Republic

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"

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.

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

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 naïve;

“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.

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."

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.

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