Eight pin stuck in the newspaper

 

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 7^th 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 25^th 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 25^th 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 25^th 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 25^th 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.