Posts in category Buttonwood’s notebook


Business and financeButtonwood's notebook

Where did the inflation go?

THE strength of the global economy is one reason why the stockmarket has started 2018 in buoyant mood (with the Dow passing 25,000). At some point, in any expansion, businesses find it harder to recruit workers or get the materials they need; these bottlenecks cause wages and prices to rise. Central banks then start to tighten monetary policy, a process that can eventually turn the market (and the economy) down.

After many years of ultra-low interest rates, the Federal Reserve has started to tighten monetary policy. There were three rate rises in 2017, and three are expected this year. The idea is to tighten gradually and (keep ahead of the curve) so that inflation does not accelerate so fast that a very sharp monetary tightening is needed.

The problem is that inflation remains hard to spot. Continue reading

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Business and financeButtonwood's notebook

Is the bubble only starting?

READY for a melt-up? Investors are generally upbeat about the prospects for equity markets this year but one intrepid fund manager thinks it is likely that American share prices could rise by 50% in the next six months to two years. Perhaps the biggest surprise is the identity of that pundit: Jeremy Grantham.

Mr Grantham, one of the founders of the fund management group GMO, is best known for a cautious approach to valuations. He was one of the investors who got out of the dotcom boom well before the top. His firm’s most recent prediction for seven-year returns are for an annual loss of 2% from American largecap equities; indeed among all the asset categories, only cash and emerging market equities and bonds and cash are expected to produce a positive real return over the seven-year period. 

So how can Mr Grantham justify his views? He…Continue reading

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Business and financeButtonwood's notebook

When politicians and executives get caught out

POLITICIANS and executives are held to different standards. That is pretty clear when it comes to issues such as sexual harassment, notwithstanding the resignation of Al Franken or the rejection by voters of Roy Moore. As others have pointed out, the tweets and remarks of Donald Trump would have seen him forced out of the leadership of an S&P 500 company long ago.

There are also big differences when it comes to the consequences of their regular actions. Politics is about making choices. Should public money be spent on defence or welfare benefits? Should taxes be cut for one type of voter and raised for another? The problem for politicians is that making those choices explicit may not be a vote-winning strategy. The losers will be more resentful than the winners will be grateful. So politicians get around this problem by making their promises very generic—tax cuts will go to hard-working families, public spending will be reduced through cutting waste and the like. 

The executives who run quoted companies face a…Continue reading

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Business and financeButtonwood's notebook

Putting a price on Bitcoin

SCENE: A pet shop with a bored looking proprietor. A customer approaches

CUSTOMER: I’d like to buy a parrot.

OWNER: Certainly, sir. How about this one? It’s a Norwegian Blue. Beautiful plumage.

CUSTOMER: It’s not moving much

OWNER: It is tired and shagged out after a long squawk

CUSTOMER: Fair enough. How much is it?

OWNER: $20,000

CUSTOMER: I’ll pay with this Bitcoin

OWNER: Sorry, sir. On WavesDEX, the Bitcoin is only worth $13,500

CUSTOMER: But on LocalBitcoins, it is over $21,500! Look at the news headlines. 

OWNER: Sorry, sir, but I can’t afford the risk. My rent, heat and light are all payable in dollars.

CUSTOMER: But the dollar has ceased to be, it has shuffled off this mortal coil, it is an ex-currency

OWNER: So you say, sir. But at least it’s a reliable means of exchange. It doesn’t move much from minute to minute

CUSTOMER: Like this parrot

If ever Bitcoin were widely adopted as a trading currency, this scene would be played…Continue reading

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Business and financeButtonwood's notebook

Can you afford to retire?

HOW much money do you need to retire? Depending on your age, it is a question you think about a lot (if retirement is imminent) or barely at all. For younger people, the subject is a combination of too far away, too complex and too boring, and too depressing. When you consider that you might live for 20, 25 or even 30 years after you stop working, it is a pretty important issue.

Say you want to retire on £20,000 a year (not a fortune) and you are 65. The best annuity rate at the moment in the UK is just under 5.2% which means you would need a pot of £385,000 to afford this. But hold on a minute. That is a flat £20,000 which does not account for inflation; if prices rise at 3% a year, the value of that pension will halve by your 90th birthday. To get an income of £20,000 that is guaranteed to rise in line with prices, you would need a pot of £619,000. (For American readers, the dollar amounts won’t be exactly the same, but they will be in the ballpark). 

These are very big sums and explain why private sector…Continue reading

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Business and financeButtonwood's notebook

Why a Labour government might mean a fall in sterling

THE British Labour Party is in buoyant mood at its annual conference, expecting to be in power very soon. And it has already started to think about the consequences, including a possible run on the pound if it takes office. But not everyone thinks this is likely; Simon Wren-Lewis, an economist, challenged people to think of “a serious economic reason why stering would fall on the election of a Labour government”. Well, this blogger can think of several. 

1. Labour plans to increase the rate of tax on corporate profits from (what will be) 17% to 26%. That means the profits available to overseas investors will be reduced accordingly. They will demand a lower price to compensate for this lower return—this will either come in the form of a fall in the stockmarket or in the pound, or probably a bit of both.

2. Labour plans to nationalise various utilities (railways, water, the Royal Mail and some energy) and to cancel some private finance initiatives…Continue reading

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Business and financeButtonwood's notebook

Picking a fund manager? The odds aren't great

WHO wants mediocrity? That is what a lot of people say when the subject of index-tracking, or passive fund management, comes up. They would rather choose a fund manager (an active manager in the jargon) who tries to beat the market by picking the best stocks. It does sound like a good idea.

The tricky bit is finding the right manager. The temptation is to look at past performance but fund managers rarely beat the market for long.

The average fund manager is always going to struggle to beat the market (this is a separate argument from whether markets are “efficient”). That is because the index reflects the performance of the average investor before costs. In a world dominated by professional fund managers, there aren’t enough amateurs for the professionals to beat. Even the hedge funds, those supposed “masters of the universe”, haven’t been able to do it; Warren Buffett looks set Continue reading

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Business and financeButtonwood's notebook

The bond market defies the doomsters

THE yield on the ten-year Treasury bond fell to 2.13% on August 28th, after North Korea fired a missile over Japanese territory. Investors tend to buy government bonds when they feel risk-averse. That will have come as a surprise to those commentators who have called the bond market a “bubble” that is sure to burst; one British magazine made this a cover story back in September 2001. Every time the ten-year yield falls close to 2%, press references to a bond bubble seem to increase (see chart; the yield is inverted).

It is not just the press. Investors have been cautious about bonds for a while; the vast preponderance of fund managers polled by Bank of America Merrill Lynch in January had a smaller holding than usual in the asset class, just as they did in January 2016. But while inflation stays subdued, and central banks maintain short-term rates at historically low levels, government bonds seem able to attract buyers. Japan’s government bond yields have been very low since the start of the millennium; those betting on a crash…Continue reading

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Business and financeButtonwood's notebook

Where might the next crisis come from?

TEN years ago, BNP Paribas, a French bank, temporarily suspended dealings in three funds, citing “the complete evaporation of liquidity in certain market segments of the US securitisation market”. Many people treat this as the start of the credit crunch but one can trace it back to the need for Bear Stearns to rescue hedge funds that invested in mortgage-backed securities in June, or the signs of home loan defaults and failing mortgage lenders that emerged in late 2006. The subsequent tightening of credit and loss of confidence in the banking system eventually led to the collapse of Lehman Brothers, when the crisis reached its height in the autumn of 2008 (see picture).

The inevitable question on the occasion…Continue reading

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Business and financeButtonwood's notebook

Capitalism and the absence of creative disruption

NINE straight highs for the Dow Jones Industrial Average might suggest that all is well with capitalism. But on the contrary, they could be a sign that things have been going profoundly wrong with the way the system is working.  

The main driver for the surge in share prices this year has been the strength of profits; second quarter profits for S&P 500 companies are around 12.6% higher than a year ago, according to Andrew Lapthorne at SG, a French bank. As the chart shows, relative to GDP, profits seem to be regaining their levels of recent years. And those levels are much higher than they have been in much of the post-war era (see chart).

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Business and financeButtonwood's notebook

A tale of two markets

THE DOW Jones Industrial Average closed above 22,000 on August 2nd, something President Trump is almost certain to mention in a tweet soon*. So it might seem as if the “Trump bump”, which began on the night of the election, is continuing smoothly. But the picture is a lot more complex than that as a look at the euro/dollar rate shows (see chart). The euro fell (and the dollar rose) between election day and the end of 2016. But then came a turning point. The euro has been climbing (and the dollar retreating) for much of 2017.

For dollar-based investors, that means European shares have been a much better bet this year. As of august 2nd, euro zone shares (as measured by the FTSE Euro 100) were up 19.9% since the start of the year, while the S&P 500 was up10.7%. Looked at another way, the American market has dropped by 8% in euro terms since February 2nd.  

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Business and financeButtonwood's notebook

Foreign investors snap up London's iconic buildings

LONDON’S skyline has altered a lot in the last 30 years. While it can’t match Manhattan or Chicago, there are quite a few trophy buildings that can be seen from this columnist’s office window (for the moment*). The British sense of humour means these offices often acquire their own nicknames, regardless of the developer’s intentions—the Cheesegrater or the Gherkin, for example.

And the buildings also tend to get snapped up by foreign investors (see map). The latest to go is the “Walkie talkie” at 20, Fenchurch Street which has been bought by Lee Kum Kee, a Hong Kong food company, for £1.3bn, the highest amount ever paid for a British building. Presumably the company, best known for its oyster sauce, is not planning to transfer production to the site; this is a punt on the London property market.

Ironically, it was only a year ago that many Continue reading

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Business and financeButtonwood's notebook

Foreign investors snap up London's iconic buildings

LONDON’S skyline has altered a lot in the last 30 years. While it can’t match Manhattan or Chicago, there are quite a few trophy buildings that can be seen from this columnist’s office window (for the moment*). The British sense of humour means these offices often acquire their own nicknames, regardless of the developer’s intentions—the Cheesegrater or the Gherkin, for example.

And the buildings also tend to get snapped up by foreign investors (see map). The latest to go is the “Walkie talkie” at 20, Fenchurch Street which has been bought by Lee Kum Kee, a Hong Kong food company, for £1.3bn, the highest amount ever paid for a British building. Presumably the company, best known for its oyster sauce, is not planning to transfer production to the site; this is a punt on the London property market.

Ironically, it was only a year ago that many Continue reading

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Business and financeButtonwood's notebook

The euro’s obituaries were premature

FIVE years ago, Mario Draghi, head of the European Central Bank, pledged to do “whatever it takes” to save the euro. At the time, many people were predicting that the euro zone would break up. But Mr Draghi pulled off the trick; no countries have left the single currency. Borrowing costs have come down and even Greece has been able to tap the markets.

Keeping the euro together may have been the aim of the game, but was it worth it? As M&G, the fund management group, points out, the record has been mixed. Economic growth has rebounded to a respectable 1.5% year-on-year. This is not stellar but it is hard for the euro zone to grow rapidly when its population is ageing; the IMF suggests a greater proportion of older workers may weigh on productivity growth.  

Of course, the euro zone could get more of the current…Continue reading

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Business and financeButtonwood's notebook

Britain: back to being the sick man of Europe?

IN THE 1970s, Britain was dubbed “the sick man of Europe”, a role previously played by the Ottoman empire in the late 19th century. A poor growth record since the second world war combined with terrible industrial relations (29m days lost to strikes in 1979) to make many ask the question “Is Britain governable?”.

The reason Britain joined what was then the EEC in 1973 (at the third attempt) was, in large part, a desperate attempt to find a way of forcing the country to become more competitive. Whether Europe was the key factor, or whether it was Margaret Thatcher’s reforms, by the mid-1990s, the trick seemed to have worked. In particular, London, which lost a quarter of its population between 1939 and the early 1990s, became a global, self-confident city, attracting expats from…Continue reading

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