking more from them! Notice she threw in the banks as the stock villain. How dull.

The BBC comment invite at the bottom of the article really sums up the tone of the journalistic and political discourse in the UK;

Do you feel that you are hardest hit by the government's tax changes? Send us your comments using the form below.”

Tuesday, 3 January 2012

Quote for 2012

"I don't believe that the world is made of quarks or electromagnetic waves, or stars, or planets, or any of these things. I believe the world is made of language."

- Terence McKenna