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

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

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

 This is Lex on the 24th 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.

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

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%

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.

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.

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.