The Constant Sea

A couple of weeks ago in Antibes, on the beach with my children, I watched other parents on the beach with their children

It was 1982 when I a novice parent, morphed from my father with me on the beach, into a parent with my own young children on the beach, and again 27 years later a parent again, the scene hadn’t changed.

The other parents on the beach with their children in 1982 were there still in 2009, parents and children behaving exactly as they did then, only with more tattoos.

The same sand-works, the same seeming mothers holding the arms of their toddlers as their toes flicked the wavelets in that same way.  Kids, behaving the same in front of the same sea as they did in 2009 B.C, though maybe their parents also had fewer tattoos

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Was it all for Harry Potter?

The Somme, Stalingrad, Vietnam,  Korea, Norman Invasion, Stalingrad….

In 1898, between April - August, the Spanish-American War claimed a few hundred lives , and in 1805 The Battle of Trafalgar a few thousand, do you know any of the names of the dead, or care that they died? I don’t.

If none of these wars and battles  had occured, would there be any fewer mobile telephone, Starbucks, motorways, McDonald’s,  or designer handbags, on the planet?

Neither winners nor losers heirs missed out on, Who Wants to be a Millionaire (syndicated to 100 countries many of which have been at war with each other, including Argentina, Vietnam, Russia, Japan, China, India, Pakistan),  Weetabix,  Gillette,  BMW and…… Harry Potter

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Lex, let Wittgenstein be your guide: “Whereof one cannot speak, thereof one must be silent.”

 This is Lex on the 24^th September:

“But the frightening reality is that bank lending is contracting faster than the Fed is buying assets from the non-bank private sector, as part of its efforts to lower yields and revive failed markets. No matter how much the Fed seems to do, banks are not extending loans. US consumer credit, for example, fell at an annualised 10 per cent in July. Total debt outstanding is where it was a year ago.

Some wonder about the wisdom of attempting to mend the wreckage of a debt bubble with yet more debt. Even so, the economic consequences of shrivelling broad money do not bear thinking about – the long-term growth rate of M2, for example, is normally about 10 per cent per year. So forget about inflation. Goldman Sachs notes that inflation has the highest correlation to broader measures of money supply. Best ask for that pay rise now.”

Is Lex saying deflation is coming? I think so, but how can anyone know?

What I know is that there will be deflation, inflation or something in between, and that we will make heroes of the lucky pundits, economists, or punters who guessed right.

Bun rating: 99% bun from the harvest of 2012, if there is one.

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Lex it’s the capital stupid!

Lex writes today about ‘Executive compensation’.   But ‘Executive compensation’ is to income, what Harry Potter is to literature.

Traditionally and in most people’s minds, income is earned from employment to fund current consumption, though some may be deferred (savings).

Anyone fortunate enough to have experienced a steady ascent from average income to say, ten times average income, will have discovered that income has limitations.  Each increase results in a diminishing pool of useful spending options.  But the main limitation of income is that you have to keep clocking in to get it.

The acquisition of and ownership of capital opens up many more possibilities.  Capital is necessary to live comfortably and be free of work. Capital buys status. Capital buys power and influence. Capital buys security.

The open goalpost financial culture has led to a new shadow industry.  This industry’s objective is the application of entrepreneurship by employees to find increasingly inventive ways  to extract capital from it for their personal use.

Lex suggests that shareholders can vote for change.  Lex : ‘it is helpful to establish principles on which shareholders can act, especially on dubious practices like golden parachutes, tax gross-ups, and personal perks’

But shareholders, in the real world Lex, are effectively disenfranchised (see my thoughts on this at  http://fabooks.wordpress.com/2009/09/01/the-disenfranchisement-of-capital-%e2%80%93-how-the-city-stole-your-vote/

We really need you to sharpen up – we private shareholders, who own most of quoted UK PLC – need a champion, not a lackey.

Bun rating, 95% dough, meat extracted 5%

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Does Lex need a dentist?

Commercial property investment and development is a simple cyclical business. Success or failure depends upon timing entry and exit points in the cycle to gain maximum advantage from differences between interest rates and property capitalisation rates.

Rocket science it is not.

Very highly paid directors of commercial property PLCs should get the timing right. If they can’t do this, they shouldn’t be there, should they Lex? British Land share price reach £24 in the final quarter of 2007. A very good time to launch a rights issue, instead they waited as the share price sank steadily before launching a rights issue at 225p in February 2009 . In 2007 the commercial property market was at a high, the perfect time to dispose of investments, instead British Land waited until now to sell Broadgate.

British Land has now ‘off-loaded’ (Lex’s words, is he hinting at British Land’s alleged astuteness?) half of its Broadgate property to Blackstone. That is British Land has chosen to sell a substantial commercial property investment at the bottom of the market. Worse, the purchasers are doing what British Land should be doing at this stage of the cycle, taking a highly leveraged bet (Blackstone are only putting in £75 million of equity) on a cyclical recovery in commercial investment values, which has already commenced.

If ever shareholders needed an angry and unequivocal comment on the judgement of the directors of a major quoted property PLC it is now.

I looked in vain for some harsh words from Lex on behalf of the poor bloody shareholders, instead Lex presents the deal as nice for both parties. For British Land it is ‘insurance cost against further market falls’ and for Blackstone ‘hopes it has called the bottom of the market’

Bun rating, 90%. With flour suitable for toothless mouths, and 10% meat which may or may not be there depending on whether you are buying or selling.

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If only there was a bank on Mars

Three years ago equities and property were moving up in tandem, a continuation of the trend since 2003 .  By this time, all other tradeable capital assets worldwide, equities, property, commodities, also moved as one, all charts looked the same.  Anything sold because it looked over valued continued to move up at the same pace as its replacement.

In the mid 1990s the Japanese Central Bank cut interest rates to 1%.  Borrowing at around 1% and investing in average yielding investment assets would have provided an automatic 4-5% gain, a license to print money were it not for the potentially ruinous  exchange rate losses if the Yen moved against your invested currency. There was a solution though.

Set up and manage an unregulated investment fund.  Use smoke and mirrors and nonsensical jargon to give the impression that what you were doing was ultra sophisticated and highly skilled and call it a hedge fund.  As manager you would take 20% of any profits the fund made over a modest bench-mark.   Should there be losses, the fund i.e. your investors, would bear 100 % of them, but you would still take a 2% management fee.  Only  your investors could lose.   A perfect vehicle for the perfect trade, gambling other peoples money on terms where you win very large if your bets come right, but only win a little if they don’t.

In the ensuing years hedge funds proliferated, and the Ponzi nature of their collective activities resulted in spectacular profits for their managers.

At the end of 2006 worldwide asset prices seemed precipitously high, driven up by the carry trade and liquidity bubbles blown from the shadow banking system.  In trying to identify a safe haven investment asset which had not inflated like all the others, German residential property caught my attention.

I decided to invest in German residential property, which was relatively cheap on two counts, the Euro was undervalued against Sterling, and the German property market had gone nowhere for 15 years.

In 1992 an average apartment in London would have ‘bought’ .7 of an equivalent one in Frankfurt, but by 2006 that same London apartment had become worth 2 of the  Frankfurt apartments. This was the result of the appreciation of Sterling against the Euro, combined the effects of an inflated property market in the UK, and a static one in Germany.

Anyone fully invested since the March lows this year is now be sitting on a 60- 100% gain.  Time to sell maybe, but the question of where to store the value created also arises again. And once again, with all asset classes inflating in unison, I have begun searching  a new un-inflated lifeboat.

If only there was a bank on Mars.

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Is Lex a lawyer?

Expressing an opinion can be risky, events may prove you wrong.  However. this can be avoided if you include most of the available opinion options in a commentary.

Welcome to the “no comment” commentary or:  “We might not always be right, but we are never wrong”

Here is my commentary on today’s Lex piece on Baidu. I have italicised the tentative interpretation of events, the sum of which is zero.

 “In the wake of the storm over “trading huddles”, there are new mutterings of investment bank tip-offs to preferred research clients. Consider Baidu, the $14bn Chinese search specialist listed on NASDAQ. The stock had an uneventful summer, beginning July at $301 and ending August at $330. At about 10am on Friday September 4, it suddenly surged against a flattish benchmark. By 1pm, the stock was up 5 per cent. Over the next three trading days, it continued to rise. On September 11, Goldman Sachs upgraded earnings estimates, with a higher target price – $475 – than any of the 23 brokers on the street. On Wednesday, Baidu broke through $400.

Other factors than a trading huddle might explain Baidu’s ascent. After the market close on September 3, Dow Jones Indexes announced that, as of September 18, Baidu would be one of three stocks promoted to its Bric 50 Index. On the morning of September 4, Google – Baidu’s big rival – also said its president of Chinese operations was stepping down.

Neither event provides wholly satisfactory explanations. The two other stocks attracting new demand from tracker funds, Brazil’s OGX and India’s Jindal Steel & Power, jumped less on September 4, and have since risen half as much. And while investors may be extrapolating gains for competitors at Google’s expense, China’s other leading US-listed portals, such as Sohu and Sina, have been left in Baidu’s dust.

Stock price moves, alone, are inconclusive. More decisively, Goldman says it had no “huddle” on September 4, when Baidu began to rise. Still, as the least blemished institution throughout the crisis, it remains an obvious target for grievances over some of the shady practices that fomented it. The vampire squid will be harpooned for a good while yet.”

 Bun rating - 98% dough, 1% meat, 1% grease.

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Ufos – do we have anything of interest to say?

Recent sighting of UFOs over Zurich, reminds me that I have now been seeing UFO reports in the media for over 50 years.  During this time sighted UFOs have been described as either cigar shapes or discs, consistent with any photographs taken.

If any of these UFOs are from another planet, whether our galaxy or elsewhere, it seems improbable that they would need to make multiple visits.  If they are one time visits from different planets, it seems improbable that the craft would look the same.

It is also difficult to think of a convincing reason why the craft would need to be manned (‘lifed’?), by ‘aliens’ – who some claim to have seen. We don’t send manned exploratory vehicles into deep space, and a technically advanced planet would presumably have no need to send along inhabitants either.

But if we are not alone in the Universe, where is everybody?

 I am persuaded by the statistical argument of the probability of other life forms on other planets in the Universe, but I am unable to imagine why if other forms of life exist, and were ‘intelligent’, they would need to communicate with us.  But many people insist that if there were other intelligent life in the Universe, it would have communicated with us by now, or at least we would have detected radio waves recognisably generated by life forms.

Really?  On Earth we have only had the capacity to transmit radio waves for a little over 100 years.  At some point in the future we may be communicating telepathically, or in some inconceivable way (remember radio communication would have seemed inconceivable in 1809) way which does not rely upon radio waves, and so the technology ‘window’ during which intelligence might use radio waves might be relatively short lived.

Suppose we had the capability to travel back in time, 1,000, 2,000, 3,000 years on our own planet, we would probably do so, but why we would want to communicate with anybody we found  – what would be the point? 

Another difficulty I have is that whereas I can relate to the statistical argument for life elsewhere, I am in difficulty in believing that it would have to be intelligent life.  I see no reason why life here could not have continued for an indefinite further number of millennia, without intelligent life evolving from other life forms.

The assumption that communication is even possible between different species is also taking much for granted. As technologically advanced as we suppose we are, we cannot understand what dogs and chimpanzees are saying to each other, so why do we suppose that we could be understood by, or understand an alien intelligence?

If we can’t find a good enough reason to learn to talk to mice, for example, why should anyone from another galaxy have reason to communicate with us?

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The inflated elephant in Lex’s room

I do not believe there is an active conspiracy, but I do think that the collective power of the large and amorphous city establishment (this includes the Financial Times), consciously and unconsciously limits the agenda for discussion, to one which is survival friendly for the tribe.

The FT depends upon financial advertising and as a consequence, must align itself with the culture and interests of its City-centric readers otherwise they would stop buying it. You are no more likely to find a serious analysis of the disaster caused by the shadow banking system, together with an argument for its dissolution in the FT, than an article in the Meat Trades Journal promoting vegetarianism.

This year Britain’s central bank has set UK’s lowest central bank interest rate for 315 years. As a consequence, since March, asset prices have commenced a new spectacular inflation.  This phenomenon and the tsunami of central bank created credit accompanying it, has rendered any conventional analysis of variable such as earnings per share and profit ratios (see Lex most days), irrelevant.

That is the news Lex!

No bun rating today, the elephant ate it.

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Lex – more bun than burger again this morning

Financial Times  subscribers deserve more analysis and reflection from the paper’s lead commentator than another sterile discussion about the level of the S&P .  Today Lex states that the S&P is too high. “valuations look toppy indeed”.  

The column supports this view with references to the current S&P constituents average percentage profit levels, which at about 35% are high compared with the 29% historic average since 1947.

But it is glaringly obvious that as all the major stock markets have moved up and down in unison, an analysis of the ‘value’ level of a particular market by reference to its domestic history is inadequate

Whatever is driving the S&P is the same as that driving the SMI, FTSE, DAX etc – see the chart below.

chart_V_998434_845_1Y

The markets cannot be explained in terms value variables because the world markets are driven by something else.

What drives all markets together? Try, credit, price of credit, availability of credit, liquidity.

 Capital asset market prices are driven by liquidity, its pointless in pretending any longer that their prices are determined by value.

I award Lex, 70% bun rating for this piece, and 30% meat.

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