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![moneyweek.com 14 October 2016 MoneyWeek
Chart of the week: Global IPO sales at post-crisis low
It’s been a poor year for initial
public offerings (IPOs). The
value of flotations in the first
three quarters of 2016 totalled
$82.5bn worldwide, compared
with $190bn at this stage in
2014 and $123bn in 2015. In
Britain, the value of new listings
is down 60%, compared with
45% in the US and Europe, says
the FT’s Gavin Jackson. It’s
been an unusually volatile and
uncertain year, kicking off with
January’s jitters over Chinese
growth, but the main theme has
been geopolitical uncertainty.
Brexit and the US election have
discouraged new listings. Still,
nerves may be settling: IPOs
rose in September.
200
150
100
50
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Global IPO sales (first three quarters)
$bn
People have got so used to ultra-low interest
rates amid talk of stagnation and deflation that
they can barely imagine anything else. But an
interesting talk last week by Charles Dumas
of Lombard Street Research suggests that the
West is in solid shape, rate rises may be closer
than we think, and the 35-year bond bull
market is over.
The speech concentrated on the eurozone
economy, which Dumas says is in better
shape than most analysts realise. The German
economy is 7% above its pre-crisis peak;
Spain is growing at more than 3%. The euro’s
inflation-adjusted exchange rate is over 10%
lower than during the eurozone crisis, making
European products very competitive on world
markets. The collapse in the oil price in 2014
was an “extraordinary stroke of luck” that
fuelled “impressive” household spending
and also lowered inflation, prompting the
European Central Bank to keep printing
money. Solid trade and consumption has
underpinned strong capital spending.
The three “main engines of economic
advance”, then, are in “pretty good form”.
Meanwhile, the financial and eurozone crisis
reduced the economy’s productive capacity,
Beware
emerging-
market bonds
The global hunt for yield
has turned to increasingly
risky asset classes. With
the yields on emerging-
market government bonds
also at historic lows,
investors have piled into
debt issued by firms in
developing countries.
The emerging-market
corporate bond index has
risen by over 13% in 2016.
But investors “need to be
careful”, says Buttonwood
in The Economist. The
fundamentals are starting
to deteriorate. Twenty-
six issuers defaulted last
year, up from five in 2014.
This year’s tally is already
18. The default rate on
junk debt has hit 3.1%, the
highest since the global
crisis. “More defaults are
probably on the way.”
Trade is a crucial
component of emerging-
market growth, and it’s
spluttering. Citigroup
estimates that it hasn’t
been this weak compared
to global GDP growth since
the 1930s. Protectionism
clouds the outlook further.
Note too, says Buttonwood,
that “when things do go
wrong for emerging-market
borrowers, it seems to
happen faster”: the interval
between a bond issue and
its default averages 3.6
years in emerging markets,
compared with 5.8 in
developed ones.
markets 7
Eurozone money printing is set to ease next summer
©iStockphotos
Get set for rising
bond yields
and hence the potential, or trend, growth rate.
So the rate at which the eurozone can expand
without stimulating inflation – economy-wide
demand exceeding supply, essentially – is
lower. Dumas thinks the eurozone is already
growing at trend. As the oil slide falls out of
the annual inflation calculation, the headline
rate will head back to 1% in the next few
months. That will gradually prompt the
realisation that money printing needs to
stop: deflation, after all, has been averted
and the economy will be strengthening
beyond trend soon.
Dumas thinks we can expect quantitative
easing to start tapering off next summer.
With America also growing at above trend,
we will see bond yields, which may already
have seen the low post-Brexit, climbing in
anticipation of dearer money, thus definitively
turning their back on a 35-year fall.
Viewpoint
It’s election season... time for partisans
to pose as economists and strategists in
order to explain how much the markets
support their favourite candidate… [but]
Mr. Market… isn’t especially concerned
with politics… I don’t want to suggest that
presidents are irrelevant to markets and
the economy; their actions can and do
affect interest rates, and commodity and
equity prices. A well-designed stimulus
can help blunt the harm of a recession,
while policy blunders such as waging
unnecessary wars… will affect
markets. But during the ordinary
course of business, a president isn’t
usually an especially important market-
moving agent.
Barry Ritholtz, Bloomberg Views
2016’s top metal has further to go
Industrial metals have generally moved “in lockstep” with Chinese demand in recent years, says
Bloomberg.com’s Agnieszka de Sousa. But they have started to diverge this year, suggesting that
the supply outlook is now the main influence on prices. Plentiful supplies have held copper back,
while zinc, this year’s best-performing metal, has jumped by 50% because the market is so tight.
Above-ground stocks are at a seven-year low, while an environmental crackdown in China has
curtailed mine production. Glencore, also a major producer of the metal used to coat steel, has
reduced output. Goldman Sachs predicts a deficit of 360,000 tonnes this year. Prices look set to
rise from around $2,320 a tonne to $2,500 by the end of the year, reckons Goldman, but that
should be high enough to trigger “a major supply response” – so the market will then cool.](https://image.slidesharecdn.com/issue-815-161120210653/85/Issue-815-7-320.jpg)
![MONEYWEEK 14 October 2016 moneyweek.com
I wish I knew what a carry trade was, but I’m too embarrassed to ask
An asset’s “carry” is the amount of interest it produces. In
the case of a currency, the carry is what you can make by
depositing the currency at the central bank (ie, the country’s
interest rate). In the foreign-exchange market, a carry trade
involves borrowing in a currency with a low interest rate and
using the money to buy one that pays a higher interest rate. If
the exchange rate remains constant, you’ll receive more interest
than you pay. Since US interest rates are higher than those in
the UK (0.5% compared with 0.25% ), buying dollars and selling
sterling would technically be considered a carry trade.
Buying a lower-yielding currency to invest in a higher-yielding
one can seem attractive – the currencies of countries with
higher interest rates tend to attract more capital, drawn by the
more attractive yields, and so carry traders can enjoy a double-
whammy – a higher interest rate, plus capital appreciation.
However, carry trades involve a huge amount of risk – if the
trade reverses and everyone tries to get out at once, gains
can turn into losses extremely rapidly. For example, in the years
leading up to the 2008 financial crisis, one popular trade was to
borrow money in pounds or dollars and then invest in
a high-yielding currency, such as the Icelandic krona. This
worked very well – until the krona collapsed at the start of the
financial crisis and everyone ran for the exit at once. As a result,
the strategy has been described as “picking up pennies in front
of a steamroller”.
Guru watch
Forget the doom
and gloom
mongers –
Professor Jeremy
Siegel of Wharton
School of
Business reckons
that now is not
a bad time to be
an investor. US
shares are going through a period of
“high valuations” in historic terms,
he admits, but they still look “pretty
good”, given expected growth and
low interest rates. Indeed, “for the first
time in maybe 50 years” investors are
looking at robust dividend payouts and
“beginning to think about stocks as
the income-producing asset they will
need in the future”. As far as Siegel is
concerned, that makes perfect sense –
solid dividend-paying stocks offer “3%
or 4% with good growth possibility”.
Siegel isn’t worried about the wider US
economy either. Earnings are growing
at a reasonable rate, and consumer
confidence is “just finally getting
back to near pre-crisis levels”. He’s
not even worried about the upcoming
presidential election. Sure, the market
“would be a little more comfortable
with a [Hillary] Clinton victory”, but
in fact, “a lot of [Donald] Trump’s
economic policies, like his tax plan and
plan for less regulation, are far more
capital-friendly”. As for Brexit, from an
American perspective, Britain leaving
the European Union is “a non-event”.
However, there is one asset class
that he’s not so sanguine about –
Siegel admits that he does have “a
pessimistic view of bonds”. There are
two reasons for this. Firstly, he says,
valuations are “super high” and yields
“aren’t very good”. Secondly, “the
Federal Reserve is definitely going
to raise interest rates”. He expects
the Fed’s next rate rise to come in
December. The US central bank is
then likely to “wait to see what
happens before tightening again”,
but the fact is that “any increase is
going to harm the capital position
of long-term bond holders”.
The Big Mac index: tempting, but flawed
8 investment strategy
Ever since the UK voted to leave the
European Union, the pound has been
skating on thin ice. This week, it fell
through. In less than four months,
sterling has plunged from a high of just
over $1.50 to the US dollar to a low
of below $1.20 (it has rallied a little
since). It is by far the worst-performing
major currency this year, with even the
Mexican peso – which traders are using
to bet on the likelihood of a Donald
Trump presidency – outperforming it.
We look at the impact of the plunge in
sterling on the wider economy on
page 24. But has the rout in
the pound been overdone?
One way to check is by
using The Economist’s
“Big Mac index”.
The Big Mac index
is derived from an
economics theory
called “the law of one
price”. Simply put, this
claims that in a modern
global economy, the
cost of any given goods
should be the same
around the world, once
you take the exchange
rate into account. So if a product costs
£5 in London and $10 in New York,
the exchange rate should be £1 to $2.
The argument is that any serious price
differential would result in people buying
a product where it is cheap and selling
where it is expensive (arbitrage).
As the name suggests, the Big Mac index
uses the price of the famous McDonald’s
hamburger – a simple, standardised
product that is sold in 119 countries
around the world – to calculate whether
a currency is cheap or overpriced.
According to The Economist, as of July,
a Big Mac sells for an average of $5.06
in the US, compared with £2.99 for the
UK. This implies that the exchange rate
should be £1 to $1.69, which would
make the pound relatively cheap.
Of course, the Big Mac index is a very
rough, somewhat light-hearted guide to
currency valuation. Using other goods
produces entirely different results. For
instance, the latest iPhone costs £599 in
the UK and $649 in the US, implying an
exchange rate of £1 to $1.08, suggesting
that you should be buying dollars.
However, you can take a wider measure
– purchasing power parity (PPP) data,
which looks at the price of all goods and
services in an economy. This suggests
that £1 should be worth
around $1.45. And
several studies suggest
that over the long
run, currencies do
tend to revert to
the exchange rates
predicted by the
PPP and even the
Big Mac index.
However, they
don’t work
terribly well to
make short-term
predictions.
Indeed, Ahmad
Raza of the
University of Otago found that currency
trading strategies based around these
measures underperformed. The main
reason for this is that in the real world
there are often barriers to trade, such
as tariffs and simple physical distance,
which prevent the theoretical arbitrage
described above. Indeed, some services
are almost completely non-tradable.
Global brands also have sufficient
market power to vary their prices by
region. So while PPP and Big Mac
prices can provide useful pointers to a
currency’s fundamental value, they are
only part of the picture. And as Brexit
has shown, in the short term there are
plenty of surprises that can derail even
the most considered currency forecast.
How to value currencies
by Matthew Partridge
investment strategy XX
The Big Mac index: tempting, but flawed
page 24. But has the rout in
the pound been overdone?
One way to check is by
using The Economist’s
services in an economy. This suggests
that £1 should be worth
around $1.45. And
several studies suggest
that over the long
run, currencies do
the exchange rates
predicted by the
PPP and even the
Big Mac index.
don’t work
terribly well to
make short-term](https://image.slidesharecdn.com/issue-815-161120210653/85/Issue-815-8-320.jpg)
![MoneyWeek 14 October 2016 moneyweek.com
A debate about success
Trump claims that he took a $1m loan from his father and
turned it into a $10bn empire. In fact, that’s an example of
semi-truthful hyperbole. He joined the business in 1968,
inherited control of it in 1971, and then inherited $40m in
cash from his dad in 1974. In 1978, Business Week put his
net worth at $100m. Had he invested that in an index fund
tracking the S&P 500 – the kind many Americans use to
save for retirement – he would today be worth $6bn.
That’s quite an underperformance – and at the same
time, says Robert Reich, the economist who served under
Ford, Carter and Clinton, Trump has benefited from about
$850m in tax subsidies in New York alone. This is “not a
businessman”, says Reich. This is “a con man”.
A curious mix of skilful and utterly reckless
12 briefing
Is Donald Trump really a billionaire?
Probably, although it’s hard to be sure.
The Republican candidate for the US
presidency has defied convention and
refused to release his tax returns.
He may well have paid no income tax
for the past 18 years after registering
a near-billion dollar loss in the mid-
1990s. However, Trump did have to file
a “personal financial disclosure” with
America’s Federal Election Commission
in July 2015, when he decided to run for
the nomination. The press release with
this 92-page document states that “as
of this date Mr Trump’s net worth is in
excess of TEN BILLION DOLLARS
[his capitals]”. He also revealed that his
2014 income was $362m, “which does
not include dividends, capital gains, rents
and royalties”.
So he’s worth around ten billion?
Not according to numerous journalists
who have examined the claim. According
to Fortune, which has repeatedly
challenged Trump’s claims about his
own wealth over many years, the $362m
figure is in fact Trump’s overall revenues
(ie, before deducting any costs), not
his income. After making extremely
generous assumptions about everything
from rental yields to stockmarket
dividends to the value of Trump’s
personal brand, Fortune estimates a
pre-tax income for Trump’s businesses
(which are in real estate and leisure)
of $166m. Assuming his businesses
are worth 20-times earnings, that puts
Trump’s overall worth at around $3.3bn.
Bloomberg estimates it at $2.9bn.
Still pretty wealthy then?
Absolutely. But the bizarre thing (or one
of them) about Trump is his desperation
to over-egg his own status. “He lives
to see his name praised in the press”, a
former business associate told Fortune
this year. “When it comes
to choosing between getting
more publicity and making
good deals, I’d say it’s a tie.”
On top of genuine success
in New York real estate
(and plenty of flops in other
areas), Trump has dedicated
his life to building what The
Washington Post once called
“an architecture of self-
aggrandisement”. To be fair to
Trump, he appears to recognise
this. “I play to people’s
fantasies,” he wrote in his 1987
book The Art of the Deal. “I
call it truthful hyperbole. It’s
an innocent form of exaggeration – and a
very effective form of promotion”.
Is he a good businessman?
He’s a curious mixture of skilful and
utterly reckless. Trump has made much
in the election campaign of his status as
a billionaire who will get things done.
But his business record is decidedly
mixed. His main claim to fame (other
than his role playing himself on The
Apprentice) is as a Manhattan real estate
developer – a profession he inherited
from his father, Fred. His flagship
projects include Trump Tower on Fifth
Avenue, Trump Tower in Chicago, and
his Trump Organization owns buildings,
hotels and golf courses around the world.
Yet despite his talent for self-promotion,
Trump has always been a “relatively
minor player”, according to The New
York Times. He has never been ranked
among the top-ten developers in the
city, and of the dozen buildings in New
York that bear his name, nearly all
are branding relationships; he doesn’t
actually own them. Still, most analysts
agree he’s a canny property developer
– and an effective manager of others’
developments – who has benefited from a
booming market over several decades.
What about other businesses?
Here’s where it gets much messier.
Trump’s dealings in hotels and golf
courses appear successful (his companies
are privately held, so details are scarce).
But forays into other areas – including
casinos, airlines, and professional
football – have ended badly. In the
1990s, Trump’s entanglements in casino
development and ownership led to four
separate bankruptcies, which to this
day (according to The New York Times)
mean that Wall Street banks are hesitant
to lend him money. “I think he’s very
good at real estate, I don’t think he’s
very good at other things,” according to
his biographer Michael d’Antonio. “He
tried to run casinos and failed four times.
That’s not evidence of brilliance when it
comes to operating a complex business.”
What about Trump University?
The so-called Trump University – in
fact a series of property development
seminars that separated students from
their cash with savage cynicism – is the
most prominent of the Trump brands to
have attracted negative attention during
the campaign. But Trump has also put
his name on everything from steaks
and ties to bottled water and perfume.
Opinions divide on whether all this
makes him a canny operator or not. On
the one hand, why is a billionaire getting
mixed up in a seminar scam
that could only end up trashing
his brand? On the other, since
his low point in the 1990s,
he does appear to have sworn
off taking on large amounts
of debt, and instead used his
brand to collect licensing fees
on multiple projects in addition
to real estate. If his brand does
not now take him all the way
to the White House, some
speculate that his real plan is to
leverage his political brand into
some form of new, right-wing
media empire. Trump TV?
It may be just weeks away.
Playing to people’s fantasies
©Alamy
The GOP candidate for US president is a publicity seeker of note who admits to using “truthful
hyperbole”. This run might be a really effective way of boosting his brand, says Simon Wilson
briefing XX](https://image.slidesharecdn.com/issue-815-161120210653/85/Issue-815-12-320.jpg)
![MoneyWeek 14 October 2016 moneyweek.com
Money talkThe Federal Reserve’s policy of low interest rates is “dangerous”, says
Martin Feldstein. “Notwithstanding talk of a ‘non-recovery’, rising
asset prices have lifted household wealth to an all-time high,” fuelling
consumer spending, faster GDP growth and lower unemployment.
Meanwhile, investors have turned to equities, long-term bonds,
commercial real estate and other riskier assets in search of yields,
pushing prices to “unsustainable levels”. Fed Chair Janet Yellen is
concerned that normalising rates would cause these prices to fall,
dragging the economy down, but the longer the Fed waits, the more
damaging the eventual decline. Unusually low rates are also causing
lenders to loosen lending criteria. If an asset-price correction causes an
economic decline, “these high risk loans will suffer and… lenders will
be in trouble”. The current low bond rate has removed the pressure
to deal with budget deficits, but as debt grows, so will the cost of
servicing it, and the tax burden will rise. The Fed must raise rates now.
“Women are often forced
to be held in the ideal of
what a male audience
wants. They have to be
pretty, likeable. I hate the
word ‘likeable’. I hear it all
the time in Hollywood, and
I don’t care if I’m likeable
or not.”
Actor Emily Blunt
(pictured), quoted in
The Sunday Times
“Hillary is probably
the most overqualified
person ever to run for the
presidency. Women have
to get up an hour earlier
and have many more
degrees after their name
just to be considered.”
Former Vanity Fair editor
Tina Brown, quoted in the
Evening Standard
“A big part of not having
money as a kid isn’t that
you haven’t the stuff you
want… [you worry about
your parents’ anxiety]…
but I’m grateful...it gave
me a... good work ethic.”
Actor Sarah Jessica Parker,
quoted in The Observer
“Where else but in
America can you turn
your life around in one
generation, going from
nothing to worrying
about your kids being
too spoiled? But they see
where I’ve come from and
they’re pretty grounded.”
Actor Mark Wahlberg on
refusing to indulge his
children too often, quoted
in the Evening Standard
“The inherent vice of
capitalism is the unequal
sharing of blessings.
The inherent virtue of
socialism is the equal
sharing of miseries.”
Winston Churchill, quoted
on Forbes.com
Why the Fed
must raise
rates now
Martin Feldstein
The Wall Street Journal
14 best of the financial columnists
©RexFeatures
Some falsehoods are “so near the truth that they convince and are
widely believed”, says Jake Van Der Kamp. In the run-up to the Brexit
referendum, Martin Schulz, the president of the European Parliament,
reportedly said that “it is not the EU philosophy that the crowd can
decide its fate”. He never said those words – yet he might as well have
done, as they neatly encapsulate European ideas of “relations between
the governing and the governed”. People believed it because it is true.
Brexit is “not an expression of arrogance, ignorance and nostalgia
but of fundamental differences from the EU on the nature of the
rule of law, democracy and personal liberty”. The EU is “distinctly
non-democratic”. Worse, those in charge are inept, as shown by their
failure to stimulate growth. The British may be seen as rats for leaving,
“but let’s have it straight that the ship is indeed sinking and the crew
will do no more than sing ‘Nearer my God to Thee’ as they lead the
passengers under the waves.” Better to be the rat than drown.
Britain is
right to flee
the EU
Jake Van Der Kamp
South China Morning Post
Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble
promised that taxpayers would “no longer have to rescue banks”,
says Jan Hildebrand. Shareholders and creditors would be called
upon to make sacrifices before the state stepped in to help. This was
controversial, with people concerned that creditors would withdraw
from financing European banks. So it’s no wonder that attempts have
been made to bend the rules, notably in the current crisis at Deutsche
Bank (DB). But, for markets, DB’s problems are “a test of whether the
federal government will keep to the rules it insisted on” or whether in
an emergency it “will issue state aid without creditor participation in
order to calm the situation”. The stakes are high. If Germany sets a
bad example, that would send “a devastating signal” to citizens who
remember the promise that they would not be the first to pay. It would
also deal a blow to the long-term stability of the financial system, since
it would be an invitation for the industry to “keep on gambling”.
Germany
must not
bail out DB
Jan Hildebrand
Handelsblatt Global
The UN’s Green Climate Fund (GCF) was set up in 2010 as part
of a pledge to mobilise $100bn a year by 2020 to help developing
countries cut climate emissions and cope with climate change, says The
Economist. Last year, after “coaxing” $10.3bn from governments, the
GCF started operations; its first investment – a solar electricity scheme
in Rwanda – is finally up and running. Few of the 17 projects it has
approved, however, “are transformational”. Part of the problem is that,
“with one eye on future fund-raising”, the board has set an ambitious
target of approving $2.5bn of investment this year, and so is “waving
through” every proposal. Another issue is who run projects. The GCF
channels money through “accredited entities” including big banks.
This is controversial, but small institutions can’t cope. The GCF has
potential, but it must sort out its processes and “if it is to have any
point, it must go where the World Bank or private money dare not”.
A slow start
for the UN’s
climate fund
Editorial
The Economist
best of the financial columnists XX](https://image.slidesharecdn.com/issue-815-161120210653/85/Issue-815-14-320.jpg)
![moneyweek.com 14 October 2016 MoneyWeek
The MoneyWeek audit: Irene Bergman
n How did she start
her career?
Irene Bergman – the
longest-serving
woman on Wall
Street – was born
on 2 August 1915
in Berlin. Her epic
career stretched 74
years, coming to an
end on 29 September, when she passed
away at her Manhattan home, aged 101.
Bergman, whose father was a private
banker at the Berlin Stock Exchange, grew
up in wealthy surroundings. But in 1936,
she moved with her Jewish family to the
Netherlands to escape Nazi persecution.
When Germany invaded four years later,
the family was forced to flee again – this
time to America, via Portugal.
n What was her big break?
Bergman arrived in New York in 1942.
Her father secured her a job as a banker’s
secretary, paying $35 a week – an amount
she described as a fortune for the time.
“Everything I know about investments,
I learned there”, she said. While working
at the bank, her father died and she
redoubled her efforts, joining investment
firm Hallgarten & Company in 1957.
There she worked in merger arbitrage
(attempting to profit by buying and selling
stocks in two merging companies), as
well as writing a weekly market letter.
After six years at Loeb, Rhoades & Co,
Bergman joined Stralem & Company
in 1973, where she felt she was treated
equally as a woman for the first time. She
worked at Stralem for the rest of her life,
helping oversee $1bn in assets.
n What was her attitude to money?
A decade after arriving in America,
Bergman managed to reclaim her family’s
assets, which had been frozen by the
Dutch and US authorities as a result of
the war. Her personal wealth reassured
her clients, she told Bloomberg last
year. “They had the feeling that I didn’t
need to churn their accounts because
I had money myself.” The amount of
time taken to get it back meant that
she put considerable emphasis on the
importance of safeguarding funds, which
reassured her older clients. Bergman
never retired; she stopped coming into
the office in December 2014, after an
illness, but carried on working from her
flat in Manhattan, surrounded by Dutch
masterpieces, Louis XV furniture, four
assistants, and her pet Maltese, Fanny.
There are two types of start-up in a tech entrepreneur’s
career, according to thirtysomething billionaires Kyle Vogt
and Daniel Kan (pictured centre and left with General Motors’
President Dan Ammann). “The first time you start a firm,
you want to get rich,” Kan tells Fortune’s Erin Griffith.
“The second time... you want to build a legacy.” Their money
maker was Justin.tv, a live-streaming tech firm founded by
Vogt, which morphed into Twitch, the online video-gaming
channel snapped up by Amazon for $970m in 2014. That left
their legacy project, begun in 2013: self-driving tech start-
up Cruise Automation. When General Motors (GM) bought
Cruise for $1bn in May, Vogt and Kan went too and became its
youngest senior directors. Naturally, there has been a culture
clash between the 108-year-old car giant’s focus on durability
and Cruise’s focus on speed, says Griffith, but Cruise has
benefited from the clout of the GM brand. Meanwhile, GM has
gained from the younger company’s dynamism. With Google,
Uber, Ford and others all working on their own self-driving
technology, it can’t afford to fall behind.
©GettyImages
From drunken signings
to digital beer mats
“I’ve stopped signing bands
while I’m drunk,” Simon
Williams tells Alex Lawson
in the Evening Standard.
The founder of Fierce Panda
– the offbeat independent
record label that put out early
releases by Ash, Coldplay,
Keane and Supergrass,
among others – was prone to
wandering backstage after
gigs and offering to release
an up-and-coming band’s
single on the spot. “Usually
they were so drunk, stoned,
or exuberated by the live
experience that they’d go:
‘yeah, alright then’.”
It wasn’t, however, an ideal
business model in the modern
music industry. The internet
has made it possible for fans
to access music for free – and
for bands to make it big
outside traditional channels.
“All the rules of signing bands
that were in place are gone.
It used to be that if you sold
out the Scala [in King’s Cross],
you’d be ready to put out an
album on a major label.”
Today, you “can be a couple
of teenagers from Merthyr
Tydfil who’ve only done two
gigs and look quite cool”, he
says, referring to rock band
Pretty Vicious, who shot to
fame after uploading
a single song to the
SoundCloud website.
The economics of running
a small label are tough:
a handful of other
independents, such as 4AD
and Heavenly, survive, but
many contemporaries have
vanished. However, Fierce
Panda – which was set up
more than 20 years ago by
three journalists from music
magazine NME – perseveres
under the guidance of
Williams, the “most indie
man alive”. Last year,
the label put out a single
every month – through the
unconventional medium of
beer mats that included a link
to a digital download.
Bringing money transfers
into the internet age
Ismail Ahmed is not a typical
fintech entrepreneur. Born
in Somaliland, from where
he fled a brutal civil war,
the 56-year-old founder of
London-based money transfer
app WorldRemit went to
work for the UN, tasked with
ensuring aid money went
to where it was supposed to
go. What he found wouldn’t
look out of place in a John
Grisham novel, says Simon
Duke in The Sunday Times.
In Kenya, “I saw widespread
corruption involving several
UN officials,” says Ahmed.
So in 2006 he blew the whistle
and ended up on a blacklist
for his troubles.
Vindication came four years
later, along with a sizeable pay
out for lost earnings, which
provided the seed capital for
his start-up venture. His aim
was to make it easier and
cheaper for migrant workers
to send money home, dragging
“the industry – which had for
centuries been founded on
informal networks of back-
street money changers – into
the digital age”, says Duke.
For now, WorldRemit is a
relative minnow – but it is
growing fast, with revenues
rising from £15m in 2014 to
a forecast £42m this year.
It has been valued at $500m
by venture capital investors.
“Just like many other
industries, backstreet money
exchanges will be crushed by
the digital hordes.”
XX money makers
money makers 31](https://image.slidesharecdn.com/issue-815-161120210653/85/Issue-815-31-320.jpg)
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- 1. 9771472206092 >41 moneyweek.com £3.95 14 October 2016Issue 815 Britain’s best-selling financial magazine Why death is getting more expensive P20 Signing Coldplay didn’t make me rich P31 The pit bull backing Donald Trump P34 HOW TO MAKE IT, HOW TO KEEP IT, HOW TO SPEND IT Don’t panicSterling’s slide is good for the UK, says John Stepek Page 24 14 October 2016 Issue 815 Britain’s best-selling financial magazineBritain’s best-selling financial magazine Don’t panic Britain’s best-selling financial magazineBritain’s best-selling financial magazineBritain’s best-selling financial magazineBritain’s best-selling financial magazine Why death is getting
- 3. moneyweek.com 14 October2016 MONEYWEEK “If we want a more balanced economy, the sterling crash could be what we need” Editor-in-chief: Merryn Somerset Webb Executive editor: John Stepek Managing editor: Cris Sholto Heaton Markets editor: Andrew Van Sickle Senior writer: Matthew Partridge Contributors: Chris Carter, Emily Hohler, Jane Lewis, Sarah Moore, David Prosser, Alex Rankine, Natalie Stanton Group art director: Kevin Cook-Fielding Picture editor: Natasha Langan Designer: Sam McMurchie Production editor: Stuart Watkins Chief sub-editor: Joanna Gibbs Website editor: Ben Judge Advertising sales director: Simon Cuff (020-7633 3720) Commercial director: Vinod Gorasia (020-7633 3664) Publisher: Dan Denning Managing director: Helen Hunsperger Founder and editorial director: Jolyon Connell Group publisher: Bill Bonner Editorial queries: Our staff are unable to respond to personal investment queries as MoneyWeek is not authorised to provide individual investment advice. Email: editor@moneyweek. com Phone: 020-7633 3651 Subscriptions & Customer Services: 020-7633 3780 Mon-Fri, 9am – 5.30pm Web: contactus.moneyweek.com Subscription costs: £69 a year (credit card/cheque), or £19.95 every 13 issues (direct debit). MONEYWEEK is published by: MoneyWeek Ltd, 8th Floor, Friars Bridge Court, 41-45 Blackfriars Road, London SE1 8NZ. MONEYWEEK and MONEY MORNING are registered trade marks owned by MoneyWeek Limited. ©MoneyWeek 2016 ISSN: 1472-2062 • ABC, Jan – Jun 2016: 45,239 MoneyWeek magazine is an unregulated product. Information in the magazine is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision. MoneyWeek Ltd and its staff do not accept liability for any loss suffered by readers as a result of any investment decision. Loser of the week Footballer Wayne Rooney could be facing a £3.5m tax bill, says The Times. HMRC has challenged a suspected tax avoidance film scheme called Invicta 43, that involved investors borrowing money to buy the rights to the films Fred Claus and 10,000BC. Investors could pay in, for example, £200,000, borrow a further £800,000 and get £400,000 of tax relief on the total £1m that could be used to shelter other income, with tax paid later on the income generated from leasing the films back to the studios. Rooney reportedly paid £2.5m into the scheme in cash and borrowed £10m. could be facing a £3.5m tax bill, says The Times. HMRC has challenged a suspected tax avoidance film scheme called Invicta 43, that involved investors borrowing money to buy the rights to the films Fred Claus and Investors could pay in, for example, £200,000, borrow a further £800,000 and get £400,000 of tax relief on the total £1m that could be used to shelter other income, with tax paid later on the income generated from leasing the films back to the studios. Rooney reportedly paid £2.5m into the scheme in cash and borrowed £10m. MONEYWEEK Coverillustration:AdamStower.Photos:Alamy;iStockphotos;RexFeatures In the middle of this week, the UK pound fell to the lowest in 168 years (or possibly more – the data’s a bit dodgy before that) as measured against a basket of the currencies of its major trading partners (Germany, France, the US, Japan and Italy). It is weaker than it was when we left the Gold Standard in the 1930s, weaker than it was when we left the European Exchange Rate Mechanism in 1992 and, of course, weaker than at the bottom of the financial crisis of 2008. This can’t be dismissed lightly: it’s a big deal. But the question is – a big deal in which direction? Is it a nightmare for Britain, or a scary bout of volatility with a very silver lining. In our cover story on page 24, John Stepek has the answer. Sterling has been overvalued for years (we have been writing about this very thing in MoneyWeek since at least 2008) and it is generally accepted that our economy is horribly unbalanced: too much finance, too little of everything else. If we really want a more balanced economy the sterling crash could be “exactly the medicine we need”. It could bring us lower house prices, higher interest rates, better productivity, a genuine manufacturing resurgence, a reduced dependence on finance and perhaps even less of a north-south divide. Who could be against any of those things? They are, of course, the very things that almost all commentators on all sides have been claiming they want the state to deliver for years. The other thing the 20%-odd fall in sterling does, of course, is render irrelevant all mutterings about post- Brexit tariffs. The top tariff rate is unlikely to be more than 10%, something that, as a letter to the FT points out, would bring “the price of British exports back to a little less than they were year ago”. Net effect: nothing at all. The problem with this happy interpretion of the sterling slide is that this isn’t going to feel good going into Christmas. The UK imports 40% of its food, 90% of its clothes and around the same percentage of its toys. That means that dealing with all this currency volatility doesn’t just mean focusing on the long-term benefits to us all. It means acting to avoid short- term disadvantages. You might want to buy your Christmas claret and your made-in-China presents earlier than you usually do (price rises take a while to filter through). You should also turn to page 21. There we look at the attempts by some MPs to water down the inflation protection on defined benefit pensions. Right now – with inflation super low – that might not seem like a particularly big deal. When inflation is 6% it will. Finally, note that the best way to outrun inflation is to invest in stocks that can outrun it. With that in mind Max King looks at three excellent income trusts, on page 28, and our interview this week is with Charles Heenan of Kennox. His aim, he tells us, is to make sure that the long-term value of the capital held in his fund is always protected. So far so very good (see page 22). From the editor-in-chief... Merryn SomersetWebb email: editor@moneyweek.com Good week for: Leah Bracknell: The former Emmerdale actress said she felt “extremely blessed” after fans donated over £55,000 online to fund her pioneering medical treatment in Germany. Bracknell was diagnosed with stage four lung cancer five weeks ago. DIY roadmenders: A council in Devon has turned to volunteers to fix pot holes in roads it says it can’t afford to repair in response to a £21m shortfall in its budget. Volunteer road wardens get two days training, equipment and materials. Bad week for: Gloria Hunniford: The veteran television presenter said that she had “lost all faith in banks” after fraudsters stole £120,000 from her savings account with Santander. Muhammadu Buhari: The president of Nigeria advertised two of his 11 presidential jets for sale in a local newspaper after the country went into recession. No price was quoted, but a Hawker 4000 reportedly cost $51m when it was bought six years ago by his predecessor Goodluck Jonathan. Wasted money: Axing plans to build the controversial Garden Bridge over the river Thames in London will still cost taxpayers £22.5m, even if the project is scrapped tomorrow, according to a report by the National Audit Office. 14 October 2016 Issue 815 Britain’s best-selling financial magazine
- 4. MONEYWEEK 14 October2016 moneyweek.com The way we live now IndiGo, an Indian budget carrier, has become the world’s first major airline to introduce child-free zones on its planes, said Andrew Ellson in The Times. The group, which operates 818 flights a day to over 40 destinations, says it will set aside rows 1 to 4 and 11 to 14 as Quiet Zones to ensure that business travellers can get on with their work. IndiGo is following in the footsteps of some smaller Asian airlines, one of which allows passengers to pay up in order to escape screaming children. So far, however, no Western airline has signalled that it will follow suit, even though it would be a popular idea: a 2014 poll found that 70% of passengers backed it. The way we live now 4 news Washington DC Republicans flee Trump: Paul Ryan, Speaker of the House of Representatives, has become the latest high-profile Republican to distance himself from his party’s presidential candidate, Donald Trump. He said he would stop defending Trump, while many Congressional candidates in tight races rescinded their support after a video of Trump boasting about groping women emerged last week. A poll taken after the video’s release showed Hillary Clinton leading 46-35 among likely voters. Trump also caused uproar in the second presidential debate last Sunday by saying he would jail Clinton if he wins. Given that a Trump victory would severely unsettle global markets, an increasingly likely win for Clinton implies a 75% chance of an interest-rate rise before the year is out, according to Goldman Sachs. Mexico City Peso shrugs off Trump: The Mexican peso jumped to a four-week high this week. It is now over 5% up from last month’s record low of almost 20 to the US dollar. The peso has become a barometer of Donald Trump’s progress throughout his campaign given his threats to slap high tariffs on Mexican exports, build a wall on the border, and ditch the North American Free Trade Agreement. Since July, notes Michelle Davis on Bloomberg.com, several Mexican companies intending to sell shares or bonds have singled out Trump as a risk factor in their prospectuses. “I don’t recall ever having risk factors that called out individual US major party figures”, said Jorge Juantorena of Cleary, Gottlieb, Steen and Hamilton. ©GettyImages Pretoria Finance minister charged with fraud: The South African rand slid by over 3% on the news that South Africa’s Finance Minister Pravin Gordhan had been issued a summons to appear in court next month to answer fraud charges. He is accused of misconduct when he was in charge of SARS, the tax collection service, ten years ago. He has said the allegations are completely unfounded and politically motivated. He’s probably right: President Jacob Zuma and his allies appear to have it in for Gordhan, who has tried to rein in overspending and attempted to combat cronyism in state- owned enterprises. The worry is that if he is he is forced to go, the prudently managed treasury could be at risk of being continually pilfered by the president’s circle, and South Africa may be downgraded to junk status. Brasilia Government pushes through spending cap: Brazil’s President Michel Temer has persuaded Brazil’s lower house of parliament to back a constitutional amendment freezing public spending in real terms for at least ten years. Temer’s comfortable victory in the vote “is the most significant sign yet that Temer’s government may have the political support needed to live up to investor expectations”, says Bloomberg. com. Investors have propelled the local stockmarket to two-year highs despite a deep recession because they think Temer can implement some long overdue spending discipline – the budget deficit has hit 10%of GDP – and structural reforms. The spending freeze faces another vote in congress and then two in the Senate. The next test is a bill to alter the pension system.
- 5. moneyweek.com 14 October2016 MONEYWEEK news 5 London FTSE 100 at record high: Britain’s blue- chip index, the FTSE 100, reached a new all-time peak around 7,130 early this week. Its previous record was achieved last year, before which the index spent 15 years trying to eclipse its 1999 level. The jump was due to a fall in the pound, which is back around $1.22 and at an eight-year low in trade-weighted terms (against a basket of major trading partners’ currencies). It has lost almost a fifth this year by this measure. The blue chips make 70% of their sales abroad, so they benefit from a cheaper currency. Jitters over the possible consequences of a “hard Brexit”, implying being outside the single market, have caused the latest sterling slide. (See page 24.) Paris Opec output hits record: The oil exporters’ cartel Opec produced a record 33.64 million barrels per day (mbpd) in September, according to the Paris- based International Energy Agency. The 14-member group is trying to hammer out a deal, to be finalised next month, to curb output to 32.5mbpd-33mbpd. As oil revenues have slid in the past two years, Opec states have had to rein in spending. This has proved painful and so they have “effectively abandoned” its policy of trying to put US shale producers out of business by flooding the market, notes the IEA. However, boosting prices will be hard work. At $60, increasingly cost- effective shale firms could return; Opec members often cheat on their quotas; and non-Opec production has risen of late. Athens Greece ticks reform boxes: Eurozone ministers have approved the disbursement of a €2.8bn tranche of bailout money to Greece. The sum is a part of Greece’s third international rescue package. Ministers were impressed that the government had implemented structural reforms ranging from liberalising the energy sector to setting up a new privatisation agency. But these measures, however worthwhile, “are unlikely to make a material difference to growth in the short to medium term”, notes the FT. The International Monetary Fund thinks the current fiscal targets are too strict, while it also recommends debt relief to fuel confidence, a course of action that Berlin is keen to avoid lest it infuriate taxpayers and help populist parties. Stockholm Ericsson in trouble: Shares in telecoms equipment maker Ericsson slumped by almost a fifth to a seven-year low this week. The group said sales in the third quarter had fallen by 14% year-on-year, while its operating profit crashed from SKR5.1bn a year ago to SKR300m. Demand for mobile broadband had fallen as European operators cut back spending, while there will be a multi-year lull until mobile groups elsewhere roll out 5G networks. The group also confirmed it would cut a fifth of its Swedish workforce amid intensifying competition from Finland’s Nokia and China’s Huawei. Ericsson has struggled since it sold its mobile phone business in 2012, with forays into IT services and media failing to convince. Beijing China tackles corporate debt: China’s State Council has approved a debt-for-equity swap programme as part of a package to lower corporate indebtedness. It says it also wants to encourage mergers, bankruptcies and debt securitisation to cut company debt worth $18trn, or 170% of GDP. Debt-for- equity swaps have been under consideration for some time, but critics suggested that Chinese banks would merely end up swapping bad loans for shares in dodgy companies, thus keeping them alive and crowding out productive investment and future growth. The government has tried to allay these fears by applying the programme for companies with a promising future. It will also soon announce further measures to restrict credit growth, reversing recent monetary loosening that has bolstered growth this year.
- 6. MoneyWeek 14 October2016 moneyweek.com by Andrew Van Sickle Thailand: a right royal mess The deteriorating health of an 88-year- old man wouldn’t normally wipe 3.6% off a country’s stockmarket. But the world’s longest-reigning monarch, King Bhumibol Adulyadej of Thailand, is a crucially unifying figure in a divided country. And with the succession uncertain, tension could flare up again. Thailand has “gone from one crisis to another” recently, says Capital Economics. There have been two coups in ten years, the most recent in 2014. The context is a bitter divide between a poor rural population and an urban elite. The country is currently under military rule, a new constitution has just passed through parliament and a general election has been promised for 2017. Given that the king’s presence may well have helped avert civil war on several occasions, his death could deepen the political divide and knock a post-coup recovery off course. Tourism, which comprises 10% of GDP, would be damaged, while there is little prospect of other sectors picking up the slack. The relatively subdued global environment precludes a boost for exports, which tend to be concentrated in slow-growing industries anyway. High consumer debt – 80% of GDP – militates against a rise in household spending. Business spending is subdued in any case, owing to chronic instability: investment growth has averaged a measly 3% over the past decade. Now it could fall further. To cap it all, stocks have looked expensive of late. Don’t expect a major bull run anytime soon. It’s been a peculiar few days in the markets, says Ian King in The Times. There was the “flash crash” in the pound (see page 24), for one thing. Even odder, however, was Italy’s sale of its first 50-year bond. And “more astonishing” was the demand for it. It attracted €18.5bn of orders, far more than the government had expected. It was priced to yield 2.85% – in other words, investors are happy to get that much per year for a bond that expires in 2067. Five years ago, at the peak of the euro crisis, Italy couldn’t even persuade investors to accept that return on three-month paper. This is nuts for so many reasons it’s hard to know where to start. But “the Wikipedia list of Italian prime ministers” is probably as good a place as any, as DollarCollapse.com notes. “Spoiler alert: they’ve had a million of them.” Well, not quite, but 63 governments since 1945 is not the sort of statistic that would seem to justify entrusting your money to a country for half a century at a piddling rate of return. It’s always been a shaky polity; a collection of disparate and fractious states cobbled together in 1861. Since the war, poor macroeconomic management by successive governments has racked up debt and increased inflation. The latter tended to be higher than the European average, and certainly higher than 2.85%, which hardly bodes well for real returns from this bond. Years of overspending have produced a public-debt pile worth 130% of GDP. Nor is there much reason to suppose things are about to take a miraculous turn for the better. The Italian economy has lagged the eurozone for years, and in recent months has slowed to a crawl again. One key problem is the banking system, suffering from bad debts worth around €360bn. Continual political stalemates in the two upper houses of parliament have thwarted structural reforms to galvanise growth in the over- regulated economy. An attempt to rectify this in December, through a referendum on measures to reduce the upper house’s authority, could go badly wrong. Prime Minister Matteo Renzi has staked his personal authority on it, and has said he will quit if he fails. That could lead to chaos, given the economic stagnation and pervasive anti-EU populism on the political scene. The polls suggest Renzi will lose. In a worst-case scenario, says King, the EU could tear itself apart in the next few years, and Italy could do the same. Italy’s bond, then, is a bet that all will be well, which is not a viewpoint that history would justify. It’s just another example of “the desperation for anything that offers yield”, says the FT’s Miles Johnson. Steer clear. Italy’s 50- year bond madness 6 markets Prime Minister Matteo Renzi: he’ll quit if a referendum to reform the upper house fails King Bhumibol Adulyadej’s illness is causing instability ©Alamy ©PressAssociation
- 7. moneyweek.com 14 October2016 MoneyWeek Chart of the week: Global IPO sales at post-crisis low It’s been a poor year for initial public offerings (IPOs). The value of flotations in the first three quarters of 2016 totalled $82.5bn worldwide, compared with $190bn at this stage in 2014 and $123bn in 2015. In Britain, the value of new listings is down 60%, compared with 45% in the US and Europe, says the FT’s Gavin Jackson. It’s been an unusually volatile and uncertain year, kicking off with January’s jitters over Chinese growth, but the main theme has been geopolitical uncertainty. Brexit and the US election have discouraged new listings. Still, nerves may be settling: IPOs rose in September. 200 150 100 50 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Global IPO sales (first three quarters) $bn People have got so used to ultra-low interest rates amid talk of stagnation and deflation that they can barely imagine anything else. But an interesting talk last week by Charles Dumas of Lombard Street Research suggests that the West is in solid shape, rate rises may be closer than we think, and the 35-year bond bull market is over. The speech concentrated on the eurozone economy, which Dumas says is in better shape than most analysts realise. The German economy is 7% above its pre-crisis peak; Spain is growing at more than 3%. The euro’s inflation-adjusted exchange rate is over 10% lower than during the eurozone crisis, making European products very competitive on world markets. The collapse in the oil price in 2014 was an “extraordinary stroke of luck” that fuelled “impressive” household spending and also lowered inflation, prompting the European Central Bank to keep printing money. Solid trade and consumption has underpinned strong capital spending. The three “main engines of economic advance”, then, are in “pretty good form”. Meanwhile, the financial and eurozone crisis reduced the economy’s productive capacity, Beware emerging- market bonds The global hunt for yield has turned to increasingly risky asset classes. With the yields on emerging- market government bonds also at historic lows, investors have piled into debt issued by firms in developing countries. The emerging-market corporate bond index has risen by over 13% in 2016. But investors “need to be careful”, says Buttonwood in The Economist. The fundamentals are starting to deteriorate. Twenty- six issuers defaulted last year, up from five in 2014. This year’s tally is already 18. The default rate on junk debt has hit 3.1%, the highest since the global crisis. “More defaults are probably on the way.” Trade is a crucial component of emerging- market growth, and it’s spluttering. Citigroup estimates that it hasn’t been this weak compared to global GDP growth since the 1930s. Protectionism clouds the outlook further. Note too, says Buttonwood, that “when things do go wrong for emerging-market borrowers, it seems to happen faster”: the interval between a bond issue and its default averages 3.6 years in emerging markets, compared with 5.8 in developed ones. markets 7 Eurozone money printing is set to ease next summer ©iStockphotos Get set for rising bond yields and hence the potential, or trend, growth rate. So the rate at which the eurozone can expand without stimulating inflation – economy-wide demand exceeding supply, essentially – is lower. Dumas thinks the eurozone is already growing at trend. As the oil slide falls out of the annual inflation calculation, the headline rate will head back to 1% in the next few months. That will gradually prompt the realisation that money printing needs to stop: deflation, after all, has been averted and the economy will be strengthening beyond trend soon. Dumas thinks we can expect quantitative easing to start tapering off next summer. With America also growing at above trend, we will see bond yields, which may already have seen the low post-Brexit, climbing in anticipation of dearer money, thus definitively turning their back on a 35-year fall. Viewpoint It’s election season... time for partisans to pose as economists and strategists in order to explain how much the markets support their favourite candidate… [but] Mr. Market… isn’t especially concerned with politics… I don’t want to suggest that presidents are irrelevant to markets and the economy; their actions can and do affect interest rates, and commodity and equity prices. A well-designed stimulus can help blunt the harm of a recession, while policy blunders such as waging unnecessary wars… will affect markets. But during the ordinary course of business, a president isn’t usually an especially important market- moving agent. Barry Ritholtz, Bloomberg Views 2016’s top metal has further to go Industrial metals have generally moved “in lockstep” with Chinese demand in recent years, says Bloomberg.com’s Agnieszka de Sousa. But they have started to diverge this year, suggesting that the supply outlook is now the main influence on prices. Plentiful supplies have held copper back, while zinc, this year’s best-performing metal, has jumped by 50% because the market is so tight. Above-ground stocks are at a seven-year low, while an environmental crackdown in China has curtailed mine production. Glencore, also a major producer of the metal used to coat steel, has reduced output. Goldman Sachs predicts a deficit of 360,000 tonnes this year. Prices look set to rise from around $2,320 a tonne to $2,500 by the end of the year, reckons Goldman, but that should be high enough to trigger “a major supply response” – so the market will then cool.
- 8. MONEYWEEK 14 October2016 moneyweek.com I wish I knew what a carry trade was, but I’m too embarrassed to ask An asset’s “carry” is the amount of interest it produces. In the case of a currency, the carry is what you can make by depositing the currency at the central bank (ie, the country’s interest rate). In the foreign-exchange market, a carry trade involves borrowing in a currency with a low interest rate and using the money to buy one that pays a higher interest rate. If the exchange rate remains constant, you’ll receive more interest than you pay. Since US interest rates are higher than those in the UK (0.5% compared with 0.25% ), buying dollars and selling sterling would technically be considered a carry trade. Buying a lower-yielding currency to invest in a higher-yielding one can seem attractive – the currencies of countries with higher interest rates tend to attract more capital, drawn by the more attractive yields, and so carry traders can enjoy a double- whammy – a higher interest rate, plus capital appreciation. However, carry trades involve a huge amount of risk – if the trade reverses and everyone tries to get out at once, gains can turn into losses extremely rapidly. For example, in the years leading up to the 2008 financial crisis, one popular trade was to borrow money in pounds or dollars and then invest in a high-yielding currency, such as the Icelandic krona. This worked very well – until the krona collapsed at the start of the financial crisis and everyone ran for the exit at once. As a result, the strategy has been described as “picking up pennies in front of a steamroller”. Guru watch Forget the doom and gloom mongers – Professor Jeremy Siegel of Wharton School of Business reckons that now is not a bad time to be an investor. US shares are going through a period of “high valuations” in historic terms, he admits, but they still look “pretty good”, given expected growth and low interest rates. Indeed, “for the first time in maybe 50 years” investors are looking at robust dividend payouts and “beginning to think about stocks as the income-producing asset they will need in the future”. As far as Siegel is concerned, that makes perfect sense – solid dividend-paying stocks offer “3% or 4% with good growth possibility”. Siegel isn’t worried about the wider US economy either. Earnings are growing at a reasonable rate, and consumer confidence is “just finally getting back to near pre-crisis levels”. He’s not even worried about the upcoming presidential election. Sure, the market “would be a little more comfortable with a [Hillary] Clinton victory”, but in fact, “a lot of [Donald] Trump’s economic policies, like his tax plan and plan for less regulation, are far more capital-friendly”. As for Brexit, from an American perspective, Britain leaving the European Union is “a non-event”. However, there is one asset class that he’s not so sanguine about – Siegel admits that he does have “a pessimistic view of bonds”. There are two reasons for this. Firstly, he says, valuations are “super high” and yields “aren’t very good”. Secondly, “the Federal Reserve is definitely going to raise interest rates”. He expects the Fed’s next rate rise to come in December. The US central bank is then likely to “wait to see what happens before tightening again”, but the fact is that “any increase is going to harm the capital position of long-term bond holders”. The Big Mac index: tempting, but flawed 8 investment strategy Ever since the UK voted to leave the European Union, the pound has been skating on thin ice. This week, it fell through. In less than four months, sterling has plunged from a high of just over $1.50 to the US dollar to a low of below $1.20 (it has rallied a little since). It is by far the worst-performing major currency this year, with even the Mexican peso – which traders are using to bet on the likelihood of a Donald Trump presidency – outperforming it. We look at the impact of the plunge in sterling on the wider economy on page 24. But has the rout in the pound been overdone? One way to check is by using The Economist’s “Big Mac index”. The Big Mac index is derived from an economics theory called “the law of one price”. Simply put, this claims that in a modern global economy, the cost of any given goods should be the same around the world, once you take the exchange rate into account. So if a product costs £5 in London and $10 in New York, the exchange rate should be £1 to $2. The argument is that any serious price differential would result in people buying a product where it is cheap and selling where it is expensive (arbitrage). As the name suggests, the Big Mac index uses the price of the famous McDonald’s hamburger – a simple, standardised product that is sold in 119 countries around the world – to calculate whether a currency is cheap or overpriced. According to The Economist, as of July, a Big Mac sells for an average of $5.06 in the US, compared with £2.99 for the UK. This implies that the exchange rate should be £1 to $1.69, which would make the pound relatively cheap. Of course, the Big Mac index is a very rough, somewhat light-hearted guide to currency valuation. Using other goods produces entirely different results. For instance, the latest iPhone costs £599 in the UK and $649 in the US, implying an exchange rate of £1 to $1.08, suggesting that you should be buying dollars. However, you can take a wider measure – purchasing power parity (PPP) data, which looks at the price of all goods and services in an economy. This suggests that £1 should be worth around $1.45. And several studies suggest that over the long run, currencies do tend to revert to the exchange rates predicted by the PPP and even the Big Mac index. However, they don’t work terribly well to make short-term predictions. Indeed, Ahmad Raza of the University of Otago found that currency trading strategies based around these measures underperformed. The main reason for this is that in the real world there are often barriers to trade, such as tariffs and simple physical distance, which prevent the theoretical arbitrage described above. Indeed, some services are almost completely non-tradable. Global brands also have sufficient market power to vary their prices by region. So while PPP and Big Mac prices can provide useful pointers to a currency’s fundamental value, they are only part of the picture. And as Brexit has shown, in the short term there are plenty of surprises that can derail even the most considered currency forecast. How to value currencies by Matthew Partridge investment strategy XX The Big Mac index: tempting, but flawed page 24. But has the rout in the pound been overdone? One way to check is by using The Economist’s services in an economy. This suggests that £1 should be worth around $1.45. And several studies suggest that over the long run, currencies do the exchange rates predicted by the PPP and even the Big Mac index. don’t work terribly well to make short-term
- 9. moneyweek.com 14 October2016 MONEYWEEK Who’s getting what ■ Arsenal Chief Executive Ivan Gazidis enjoyed a £440,000 pay rise last season, despite his club failing to win a trophy. The increase bumps Gazidis’ salary up by 20% to £2.64m for the year, making him the second-highest paid executive in the Premier League behind Manchester United’s Ed Woodward on £3m a year. ■ Former Friends star Jennifer Aniston has been paid $5m (£4m) to feature in a new advertising campaign by Dubai-based airline Emirates. The advertisement was seen three million times within 14 hours of appearing online. It follows a similar one for Emirates last year, for which Aniston was also reported to have been paid $5m. ■ The CEO of Scottish Development International, Anne MacColl, is to receive a £200,000 pay-off after quitting her role. The government-funded organisation, which promotes Scotland’s interests on the world stage, has lost more than £31m of public funds in the last two years amid a series of failed investments in renewable energy. ■ The so-called king of the London insurance market, John Charman, has banked $311m from the sale of his 5% stake in Endurance Specialty, the Bermuda-based underwriter with a large presence on the Lloyd’s of London insurance exchange, bought by Japanese insurer Sompo Holdings for $6.3bn. Sharman is to stay on as CEO and stands to pocket a further £13m from share options. Nice work if you can get it The fat cat bosses of Britain’s “Big Six” energy companies earned a staggering £29m between them last year, The Sun reveals. British Gas owner Centrica alone paid its top staff £13.1m, with Chief Executive Iain Conn taking home £3m. Directors at SSE received £3.7m, and E.On, EDF, Scottish Power and nPower paid theirs £12.5m between them. Other notable outsized salaries include E.On boss Tony Cocker, who is on an estimated £1.1m, EDF head Vincent de Rivaz on £1.3m, and SSE’s Alistair Phillips-Davies, who pocketed £1.7m last year. Paul Coffey, boss of nPower, was paid a “relatively” modest £320,000. “Meanwhile, families are paying £6bn a year more than they should due to excess tariffs,” says the paper. In the UK, some 14 million people work outside a nine-to-five set-up XX city view Whether it is selling a few things on eBay, renting out a room on Airbnb, or working as a full-time freelancer, more and more of us are now working in the gig economy. If you include people who do a bit of trading on the side and the traditional self-employed, around 14 million people in the UK have some kind of work outside the traditional nine-to- five, according to consultants McKinsey. That’s close to half the total 31.5 million people in work in the UK. The good news is that the government is starting to take notice of this shift. Theresa May has appointed Tony Blair’s former aide Matthew Taylor to report on how to help the self-employed. However, the government must resist attempts to get gig workers into insurance schemes, or to unionise them, as many on the left would like. Instead, here are four key reforms that would help. First, allow the self-employed to hire one extra person free of National Insurance charges, or any kind of employment law beyond minimum health and safety standards. The barrier between having zero staff and one person is huge – take on just one person and you suddenly have a hurricane of regulations to obey and taxes to pay. Hence many self-employed people end up working too hard because they don’t want to turn away clients, but they also don’t want the hassle of becoming an employer. Allowing them one assistant would help a lot – and if just 10% of them took it up, it would create almost half a million new jobs. Next, raise the VAT threshold from £83,000 to £142,000. No business turning over less than the prime minister’s salary should have to register for VAT, with all the paperwork that involves. There are lots of self-employed people who decide to limit the amount they earn to stop themselves breaking through that barrier – and that stops them from growing their businesses. Third, cut them in on tax breaks, without all the work involved in becoming a company. The UK has done a lot to make itself an attractive place to set up a company. Corporation tax will fall to 17% by 2020, the lowest of any major economy. The 10% rate of capital- gains tax for entrepreneurs is lower than anywhere, apart from a few tax havens. But none of that is available to the self-employed – even if many of them are just as entrepreneurial. So how about creating a new category of a “single person company”, with no reporting requirements to Companies House, and no requirement for a formal audit, but still benefiting from lower corporate taxes? That would help a great deal. Finally, we should simplify working from home. For example, there is no reason why only a percentage of home office expenses should be tax deductible – allow anyone working from home to claim the majority of their costs, just like any other business can. Sure, there will be some expensive claims – a lot of pricey furniture might suddenly be a requirement for the home office. But so what? They are contributing a lot of tax revenue, and there is no reason they shouldn’t get a few breaks as well. The gig economy is one of the great growth stories of the decade. It is creating jobs in a way that no other sector can right now. But the self- employed are escaping the restrictions and rules of corporate life. The last thing we need to do is wrap them up in new structures. Health and pension schemes, maternity cover, and all the rest of the paraphernalia of big company life are largely irrelevant. Give them the freedom to develop their own careers – and the economy will rapidly reap the rewards. Set the gig economy free to grow ©iStockphotos city view 9 Set the gig economy free to grow Matthew Lynn
- 10. MONEYWEEK 14 October2016 moneyweek.com Samsung’s hopes go up in flames Samsung is the world’s biggest seller of mobile- phone handsets, boasting a market share of over 22% in the second quarter of 2016, according to research firm Gartner – more than twice Apple’s market share. It has carved out a position as a high-quality brand whose products sell for a premium price. Now that brand is under threat. Its top-end phone, the Galaxy Note 7, which retails in the UK at over £700, developed a worrying tendency to burst into flames. The firm recalled 2.5 million handsets in September, but phones shipped to replace the faulty units also burst into flames. So on Tuesday, Samsung took the drastic step of halting production and taking the device off the market. The saga has been a disaster for Samsung – $21bn was wiped off its share price earlier this week, and the company says pulling the Note 7 could hit profits by $2.3bn. Its ambitions to rival Apple in the smartphone market “suffered a deep blow”, says Jung-a Song in the Financial Times. And the fact that the firm replaced defective handsets with ones that were still unsafe “could trigger a large loss of faith in Samsung products”, says Richard Windsor from Edison Investment Research, quoted on BBC.co.uk. “Expect others to capitalise on the opportunity,” says Dan Gallagher in The Wall Street Journal. Chinese firms such as Huawei were already set to take Samsung on. Another winner could be Google, which has just launched its own top-end handset, the Pixel. “Google’s record in hardware has never been stellar,” but this time it may have got lucky. 10 shares These are the “best of times for European air passengers”, says Chris Bryant on Bloomberg Gadfly. But “for airline investors, it’s hard to imagine how things could possibly be worse”. Shareholders in easyJet have had a remarkably successful run over the last few years. In a notoriously cut-throat business, the company has managed to deliver an increase in profits every year since 2009. But last week it said that it expects pre-tax profits for the 12 months to 30 September to fall by some 28% compared with last year. Shares slumped to their lowest in over three years on the news, and are down by almost 50% in the last year. Carolyn McCall, the airline’s chief executive, blamed “extraordinary events”. Terrorist attacks in Nice, Brussels and Paris and air-traffic control strikes in France have all disrupted schedules. The tumbling pound is expected to wipe £90m off the airline’s profits this year. “Every 1% of the pound weakening versus the US dollar pushes the fuel bill up roughly £10m”, said analysts at Societe Generale. And while it’s true that the airline is carrying 6.6% more passengers, they’re paying 8.7% less for their seats. McCall is betting on expansion to see easyJet through the tough times – “history shows that at times like this the strongest airlines become stronger”, she says. “The airline grew capacity by 5.8% during April-September,” says Royston Wild on Forbes.com, “and plans a further 8% hike in the current year.” That should leave it “in good stead to enjoy splendid revenues growth once its current troubles subside”. But others aren’t so optimistic. Adding capacity is the wrong way to go about things, says Bryant. If the airline industry wants to preserve shareholder value, it needs to consolidate. If it keeps “seeking salvation through expansion, fares will fall further, and so will earnings and airline stocks”. “Europe’s airlines are their own worst enemies,” he adds. By contrast, US airlines, which have been through a period of consolidation, are “far more profitable than European rivals”. Quite, says Nils Pratley in The Guardian. Europe’s short-haul market “has too much capacity”, with “cheap oil” fuelling too much expansion. One comfort for shareholders is the “chunky” dividend, which yields 5.7% “at the reduced share price”. But that might not be enough to tempt investors. “Prospects for earnings themselves are the real worry. One tough year could be viewed as exceptional, but the City is expecting at least three before the clouds clear.” Not all investors may be willing to wait that long, says Bryce Elder on FT Alphaville. “If I were a shareholder,” he says, “I’d be asking questions.” William Hill, Britain’s biggest bookmaker, is in talks with Canada’s Amaya, owner of PokerStars – the world’s largest online poker business – about a £5bn “merger of equals”. The new company would be headquartered in London, with Amaya’s CEO, Rafi Ashkenazi, taking the top job. The deal adds to “the feeding frenzy among bookies”, say Peter Evans and Daniel Dunkley in The Times, driven by “rising taxes and a crackdown on fixed-odds betting terminals”. Mergers include Paddy Power and Betfair, Ladbrokes and Gala Coral, and GVC and Bwin.party. “The new company would have 60% of its revenues from online betting, and 40% in ‘land-based’ business,” says Murad Ahmed in the FT, making it “well diversified across different betting areas”, and bringing cost savings of more than £100m. Still, the deal is risky, says Nils Pratley in The Guardian. PokerStars faces a lawsuit in the US state of Kentucky that comes with a potentially huge fine. And the combined firm would be too exposed to markets where gambling is either “banned or the rules are so unclear that your local operation can be legislated out of existence”. Overall,”both these companies have bad hands, says James Moore in The Independent. “The best bet for their shareholders? Fold.” easyJet hits turbulence Bids and deals: William Hill goes all in on PokerStars The low-cost airline was a rare success in a cut-throat business, but headwinds are building fast Canada’s Amaya, owner of PokerStars – the world’s largest online poker business – about a £5bn “merger of equals”. The new company would be headquartered in London, with Amaya’s CEO, Rafi Ashkenazi, taking the top job. The deal adds to “the feeding by Ben Judge
- 11. moneyweek.com 14 October2016 MONEYWEEK Vital numbers Price at 11 Oct % change since 4 Oct FTSE 100 7,115 0.58% S&P 500 2,163 0.84% Nasdaq 5,329 0.91% Dax 10,661 0.39% Topix 1,356 1.19% Hang Seng 23,549 -0.59% $ per £ 1.23 -3.15% € per £ 1.11 -2.63% ¥ per £ 127.28 -2.77% Gold ($ per oz) 1,254 -1.26% Oil ($ per barrel) 53 3.92% Directors’ dealings John Dawson, founder and Chief Executive of Alliance Pharma, “now has somewhere to stay when he visits the City”, says Investors Chronicle. Dawson sold three million shares at 45.25p – a total of £1.36m – using the proceeds to buy a flat in London. He and his wife still own 12% of the pharmaceutical licensing and marketing firm. Investors were rattled by rising net debt and squeezed margins in the latest half-year update, but growth remains strong. “The shares trade on 12-times forward earnings, which still looks undervalued to us. Buy.” A French view The news that Chinese film group Fundamental Films is to invest €60m in EuropaCorp has had little impact on the French film studio’s shares, says Investir.fr. Investors are nervous about the risks of big-budget science fiction film Valerian and the City of a Thousand Planets, which will be released in July 2017. But Fundamental Films is funding €50m of the estimated €200m budget, and with presales for cinemas and TV channels included, 92% of the funding is covered. EuropaCorp needs to show it can succeed with a US-style blockbuster of this type, but its current market capitalisation values its future productions (which include the next instalments in the popular Lucy and Taken franchises) at just €166m. Buy, with a price target of €5.5. Three to buy Daily Mail & General Trust Shares The Daily Mail & General Trust (DMGT) owns the Daily Mail, the Mail on Sunday and Metro, and a large B2B publishing operation, as well as a 31% stake in online property portal Zoopla. DMGT has invested heavily in MailOnline and other digital ventures and new chief executive Paul Zwillenberg – who has a background in digital media – is well placed to turn those investments into extra revenue and profit. 750p Provident Financial The Sunday Times Provident Financial dropped sharply after the referendum, but has since roared back, helped by the outlook for its Vanquis arm, which specialises in lending to people with difficult credit histories. Provident is wholly UK-focused, which looks like a disadvantage, but if the economy weakens and the big high-street banks pull in their horns there will be more space for Vanquis to expand. 3,190p Jimmy Choo The Mail on Sunday The luxury footwear maker has performed disappointingly in the US in the past year, but business in the Far East is booming. It will benefit from recent currency movements because the weak pound means its earnings abroad convert back into higher sterling profits at home. 139.75p Three to sell JPR Group The Times Investors are more confident in this financial services group – which was created by the merger of Just Retirement Group and Partnership Assurance – after encouraging half-year figures and assurances that the group will achieve promised cost savings. But the share-price recovery looks complete and the shares are no longer good value. Avoid. 142p Greggs The Times The latest trading update contains nothing to worry investors in this baker. The firm has moved into the fast-growing food-to- go market and is opening new stores at a rate of about 70 a year. However, inflationary pressures are now building up for raw materials, which could bring problems down the line. With shares trading at 18-times earnings, there is little upside. 1,051p ITE Group The Times The exhibition and conference organiser is exposed to the trouble spots of Russia and Turkey. A recent trading statement reported that revenues were stable, but the weakening pound disguised an 8% like-for- like fall in the underlying figures. This may be the nadir for ITE, but on a price/earnings ratio of 15 times, the shares are not worth buying. 156.75p Buys A.G. Barr The soft-drinks maker has a strong balance sheet and valuable brands. (Shares) 508.5p AstraZeneca Dividends are paid in dollars so will gain from sterling’s weakness (Times) 5,025p BAE Fears over delays to defence orders from Saudi Arabia are overdone (Times) 537p Burford Capital Management at the litigation-finance group has a solid record (Investors Chronicle) 415p CRH The materials group is reaping the rewards of recent acquisitions (IC) 2,578p DFS The furniture retailer is cheap on a price/earnings ratio of 12 (Times) 273.25p Hastings Group The firm’s motor-insurance operation is well placed to add customers (Times) 223p National Grid Low rates make this utility’s secure income stream attractive (Daily Telegraph) 1,058p Paragon Group There is undeniable growth potential at the challenger bank (Times) 318.5p Regional Reit This Reit owns property outside London, which offers higher yields (Telegraph) 103p Secure Income The property company’s dividend should continue to grow (Times) 310p Swallowfield The cosmetics manufacturer is now developing its own range of brands (IC) 270p Topps Tiles Investors are nervous, but recent share-price falls now look overdone (Times) 101.75p Zotefoams The specialist foam maker has good prospects despite a weak first half (IC) 258p And the rest horns there will be more space for Vanquis to expand. Jimmy Choo The Mail on Sunday The luxury footwear maker has performed disappointingly in the US in the past year, but business in the Far East is booming. It will benefit from recent shares 11 MoneyWeek’s comprehensive guide to this week’s share tips
- 12. MoneyWeek 14 October2016 moneyweek.com A debate about success Trump claims that he took a $1m loan from his father and turned it into a $10bn empire. In fact, that’s an example of semi-truthful hyperbole. He joined the business in 1968, inherited control of it in 1971, and then inherited $40m in cash from his dad in 1974. In 1978, Business Week put his net worth at $100m. Had he invested that in an index fund tracking the S&P 500 – the kind many Americans use to save for retirement – he would today be worth $6bn. That’s quite an underperformance – and at the same time, says Robert Reich, the economist who served under Ford, Carter and Clinton, Trump has benefited from about $850m in tax subsidies in New York alone. This is “not a businessman”, says Reich. This is “a con man”. A curious mix of skilful and utterly reckless 12 briefing Is Donald Trump really a billionaire? Probably, although it’s hard to be sure. The Republican candidate for the US presidency has defied convention and refused to release his tax returns. He may well have paid no income tax for the past 18 years after registering a near-billion dollar loss in the mid- 1990s. However, Trump did have to file a “personal financial disclosure” with America’s Federal Election Commission in July 2015, when he decided to run for the nomination. The press release with this 92-page document states that “as of this date Mr Trump’s net worth is in excess of TEN BILLION DOLLARS [his capitals]”. He also revealed that his 2014 income was $362m, “which does not include dividends, capital gains, rents and royalties”. So he’s worth around ten billion? Not according to numerous journalists who have examined the claim. According to Fortune, which has repeatedly challenged Trump’s claims about his own wealth over many years, the $362m figure is in fact Trump’s overall revenues (ie, before deducting any costs), not his income. After making extremely generous assumptions about everything from rental yields to stockmarket dividends to the value of Trump’s personal brand, Fortune estimates a pre-tax income for Trump’s businesses (which are in real estate and leisure) of $166m. Assuming his businesses are worth 20-times earnings, that puts Trump’s overall worth at around $3.3bn. Bloomberg estimates it at $2.9bn. Still pretty wealthy then? Absolutely. But the bizarre thing (or one of them) about Trump is his desperation to over-egg his own status. “He lives to see his name praised in the press”, a former business associate told Fortune this year. “When it comes to choosing between getting more publicity and making good deals, I’d say it’s a tie.” On top of genuine success in New York real estate (and plenty of flops in other areas), Trump has dedicated his life to building what The Washington Post once called “an architecture of self- aggrandisement”. To be fair to Trump, he appears to recognise this. “I play to people’s fantasies,” he wrote in his 1987 book The Art of the Deal. “I call it truthful hyperbole. It’s an innocent form of exaggeration – and a very effective form of promotion”. Is he a good businessman? He’s a curious mixture of skilful and utterly reckless. Trump has made much in the election campaign of his status as a billionaire who will get things done. But his business record is decidedly mixed. His main claim to fame (other than his role playing himself on The Apprentice) is as a Manhattan real estate developer – a profession he inherited from his father, Fred. His flagship projects include Trump Tower on Fifth Avenue, Trump Tower in Chicago, and his Trump Organization owns buildings, hotels and golf courses around the world. Yet despite his talent for self-promotion, Trump has always been a “relatively minor player”, according to The New York Times. He has never been ranked among the top-ten developers in the city, and of the dozen buildings in New York that bear his name, nearly all are branding relationships; he doesn’t actually own them. Still, most analysts agree he’s a canny property developer – and an effective manager of others’ developments – who has benefited from a booming market over several decades. What about other businesses? Here’s where it gets much messier. Trump’s dealings in hotels and golf courses appear successful (his companies are privately held, so details are scarce). But forays into other areas – including casinos, airlines, and professional football – have ended badly. In the 1990s, Trump’s entanglements in casino development and ownership led to four separate bankruptcies, which to this day (according to The New York Times) mean that Wall Street banks are hesitant to lend him money. “I think he’s very good at real estate, I don’t think he’s very good at other things,” according to his biographer Michael d’Antonio. “He tried to run casinos and failed four times. That’s not evidence of brilliance when it comes to operating a complex business.” What about Trump University? The so-called Trump University – in fact a series of property development seminars that separated students from their cash with savage cynicism – is the most prominent of the Trump brands to have attracted negative attention during the campaign. But Trump has also put his name on everything from steaks and ties to bottled water and perfume. Opinions divide on whether all this makes him a canny operator or not. On the one hand, why is a billionaire getting mixed up in a seminar scam that could only end up trashing his brand? On the other, since his low point in the 1990s, he does appear to have sworn off taking on large amounts of debt, and instead used his brand to collect licensing fees on multiple projects in addition to real estate. If his brand does not now take him all the way to the White House, some speculate that his real plan is to leverage his political brand into some form of new, right-wing media empire. Trump TV? It may be just weeks away. Playing to people’s fantasies ©Alamy The GOP candidate for US president is a publicity seeker of note who admits to using “truthful hyperbole”. This run might be a really effective way of boosting his brand, says Simon Wilson briefing XX
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- 14. MoneyWeek 14 October2016 moneyweek.com Money talkThe Federal Reserve’s policy of low interest rates is “dangerous”, says Martin Feldstein. “Notwithstanding talk of a ‘non-recovery’, rising asset prices have lifted household wealth to an all-time high,” fuelling consumer spending, faster GDP growth and lower unemployment. Meanwhile, investors have turned to equities, long-term bonds, commercial real estate and other riskier assets in search of yields, pushing prices to “unsustainable levels”. Fed Chair Janet Yellen is concerned that normalising rates would cause these prices to fall, dragging the economy down, but the longer the Fed waits, the more damaging the eventual decline. Unusually low rates are also causing lenders to loosen lending criteria. If an asset-price correction causes an economic decline, “these high risk loans will suffer and… lenders will be in trouble”. The current low bond rate has removed the pressure to deal with budget deficits, but as debt grows, so will the cost of servicing it, and the tax burden will rise. The Fed must raise rates now. “Women are often forced to be held in the ideal of what a male audience wants. They have to be pretty, likeable. I hate the word ‘likeable’. I hear it all the time in Hollywood, and I don’t care if I’m likeable or not.” Actor Emily Blunt (pictured), quoted in The Sunday Times “Hillary is probably the most overqualified person ever to run for the presidency. Women have to get up an hour earlier and have many more degrees after their name just to be considered.” Former Vanity Fair editor Tina Brown, quoted in the Evening Standard “A big part of not having money as a kid isn’t that you haven’t the stuff you want… [you worry about your parents’ anxiety]… but I’m grateful...it gave me a... good work ethic.” Actor Sarah Jessica Parker, quoted in The Observer “Where else but in America can you turn your life around in one generation, going from nothing to worrying about your kids being too spoiled? But they see where I’ve come from and they’re pretty grounded.” Actor Mark Wahlberg on refusing to indulge his children too often, quoted in the Evening Standard “The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of socialism is the equal sharing of miseries.” Winston Churchill, quoted on Forbes.com Why the Fed must raise rates now Martin Feldstein The Wall Street Journal 14 best of the financial columnists ©RexFeatures Some falsehoods are “so near the truth that they convince and are widely believed”, says Jake Van Der Kamp. In the run-up to the Brexit referendum, Martin Schulz, the president of the European Parliament, reportedly said that “it is not the EU philosophy that the crowd can decide its fate”. He never said those words – yet he might as well have done, as they neatly encapsulate European ideas of “relations between the governing and the governed”. People believed it because it is true. Brexit is “not an expression of arrogance, ignorance and nostalgia but of fundamental differences from the EU on the nature of the rule of law, democracy and personal liberty”. The EU is “distinctly non-democratic”. Worse, those in charge are inept, as shown by their failure to stimulate growth. The British may be seen as rats for leaving, “but let’s have it straight that the ship is indeed sinking and the crew will do no more than sing ‘Nearer my God to Thee’ as they lead the passengers under the waves.” Better to be the rat than drown. Britain is right to flee the EU Jake Van Der Kamp South China Morning Post Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble promised that taxpayers would “no longer have to rescue banks”, says Jan Hildebrand. Shareholders and creditors would be called upon to make sacrifices before the state stepped in to help. This was controversial, with people concerned that creditors would withdraw from financing European banks. So it’s no wonder that attempts have been made to bend the rules, notably in the current crisis at Deutsche Bank (DB). But, for markets, DB’s problems are “a test of whether the federal government will keep to the rules it insisted on” or whether in an emergency it “will issue state aid without creditor participation in order to calm the situation”. The stakes are high. If Germany sets a bad example, that would send “a devastating signal” to citizens who remember the promise that they would not be the first to pay. It would also deal a blow to the long-term stability of the financial system, since it would be an invitation for the industry to “keep on gambling”. Germany must not bail out DB Jan Hildebrand Handelsblatt Global The UN’s Green Climate Fund (GCF) was set up in 2010 as part of a pledge to mobilise $100bn a year by 2020 to help developing countries cut climate emissions and cope with climate change, says The Economist. Last year, after “coaxing” $10.3bn from governments, the GCF started operations; its first investment – a solar electricity scheme in Rwanda – is finally up and running. Few of the 17 projects it has approved, however, “are transformational”. Part of the problem is that, “with one eye on future fund-raising”, the board has set an ambitious target of approving $2.5bn of investment this year, and so is “waving through” every proposal. Another issue is who run projects. The GCF channels money through “accredited entities” including big banks. This is controversial, but small institutions can’t cope. The GCF has potential, but it must sort out its processes and “if it is to have any point, it must go where the World Bank or private money dare not”. A slow start for the UN’s climate fund Editorial The Economist best of the financial columnists XX
- 16. MoneyWeek 14 October2016 moneyweek.com How much could Brexit cost? Draft cabinet papers leaked to The Times this week warned that a “hard Brexit” could cause the economy to shrink by 9.5%, writes Emily Hohler. Hard Brexit implies Britain leaving the single market and having to rely on World Trade Organisation rules for trading with the continent. The document says that after 15 years, trade and foreign direct investment would be “around a fifth lower” and public sector receipts would be up to £66bn a year lower. What rot, says Tim Worstall in Forbes. These figures belong to “Project Fear”. The Treasury assumes that if we leave the EU we could “put up our import tariffs”, which of course we wouldn’t, because doing so would be “entirely insane”. Patrick Minford, Vidya Mahambare and Eric Nowell, on the other hand, worked out a decade ago what would happen if we left the EU and followed a “sensible trade policy”, and found that we would get a 3% or so boost to GDP. The prospect of hard Brexit is still alarming, says Andrew Rawnsley in The Observer. Look at sterling. Investors are waking up to the prospect of Britain “lurching out of the EU without reliable access to her most important markets”. May has announced that Article 50 will be triggered by April 2017. Once she triggers Article 50, she has two years to negotiate a new deal. The danger, says Gideon Rachman in the FT, is that before one is ready, Britain will be out of the EU and “face tariffs on manufactured goods and the loss of ‘passporting’ rights that allow financial services firms in the City to do business across the bloc”. Betting on politics by Matthew Partridge The audiotape of Donald Trump boasting about groping women seems to have put paid to his chances of becoming US president. While other politicians have managed to get away with sleazy behaviour, sexual assault is something else entirely. With nearly a month still to go, it’s also likely that worse revelations will emerge. Even if they don’t, the stampede of Republicans running away from him, Trump’s deficit in the polls and the huge lack in both organisation and fundraising present insurmountable obstacles. Nonetheless, the markets are still offering 1.18 (84.7%) on the Democrats retaining the White House. If you haven’t bet on this market before, this is probably the last decent opportunity you’ll get. But I wouldn’t suggest that you follow the example of the punter who bet €550,000 on Hillary with William Hill, since putting that much on a single bet is poor money management. I make it a rule never to double down on a bet that I’ve made, whatever happens (closing bets is obviously another matter). The big remaining question is how this scandal, and Trump’s decision to descend into the gutter by attacking Hillary for her husband’s alleged misbehaviour, will affect turnout. The University of Virginia Centre for Politics admits to being “torn” on this issue, with early voting data giving “mixed indications”. I’m sticking with my bet that turnout will be between 50%-62%, a level not breached since the 1960s, which you can get on Betfair for combined odds of 73%. Last week, Home Secretary Amber Rudd unveiled a raft of new measures, including making it unlawful to rent property to illegal immigrants and making companies publish the numbers of foreigners that they employ. At the same time, Theresa’s May’s conference speech also promised to slash the inflow of people coming to the UK. Good news, says the Daily Mail’s Peter Oborne, who approves. Immigration “means cheap and efficient domestic service” for the “Chipping Norton set” and “cheap labour” for “the big corporate bosses”. However, “many ordinary people” have paid a “heavy price in job insecurity and living standards”. What nonsense, says the FT’s Martin Sandbu. Immigrants don’t stop locals getting jobs. Studies have found “no correlation between changes in immigration and changes in native pay or employment by location”. One suggests that “nearly one in two recent migrants were in the highest educational category, compared to one in four of the UK-born population”. In any case, “it’s not as if British workers don’t have jobs”, since “the unemployment rate is 4.9% and the share of Britons in work has never been greater”. So much for the PM’s boast that we are “open for business”, says Simon Jenkins in The Evening Standard. The government is now telling the world to “get lost”. This is “mad”. Politically, however, this is a shrewd move, says Daniel Hodges in The Mail on Sunday. The immigration crackdown is aimed at bridging the “lethal chasm between voters and the political class”. Despite “cries of anguish” from the “salons of Islington” the policy is strongly supported in the “pubs, supermarkets and school gates of middle Britain”: 60% of voters approved of Amber Rudd’s push to shame firms who supposedly employ too many foreigners. So it’s a push for the centre ground. The proposals are yet another example of how May is offering “a ‘Red Tory’ brew”, adds Anne McElvoy in The Guardian. This comprises not just economic nationalism, but also a “grab at left-of-centre themes of discontent about under-addressed market failures” – witness her cry for “tax justice”, which “recalls a slightly smug Ed Miliband”. Then there’s the rhetoric designed to highlight “compassionate conservatism”, including the statement that there is more to life than individualism. How much of all this survives the inevitable squabbles over the “Brexit recipe”, however, remains to be seen. May offers a Red Tory brew ©RexFeatures 16 politics & economics Amber Rudd: pushing for a crackdown on immigration politics & economics XX by Matthew Partridge
- 17. moneyweek.com 14 October2016 MoneyWeek How can we persuade Putin to stop the bombing? Russia’s continued bombardment of Aleppo continues to generate international anger, writes Matthew Partridge. During Tuesday’s parliamentary debate on Syria, the Foreign Secretary Boris Johnson said that he “would certainly like to see demonstrations outside the Russian embassy”. Beware, says The Guardian’s Mary Dejevsky. “Unleashing your own crowds on someone else’s embassy is tantamount to an invitation to someone else to unleash their crowds on yours.” Still, the real fault lies with MPs, who rejected action against Assad in 2013. This “arguably opened the way for the desperate situation in which eastern Aleppo finds itself today”. The “atrocity unfolding in what was once Syria’s biggest city ranks with the worst of the past century”, according to The Times. A no-fly zone, as some are calling for, could lead to “a rapid escalation to full-scale war with Russia in the event of a confrontation between Nato and Russian aircraft over Syria”. “That does not mean that the West is powerless.” War crimes have no statute of limitations; the longer Putin and Assad bomb, “the longer the indictments drawn up against them by international prosecutors are likely to be”. However, despite their words, Britain and the US seem to have “little appetite for becoming too involved in Syria’s complex civil war”. The “chronic absence of Western leadership” has convinced the Russians that “they, together with their pro-Assad allies in Damascus, can do very much as they please”, says The Daily Telegraph’s Con Coughlin. However, the West “could still bring a halt to the carnage around Aleppo simply by proclaiming the area to be a civilian safe haven, and daring the Russians to continue at their peril”. Russia might not like this, but since it “has nothing but contempt for international law, then it can have no complaints when the rest of the world chooses to ignore its objections”. Even if shooting down Russian jets seems too risky, targeting Assad’s helicopters “would at a touch reduce civilian deaths by around 90%”, argues Hamish de Bretton-Gordon in The Guardian. They drop illegal barrel bombs loaded with napalm and chemical weapons, and “nobody could argue” that they “are precision strikes to kill terrorists”. Overall, “it is time for Britain to stand up and show that Putin’s desire to turn Aleppo into a modern-day Stalingrad will be tolerated no further”. Donald Trump is poised to revert to the “bare-knuckled campaigning that won him the Republican nomination”, say Courtney Weaver and Demetri Sevastopulo in the FT. A day after House speaker Paul Ryan’s public announcement that he was no longer backing his candidacy, Trump broadcast a series of tweets describing his party’s most senior official as “weak and ineffective” and rejoicing that the loss of “party restraint” meant he was now free to go after Democratic rival Hillary Clinton. “It’s so nice,” he wrote, “that the shackles have been taken off me and I can now fight for America the way I want to.” Republican support for Trump has evaporated since the release last Friday of a video in which Trump boasts about “grabbing women by the p***y”. Trump initially dismissed the comments as “locker room banter” and issued a video apology, but leading Republicans have abandoned him in droves: 160 have now declared that they will not support him. These defections are “particularly galling” since the video “showed us nothing new about Trump”, says Andrew Rosenthal in The New York Times. He’s been insulting women all year, along with immigrants, Muslims, gay Americans and the disabled. What the Republican leadership don’t like is not so much Trump’s “fringe views”, but his way of expressing them. They are walking away because he has become what The Atlantic’s Ronald Brownstein calls a “political black hole for the party”. His debate performance – a vicious affair in which he attacked Bill Clinton for his treatment of women and said Hillary would be in jail if he were president – shored up his core support, says Jason Riley in The Wall Street Journal. But the fact that this needed doing a month before the election is a “problem”. Trump’s core supporters don’t make up a majority of the electorate. While Trump took to feuding with the GOP establishment on social media after the debate, Clinton released advertisements highlighting her growing support among independents and disaffected Republicans. According to a new WSJ/NBC News poll, Clinton is now leading by nine percentage points among likely voters. This is an “absolute worst-case scenario” for Republicans, says Chris Cillizza in The Washington Post. Republicans knew that this version of Trump – “angry, cornered, vengeful, selfish” – existed when they backed him as their nominee, but they thought they could control him. What appears to be happening is the Breitbartization of Trump’s campaign (Steve Bannon, Trump’s campaign chairman is CEO of conservative news website Breitbart). He is “adopting a strategy of full-on attack against anyone who doesn’t see the world as he does” and “effectively turning the guns on his own troops”, a move that will result in “near-certain carnage for lots of Republicans”. Had Trump’s poll numbers sagged then as they have now, “extricating themselves from the dumpster fire might have been painful, but it was possible”. Any real distancing from him now will be hard. Trump is not only losing the presidential race, but jeopardising the Republican control of the House and Senate. “The disaster scenario – an electoral college wipeout, losing the Senate and the House – now has to be on the table.” The GOP’s worst-case disaster scenario ©PressAssociation politics & economics 17 Trump is said to be adopting a strategy of full-on attack politics & economics 17 by Emily Hohler
- 18. MONEYWEEK 14 October2016 moneyweek.com The high-tech credit card combating fraud Bank-card fraud has become a huge global problem in recent years, thanks in part to the rise of online shopping. Credit-card fraud in Britain alone came to £755m last year, according to Financial Fraud Action UK. But a technology called Motion Code from French digital security firm Oberthur Technologies could make life harder for fraudsters. How does Motion Code work? On the reverse side of every credit card, next to the signature box, is the card verification value (CVV) – a static three-digit number you input whenever you buy something with your card online. With Motion Code, that three-digit number is constantly changing at random on a tiny digital display powered by a very thin lithium battery with a three-year lifespan. This means that if criminals get hold of details of a Motion Code-equipped card by using “skimmers” – devices fitted onto cash machines that “skim” the data off your card’s magnetic strip – or other means, they won’t know or be able to guess the CVV. Of course, a randomised CVV number won’t help you if your physical card gets stolen. And you won’t be able to memorise your own CVV so that you can pay online without having the card to hand. But that might be a small price to pay to keep your card details safe. In France, where the cost of card fraud stood at €395.6m in 2014, banks BNP Paribas, Societe Generale and Groupe BPCE have trialled the Motion Card on a sample pool of customers, in preparation for a wider roll-out that may begin later this year. Pilot schemes are also under way in Poland and Mexico, and British banks are in talks with Oberthur to bring it to the UK. “In some ways, it’s surprising it has taken so long for this to appear,” Prof Alan Woodward, a cybersecurity expert from Surrey University, told the BBC. “The technology has existed for some time so now it will be a case of persuading card processors that it is worth doing.” 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8 Administered,housing and commodity prices Private sector goods and services (ex-fuel & light) Private sector goods and services Decomposition of UK retail price inflation Annualinflationrate(%) moneyweek.com 18 opinion The notion that grindingly slow economic growth will be accompanied by long-term stagnation in consumer prices has had a powerful grip on the bond market. Throw in the demographic and technology arguments, and the “new normal” crowd reckon that a future of low or no inflation is a slam dunk. Then came Brexit and an abrupt 13% depreciation of Sterling. How have the new normal crowd reacted? It is no surprise that their instincts are to downplay the inflationary impact of Brexit. They expect headline consumer price index (CPI) inflation to rise only moderately over the coming year, touching 2% at worst and averaging only 1.5% for 2017. Sluggish domestic demand will open up a large output gap and exert disinflationary pressure. Weakness in core goods and services prices will counteract the partial recovery of the oil price, and the impact of the drop in sterling on import prices. Those of us with long memories tend to take a very different view. The UK has been one of the most inflation- prone countries in western Europe over the past 25 years. Our 20th century peak inflation rate was 25% a year, in 1975. We managed double-digit CPI inflation as recently as 1990. The UK is heavily dependent on imports across a wide swathe of manufacturing sectors, susceptible to bouts of money madness and protective of oligopolies in consumer-facing sectors such as megastores and car dealerships. Ripping off the punter is a national sport. A decomposition of the retail price index (RPI) shows private sector inflation (excluding fuel and light) rebounding over 3% – see the grey line on the chart to the right. We prefer the old RPI measure for this analysis because it includes housing. The chart shows that UK inflation remains elevated in comparison with the 1992-2007 period. The global financial crisis marked the beginning of a new era of erratic, generally higher UK inflation, because the crisis weakened domestic competition and allowed the profitability of the service industries to soar to new heights. In common with other advanced economies, headline CPI inflation flirted with negative inflation last year under the full force of the energy price collapse. But the starting gun on inflation normalisation was fired in May 2016 and over the next 12 months, the bias will be to an annual increase. The new normal crowd are dismissive of normalisation and Brexit-related pressures, which they expect to be muted and temporary. Yet we can observe already a substantial impact on imported inflation in the July and August producer price inflation data. Based upon the historical relationship between import inflation and CPI inflation for non-energy industrial goods, headline CPI inflation should move up by 1.5 to 2.0 percentage points from its current 0.6% by mid-2017. For RPI, the implied shift is from 1.9% currently to around 3.5% by mid-2017. Lower forecasts for inflation suggest a marked degree of compression in companies’ profit margins. Our sympathies are with the conventional view of producer-price inflation being passed through to higher consumer prices. Any output loss from Brexit is likely to be gradual and cumulative over the next three years, not sudden – so the domestic economy should not suffer an “air pocket” effect and resulting disinflationary effects. Anyway without an initial post-referendum output and spending slump, there is no justification to expect prices to drop sharply. UK inflation break-evens – the inflation rate implied by the difference between the yield on nominal UK government bonds and inflation-linked ones based on RPI – have risen in anticipation of the changing landscape. However, they have still risen by too little properly to reflect the higher inflation coming our way. Peter Warburton is the founder and chief economist of Economic Perspectives Inflation forecasts are wishful thinking opinion XX Inflation forecasts are wishful thinking Peter Warburton
- 19. The Week_Classic advert_OL.indd1 07/10/2016 11:25
- 20. MoneyWeek 14 October2016 moneyweek.com Europe’s gender pay gap Executives at some 8,000 companies with over 250 employees are poring over spreadsheets ahead of new rules that will force them to publish by April 2018 any pay disparities between men and women. That should give female workers a little extra leverage when it comes to seeking equal pay with their male colleagues, says Stephanie Baker on Bloomberg.com. Taking her cue from David Cameron, Prime Minister Theresa May has vowed to fight the “burning injustice” that means “if you’re a woman, you will earn less than a man”. In Britain, women earn 19.1% less on average, compared with 16.4% less across the European Union, according to Eurostat data from 2012, as the map shows. Should you pay for your funeral in advance? Pre-paid funeral plans allow you to pay up front for your send-off – either in a lump sum or monthly instalments – to take the strain off your friends and family when you pass away. They offer a number of benefits. First, they guarantee you a service regardless of any price increases – which may be a plus, given that funeral prices are currently rising faster than pensions, prices or earnings. A simple, no- frills cremation plan with the Co-op currently costs £2,945 – much less than the £3,897 average. They also allow you to choose the send-off you want, specifying your preferences in details such as music, flowers and the coffin. However, think carefully before buying a pre-paid funeral plan. Check the small print: many of these deals have costly exclusions. Some only put a contribution towards burial costs, while others have a limit on how far they will travel to collect the body. Any funding gaps may have to be filled by your estate, or friends and family. If you choose to pay in monthly instalments, take into account interest payments that can significantly bump up the total cost. You should investigate exactly what the plan includes, and compare this to the cost of organising all aspects separately (bearing in mind that the prices are likely to rise). You may find that a more DIY approach will work out cheaper overall. For example, you could drip-feed a monthly sum into a savings account that you set aside solely as a dedicated funeral fund. Banks usually release money early from an estate to pay for funeral costs if you provide a copy of the death certificate and an itemised account from a funeral director. It may sound morbid to think about the cost of a funeral, but dying is an increasingly expensive business. The cost of a funeral has risen by 103% since 2003, according to research from insurer SunLife. It will now set you back an average of £3,897, pushing up the overall cost to £8,802 per person. Funeral directors are a large part of the cost, at an average of £2,411. They’ll deal with all the arrangements – organising the funeral, storing the body of the deceased, handling all the paperwork, and arranging the coffin and hearse. You can also expect to shell out hefty burial and cremation fees. The average burial costs £1,950, although this can shoot up to £4,700 in London, while a cremation costs roughly £733. Of course, these costs don’t account for additional expenses, such as doctor’s fees, minister’s fees, a reception, or probate charges. So what can you do to keep funeral costs in check? It may sound obvious, but remember to shop around. While hospitals may recommend using a particular funeral home, this is by no means mandatory. The two biggest chains – Co-operative Funeralcare and Dignity – make up 30% of all funeral parlours in Britain, according to The Guardian, but you may well save money by going to a smaller firm. If you’d like to avoid using a funeral home altogether, it’s possible to arrange a DIY funeral. This involves taking on all the jobs usually handled by a funeral director, but is likely to reduce costs significantly – although many people may not want to take on all this responsibility at such a difficult time. Another option is to consider a direct burial or cremation. This means that the body is taken straight from the hospital or home and buried or cremated whenever there is space in the schedule. Families can then plan their own ceremony separately. This costs less than a traditional funeral, at roughly £1,600. A number of organisations offer woodland burial plots, which may work out significantly cheaper than a traditional cemetery. Lastly, it’s possible to avoid burial or cremation costs altogether by donating your body to medical science. The soaring cost of funerals 20 personal finance by Natalie Stanton personal finance XX Choose a smaller funeral firm to save costs ©iStockphotos 14.4% Ireland 16.9% Netherlands 22.4% Germany 6.4% Poland 22% Czech Rep 23.4% Austria 20.1% Hungary 18% Croatia 9.7% Romania 14.7% Bulgaria 15% Greece 19.1% UK 14.8% France 17.8% Spain 15.7% Portugal 6.7% Italy 15.9% Sweden 19.4% Finland 30% Estonia
- 21. moneyweek.com 14 October2016 MoneyWeek Pension news round-up n The Pensions Regulator should have more powers to intervene in mergers and acquisitions transactions involving firms with final salary pension schemes, the watchdog’s CEO has told the BBC. Lesley Titcomb, whose organisation has faced criticism for its failure to deal with the pension scheme crisis at BHS, where a £600m pension fund deficit emerged after the retailer was sold and subsequently went under, argues that there is currently no requirement for companies to tell the regulator in advance about transactions. Nor does the regulator have any powers to intervene in a deal, even where pension benefits look vulnerable. “We may need new powers in certain situations,” Titcomb said. “Where a company is being sold and the scheme is significantly underfunded, it may be appropriate for the regulator to be told in advance about the transaction, and it may be appropriate for us to have the power to intervene in some way, which we don’t have at the moment.” n Asset managers investing money on behalf of workplace pension schemes will have to be more transparent about their fees under new regulations proposed by the Financial Conduct Authority (FCA). The FCA wants asset management firms to provide data on costs in a much more transparent and consistent fashion, amid complaints from pension scheme trustees and governance committees that they often receive little information about the fees that their investment managers are levying for activities such as buying and selling assets. The Transparency Task Force, a campaign group, has claimed that asset managers routinely charge pension schemes for up to 200 different types of cost without providing any detail. n Reforms to encourage pension schemes to invest more in key infrastructure projects could be a key focus for next month’s Autumn Statement, according to a report in The Sunday Telegraph. The Chancellor, Philip Hammond, is understood to be working on reforms that would make it much easier for pension schemes to invest in energy projects, transport initiatives and technology infrastructure. Hammond believes the reforms could deliver vital new capital for such projects while providing pension scheme savers with access to an asset class offering potentially attractive long-term returns. Are inflation-linked annuities good value? A 65-year-old man in good health living in the southeast of England with a pension fund worth £100,000 might currently expect to obtain a level annuity income of £3,501 a year, assuming he also takes 25% of his savings as tax-free cash on retirement, according to the Money Advice Service. However, adding inflation protection to the annuity contract – guaranteeing his income rises in line with prices each year – would reduce the starting income to £2,072. Which annuity product works out to be best value will depend on how long the man lives and how inflation changes over time. The Office for National Statistics says the typical 65-year-old man can currently expect to live for a further 19 years. At the current 0.3% of inflation, the inflation-linked annuity will be a significantly worse deal: after 19 years, it would still only pay £2,186 a year, by which time someone on a level annuity would have received almost £27,500 in additional income. Even if inflation were to run at 2% in future – the Bank of England’s target rate – the inflation-linked annuity would still pay less, only £3,017, by the time the man turns 84. By then he would have missed out on a total of £19,700 worth of pension income. If inflation runs at 5% a year, however, our 65-year-old man would be receiving a pension worth £5,233 at age 84, and would have received more pension income in total by his eighty-fifth birthday. The exact figures will vary according to factors such as health, gender and age, but the lesson is that inflation-linked annuities only offer value if inflation rises significantly higher than today’s unusually low levels. Should struggling company pension schemes that have offered guaranteed levels of retirement income to their members be allowed to drop a promise to protect them from inflation? Frank Field, the veteran Labour MP who chairs the House of Commons work and pensions select committee, says the cross-party group will debate exactly this. The idea would be to lighten the burden for around 6,000 defined benefit company pension schemes that collectively provide pensions to 11 million current and future pensioners. In most cases, these schemes raise pensions- in-payment each year in line with the change in the consumer price index (CPI) or the retail price index (RPI), or at least by a minimum percentage that is linked to inflation. Trustees are rarely allowed to cut back on this guarantee. Field’s argument is that with company pension schemes suffering huge funding issues, particularly as bond yields have fallen, employers could be forced to fall back on the Pensions Protection Scheme, which protects savers where a scheme is unable to make good on its promises. The MP fears this would see many members even worse off than if they lost their inflation protection. By contrast, giving trustees more discretion to vary the inflation link might help employers cope with pension-scheme costs. The debate will focus on the cost of inflation protection, which tends to be expensive, even though UK inflation currently stands at almost zero. But the discussion will also be of interest to anyone with private pension savings, since they too have the option of buying inflation protection on retirement if purchasing a guaranteed annuity income. In fact, the merits of doing so look highly questionable at the moment. The cost of building annual inflation-linked increases into your pension income is so high – in terms of the lower starting income you must then expect – that inflation would have to rise substantially to make it worthwhile. Against that, however, inflation-proofing does offer peace of mind – certainty that however high inflation rises, your pension’s purchasing power won’t be eroded. MP: let schemes ditch CPI link pensions 21 by David Prosser pensions 21 Frank Field: let trustees vary the inflation link ©RexFeatures
- 22. MoneyWeek 14 October2016 moneyweek.com I first mentioned Charles Heenan and his new firm Kennox Asset Management in print back in January 2011. At the time his fund – the Kennox Strategic Value Fund – was tiny and his record short. But my interest had been caught by the fact that his seed investors included the rather wonderful Angus Tulloch of First State, alongside several other very good investors. His performance record over his first few years on the job wasn’t bad either. We should take note, I said. Heenan was holding the things we should all be holding – “solid companies at reasonable prices” – and working on the very sensible principle that “if you can protect your capital when the markets fall, longer-term performance over the cycle will be good even if you give some ground up when the markets run”. I hope some readers did take note. The last couple of years were dull ones for value funds, but look at the longer term and his fund is doing well. The annualised return since inception is 9.4% (it was up 30% to the end of September this year) and it isn’t particularly small any more (it has around £200m under management). So what’s going right? The key, he says, is to stick to what works. “We are value investors... that means price matters... we really do believe that if you pay too much for an asset, it’s a huge risk.” He believes in quality – and won’t buy low-grade companies just because they are cheap. Doesn’t that make finding things to buy in markets such as ours hard, I ask. It does. “We have 29 stocks and the turnover is about 15%, which means we buy one to two stocks a year. In the last year, I’m afraid to say, we haven’t bought a single stock. So it doesn’t happen often. You have to be patient. We’re firm believers that it’s one of the hardest things to do... to wait for the great opportunities there”. I agree: too many managers feel a need to justify their position by trading even if they have to do so in the wrong stock or at the wrong price. Not Kennox: half the stocks in the fund now were in it in 2007. The ability to be inactive with confidence is often the thing that sets the good managers apart. That confidence was much needed in 2014/2015 when value stocks were very, very out of favour: anything cheap and anything with problems was ignored. A great example, says Heenan was (and is) Neopost, a smallish company that makes franking machines. Overall post might be declining, but parcels are growing and Neopost has 800,000 customers. Its earnings were under some pressure, but still “it’s a lovely little business”. Heenan bought shares in it on ten-times earnings: “there are not many quality companies out there with ten-times earnings”. Okay, a quality company on a price-to-earnings (p/e) ratio of ten is good value. How expensive does it have to get before it isn’t a value stock? Heenan will buy quality companies on up to 12 times what he considers to be their sustainable level of earnings (which implies returns in the high single digits), but “we find it very hard to hold anything over 20. So in the high teens, we get nervous”. Johnson & Johnson was an example: Kennox held it in 2008/2009, but as its price rose from 11-times earnings to 18 times, they started to sell: “at some point, you say, ‘Actually, now, we just think it’s time to go’”. This is hard: it is very easy to hang on to good performers just because they are going up. “We struggle with that,” he says. You have to sell when things get expensive, but not too early or to have a high turnover. Remember that industrial cycles last seven years and firms in infrastructure or oil will be making 40-year investments. “Market trends last longer than you think.” We move on to the markets. At the MoneyWeek conference last week I introduced our speakers as either optimists or pessimists. Had Charles been there, he would have been the latter. “I am,” he Patience pays for value investors 22 the moneyweek interview The secret of success? Stick to what works, buy cheap, hold out for quality and – above all – bide your time, Charles Heenan tells Merryn Somerset Webb Heenan is keen on Newmont Mining – it’s properly diversified with a solid reserv “Too many managers feel a need to justify their position by trading, even if they have to do so in the wrong stock or at the wrong price”
- 23. moneyweek.com 14 October2016 MoneyWeek Fact file: Charles Heenan Charles Heenan has 20 years experience in global investing. In 1997 he joined Stewart Ivory (later First State), where he spent seven years working with another MoneyWeek favourite fund manager, Angus Tulloch, and specialised in Asian emerging markets. In 2007 he was one of the founders of Edinburgh-based Kennox Asset Management and, together with Geoff Legg, has managed the Kennox Strategic Value Fund since its inception. The fund’s main aim is to preserve capital over the long term. the moneyweek interview 23 says, “a permanent bear. I’m always pessimistic. I’m always convinced the world is going to end”. But “I use my pessimism as a tool” – to make sure that the bar for buying with a margin of safety is high. “If you can build a portfolio that you think can hold up, irrespective of what bad things happen, you’ve done extraordinarily well. That’s what equity investment is about. So if we can get them at reasonable valuations, imply good numbers, and we think that we have a real spread of businesses and diversification in underlying themes in the portfolio, then that is extraordinarily powerful”. So what is today’s pessimism based on? “History – which tells us that bad things happen.” More specifically? “President Trump, for a start. An oil shock, again. Saudi Arabia, the Middle East, is disintegrating. Banking crises… Deutsche Bank going out of business… And then there’s the elephant in the room, of course, which is what are central banks doing?” There are no safe havens: everyone has to assume that at some point in the next five to ten years “their wealth will drop by 20%”. The good news is that buying stocks is inherently optimistic: “you’re buying an unlimited-duration asset”. I grasp at this bit of optimism and we move on to the current portfolio. What’s in it? The biggest holding (around 7% of the portfolio) will be familiar to MoneyWeek readers: it is gold miner Newmont Mining (NYSE: NEM). It has had a fabulous run this year and Heenan has sold some of the stake, but the rest stays. Gold is all about supply now. Most industries are “swimming in oversupply”, yet almost no capacity is being taken off the market. Not so in gold. Here the supply is coming off – it started to shrink in the fourth quarter of 2015 – and “what has been a headwind turned into a tailwind... one of the very few in the world”. That makes it worth holding Newmont and one smaller riskier miner too, Canada listed Yamana Gold (Toronto: YRI). Can he see that capital cycle turning elsewhere in the mining sector? “We think it’s too early still.” Oil? Getting there. Supply is coming off: “we’ve seen estimates of up to two trillion dollars of projects being cancelled... and while we don’t know when that’s going to affect the oil price, we do know that BP, Shell and the Exxons of this world will be around to see it”. These aren’t short-term buys, but “on a five-year and a ten-year view, we’re still convinced that those guys will survive”. What about banking and technology? Would Kennox hold those? No. The problem with technology is that it is impossible to see what the sustainable long-term earnings are or aren’t: “my guess is there’s going to be another product that we like better in ten years’ time than we like Apple. The same way it was Nokia and before that it was Motorola”. And banks? “We’ll never own banks. At one point in the cycle, they’re bust... and we don’t want to have to predict when”. We talk a little more about the right ones. He loves Western Union (NYSE: WU) on about 11-times earnings. There is “technology risk” to the cash remittance business, but “it generates brilliant cash flow”. There is Taisho Pharmaceuticals (Tokyo: 4581), which is in every part of the market for Japanese health – and its shares are benefiting from the ongoing improvements in corporate governance in Japan. The same goes for his other holdings in Japan: “three years ago, all our stocks were half of what they are now… we’ve been trimming them, bringing them back as they run and run”. Does he have faith that corporate governance in Japan really is improving? “We hope so. But we don’t need to bet on it. We’re very happy with what we’ve got.” If he had to hold just one for ten years, what would it be? We agree it’s a stupid question. But he plays the game – and goes for Newmont. “The world is crazy right now. And to have something that is properly diversified in the form of a reserve of gold sitting in the ground” is attractive. “We’re pretty happy that it’s still the place to be.” a solid reserve of gold sitting in the ground “Newmont Mining has had a fabulous run – and with the gold supply shrinking, it’s worth holding”
- 24. MoneyWeek 14 October2016 moneyweek.com 3%+ Expected UK inflation over the next ten years The pound hit a historic milestone this week: measured against a basket of the currencies of its main trading partners, it fell to an all-time low (see the chart on page 26). The reason for the plunge was clear. There was talk of a “flash crash” amid illiquid markets, and a strengthening US dollar didn’t help. But ultimately, the pound has crashed because markets are suddenly worried that Brexit really does mean Brexit. At the Conservative party conference, Prime Minister Theresa May not only announced plans to trigger Article 50 by the end of March next year, but also made plenty of noises about tougher immigration policies and taking a firmer hand with big business. As investment bank UniCredit put it: “It is not just about the UK’s free access to the single market and trade becoming costlier; investors are now perplexed by the country’s vision on immigration, openness and business-friendliness”. In short, markets fear that a “hard” Brexit is now much more likely than the “soft” Brexit, or even the non-Brexit some had hoped for. May’s rhetoric is just a starting point for negotiation, of course. May is talking tough now, as are her European counterparts, but the two sides are likely to edge closer as Britain and the European Union (EU) figure out their post-Brexit relationship. Indeed, the pound rebounded a little mid-week after May suggested that parliament would have some say on whatever Brexit deal materialises. But does the crashing pound really prove that Brexit is a dire mistake? Or is it just a necessary step on the path to rebalancing the UK economy – painful for some, but equally beneficial for others? More importantly, what does it mean for your money either way? Rebalancing act Sterling’s collapse has, of course, been manna from heaven for those who still oppose the idea of Britain leaving the EU. In the absence of any other clear sign of economic or market collapse, the slide in the pound is a good way to justify dire warnings issued pre-referendum. As Martin Wolf puts it in the Financial Times with grim relish: “the markets have taught Theresa May a hard lesson on sovereignty”. Yet there are two sides to this story. If Britain is genuine in its desire to have a more sustainable economic model that depends less on finance and trading overpriced houses with one another, then many economists believe that a falling pound could be exactly the medicine we need. Amid the hand-wringing over the impact of Brexit on the City, many appear to have forgotten that it was Britain’s overreliance on the financial sector that landed us in the mess we got into in 2007 and 2008 in the first place. “Britain within the EU became a magnet for speculative international financial capital,” notes Ashoka Mody of the International Monetary Fund (IMF). This created “a property-buying frenzy in London and neighbouring districts. British banks channelled foreign speculative capital, and the finance-property bubble became a central feature of the British economy”. This also drove up the value of the pound, and as a result, “British producers lost competitiveness at home and abroad. Producers’ incentives to invest were weakened, leading to Britain’s poor productivity performance”. This also helped create our huge current-account deficit – worth 7% of GDP – as imports outstripped exports. This, as Larry Elliott notes in The Guardian, came at a huge cost. Big deficits “are financed either by Britons selling off their overseas assets or by investors from other countries buying up assets in the UK”. In short, as Mody puts it: “The people of Britain were not richer before Brexit. On the contrary, they were living beyond their means”. Paul Krugman sums it up well in The New York Times. Krugman isn’t MoneyWeek’s usual economist of choice – he has a fondness for advocating monetary extremism that we’re not really on board with. But he was among the few “mainstream” economists who was clear- headed enough to remain sanguine about the short-term economic impact of Brexit before the EU referendum. Krugman argues that Britain’s dependence on financial services is a form of Dutch disease – but rather than commodities crowding out investment in other sectors, the dominant financial industry has squeezed out manufacturing investment. As Roger Bootle of Capital Economics and entrepreneur and Labour party donor John Mills argue in their book, The Real Sterling Crisis, this is a problem because the weakness of manufacturing “diminishes our prospective rate of productivity growth (since productivity growth is stronger in manufacturing than services), intensifies the problems associated with employing lower-skilled workers, increases inequality, and accentuates the regional divide”. So how do we resolve this? Put simply, “the correction for an excessive current-account deficit is a fall in the value of the currency”, argues the US-based Center for Economic and Policy Research. “As the UK loses part of its financial industry in the fallout from Brexit, it will need increased output in other What sterling’s nosedive means for your money 24 cover story The pound has collapsed as Theresa May talks tough on Brexit. But is this really a disaster – or a long-overdue rebalancing? John Stepek investigates “The pound rebounded a little mid-week after May suggested parliament would have some say on whatever Brexit deal materialises“ ©Alamy
- 25. moneyweek.com 14 October2016 MoneyWeek “A weaker pound shouldn’t be viewed as an additional cost from Brexit, it’s just part of the adjustment“ Continued on next page areas to fill the gap created… A lower valued pound will make a wide range of UK-produced goods and services more competitive internationally, reducing the size of the country’s trade deficit.” In short, if the “march of the makers” and the “Northern powerhouse” are ever to be anything more than empty slogans, then Britain needs something more radical than a half-hearted reshuffling of regulatory responsibilities backed up by endless quantitative easing – and the weaker pound can help with that. “If we were able to increase our net exports this would not only boost incomes and employment, but it would do so in parts of the economy that have recently done relatively badly – the parts that have been heavily dependent upon manufacturing, thereby helping to address some of our country’s problems with inequality,” note Bootle and Mills. As Krugman puts it, “a weaker pound shouldn’t be viewed as an additional cost from Brexit, it’s just part of the adjustment”. Soft or hard, Brexit is Brexit But won’t a hard Brexit be bad news for trade? Not necessarily. As Bootle notes in The Daily Telegraph, splitting Brexit into “soft” and “hard” options just confuses the issue. The key point is whether or not Britain remains part of the single market, and this is by no means an unalloyed good – membership prevents us from negotiating our own trade deals, and as a study by Adam Slater from Oxford Economics shows, our trade with the EU actually grew more slowly after we joined the single market than before. And, as Mody points out, even in a worst-case scenario where Brexit results in extra barriers to trade, “if the pound is about 20% overvalued, then the fuss about the laughably trivial few percentage points increase in tariffs after leaving the EU is really beside the point”. The good news is that the weakening pound is already having an impact on reducing our current- account deficit. Germany’s DIHK Chambers of Industry and Commerce has warned that German exports to the UK are set to fall this year, rather than rising by 5% as previously estimated. Meanwhile, as Liam Halligan notes in The Sunday Telegraph: “British factories registered their best month in almost three years during September… as export orders surged”. The return of inflation Of course, it isn’t all upside. A weaker currency will drive up the price of imported goods. The market now expects UK inflation to average more than 3% a year over the next ten years (hence the price of index-linked gilts has soared). Inflation has the potential to squeeze wage growth (assuming companies actually feel able to pass on price rises to consumers in such a competitive environment, which is by no means certain). Fear of inflation could also Theresa May’s tough talk on immigration and reining in big business spooked markets and caused the pound to crash ©Alamy
- 26. MoneyWeek 14 October2016 moneyweek.com The best ways to benefit from a weaker pound Let’s make one thing clear. Trying to make money based purely on currency movements is a mug’s game. You can figure out what a currency should do in theory, based on expectations for interest rates, inflation and economic growth. But turning that into a consistently profitable investment strategy is nigh-on impossible. It only takes one unexpected event – Brexit, say – to upturn everyone’s forecasts and systems. So there’s no guarantee that the pound will get weaker from here, or even remain weak. Indeed, on a purchasing power parity basis (see page 8), Charles Gave of Gavekal reckons the pound is about 10% undervalued versus the euro, and 17.5% versus the US dollar. When that scale of undervaluation has happened in the past, “within two years” the pound had returned to fair value. “Based on that pattern, the next two years should see the pound return 15%... not too shabby.” So from a big-picture perspective, the best way to protect your portfolio from any sterling shock is to diversify. Investors globally tend to suffer from a phenomenon known as “home country bias” – they have too much money tied up in their own domestic markets. Don’t be one of those investors. Own some gold (it’s dollar-denominated and essentially a form of currency in its own right). Get exposure to overseas markets: we’ve regularly recommended Japan here; we also think it’s worth having some money in the eurozone; and several emerging markets look attractive right now. Regardless of which way sterling goes next, it makes sense to avoid having your portfolio entirely focused on the UK. However, for now it seems clear that even if the pound is near a bottom, it may take some time to regain its previous heights. That means that at least some of the rebalancing discussed above may come through and there are certainly some companies that will benefit from even a relatively short bout of sterling weakness. One nice thing about the London market and the FTSE 100 in particular is that it gives you lots of exposure to US dollar earnings (hence the FTSE hitting an all-time this week). Financial data firm Markit expects dividend payouts from the FTSE 350 to rise in value by 16% this quarter compared with last year, as blue chips like pharma giant GlaxoSmithKline (LSE: GSK), mining giant Rio Tinto (LSE: RIO), and oil majors BP (LSE: BP/) and Royal Dutch Shell (LSE: RDSB) make more in sterling terms. As for promising exporters to back – in March (while Brexit was still deemed unlikely) we tipped four UK exporters that looked set to profit from a weak pound: valve specialist Rotork (LSE: ROR), plastics manufacturer Victrex (LSE: VCT), aerospace giant Rolls-Royce (LSE: RR) and steam engineer Spirax-Sarco (LSE: SPX). All four companies have made solid gains since then, but with the pound far weaker than it was six months ago, they should continue to benefit. 105 100 95 90 85 80 75 1990 1995 2000 2005 2010 2015 Trade-weighted sterling index drive up borrowing costs – investors don’t want to buy assets that pay a fixed income if inflation is rising, as this erodes the “real” value of the income stream. That could make any planned “fiscal” stimulus spending from the government somewhat more costly to fund. Already, this week, the yield on the ten- year gilt (the UK government bond) has risen above 1% for the first time since the day of the EU referendum result. That’s almost double the record low of 0.52% it hit on 12 August. In turn, that means government bond prices have fallen – the ten- year has lost nearly 4% of its value since then, the 20-year is down 6.6%, and the 30-year has lost 9%. As Hargreaves Lansdown’s Laith Khalaf notes, that’s “pretty negative price action for a ‘safe’ asset”. It’s good news for the nation’s pension deficits. But “this sell-off hints at the damage that could be done to bond portfolios if interest rates were to rise to more normal levels”. That said, for now, there’s no need to worry. Britain’s borrowing costs are still lower than the Treasury had budgeted for at the start of the year, so as Jonathan Loynes at Capital Economics notes, “the Chancellor will still save... on interest payments versus the expectations in the Budget”. It’s also possible that the crash in sterling will prevent the Bank of England from cutting interest rates any further, as many analysts expect. In fact, it could even raise them. However, we wouldn’t bet on it. If the Bank seriously believes that we’re heading for a Brexit-driven recession, then the last thing it will want to do is raise rates. The Bank is only likely to step in if the fall in the pound turns into a full-blown collapse. That’s certainly not impossible – it happens regularly in emerging markets – but it does remain unlikely. Perhaps more to the point, as Lord King, former governor of the Bank of England, put it: “Someone said the real danger of Brexit is you’ll end up with higher interest rates, lower house prices and a lower exchange rate, and I thought: dream on. Because that’s what we’ve been trying to achieve for the past three years… now we have a chance of getting it”. In short, as David Bloom, head of FX strategy at HSBC, tells The Daily Telegraph, sterling “is a flexible currency and in a time like this, it needs to flex. It will help rebalance the economy if we want to enter into this new brave world”. We look at how to position your portfolio for a weaker pound, and at the sectors best placed to profit from this shift, in the box below. 26 cover story Continued from previous page Brexit may lift UK manufacturing and exports ©Alamy “Someone said the real danger of Brexit is you’ll end up with higher interest rates, lower house prices and a lower exchange rate, and I thought: dream on“
- 27. Long-term investment partners *Source:Morningstar, share price, total return as at 30.06.16. † Ongoing charges as at 31.03.16. Your call may be recorded for training or monitoring purposes. Scottish Mortgage Investment Trust PLC is available through the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA, which are managed by Baillie Gifford Savings Management Limited (BGSM). BGSM is an affiliate of Baillie Gifford & Co Limited, which is the manager and secretary of Scottish Mortgage Investment Trust PLC. WHILE OTHERS STICK TO THE INDICES, WE ARE FREE TO CHOOSE. Scottish Mortgage Investment Trust has its own way of doing things. So it’s hardly surprising that the Trust’s portfolio looks nothing like the index. After all, we are active rather than passive investors and we firmly believe that the index is an illustration of ‘past glories’ rather than future prospects. In fact, our abiding principle has always been to invest in tomorrow’s companies today. But don’t just take our word for it. Over the last five years Scottish Mortgage, managed by Baillie Gifford, has delivered a total return of 92.2%* compared to 60.5%* for the index. And Scottish Mortgage is low-cost with an ongoing charges figure of just 0.45%.† Standardised past performance to 30 June each year*: 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 Scottish Mortgage -11.0% 26.9% 28.9% 25.8% 4.9% FTSE All-World Index -4.0% 21.4% 9.6% 10.2% 14.0% Past performance is not a guide to future returns. Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. You may not get back the amount invested. For a free-thinking investment approach call 0800 917 2112 or visit www.scottishmortgageit.com SCOTTISH MORTGAGE WAS ORIGINALLY LAUNCHED TO PROVIDE LOANS TO RUBBER GROWERS IN MALAYSIA IN THE EARLY 20TH CENTURY. SCOTTISH MORTGAGE INVESTMENT TRUST
- 28. MONEYWEEK 14 October2016 moneyweek.com Funds news round-up BlackRock, the world’s largest asset manager, has cut the prices across its core range of exchange-traded funds, in a further sign of the escalating price war between ETF providers in the US. The New York-based asset manager has cut fees on its 15 US- listed iShares ETFs by up to five basis points, meaning annual fees will now range from between 0.04% and 0.14%, down from between 0.07% and 0.16%. This move is designed to make its products more appealing ahead of the introduction of new US government legislation, which is expected to encourage a shift of retirement funds into lower-cost passive investments. The regulations, brought in by the US Labour Department, will oblige brokers to act in the best interests of their clients when selling retirement products, making it harder for advisers to justify choosing expensive actively managed funds. Revenue reductions from price cuts will be made up by greater flows into BlackRock’s exchange traded funds (ETFs), says Mark Wiedman, global head of the asset manager’s iShares range. Wiedman told Bloomberg News that he expects the iShares Core series, which was launched in 2012, to grow to $1trn in assets in the next ten years. BlackRock’s ETFs have already seen inflows of $64bn in cash this year, while rival Vanguard’s products have attracted $62bn. This equates to around 80% of the $157bn in total US ETF flows, according to Bloomberg Intelligence. Activist watch Samsung Electronics’s shares have fallen sharply this week after its Galaxy Note 7 model had to be recalled due to fire concerns – immediately after they had reached a record high on news that activist investor fund Elliott Management was pushing for further change in the company. Affiliates of Elliott sent a letter to Samsung’s board calling for a streamlining of the company’s structure, which it said was currently “unnecessarily complex”. Last year, Elliott attempted to stop a merger between two other Samsung group companies, as this was considered to be a move designed primarily to increase the owning family’s control of the business. Elliott was ultimately unsuccessful in its effort. 2012 2013 2014 2015 2016 80% 60% 40% 20% 0% Perpetual Temple Bar Five-year share-price return Lowland With interest rates in the UK almost zero and gilts with ten years to run yielding under 1%, investors are chasing after income wherever they can find it. Surprisingly, though, investment trusts specialising in UK equity income and managed by some of the most highly regarded managers are trading on reasonable discounts to asset value. In recent years, Lowland (LSE: LWI), Temple Bar (LSE: TMPL) and Perpetual Income And Growth (LSE: PLI) have usually traded at premiums, enabling their boards to grow the funds by issuing new shares to investors at above net asset value. Now, they trade on discounts of 8%, 9% and 8% respectively, despite strong records; their five-year net asset value returns to the end of August have been 91%, 76% and 99%, compared with 58% for the FTSE All-Share. The current discounts may be in response to dull one-year records, but the performances of Temple Bar and Lowland have picked up strongly in the last six months, while Perpetual has the better long-term record. The historic dividend yields on the three trusts are 3.6%, 3.3% and 3.4%, compared with an All-Share yield of 3.5%, but their dividend paying ability is helped by the partial capitalisation of costs. Total ongoing charges of just 0.5%, 0.6% and 0.65% respectively help to explain why the three trusts perform markedly better than comparable open-ended funds run by the same managers. Compound dividend growth over five years has been 3%, 8.7% and 9.8% respectively. Alastair Mundy, Temple Bar’s manager, was one of the few investors to warn in late 2015 that markets were highly valued. At the year end, Temple Bar’s fixed borrowings were matched by holdings of gilts, cash and gold, enabling Mundy to take advantage of market weakness early in 2016 to top up equity holdings. He is an outspoken advocate of value investing. A list of holdings topped by Glaxo, HSBC, Shell and BP shows a distinct bias to large and mega-caps. On the negative side, investing in mega-caps since 2000 has been a triumph of hope over experience and, with the exception of gold, there are actually few signs of the “contrarian” investment in recovery stocks for which Mundy is well known. Neil Woodford’s departure from Invesco left Perpetual’s manager Mark Barnett running a huge range of funds. Arguably, Barnett is the better manager, but overstretch is a worry. However, he has brought a former colleague, John Richards, out of retirement as product director, leaving him free to focus on investment. Tobacco stocks account for three of the five largest holdings, but the largest exposure (28%) is to financial services (though not to banks). The 18% in health care includes several high-risk, high-reward venture companies, but small-caps are just 10% of the portfolio. Less than half the portfolio is in members of the FTSE 100. Lowland’s manager, James Henderson, also has less than half his portfolio in the FTSE 100. Given that the FTSE 250, representing the UK’s mid-cap companies, has nearly trebled relative to the FTSE 100 since the start of the millennium, focusing on smaller stocks has been a great way to outperform. The sector composition of Lowland is very different from Perpetual, with over 25% in industrials and nearly 20% in resources compared with 14% and under 5%. Under 10% is in pharmaceuticals and health care. Debt relative to net assets, which will enhance returns in a rising market, is 12% compared with 19% at Perpetual and 7% at Temple Bar. So which is the best fund to invest in? If you can afford it and don’t mind the proliferation of holdings, buy all three. Otherwise, toss a three-sided coin. Three solid trusts for income 28 funds funds XX Max King
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- 30. MoneyWeek 14 October2016 moneyweek.com Guess the price: Dunstall Barn, Worcestershire This semi-detached, timber-framed barn conversion offers prospective new owners the best of both worlds. It’s located on the outskirts of a popular village, a short, convenient drive from Worcester. But it’s also on the edge of Dunstall Common, so you can enjoy rural views. The property is surrounded by landscaped, mature gardens and has exposed wall and ceiling timbers, a reception room with a double-height ceiling and a galleried landing, an open fireplace with a wood-burning stove and a modern kitchen with a range oven. But can you guess the asking price? (You can find the answer on page 41.) Taj on the Swan bulldozed The end of the commodity boom has taken a hard toll on Perth in Western Australia. Last week, a half-built mansion inspired by elegant Indian designs became the latest “poignant symbol” of the region’s decline, writes Jamie Smyth in the Financial Times. The foundations of the A$60m multi- domed pile on the River Swan were laid during the commodity boom, for Indian fertiliser mogul Pankaj Oswal and his wife Radhika. The “Taj on the Swan” was to boast a swimming pool, parking for 17 cars and even an observatory. But as the commodities cycle turned and prices crashed, the Oswals’ business failed and their 6,600 square metre dream property, turned to dust – literally. Bulldozers demolished the ruin this week. Government to guarantee 15,000 extra houses The government has pledged to put £2bn aside for buying houses that property developers cannot sell, in an effort to speed up the delivery of housebuilding. The “accelerated construction fund” will effectively be used to underwrite the risk taken by property developers. The hope is that the initiative will allow sites to be “built out” more quickly, says Sir Edward Lister, Chairman of the Homes and Communities Agency (HCA). With a guaranteed buyer in place, developers should be keen to accelerate their building programmes, putting up houses more rapidly. The fund will be paid for by additional government borrowing (if necessary), and will only be used to fund schemes built on public land. Steve Turner, a spokesman for the Home Builders Federation, told The Guardian that he expected small firms and new entrants to the market to be the biggest beneficiaries: “The reason that you’ve seen the number of small builders fall by 80% in the past 25 years is that building has become a very risky business”. Chancellor Philip Hammond and communities secretary Sajid Javid have said that the fund has the potential to support the construction of an extra 15,000 houses on public land by 2020. And while it might sound potentially expensive, the fund should only be drawn on in “extreme situations”. Lister told the Housing Market Intelligence Conference last week that the HCA would ideally “never spend a penny” of the fund, because developers “should be able to find buyers for new builds”, notes Inside Housing magazine. Next April, business rates (the tax paid on the occupation of non- residential property) are set to be revalued. That may not sound interesting, but if you’re investing in commercial property you need to pay attention. Because, warns commercial property group Colliers International, the revaluation promises to produce the most significant changes to business rates in a generation, and could have a huge impact on property yields. Business rates are calculated partly by the rentable value of a property. The last revaluation took place in 2008, right in the middle of the financial crash. The upcoming revaluation will be based on 2015 rental values. That means that businesses in London and the Southeast – where values have recovered sharply – are likely to be hardest hit, with rates rising by an average of 14% (and an incredible 415% on one street in Mayfair). However, regions outside of London will see an average drop in rates of between 2% and 11%, as government concessions exempt 600,000 small businesses from paying any rates at all. A rise in business rates will reduce the level of rent a landlord is able to charge, because businesses will be less willing to pay higher rents if this also drives up their business rates, notes consultancy Regeneris. Lower rents mean lower yields for investors. This could also mean that landlords will be less willing or able to invest more money in the property in question, or elsewhere in the sector – what Regeneris describes in its model as “potential development foregone”. This would dent demand and therefore prices for commercial property in areas of the country where rates are set to increase. However, Regeneris’ research suggests that this relationship between rents and business rates is stronger in the regions than in London, and also has more relevance to retail outlets and retail warehouses. As a result, working on the basis that Regeneris’ model works in reverse, this could mean that investors with exposure to retail properties in the North and the Midlands, where business rates are typically going to fall, may in fact benefit from the revaluation. One potential play on this to investigate further could be Regional Reit (LSE: RGL), which focuses on commercial property outside of the M25. 600,000 businesses escape tax ©iStockphotos 30 investing in property by Sarah Moore London’s business rates are set to rise by 14% investing in property XX
- 31. moneyweek.com 14 October2016 MoneyWeek The MoneyWeek audit: Irene Bergman n How did she start her career? Irene Bergman – the longest-serving woman on Wall Street – was born on 2 August 1915 in Berlin. Her epic career stretched 74 years, coming to an end on 29 September, when she passed away at her Manhattan home, aged 101. Bergman, whose father was a private banker at the Berlin Stock Exchange, grew up in wealthy surroundings. But in 1936, she moved with her Jewish family to the Netherlands to escape Nazi persecution. When Germany invaded four years later, the family was forced to flee again – this time to America, via Portugal. n What was her big break? Bergman arrived in New York in 1942. Her father secured her a job as a banker’s secretary, paying $35 a week – an amount she described as a fortune for the time. “Everything I know about investments, I learned there”, she said. While working at the bank, her father died and she redoubled her efforts, joining investment firm Hallgarten & Company in 1957. There she worked in merger arbitrage (attempting to profit by buying and selling stocks in two merging companies), as well as writing a weekly market letter. After six years at Loeb, Rhoades & Co, Bergman joined Stralem & Company in 1973, where she felt she was treated equally as a woman for the first time. She worked at Stralem for the rest of her life, helping oversee $1bn in assets. n What was her attitude to money? A decade after arriving in America, Bergman managed to reclaim her family’s assets, which had been frozen by the Dutch and US authorities as a result of the war. Her personal wealth reassured her clients, she told Bloomberg last year. “They had the feeling that I didn’t need to churn their accounts because I had money myself.” The amount of time taken to get it back meant that she put considerable emphasis on the importance of safeguarding funds, which reassured her older clients. Bergman never retired; she stopped coming into the office in December 2014, after an illness, but carried on working from her flat in Manhattan, surrounded by Dutch masterpieces, Louis XV furniture, four assistants, and her pet Maltese, Fanny. There are two types of start-up in a tech entrepreneur’s career, according to thirtysomething billionaires Kyle Vogt and Daniel Kan (pictured centre and left with General Motors’ President Dan Ammann). “The first time you start a firm, you want to get rich,” Kan tells Fortune’s Erin Griffith. “The second time... you want to build a legacy.” Their money maker was Justin.tv, a live-streaming tech firm founded by Vogt, which morphed into Twitch, the online video-gaming channel snapped up by Amazon for $970m in 2014. That left their legacy project, begun in 2013: self-driving tech start- up Cruise Automation. When General Motors (GM) bought Cruise for $1bn in May, Vogt and Kan went too and became its youngest senior directors. Naturally, there has been a culture clash between the 108-year-old car giant’s focus on durability and Cruise’s focus on speed, says Griffith, but Cruise has benefited from the clout of the GM brand. Meanwhile, GM has gained from the younger company’s dynamism. With Google, Uber, Ford and others all working on their own self-driving technology, it can’t afford to fall behind. ©GettyImages From drunken signings to digital beer mats “I’ve stopped signing bands while I’m drunk,” Simon Williams tells Alex Lawson in the Evening Standard. The founder of Fierce Panda – the offbeat independent record label that put out early releases by Ash, Coldplay, Keane and Supergrass, among others – was prone to wandering backstage after gigs and offering to release an up-and-coming band’s single on the spot. “Usually they were so drunk, stoned, or exuberated by the live experience that they’d go: ‘yeah, alright then’.” It wasn’t, however, an ideal business model in the modern music industry. The internet has made it possible for fans to access music for free – and for bands to make it big outside traditional channels. “All the rules of signing bands that were in place are gone. It used to be that if you sold out the Scala [in King’s Cross], you’d be ready to put out an album on a major label.” Today, you “can be a couple of teenagers from Merthyr Tydfil who’ve only done two gigs and look quite cool”, he says, referring to rock band Pretty Vicious, who shot to fame after uploading a single song to the SoundCloud website. The economics of running a small label are tough: a handful of other independents, such as 4AD and Heavenly, survive, but many contemporaries have vanished. However, Fierce Panda – which was set up more than 20 years ago by three journalists from music magazine NME – perseveres under the guidance of Williams, the “most indie man alive”. Last year, the label put out a single every month – through the unconventional medium of beer mats that included a link to a digital download. Bringing money transfers into the internet age Ismail Ahmed is not a typical fintech entrepreneur. Born in Somaliland, from where he fled a brutal civil war, the 56-year-old founder of London-based money transfer app WorldRemit went to work for the UN, tasked with ensuring aid money went to where it was supposed to go. What he found wouldn’t look out of place in a John Grisham novel, says Simon Duke in The Sunday Times. In Kenya, “I saw widespread corruption involving several UN officials,” says Ahmed. So in 2006 he blew the whistle and ended up on a blacklist for his troubles. Vindication came four years later, along with a sizeable pay out for lost earnings, which provided the seed capital for his start-up venture. His aim was to make it easier and cheaper for migrant workers to send money home, dragging “the industry – which had for centuries been founded on informal networks of back- street money changers – into the digital age”, says Duke. For now, WorldRemit is a relative minnow – but it is growing fast, with revenues rising from £15m in 2014 to a forecast £42m this year. It has been valued at $500m by venture capital investors. “Just like many other industries, backstreet money exchanges will be crushed by the digital hordes.” XX money makers money makers 31
- 32. MoneyWeek 14 October2016 moneyweek.com The stocks Morton likes 12mth high 12mth low Now SGE 761p 517.5p 740.5p CPG 1,559p 1,013p 1,499p CLG 390p 207p 335p If only you’d invested in… Altitude Group (Aim: ALT) provides services to the promotional products industry, including cloud-based software, websites, exhibitions and information services. The latest interim results show a move to a pre-tax profit of £0.4m in the first half of this year, compared with a loss of £0.7m in the same period last year. The share price is up by more than 300% since the start of September, though the management knows of “no corporate or operational reason” for the spectacular rise. Be glad you didn’t… Sepura (Aim: SEPU) makes digital radios and communications equipment for the transport, utilities, energy and mining sectors. It was founded in 2012 and is headquartered in Cambridge and now sells to over 30 countries. It warned in April that earnings would be lower than expected, and issued a second profit warning last month, cautioning that it may have to begin talks with lenders about waiving covenants next year. In the last year the share price has dropped by 90%. 90 80 70 60 50 40 30 20 10 Figures in pence Altitude Group (Aim:ALT ) A SO ON D J F M A M J J 2015 2016 150 100 50 0 Figures in pence Sepura (Aim: SEPU) A SO ON D J F M A M J J 2015 2016 UK investor sentiment lifted in August as monetary policy measures were initiated by the Bank of England and data was released that showed UK retail sales to have been better than expected. Mid- and small-caps have led the way recently as domestically oriented sectors continue to recover from the sell-off brought about by the UK’s decision to leave the European Union after the June 2016 referendum. As the “shop window” to the Franklin UK equity team, the Franklin UK Managers’ Focus Fund is run as a collective effort with each of our four UK managers bringing different skills and their best investment ideas to the table. The team employs a pragmatic, common-sense approach to investment, with decisions based on rigorous in-house valuation and risk modelling in order to select stocks likely to offer superior returns. Sage (LSE: SGE) is an example of a market-leading company we own in the fund. It provides small and medium-sized businesses with business management and services that are easy to use. Sage’s software is used by approximately three million businesses, which rely on it for procurement, order management, sales, accounting and customer services. Sage is in a secure financial position, with recurring revenues accounting for 80% of sales. It generates consistently high free cash flow and has a strong balance sheet with low debt. The company’s high earnings visibility makes for a largely predictable business model that’s straightforward to understand. Another of our current holdings is Compass (LSE: CPG), the global market leader in food services, which is ranked number one or two in most of its key markets. An increase in organic revenue growth and operating efficiencies allows the business to invest in future growth, thus completing the virtuous circle. Compass is exposed to long-term structural growth as outsourcing grows. Only around 25% of the catering market is currently outsourced, leaving plenty of scope for growth. The business has an extremely cash-generative business model that allows for a progressive dividend policy supplemented by share buybacks. Finally, Clipper Logistics (LSE: CLG) provides logistics and handling services. It also offers warehousing, customs warehousing, added value, garment handling, secure logistics, e-fulfilment and transport services. The business is extremely well-positioned to take advantage of the growth in e-commerce, as it offers its customers the full range of services that they require. In particular, Clipper’s ability to handle returns adds substantial value. The company has achieved strong growth over the past three years with best in class margins and returns. ©TheTelegraph2016 A professional investor tells us where he’d put his money. This week: Colin Morton, Franklin UK Managers’ Focus Fund Three top UK stocks 32 personal view
- 33. moneyweek.com 14 October2016 MoneyWeek Five investment tips from a legend Peter Lynch became a legend in the investment industry when he took control of Fidelity’s Magellan Fund in 1977 and proceeded to deliver 29% annual returns over the 13 years he was there. What made him so great? John Mihaljevic on LatticeWork.com extracts five key lessons for investors. 1. Exploit your unique knowledge. Each of us has one or more narrowly defined areas of knowledge in which we excel. If you are a dentist, say, you will know from experience which dental tools are best. Such knowledge can give you an edge. 2. If you need the money, don’t invest. Stocks will outperform over long time periods, but there’s no telling what they’ll do in two or three years. If you’ll need the money in that kind of time frame, you’ll end up selling at precisely the wrong time. 3. If a company is cheap enough, no growth is necessary. If a $100 stock is delivering earnings of $50 a year, the company does not need to grow to deliver a good outcome for investors. 4. Wait for the third innings. To use a baseball analogy, it’s not a good idea to invest in a fast-growing company in the first innings of a nine-innings game. Wait for the second or third. There’s no prizes for investing first. It pays to wait until a company has proved it can grow and do so profitably. 5. Don’t underestimate the difficulties in a turnaround. Investing in troubled businesses in the hope that they can turn themselves around can deliver spectacular returns. But don’t underestimate the difficulties involved. Wait for some evidence that the turnaround is likely to succeed before investing. Wait for the second or third innings to invest ©iStockphotos Why we need a new economics … workers at the bottom. Sack the rest XX the best blogs Many of the companies I work with are well past the start-up phase and are well into scaling and growing the business, says venture capitalist Fred Wilson on his AVC blog. The key to success at this stage comes down to two things: team and strategy. That may sound simple, but it is not. Most of the firms I work with didn’t really start out with a strategy at all – just an idea that turned into a great product, and then a company is built around that. But that is not a strategy: to build a sustainable business, you need a plan. Good investors can help, but ultimately strategy must come from the founder/CEO. Once you have that, he or she will need an executive team that can put the plan into action without the day-to-day involvement of the CEO. Hiring the right people is difficult, and nothing will substitute for experience here. But once you have the strategy and the team, then the CEO needs to step back. The CEO’s job is to recruit and retain the team; build and evolve the strategy and communicate it effectively and broadly in the organisation and externally; and make sure the company doesn’t run out of money. When those are the only things you’re doing, you’re doing the job right. And when your machine is humming along as it should, it is a thing of beauty. If you’ve spent any time working on the bottom rungs of the corporate ladder, you’ve probably wondered what your better-paid supervisor actually does. It turns out the answer is what you might expect: a “whole lot of nothing”, says Angelo Young on Salon.com. Today, nearly one in five employees in the US are tasked with overseeing the producers in a company – a ratio that’s at a historic high, according to the Harvard Business Review. The layer of managers and administrators wedged between the executives and the rank and file is so thick yet ineffectual, that if you removed most of them, it would have no measurable impact on a company’s output and could actually improve workplace culture, says the Review. Redeploying those supervisory workers to jobs as productive as the ones performed by their subordinates would boost national GDP by $3trn – or $141,000 per employee. As Roger Perlmutter, president of Merck Research Laboratories, once put it, the best way for companies to reduce soaring costs is to “scrape off the top five levels of management, including myself”. If your firm needs a squeeze, don’t fire those doing all the work. CEO? Step back and let your team take over The financial crisis exposed some serious flaws in our economic thinking, says Angel Gurría on the OECD Insights blog. We need a fresh approach. The starting point is to understand that economies are highly complex systems. Complex does not just mean complicated. Traditional science and technology excel at dealing with the complicated. The workings of a car, for example, may be complicated, but can be understood using normal engineering principles. The traffic on a motorway, however, is complex. Drivers interact and mutually adjust their behaviours based on diverse factors, such as perceptions, expectations, habits, even emotions. To understand traffic flows, and to build better motorways, set speed limits, and so on, we need to understand non-linear and collective patterns of behaviour, and how rules that might be imposed affect these. Similar logic applies to economies. Politicians and policymakers need to stop pretending that an economy can be controlled. Instead, they need to be constantly vigilant and more humble about their policy prescriptions; act more like navigators than mechanics; and be open to systemic risks, spillovers, strengths, weaknesses, and human sensitivities. Complex systems are prone to surprising, large-scale, seemingly uncontrollable behaviours – as we saw during the financial crisis. Rather than thinking that one big policy tool or regulation could fix this, we should place a greater emphasis on “building resilience, strengthening policy buffers and promoting adaptability by fostering a culture of policy experimentation”. The OECD is now working on the details. the best blogs 33 Talent at the top…
- 34. The world’s greatestinvestors This week: Mario Gabelli How did he start out? Mario Gabelli was born in New York in 1942. He bought his first stock at the age of 13, after overhearing brokers at the golf club at which he worked discussing the market. After graduating from Fordham University he did an MBA at Columbia Business School. He then worked at Loeb Rhoades & Co, a brokerage, as an analyst, developing his own valuation methodology. He formed his own institutional brokerage, Gabelli & Co, followed by asset manager Gabelli Investors (Gamco), and launched the Gabelli Asset Fund in 1986. What was his strategy? Gabelli focused on firms he felt were selling for less than the value of their assets. However, unlike Benjamin Graham, Gabelli placed a big emphasis on intangible assets, such as the number of subscribers a telecom or cable TV company had, as well as physical assets that he felt were undervalued. He liked to invest in companies that had experienced, or were about to experience, a catalyst that would change investors’ views. He particularly liked potential takeover targets, since the buyer would normally be willing to pay a premium. Did this work? His two flagship funds, the Gabelli Asset Fund and Gabelli Asset Trust, have both outperformed the market since their inception three decades ago. A $1,000 investment in the Gabelli Asset Fund would now be worth $290,698, compared with $185,717 for the S&P 500. This equates to an annual return of nearly 12%, compared with a 10.1% return for the market. Gamco has grown hugely, currently managing $37.5bn in assets. Gabelli himself is worth $1.7bn, according to Forbes. What was his best investment? Gabelli invested in Giant Foods, a supermarket chain, believing that the death of the founder would result in the company being sold, and that it would command a substantial premium to its current price. It took some time for a buyer to emerge, but the investment ended up returning 50% in three years. What lessons does he have for investors? Gabelli likens investing to poker: you collect information, evaluate it and use it to project what will happen in the future. As with poker, the key to success is taking the emotion out of decision-making. However, he points out that while you have to put in a minimum stake in poker, the best investors pass on opportunities until they find one that they are completely satisfied with. He also says that value investors should ignore economic news and keep searching for great individual stocks. MoneyWeek 14 October 2016 moneyweek.com “Milo Yiannopoulos is the pretty, monstrous face of the alt-right movement,” says Joel Stein in Businessweek. As the star writer for Breitbart News – a right-wing website that “merged semi-officially” with Donald Trump’s campaign in August when its chief executive, Steve Bannon, quit his job to become the Republican candidate’s campaign chairman – Yiannopoulos has become the noisiest defender of this “new, Trump-led ultra-conservatism”, which opposes immigrants, feminists, political correctness and any non-Western culture. Yet Yiannopoulos’s enthusiastic backing of Trump is just the latest “chapter of his ongoing quest to court controversy and fame”, says Rupert Myers in GQ magazine. This “goblin prince” of internet trolling first came to public attention in 2014 during “Gamergate”, when he supported a harassment campaign against women in the video- game industry. He was permanently banned from Twitter after the social media company said he had incited his 350,000 followers to send racist abuse to Ghostbusters star, Leslie Jones. Once described as a cross between a pit bull and Oscar Wilde, Yiannopoulos sees himself as a satirist and entertainer, he tells Fusion’s Karen Brown, inventing a comedy persona as a way of hiding bits of himself he feels uncomfortable about. An openly gay English/Greek Catholic of Jewish descent who now lives in Los Angeles, his background is hard to fathom: he has previously described his upbringing as “middle, middle class – horses, two cars, a pool”, but tells Stein that his father, whom he hasn’t seen for years, is “terrifying… like Tony Soprano, but Greek”. Yiannopoulos dropped out of both Manchester and Cambridge Universities, self-published poems under the pseudonym Milo Andreas Wagner and wrote a technology column for The Daily Telegraph. After being fired by the paper, he founded a technology gossip website, The Kernel, which foundered amidst lawsuits from unpaid contributors, before being hired by Breitbart News two years ago. His finances are hazy and poorly managed: there are almost 30 people on his payroll costing around $1m year, he tells Stein. Some $100,000 worth of donations made to a scholarship fund for white men he set up earlier this year to rile liberals are, by his own admission, still sitting in his bank account. He is reportedly about to buy a $3m house in Los Angeles and wears $1,000 Nike trainers, yet his life is a “trail of corporate wrecks”, says Myers. Ultimately, his currency is not money, but fame. Many suspect he doesn’t even believe his own right-wing diatribes. “He peddles a pageant of insincerity that is immediately legible to fellow Brits,” says Laurie Penny in The Guardian. But that doesn’t matter, because the harm he does by ventriloquising the fear of millions “is real”. What’s happening in America has “happened before, in other nations, in other anxious, violent times when all the old certainties peeled away and maniacs took the wheel”. The Breitbart pit bull trolling for Trump ©RexFeatures 34 profile profile XX Milo Yiannopoulos, the face of the alt-right ©Alamy
- 35. moneyweek.com 14 October2016 MoneyWeek A cruise around the Caribbean Soak up the winter rays while exploring a “less familiar” Caribbean. The Holland America’s Zuiderdam leaves Fort Lauderdale, Florida, in January and heads south, via the private island of Half Moon Cay in The Bahamas, for the Dutch Caribbean islands of Aruba and Curaçao, “where temperatures hover around a balmy 28˚c”, says David Wickers in the Daily Mail. Then it’s on to Colombia’s historical port city of Cartagena and the half- way point, the Panama Canal. While on board, “check out the Zuiderdam’s collection of original art and antiquities, including works by Andy Warhol and architect Frank Lloyd Wright”. Thirteen nights from £1,969 per person, including flights and pre-cruise hotel stay. Departs 24 January, 2017. See HollandAmerica.com (0843-374 2300). Five places to find the winter sun spending it 35 Zanzibar “Whisper ‘Zanzibar’ and you can almost feel the heat, hear the languid slap of the surf and smell the fruits of the spice island,” says Chris Haslam in The Sunday Times. Here, the average temperature stays in the high 20s. Make your way to The Residence Zanzibar (Cenizaro.com/TheResidence/ Zanzibar) and don’t be put off by the hotel’s nondescript exterior. Inside, the “rooms – which all have private pools – are fabulous”, while the glass-walled main pool is “the best on the island”. Out back, “there’s a spa”, while in front of the hotel is “a mile of dazzling white beach lapped by a lukewarm sea”. Gozo, Malta Temperatures on Malta’s “relaxed little sister”, Gozo, remain in the 20s well into October, says Andy Hill in The Guardian – perfect weather for climbing the citadel of Victoria, the island’s “dinky” capital, and surveying the “arresting greenery”, as opposed to Malta’s “dustier palette”. Once inside the ancient walls, dine on cheese and Gozitan sausage at Ta’ Rikardu, and quaff wine made from grapes grown by the proprietor. The Church of Saint John the Baptist is the most striking of the island’s 46 mostly baroque chapels and sits in the shadows of the Quaint Hotel (QuaintHotelsGozo. com), “a contemporary 12-room haven with a restaurant”. Northern Territory, Australia This “vast expanse of land” bakes in highs of 33˚C during the Australian summer (our winter). The Northern Territory is a “true place for wanderers”, with its terrain dominating some of the upper and central portions of Australia, says Nick Trend in The Daily Telegraph. Here you will find the “Outback wonder of Uluru”, formerly known as Ayers Rock, and the crossroads town of Alice Springs, while an iconic passenger train called The Ghan runs from Adelaide to the territory’s north coast capital city Darwin. But “this place of dust and drama” also offers “cityscape cool”. The Oaks Elan Darwin (OaksHotelsResorts.com), one of Darwin’s newest hotels, is sleek and modern, says Jennifer Pinkerton in the same paper. Gran Canaria, Spain The “lovely” island of Gran Canaria, located off the northwest coast of Africa, offers warm winters – think 21˚C – to those who travel the four-and-a-half hours from Britain, says Lisa Minot in The Sun on Sunday. For somewhere to stay, head to the Seaside Sandy Beach Hotel (Hotel-Sandy-Beach.co.uk), with its “stylish” Moorish design just steps from the Playa del Inglés beach. The hotel is well-known for its spa treatments and wellbeing and healthy living programmes. It also has a heated main pool, as well as a restaurant and bars. St Lucia, Caribbean After basking in 29-degree heat during the day, you can watch the sun set in any manner of ways. Head to Pigeon Point, where drinks will be waiting, and watch the “spectacular” sunset there, says Haslam. At Cap Maison (CapMaison. com), a former sugar plantation turned five-star hotel at Smugglers Cove, you can take a sunset cruise on the hotel’s motor yacht and “watch the sun go down from a private deck on the reef (drinks delivered by zipline)”. Then there’s the option of enjoying a couple’s spa treatment, “while – you guessed it – the sun sets”. Or you could simply enjoy the spectacle “from the privacy of the balcony in your hacienda-style room”. Take a stroll along a mile of dazzling white beach at The Residence in Zanzibar A five-page section covering holidays, cars and housing Smugglers Cove: even lovelier at sunset
- 36. MoneyWeek 14 October2016 moneyweek.com 36 property This week: properties for golf lovers – from a New England shingle-style house in Rhode Island’s Carnegie A Carnegie Harbor Drive, Portsmouth, Rhode Island, USA. A New England shingle-style house in Carnegie Abbey Golf Club with views over Narragansett Bay. It has classical fireplaces, a gourmet kitchen and a full-length porch. 4 beds, 5 baths, open-plan recep, balconies, 1-bed guest house, water frontage, dock, 0.5 acres. $4.375m Lila Delman Real Estate +1 401 284 4820. Red Walls House, Wheatsheaf Enclosure, Liphook, Hampshire. A 1930s house with a private gate providing access to the 18th hole of Liphook Golf Course. The living area has French doors leading onto the garden. 6 beds, 5 baths, 2 receps, orangery, tennis court, 2 acres. £2.35m Strutt & Parker 020-7629 7282. Blue Ridge, Sunningdale, Berkshire. This new-build family house backs onto Sunningdale Golf Course and is surrounded by landscaped gardens that include an outdoor pool and pool house. It has an open fireplace and an impressive kitchen. 7 beds, 5 baths, 3 receps, games room, media room, detached double garage with annexe above, 0.68 acres. £7m Strutt & Parker 01344-636960.
- 37. com moneyweek.com 14October 2016 MoneyWeek property 37 arnegie Abbey Golf Club, to a thatched house in Dorset adjoining Broadstone Golf Course Rose Lawn Coppice, nr Wimborne, Dorset. This thatched house was built in 1925 and has secluded gardens adjoining Broadstone Golf Course. It has leaded light windows, open fireplaces with wood-burning stoves and a large kitchen with French doors leading onto a terrace. 5 beds, 4 baths, 3 receps, family room, gym, cellars, attic, garage, heated pool with pool house, tennis court, cottage, woodland, 18.55 acres. £3.5m Savills 01202-856800. Los Flamingos Golf, Benahavis, Marbella, Spain. This new-build villa is located near the Villa Padierna Hotel and overlooks the surrounding golf course. It has a Gaggenau kitchen and a basement with a heated indoor pool. 6 beds, 7 baths, 2 receps, 0.6 acres. €4.95m. Fine & Country +34 952 764010. Monks Grove Farm, Puttenham, Surrey. A 16th-century house with 18th-century additions set in the midst of Puttenham Golf Course. It has beamed ceilings, open fireplaces, wood floors, and a recent extension that includes a kitchen and a family room. 6 beds, 3 baths, 3 receps, study, cellar, gardens, 0.7 acres. £1.85m Hill Clements 01483-300300. The Links, Bagendon, Cirencester. A contemporary house constructed by the developer Cotswold Barn Conversions. It stands on an individual plot of 1.5 acres with uninterrupted views across the 18th hole of Cirencester Golf Course. 5 beds, 4 baths, recep, open-plan family room/ kitchen, double garage, gardens. £1.495m Savills 01285-627550. Bakers Barn, Oake, Taunton, Somerset. A converted barn in the centre of Oake Manor Golf Course. It has beamed ceilings, an open fireplace with a wood- burning stove, bi-fold doors leading onto a terrace, a large summer house and a new garage. 3 beds, 2 baths, recep, breakfast kitchen, 3-bed annexe, 1.4 acres. £975,000 Knight Frank 01392-423111.
- 38. MONEYWEEK 14 October2016 moneyweek.com Wine of the week: a red that does what most whites fail to do 2015 Domaine de l’Idylle, Mondeuse, Philippe & François Tiollier, Savoie, France (£12.50, Yapp.co.uk, 01747-860423). There comes a moment in an adventurous red wine drinker’s life when they feel obliged to tackle the little- known mondeuse variety. This is likely to be a one-off moment, unless you follow my advice. Mondeuse is an oddly underwhelming fellow, specialising in wines with hollow, weedy fruit and a distinctly skinny middle (I am a little envious of this trait). The polite way of describing most wines made from this unfortunate red grape is to say that they are “refreshing”, “crunchy” and “bright”. All nice words, but not in the context of a red wine. Domaine de l’Idylle takes this grape and gives it some character. Juiciness, fruitiness, charm and attitude were my descriptors for this incarnation and while this is still a Beaujolais-shaped wine, it shows intellect, cheek and also a rare magnetism which draws you back to the glass. It’s not expensive, is a fast mover in the glass and I venture that it will appeal immensely as a Saturday brunch hero, acting as a discreet pick-me-up without queering the pitch for evening manoeuvres. In one fell swoop, I reckon I have found a vital wine in our armoury – a red that does what most whites fail to do. Well done Idylle – where have you been when we’ve needed you? ● Matthew Jukes is a winner of the International Wine & Spirit Competition’s Communicator of the Year (MatthewJukes.com). it some character. Juiciness, fruitiness, charm and attitude Your boat is here, Mr Bond 38 boats by Matthew Jukes In scenes seemingly designed for the opening credits of a James Bond film, the first Aston Martin powerboat, the AM37, recently took to the waves against the glamorous backdrop of the Monaco Yacht Show, says Rob Davies in The Guardian. The 37-foot boat, which will set buyers back about £1.3m, was designed by the carmaker’s “master craftsmen”, who also worked on its DB11 and Vulcan models. The day cruiser will feature mood lighting, air conditioning, a fridge, microwave and coffee machine, with room for up to eight passengers. A sliding glass roof will cover the cockpit, familiar from the luxury cars and also decked out in polished metal and leather. You want engines? It has some of those too, says Stephen Dobie on TopGear.com. You’ve got a choice between propeller or jet-thruster propulsion methods, and the base model will come with your choice of twin 370bhp diesel, or twin 430bhp petrol engines. The range- topping AM37 S will be equipped with twin 520bhp engines. So that’s 1,040bhp – or nearly as much as two V12 Vantages. Top speed? Fifty-two knots, or just shy of 60mph. That’s “plenty when you’re on water and you want to keep your fine seafood lunch in place”. This is the first step in a plan to recast the carmaker as a luxury brand akin to Ferrari or Hermès – and hence help stem five years of losses, says Peter Campbell in the FT. Earlier this month Aston Martin opened a new store in London’s Mayfair to show off its new wares, including designer handbags, leather jackets and even a high-end pram (price: £3,000). CEO Andy Palmer has said the group could even move into designer apartments. “Wouldn’t it be great,” he told The Guardian, “if you’re in a luxury harbour somewhere staying in an Aston Martin apartment, with your Aston Martin parked in the car park and your Aston Martin boat harboured outside?” Perhaps, but as Dobie points out, “AM37” is not hugely evocative as a name. “May we suggest Asty McAstonface?” cars XX
- 39. moneyweek.com 14 October2016 MONEYWEEK ©iStockphotos;RexFeatures Tabloid money... “I still don’t feel sorry for Kim Kardashian” ■ “So it turns out Kim Kardashian’s security man, Pascal Duvier, filed for bankruptcy ten weeks ago with his security firm owing nearly a million quid,” says Carole Malone writing in The Sunday Mirror. “Funny that. But not all that surprising, because he’s clearly not much cop at his job. Duvier issued threats to the gang who robbed Ms Kardashian (pictured) of £8.5m-worth of jewels last week, saying: ‘We will find you. You messed with the wrong one.’ Well actually, they didn’t. They messed with the one who wasn’t there to protect his boss when she needed him. That said, I still don’t feel sorry for Ms Kardashian.” If you use every opportunity “to flash your body and your extreme wealth – then expect someone to come get you and your stuff.” ■ “Theresa May sounds like she gets it,” says Tony Parsons in The Sun. “Tough on tax-dodging fat cats, robust in defence of our national interest, appalled by rackets that serve only big corporations and the obscenely rich – why wouldn’t any Labour voter support Mrs May?... Unlike David Cameron and Tony Blair, she is not a privately educated chinless wonder… My mother never voted Tory in her life. But I would bet my last euro that my mum would have voted for Theresa May.” ■ “Once again facing claims of hypocrisy, the Labour Party has defended Baroness Shami Chakrabarti’s son attending a top private school by suggesting that it was her ex-husband’s decision to send him there and not hers,” says columnist Jane Moore in The Sun. “Oh puh-lease. Ms Chakrabarti has never spoken against selection education so, to my mind, she is as entitled as anyone else to want the best for her child. But as a trained lawyer and former director of Liberty... the notion that she played absolutely no part in determining her child’s future is as disingenuous as it is patronising.” Superyachts – as seen by an academic “I still don’t feel sorry for Kim Kardashian” and the obscenely rich – why wouldn’t any Labour voter support Mrs May?... Unlike David Cameron and Tony Blair, she is not a privately educated chinless wonder… My mother never voted Tory in her life. But I would bet my last euro that my mum would have voted for Theresa May.” child. But as a trained lawyer and former director of Liberty... the notion that she played absolutely no part in determining her child’s future is as disingenuous as it is patronising.” PhDs are written about all sorts of cranky things, and most are probably unreadable. But this may not be true of Emma Spence’s PhD. She is completing one on the superyacht scene, having spent much of the last six years researching it. She has crewed on superyachts around the world, and, according to David Batty in The Guardian, “shadowed a yacht broker in the tax haven of Monaco, observing how the boats are deployed to establish a pecking order among the super-rich”. Superyachts are defined as boats with hulls longer than 24 metres at the waterline and that require a professional crew to sail. If you buy one, expect annual maintenance and operation costs to be 10% of the original purchase price. And be aware that, unlike other prestige assets (art, say, or houses) you are buying something that will depreciate in value. So why buy? The answer, one owner told Spence, is that having a superyacht “allows the super- rich to perform their wealth status”. There are certainly plenty of performers. The number of ultra-high-net-worth individuals in the world (ie, with net assets of at least $30m) rose by 62% between 2005 and 2015 to 187,468, according to a wealth report quoted by Batty. As for the total number of superyachts – Camper & Nicholsons say there are now 4,476 which are at least 30 metres long. Most of those which are sold – and 268 changed hands via brokers last year – are second-hand, but are then refitted to the new owners’ tastes. Meanwhile, the new ones are getting bigger. As any luxury broker will tell you, the clients who 15 years ago settled for 40-metre yachts now want 60-metre yachts – makes it easier to accommodate helipads, cinemas, infinity pools, etc. So John Staluppi, a Brooklyn automotive tycoon who gets a new superyacht every 18 months to three years, has just ordered his 19th, the 66-metre Spectre. (He calls his boats after James Bond films.) Spence says she concentrated her research on the Cote d’Azur because it’s the centre of the superyacht scene. “You have this tension between the privacy that yachts and the sea afford against this desire to see and be seen,” says Spence. “Tourists remind the super-rich of their wealth and their social status.” At night the owners or their children go to clubs like the VIP Rooms in Saint-Tropez or Gotha in Cannes, where they spend £5,000-£10,000 on a table and buy huge bottles of Dom Perignon. “There’s a group of young women that spends the day going from one port to the other, getting entry to these clubs and schmoozing these wealthy young men. The women come on board the boats, go up to the top deck and ask for champagne. They’re all drunk and you’re trying to explain at 3am that they can’t wear stilettos on board.” As you might expect, and as Spence found out during her crewing days, the superyacht industry is “completely gendered”. The interior crew are women, the deck crew male. “I’ve come across two female captains in six years of researching the industry, and I know of two chief stewards who are female. The women retire because owners don’t want them in the interior of a boat after a certain age – late 30s and you’re off.” “The women come on board...go up to the top deck and ask for champagne” blowing it 39
- 40. MoneyWeek 14 October2016 moneyweek.com How the Big Bang changed the City – and the world Crash, Bang, Wallop: The Inside Story of London’s Big Bang and a Financial Revolution that Changed the World by Iain Martin Sceptre (£25) Iain Martin’s new history of the Big Bang financial reforms in London in the 1980s “does not pretend to offer a complete history of the City”, says Gillian Tett in the Financial Times. Instead, it tries to “explain how a mix of location, language, government oversight, culture and (de)regulation helped to cement London’s dominant role as a financial centre in the late 20th century and early 21st century”. The result is “fun, rip-roaring stuff”, says The Times’ Philip Aldrick. Martin has an “ear for echoes of the present in stories from the past, making the old City feel remarkably familiar today”. The book also reminds us that while “loose morals are not new to the Square Mile”, neither are “its buccaneering spirit, outward perspective and ability to innovate, adapt and thrive”. This is “a fascinating yarn” about “an unloved industry”. One of the best aspects of the book is the way that Martin “entertainingly rattles, Peter Ackroyd-like, through the innovations and scandals of the City’s early days”, agrees Jim Armitage in the Evening Standard. Its weakness is that he “doesn’t spell out clearly enough what the reforms which resulted – Big Bang – were, and why they were so vital”. He also tends to dismiss any criticism of the City as “the silly hypocrisy of public- school Lefties”, but “I suspect many readers of Crash, Bang, Wallop from outside the City will feel the joke was on them”. “It is curious that Martin is not more sceptical about Big Bang’s ramifications,” says Reuters’ Dominic Elliott. However, he at least admits there were “less desirable side effects”, such as “a culture of following the letter rather than the spirit of the law”. Overall, this is “a zippy historical narrative that celebrates the cultural and financial change that transpired in 1980s Britain”. ©RexFeatures Trump Revealed: An American Journey of Ambition, Ego, Money and Power by Michael Kranish and Marc Fisher Simon & Schuster (£20) Polls suggest Donald Trump is more likely to end up a footnote in American political history than in the White House, but there is still a ready market for books about the real-estate tycoon turned reality-show host turned Republican presidential candidate. In Trump Revealed: An American Journey of Ambition, Ego, Money and Power, Washington Post journalists Michael Kranish and Marc Fisher look at Trump’s life and career, from his childhood up to the present day. “Any voter who is not already devoted to Trump’s cause will find plenty of reasons to think long and hard about whether to support him after reading this book,” says USA Today’s Ray Locker. It is “crammed with court records, financial data, anecdotes and interviews about Trump’s unscrupulous business practices, his liberal use of ‘truthful hyperbole’ and false promises to make himself rich, usually at the expense of others”. Overall, this “compelling narrative”, compiled from “the work of dozens of Post journalists”, ends up delivering “enough devastating details to disqualify virtually any other candidate”. The “lurid detail” of Trump Revealed shows him to be a “showman, womaniser, and a business partner who quickly ditches failing schemes”, agrees Dan Roberts in The Guardian. However, the most interesting aspect of the book is “Trump’s parasitic, and at turns downright bizarre, relationship with the press”, including a mixture of threats, inducements to individual journalists and cases where Trump leaked information about his first divorce under a false name. His attitude to the media reflects a man obsessed with shaping his own public image. “For decades, Trump’s daily morning routine included a review of everything written... about him in the previous 24 hours.” Trump Revealed confirms that Trump is “unconcerned by ethics”, with his supposed “success” mostly the result of “constant lying and exaggeration and occasional egregious bullying of journalists and analysts”, says David Aaronovitch, writing in The Times. Still, it’s disappointing that this “skilful and meticulous stitch-together of what has already been put on the record” fails to find a smoking gun. At the end of the day it confirms that Trump “has had no one rubbed out, participated in no wild sex parties and committed no obvious act of gross illegality”. Ultimately, one emerges with a picture of a man who “is not unintelligent and possesses an instinct for what people enjoy”. MoneyWeek’s view Trump Revealed is well researched, with some great anecdotes about Trump’s failed ventures. However, some of the most intriguing parts of his story, such as how he climbed from the wreckage and reinvented himself, are covered in less depth. This is a cut above the standard political biography, but regardless of whether Trump wins or loses, the full exposé of this larger-than-life figure is yet to be written. 40 books reviews XX A skilful exposé, but no smoking gun He’s a womaniser, but he’s committed no act of gross illegality by Matthew Partridge
- 41. moneyweek.com 14 October2016 MONEYWEEK Tim Moorey is author of How To Crack Cryptic Crosswords, published by HarperCollins, and runs crossword workshops (TimMoorey.info). 3 8 6 3 8 4 7 1 6 5 2 2 4 3 9 5 5 2 8 9 1 5 2 4 6 1 3 7 4 5 9 8 2 8 5 2 6 9 3 1 7 4 7 9 4 2 1 8 6 3 5 3 2 5 9 7 1 8 4 6 9 8 7 5 6 4 3 2 1 1 4 6 3 8 2 7 5 9 2 7 1 4 3 6 5 9 8 5 6 9 8 2 7 4 1 3 4 3 8 1 5 9 2 6 7 Answer to “Guess the price” column £475,000+ Fine & Country 01905-678111. Q3 AKQ732 J93 A6 82 A1095 984 J105 K4 Q1086 QJ10942 K3 KJ764 6 A752 875 Tim Moorey’s Quick Crossword No. 815 Bridge by Andrew Robson A bottle of Taylor’s Late Bottled Vintage will be given to the sender of the first correct solution opened on 26 October 2016. Answers to MoneyWeek’s Quick Crossword No. 815, 8th Floor, Friars Bridge Court, 41-45 Blackfriars Road, London SE1 8NZ. ACROSS 6 Follower of a policy of acquiring more territory (12) 8 Gag (4) 9 One who deceives a spouse (3-5) 10 Grandee; ratios (anagram) (6) 13 It could be a beefsteak, cherry or plum (6) 15 Enemy (3) 16 A cannabis cigarette (6) 17 Cycle fast (6) 18 Games (8) 21 Leave in, as text (4) 23 Notwithstanding (12) Sudoku 815 MoneyWeek is available to visually impaired readers from RNIB National Talking Newspapers and Magazines in audio or etext. For details, call 0303-123 9999, or visit RNIB.org.uk. Taylor’s, a family firm for over 300 years, is dedicated to the production of the highest quality ports. Late Bottled Vintage is matured in wood for four to six years. The ageing process produces a high-quality, immediately drinkable wine with a long, elegant finish; ruby red in colour, with a hint of morello cherries on the nose, and cassis, plums and blackberry to taste. Try it with goat’s cheese or a chocolate fondant. Solutions to 813 Across 1 Shilton 5 Oscar 8 Amour 9 Chelsea 10 Disregard 12 Icy 13 Moore 15 Giggs 18 OAP 19 Step aside 21 Inexact 23 Delft 24 Messi 25 Cantona. Down 1 Stardom 2 Icons 3 Terseness 4 Nectar 5 One 6 Casting 7 Ready 11 Dog warden 14 Orpheus 16 Sweet FA 17 Celtic 18 Opium 20 Igloo 22 Ali. The six were past and present footballers. Added letters are emboldened. N W E S The winner of MoneyWeek Quick Crossword No. 813 is: DJF Martin of Chalfont St Peter. DOWN 1 Plastic toy originating in Denmark (4) 2 Social activities after winter sport (5-3) 3 Type of trust for investment (4) 4 Quick, clever replies (8) 5 Against (4) 7 Stayed in bed longer than usual (5, 2) 11 Drive back (7) 12 Not on the established track (3-5) 14 Skilled shooters (8) 19 Docile (4) 20 Spotted (4) 22 Not difficult (4) Find and shade in the final grid a popular and successful item (5, 5 and 5, 5) featuring prominently in the recent 18 across. One other across answer may help. To complete MoneyWeek’s Sudoku, fill in the squares in the grid so that every row and column and each of the nine 3x3 squares contain all the digits from one to nine. The answer to last week’s puzzle is below. A rash reward West and South were competing for the rashest bid in the auction on this deal from the World Championships. My vote goes to South. The bidding South West North East pass 1 pass 1 2 * 3 pass 3NT ** pass pass pass * Very weak for a vulnerable two-level overcall, although as a passed hand partner will not expect too much more. ** Wow. I can see passing or bidding Three Spades (which should be forcing with five spades). But Three No Trumps, without a vestige of a club stopper?! West led the queen of clubs and declarer ducked in dummy. East defended best, overtaking with the king and switching at trick two to a low diamond. Declarer made the key play of rising with the ace, craftily anticipating the blockage that would occur. She then led a spade to dummy’s queen. East took her ace and led a second low diamond, but West held no more diamonds after winning her king, so reverted to clubs. Declarer won dummy’s ace of clubs perforce, then cashed the three top hearts. When the three-three split revealed itself, she was able to cash dummy’s three remaining hearts and follow with a spade to the promoted king-knave. Ten tricks and game made with an overtrick. Fast lane stuff from Californian World Champion Jill Meyers. Wow. For all Andrew’s books and flippers – including his new booklet Counting and Card Placement – see www.AndrewRobson.co.uk. Dealer West Both vulnerable XX crossword crossword 41
- 42. MONEYWEEK 14 October2016 moneyweek.com The bottom line 95The percentage of Britain’s pumpkin crop that is carved into jack-o’-lanterns for Halloween every year. £500,000How much a woman in Britain has bet on Hillary Clinton, the Democrat candidate, winning the US presidential election. With odds of 4-11, she stands to win £180,000 if America elects its first female president. £3.6bnThe amount taxpayers are expected to lose when the government sells its 9% stake in Lloyds Bank over the coming months. £2,702The average amount by which house prices have fallen since Britain voted to leave the European Union, from £216,726 in June to £214,024 in September, according to Halifax. $1mHow much Kaley Cuoco (pictured), Jim Parsons and Johnny Galecki each earn per episode filming American sitcom The Big Bang Theory, making them the highest-paid actors on television, according to Variety magazine. 10The percentage a Terry’s Chocolate Orange has shrunk by this year, from 175g to 157g. The price has remained the same. £1,750The price of David Hockney: A Bigger Book, which weighs 35kg and contains 450 prints. Each of the 10,000 copies of the “autobiography in pictures”, as the artist puts it, comes with its own bookstand. 44The percentage of people who would be happy to ditch cash for good if card payments were accepted everywhere, according to a study by MasterCard. Among those aged between 25 and 34, that figure rises to 62%. More than two thirds of people now use cards or electronic payments more often than cash. Four decades of attacking markets has corrupted the entire economy 42 last word No war was ever officially declared against the markets. But for four decades the feds have conducted a dirty war in which they’ve tried to mislead, obstruct, and suppress market forces. They used fake money, fake savings, and fake interest rates to confuse investors, businesses and consumers. They didn’t say so, but their purpose was to give out false signals so that people would change their behaviour. They flooded the system with credit. Price signals were distorted. Credit limits seemed to disappear. Debt limits were eased. Then, in 2008, the war turned hot. The feds overtly held down interest rates to push up stock and bond prices. In response to the crisis they caused – by encouraging too much debt in the housing sector – they claimed that the “free market” had failed. They were just responding to the emergency, they said. Is this a war the feds can win? No. Of course not. Markets can be suppressed, delayed and denied, but they can never be eliminated. Markets don’t stop working just because you try to distort and outlaw them. Victory is impossible. Markets work perfectly well whether you make war on them or not. Governments can put any price on anything they want. But only markets can tell you what something is worth. Just look at what happened in the Soviet Union. We visited Russia soon after the Soviet Union was disbanded. Markets were just opening up. But after 70 years of price fixing, there was almost nothing to buy. Almost everything that was being sold had been pilfered from the army. We bought a pair of boots for $1. We still have them. The soles are so stiff they barely bend. There are really only two types of economies: command economies and market economies. The latter work for everyone – but you never know who the real winners will be. The former work only for the commanders. Then, when they have stolen everything there is to steal, markets reassert themselves. The war on markets distorted almost all industries and corrupted the entire economy. Suppressed interest rates alone probably cost savers as much as $10trn since 2008. Goosing up asset prices probably shifted another $10trn or so to the people who own them (typically, the elite). But trying to suppress free markets or abolish them always leads to confusion, bubbles, bankruptcies, and misery. Economies weaken; people grow poorer. Since 2008, wages have been stagnant or falling for most people. GDP growth has declined and is now probably negative. Productivity growth has declined more than any time in the last 40 years. World trade levels are back to 2009 levels. The bounce-back from the Great Recession was the weakest on record. This is a war that the feds will ultimately lose. Trying to suppress markets is like putting a giant cork in the mouth of a volcano. It doesn’t stop the eruption; it just makes it more violent. The war on markets ©GettyImages;RexFeatures lastword XX Bill Bonner The feds are fighting a battle they can’t win – and the reckoning will be explosive moneyweek.com The percentage of Britain’s pumpkin crop that How much a woman in Britain has bet on Hillary Clinton, the Democrat candidate, winning the US presidential election. With odds of 4-11, she European Union, from £216,726 in June to £214,024 per episode filming American sitcom making them the highest-paid actors on television, according to Variety magazine. 10The percentage a Terry’s Chocolate Orange has shrunk by this year, from 175g to 157g. The price has remained the same. £1,750 Book, which weighs 35kg and contains 450 prints.Book, which weighs 35kg and contains 450 prints.Book Each of the 10,000 copies of the “autobiography in pictures”, as the artist puts it, comes with its own bookstand. 44 happy to ditch cash for good if card payments were accepted everywhere, according to a study by MasterCard. Among those aged between 25 and 34, that figure rises to 62%. More than two thirds of people now use cards or electronic payments more often than cash.
- 44. Let’s change theway we invest With today’s technology, we stay in touch with friends, pay our bills, and even broadcast our own news on the go. And now we bring the benefits of the latest technology into the world of trading and investment. Believing that everyone should have easy access to global trading and investment opportunities, we’ve developed SaxoTraderGO.SaxoTraderGO is an award-winning multi-asset trading platform that allows you to manage your portfolio from a single account – from wherever you are.* Let’s change the way we invest. Visit www.saxomarkets.co.uk to learn more The value of your investments can go down as well as up. Losses can exceed deposits on margin products. Please ensure you understand the risks. Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc. *Subject to internet connection, platform availability, market trading times and local regulatory restrictions. Technology has changed everything around us Change_Strategic_6_210x297_UK_EN.indd 1 31/08/2016 10:01:11