Eight
pin stuck in the Evening Standard newspaper
You
don’t know what you are doing
Or as
the Premier League footie supporters sing to opposite team managers that not
win enough;
“You will be sacked in the Morning”.
Liz Truss and Kwasi Kwarteng can vouch for all of the above.
Despite that they were right about a couple of
things.
Growth increases tax income.
Hike taxes too much and one reduces tax income.
The Bank of England (BoE) for example has been
criticized by Mr Kwarteng for failing to get a grip on inflation. It is the BoE job to ensure inflation should
be around a 2 percent target. You can hardly say job well done BoE now that UK
inflation is higher than 11 percent.
Central bankers around the world have failed in
their fiduciary duty to citizens to keep inflation under control.
The Financial Conduct Authority (FCA) is part of
the BoE. The FCA is constantly criticizing financial firms for not delivering
good outcomes for their customers. The BoE has made UK citizens and UK firms at
least 9% poorer (11-2) than planned.
How come the FCA is not criticizing its own boss
the Bank of England for delivering such a poor outcome for its customers?
The UK in
all it wisdom is still raising tax rates this year yet again despite being or
going into a recession. Prime Minister (PM)
Sunak “firmly believes in lower taxes”. The English have a good word for that
and it is poppycock.
More than 1 in 5 people out of the working-age
population in the UK is now not working and “economically inactive”. More than
600,000 UK people are now out of the workforce than compared to the period before
Covid. Clearly Netflix and chill has some fans in the UK. PM Sunak’s current
tax hike exercises will add to the incentive for UK people to Netflix and
chill. Charlie Munger has repeatedly stated to just look at the incentives if
you want to understand why things happen in the way that they do.
Furthermore for the first time in 20 years the
number of registered businesses in the UK has gone down for 2 years in a row
now. Making UK tax digital just put another burden on UK businesses.
Corporation taxes are set to go up as well in the UK next year. Companies House
registration fees for setting up a new business are about to rise as well.
Clearly hiking UK dividends tax or UK capital gains taxes on top of that is not
going to help the UK businesses going forward. The social contract between the
small businesses and the UK government was already on feeble ground after the
UK government forbade plenty of UK businesses to serve their clients in the
pandemic.
Liss Truss analysis on how to make a success of
Brexit was right; it will require growth, stable or lower taxes, less
regulation and an open for business attitude.
PM Sunak is also right about one thing; neighbour
countries don’t finance healthcare out of the general taxation as the UK does
with the NHS.
The UK treasury sold 25% of the UK bonds as
inflation linked bonds. That decision looks very costly now. The UK consumer
price index (CPI) is 11.1%. Inflation linked bonds pay interest linked to the UK
retail price index (RPI). The latest RPI hit a cool 14.2%. In financial
year-to-August data from the UK office for national statistics (ONS) the UK
interest payments were already up 65% compared to the same year before period. The
ONS says; “the recent high levels of debt interest payable are largely a result
of higher inflation, with the inflation payable on index-linked gilts rising in
line with the RPI.”
“Saving the NHS” will mean that the NHS will suck
up an ever increasing percentage of UK tax going forward. The long term outlook
for the UK currently is that 50% of tax income will have to be spend on
honouring interest payments on UK debt/bonds. The other 50% of UK tax income
will go to the NHS.
In the Netherlands in the 1990’s it took a leftish politician Wim Kok (PvdA) to admit that the Netherlands was “sick” and reform the Dutch benefit systems. In the UK we can look forward to a similar playbook as the UK is clearly sick at the moment.
Picture; £ is sinking.
Ambrose Evans-Pritchard on November 7th
2022 had a great article in the Telegraph newspaper on central banks and
pushing the QE experiment too far. He rightly pointed out that Quantitative
Easing (QE) is completely different technically than printing bank notes
Zimbabwe or Weimar Republic style. QE is more like a long term bond purchase
financed by a short term bond liability owed to commercial banks. The central
banks have borrowed short to buy long. The QE is a derivative and looks like a
maturity swap derivative. Going long those long term bonds in 2020 and 2021 is
not the best trade this year. ING said the Federal Reserve Board (FED) has
incurred a paper loss of $1 trillion (and counting) in 2022 on its $8.7
trillion balance sheet. $1 trillion is a big number. This might go down as the
worst trade ever in human history...
Question; “How are you doing?”
Answer; “Not so well. My employer the FED just lost
1 trillion dollar on their P&L this year”.
Obviously no FED central banker will get fired for
losing that much money. The FED might even ask for more resources/money for
“better risk management”. No sh*t Sherlock. Always ask for more people, power
and money after doing a bad job.
In real cash flow numbers the game is up as well.
Having an inverted yield curve is absolutely killing the interest income versus
interest bill equation. For example the US short term interest rate is around
4.17% now at the time of writing. The US 10 year interest rate is around 3.69%
now. The difference of 48 basis points may not sound like a lot but the FED
will have to find it from somewhere. An interest payment of 0.48% over a lot of
money is still a lot of money to pay.
QE could well go down in history as the worst trade
ever.
The snapback globally in interest rates was not
only dangerous for the defined benefit UK pensions industry with their
Liability Driven Investment structures (LDI) or investors with long term bonds
in their (retirement) portfolios but also dangerous for the central banks that
played with QE .. The UK Treasury just had to make the first ever payment to
the Bank of England in October 2022 for the cost of the BoE QE experiment. The
ONS called it the first indemnity payment from HM Treasury to the Bank of
England Asset Purchase Facility Fund.
As Alice Guy said for Interactive Investor; “In the
UK, interest rates have climbed from 0.1% to 3% in less than one year. That is
an increase of 2900%.” This year we have seen quite a snapback in interest
rates indeed and the snapback is ongoing. Mean reversion in financial markets
can be very powerful.
All of this begs the question;
What
does it take to fire a central banker?
Football managers that do not collect points in the
Premier League get fired left right and centre. Even UK politicians can get
fired. What is the name of the last central banker you can name that got fired
though?
Surely the damage to society of a football manager
not working out is smaller than the damage to society a central bank manager
not working out can do.
When do we say enough is enough?
Central Bank independence is a very charming
ideology but it seems to have pushed box ticking regulators that love to
regulate financial markets more heavily all the time to the top of the food
chain. Maybe it is time for some central bankers that actually understand
financial markets.
UK long term interest rates technically already
broker higher outside of the long term range the day before the mini budget. Mr Kwarteng got all the bad press but the
damage already started when the BoE failed to match the FED’s interest rate
hike literally the day before the UK mini budget.
What is the point of having an inflation target if
there are no central banker’s job consequences for missing the 2% inflation
target by 550% of more?
If western inflation goes to 100% like in Turkey
are the Western top central banker’s jobs still going to be safe because of
“central bank independence”?
One can easily make a rule that the central banks
stay independent but the top central banker in a country will automatically get
“sacked in the morning” when inflation deviates more than 100% from the
inflation target set. The top central bankers with their high salaries and gold
plated pensions can afford to take that risk.
Alternatively we can ask a couple of football fans
to do a poll every quarter with only one question; fire the top central banker
yes or no? That should spice things up.
We should also get rid of the interest rate setting
groups/meetings at central banks while we are at it. They have done an appalling
job.
Credit to Meb Faber for saying the interest rates
always go in the direction of the 2 year bond yield set by the market anyway.
Let’s just adjust the interest rate every 3 months
to be the average of the current interest rate and the 2 year bond in a country
set by the market. Easy peasy.
That was enough ranting for this blog. It is time
to link the UK story to the next investment.
It is about time to stick the eight pin into the
quotation page of a newspaper and pick a (none Euro listed and none $ listed)
stock. It makes sense to aim for a £ listed stock this time for diversification
reasons and according to the investment plan of the book Beat the Stock Market
Casino.
Considering the less than rosy macro outlook for
the UK it pains Holland Park Capital London Ltd to pick another UK listed investment
in this round.
Luckily the UK listed holdings of the crayon
portfolio Ashtead and Games Workshop also make money from outside the UK and
are not 100% sterling (£) earners. Ashtead probably only makes 10% of its
earnings from the UK. Games Workshop probably only makes around 30% of its
earnings from the UK.
The monkey portfolio already owns Lloyds Banking
Group PLC which is for the most part a sterling £ earner and Lancashire
Holdings Ltd which has more global earnings.
Maybe one more sterling earner in the portfolio
can’t do too much harm. After all no country stays a disaster for ever.... Here
is for hoping...
First though let’s have a look at how the monkey
and crayon portfolio have done so far. Both the monkey and the crayon
portfolios are paper portfolios. A paper portfolio doesn’t exist in the real
world. A paper stock market portfolio is a simulated portfolio so that
investors can practice without the involvement of real money. Holland Park
Capital London Ltd does seek to own all the companies in the monkey and in the
crayon portfolios, but the timing of the stock market purchases will be
different and the number of shares purchases will be different as well. As such
the returns that Holland Park Capital London Ltd will achieve will be
completely different from the paper portfolios by default.
The monkey portfolio is under water and losing
money now. The monkey portfolio is down $680 or around 1.5% (excluding dividends)
according to the Sigfig.com website since inception. Luckily the dividend
adjusted return is actually higher for the monkey portfolio. The Stockrover website
for example guesses that the current monkey portfolio will pay $1700 in
dividends in 2023.
Picture above; the current 7 holdings of the Monkey
Portfolio according to the Stockrover website.
The crayon portfolio was luckier so far. The crayon portfolio is up about $26310 or around 59.3% (excluding dividends) according to the Sigfig.com website since inception. The crayon portfolio has given up a lot of its previous winnings this year. Mean reversion is a bitch. The real performance difference between the monkey and the crayon is less than it appears as the current crayon portfolio will pay lower yearly dividends than the monkey portfolio. The current crayon portfolio will only pay $770 in dividends in 2023 as predicted by the Stockrover website.
Picture above; the current 7 holdings of the Crayon
Portfolio according to the Stockrover website.
Because the monkey portfolio now loses money the
eighth position will have a new position value of about $7500 according to the
“no capital gain taxes growth investment plan” in the book ‘Beat the Stock
Market Casino’.
Have you bought the book “Beat the
Stock Market Casino” yet on Amazon?
The investment plan makes sure of higher $ value
bets when the stock portfolio loses money. Simply put when the market is down
the odds of buying a stock that goes on to double or more (long term) is
higher. So a down market when the stock market is flashing a “for sale” sign
can be an opportunity for long term investors. The current market should give
investors plenty of opportunities to invest in companies whose share prices
have the possibility to double in the next 5 years. If an investor makes around
15% a year then the investor will stay comfortably ahead of current Western
inflation. As the higher $ value bets when the stock portfolio is down is embedded
in the investment plan there is no need to time the market. It is just a matter
of following the investment plan. Part of the value added of this strategy
should be the “doubling up” in down markets that is in the investment plan.
The crayon portfolio follows where the monkey
portfolio leads to keep things simple and comparable. So the crayon
portfolio will also invest around $7500 in the eighth round of investments in
the crayon paper investment portfolio.
Clearly a portfolio with only seven or eight
holdings is still way off from a diversified portfolio... So both the monkey
and crayon portfolio are still extremely risky, but the plan is to add another
holding to both portfolios every 6 months so both paper portfolios will get
diversified eventually...
Plus both portfolios are being “time diversified”
as well and at least that is reducing risk as well.....
The monkey has no opinion and no knowledge. Just
sticking to an investment plan and throwing darts at the quotation page of the
FT or Wall Street Journal will do the trick of making money. Holland Park
Capital London would bet that the monkey portfolio after another 8 years will
consistently make money. Time in the market and a diversified portfolio are
hard to beat. Put your money where your mouth is. While the monkey and crayon
portfolios are paper portfolios, Holland Park Capital London has a holding in
all the stock holdings of those portfolios. Just not the same amount of shares
per holding as the paper portfolios.
For the eighth round the yellow highlighter landed on the UK listed stock Hikma Pharmaceuticals PLC with code HIK of the quotations page of the Evening Standard newspaper. Ideally one would buy the liquid UK listing. For portfolio tracking reasons however we looked up the most liquid US listing for the same stock. That listing is HKMPY. The day range on Friday the 25th of November 2022 for this listing was 36.57-37.10 in USD. The volume in this listing that day was only 1800 shares. For the monkey portfolio a paper transaction was added to the paper portfolio of 202 shares at $37.10 the day’s high price (on the 25th of November 2022). That transaction had a value of about $7495.
Above; Evening Standard newspaper yellow marker
landed on the UK stock Hikma Pharmaceutical PLC for the monkey stock pick of
the eight round.
For the crayon portfolio a paper transaction was
added to the crayon paper portfolio of stock Diageo PLC with code DGE listed in
the UK so also in listed in the £ currency. There is a less liquid US listing
of the same stock under code DEO. The traded day range on Friday the 25th
of November 2022 for the DEO listing was 183.3-184.49 in USD. For the crayon portfolio
40 shares of DEO at $184.49 were selected for the paper portfolio (also on the 25th
of November 2022). That transaction value on paper was about $7380.
Future performance of the two new stocks will
depend on the future multiple of the earnings paid by investors and by future
earnings. Both are impossible to predict with any kind of certainty. Hence no
analysis here of why Holland Park Capital London Ltd put Diageo PLC in the
crayon portfolio in the eighth round. All that will be said is that Diageo PLC
is not a 100% sterling (£) earners. Diageo probably only makes around 10% of
its earnings from the UK. Diageo has a price/earnings ratio (P/E) of about 27
and a price/book ratio of 11. As Nick Train has rightly pointed out before some
UK companies are trading at lower valuations than global peers as the UK is
unpopular at the moment. Diageo’s competitor Brown-Forman Corp for example is
trading at a P/E of 39 and a price/book of almost 13. Also three of the
companies in the crayon portfolio (Inmode, Argenx and UnitedHealth Group) could
be seen as part of the healthcare sector. For diversification reasons and in
order to get more balance in the crayon portfolio Diageo is a good addition to
the crayon portfolio as Diageo is completely different than the three “healthcare”
stocks.
Holland Park Capital London Ltd was delighted to
read the book Zero to One: Notes on Start Ups, or how to build the future
recently. The authors Peter Thiel and Blake Maters write;
“Contrarian thinking doesn’t make any sense unless
the world still has secrets left to give up”.
Holland Park Capital London Ltd believes
second-guessing stock prices and trying to solve the puzzles in order to get
your hands on some of the secrets of the world is what drives us forward.
Pursue the secrets. Dare to dream.
Both paper portfolios have 8 holdings now. Slowly
but surely the portfolios start looking a little like diversified portfolios.
May the force be with both paper portfolios. Thanks for reading this blog.
Holland
Park Capital London hopes you enjoyed the information in the blog. This is not
a financial promotion. Holland Park Capital London Ltd is not receiving any
compensation from anyone to write this blog. Holland Park Capital London is
long the stocks in the crayon portfolio and the monkey portfolio. Holland Park
Capital London Ltd just doesn’t have the same amount of shares per holding as
the paper crayon and monkey portfolios. Holland Park Capital London Ltd is also
long the S&P 500 index. Holland Park Capital London has no business
relationship with any company whose stock is mentioned in this blog. Holland
Park Capital London expressed its own opinions. This is not advice. This blog
is for information purposes only. Make your own decisions please. Do your own
research. Please go and see an authorized financial advisor before making any
investment decisions. What works for Holland Park Capital London may well not
work for you and your personal situation is unknown to Holland Park Capital
London. Stocks go up as well as down and you may get back less than you invest.
Your capital is at risk when you invest in stocks. In other words you can lose
all your money by investing in stocks.
Any
information in this blog should be considered general information and not
relied on as a formal investment recommendation. This blog is for information
purposes only and helps Holland Park Capital London expand on the book “Beat
the Stock Market Casino” and brings extra discipline in the investment process.
Holland Park Capital London Ltd is not liable for any mistakes in this blog. Sorry
for any grammatical errors, but Holland Park Capital London Ltd hopes the
reader still understands the content. This blog cannot be a substitute for
comprehensive investment analysis. Any analysis presented in this blog is
illustrative in nature, limited in scope, based on an incomplete set of
information and has limitations to its accuracy. The information upon which
this blog is based was obtained from sources believed to be reliable, but has
not been independently verified. Therefore the accuracy cannot be guaranteed.
Any opinions are as of the date of publication and are subject to change
without notice.
