It is nearly half a century since the UK had a real, full-blown energy crisis, as the soaraway oil price gave us power blackouts and the misery of the three-day week. Much has changed since 1974, but it seems we now have to learn the importance of energy security all over again. This time it’s the price of natural gas that has triggered the crisis and, like last time, all ways out are long and hard. Just as Edward heath called an election then to ask “Who’s running the country?” and received the answer: “Not you any more”, the consequences for the current government could be particularly painful.

As always with energy, the numbers are very large. The full cost of “socialising” the coming rise in domestic fuel prices is around £20bn. For comparison, the cost of the much-hyped boost to the NHS is set at £12bn.

This moment has been a long time coming, postponed by the delusion that getting rid of oil and gas and arrival at the sunlit uplands of net carbon neutral would cause so little pain that we would hardly feel it. The Climate Change Act, waved through parliament in 2007 almost unanimously, set the course along which the pollyannas at the Climate Change Commission have been pushing us. When Ed Milliband as Energy Secretary encouraged us down this primrose path, he disguised the real cost of renewable energy by adding it to fuel bills, perhaps in the hope we wouldn’t notice (we didn’t). Today the array of hidden green subsidies adds around £170 to the average bill.

If nothing is done in mitigation, it’s likely that the next two quarterly “price caps” would add about £700 to that bill. Those well below average income might have to choose between food and warmth, truly a cost-of-living crisis. Scrapping the 5 per cent VAT on fuel would not help these people. As it is, the price surge means that money which would otherwise be spent on goods bearing VAT at 20 per cent is needed to pay the heating bill.

Expanding the Warm Home Discount scheme is surely inevitable, but there’s a nasty surprise here too. The subsidy is recouped by adding it to the cost paid by the rest of us, so the more it is extended, the greater the rise in everyone else’s bills.

While gas is the misery of the moment, the oil price is also rising again. Western oil companies are under constant pressure to stop being oil companies, and their response has been to sell off assets to privately owned buyers that the green mob finds hard to reach. Unlike the oil companies, these buyers are essentially short-term, exploiting the assets and taking the money. As western production falls, the market power of producers like Russia, Iran and Saudi Arabia will increase along with the price.

Just as chancellor Tony Barber discovered nearly 50 years ago, there is no easy way out of the misery of a fuel crisis. In his case, a four-fold rise in the price of oil in a few months was an external shock that few saw coming. Today’s crisis is home-grown. Successive governments have imposed targets for electric cars and home insulation, while monstering oil and gas and havering over whether nuclear is part of the problem or the solution, without the slightest idea of how, or even whether, they can be achieved.

Unless and until there is something resembling a convincing strategy which recognises that we will need oil and gas for many decades before we reach the fabled land of carbon neutrality, the question that Edward Heath posed all those years ago is likely to get the same dusty answer.

Unsure of Shell

Us long-suffering shareholders in Royal Dutch Shell were given some information by the company last week. A reiteration of the share buy-back programme and the intention to pay 20-30 per cent of cash flow to shareholders accompanied lots of stuff about the fourth quarter, including such gems as “Cash flow from operations excluding working capital is expected to have significant outflows from variation margin impacts.”

Who knew? If the oil analysts understood this, it caused them no surprises and the share price barely twitched. We have some more important dates coming up, including publication of the consensus guesses from those analysts (27th January), the arrival of single Shell plc (31st) and the fourth-quarter numbers on February 3.

Nobody could accuse the company of lack of operational disclosure, but it is hard to see what last week’s announcement contributed to investors’ understanding of this widely-owned business. The buy-backs, we’re told, will go on “at pace”, that current favourite word for dynamic CEOs, which generally means “whether it makes financial sense or not”.

This is fine for the increasing band of holders who want out of oil at almost any price, but in the long term, it’s the dividends that matter. In Shell’s interminable statements, the dividend barely gets a mention. Shell used to have a stodgy, predictable policy – effectively, that the payout would not go down and would occasionally be raised.

That lasted over half a century until April 2020, when the oil price bizarrely went negative, the board panicked and slashed the quarterly payout from 47c to 16c. Two gear changes later, it’s 24c, growing at 4 per cent a year, but who knows what Feb 3 will bring? Some idea of a proper policy from new chairman Sir Andrew Mackenzie would be appreciated. It might even help the battered share price.

Causing trouble again

Terry Smith is not an easy man to like, but as one of the world’s finest stockpickers, the legion of fans with £29bn of their money in his care can live with that. This week he has been making trouble, challenging the smug world of ESG by suggesting that the Unilever board might have let the whole thing go to their collective head.

He hit a nerve. After many years when the company seemed to have found the way to grow profits and social responsibility together, the shares have had a miserable time lately, lagging competitors like Nestle and Procter and Gamble. Unilever shareholders had stopped the Dutch power grab, allowing the business to be unified in London, but the languishing share price exposes the real cost of trying so hard to be good. Mr Smith’s Fundsmith is one of Unilever’s biggest holders. He is not selling out yet, but this might help the board remember whose capital it is they are using for their good causes.

A Long Time in Finance is a 20-minute Podcast with Jonathan Ford and me, published weekly on Fridays. Find it on Spotify or the Apple app store.

Surely the most extraordinary aspect of the criminal case against Elizabeth Holmes is the verdicts; out of eleven counts, she was guilty on only four, and acquitted of three relating to damage to patients. All the guilty verdicts related to the peculiarly American crime of wire fraud. As Matt Levine frequently points out, everything in the US is wire fraud, since it only needs one phone call or email to qualify. In the eyes of the jury, the misery, pain and distress inflicted on the victims of Theranos’ dud blood tests were insufficient for a guilty verdict.

The US justice system being what it is, there was always the chance that the jury would be seduced by Ms Holmes, just as so many big-shot investors had fallen for her charms. She is appealing against the verdicts, which to readers of Bad Blood, John Carreyrou’s brilliant account of the scandal, is hardly a surprise.

A significant proportion of the hundreds of millions of dollars the company raised from investors went not on the business it was supposed to be pursuing, but to hiring America’s most expensive lawyers. They were deployed against former employees, doctors who dared to suggest that the company’s finger-tip blood test was a sham, or Carreyrou’s employers at the Wall Street Journal. Intimidation by the threat of legal costs would have stopped a lesser investigation.

As others have pointed out, the atmosphere for high-risk start-ups in America has become more febrile rather than less in the years since Theranos collapsed. Wannabe investors with hundreds of millions to spend often have no time to do even the basic due diligence before someone else has stepped in, and you’ve missed the boat. For the rest of us, one moral of this story stands out: avoid any company which responds to criticism by reaching for rottweiler lawyers.

The MPC’s wake-up call

Someone in the Bank of England has a sense of humour. “Can’t we just print more money?” is a new publication which is surely aimed squarely at our financially incontinent prime minister. Unfortunately, it might also be aimed at the Monetary Policy Committee, which has been doing just that ever since the banking crisis 13 years ago, buying government debt with paper money it churns out of its Debden printing works.

This has had a magical effect on the price of the said debt, and has ensured that successive governments have been able to borrow unprecedented amounts at unprecedented rates, often close to zero. This process, called Quantitative Easing, has indeed been a magic money tree, but trees do not grow up to the sky, and this one is starting to look blighted.

It’s unfortunate that the book was not available to the MPC last year, when the first serious stirrings of inflation became apparent. Dismissed by the members as “transitory” and the result of covid-driven temporary shortages then, it is now getting established. This week Next, Britain’s most effective non-food retailer, forecast 6 per cent price rises for 2022.

Measured by the Retail Prices Index, which the Bank would rather we ignored, it is already over 7 per cent. Trades unions are gearing up their wage demands, while employers are having to raise wages to attract or keep employees. Energy costs have gone up dramatically. Manufacturers are raising their prices. Capital Economics now expects inflation measured by the Consumer Price Index to reach 7 per cent this year. The prospect of a wage-price spiral is very real, even before the cuts in living standards hit in April.

Perhaps the new publication, due out in May, will remind the MPC that its primary mandate is to keep the rise in the Consumer Price Index as close as possible to 2 per cent. As it is, the rise in Bank Rate to 0.25 per cent is hopelessly behind the curve the MPC is supposed to anticipate. So the answer to the question in the book is that, in the end, printing too much money leads to inflation, which, once established, needs the painful medicine of higher interest rates to stop.

All that glisters

Would you rather have a gold bar or a bitcoin? Neither carries any sort of guarantee, except that they will always have scarcity value, gold because it is hard to find, and bitcoin…well, because it has been designed to be limited to 21m coins, and each succeeding coin is more expensive to mine. Both are stores of value as long as people believe they are, in the case of gold a few thousand years, in the case of bitcoin a few thousand days.

Now the analysts at Goldman Sachs have decided that the coin will be a better store of value than the metal. The logic here is that the stock of bitcoin is currently worth less than a third of the $2.6 trillion stock of gold held as investment, so they suggest that each coin could be worth $100,000, or over twice today’s price, to get to a fifth of this “store of value” market.

Well, maybe. Bitcoin fans seem impervious to warnings that the whole edifice is little more than a sophisticated Ponzi scheme, and unlike the precious metal the coins are weightless and beyond the reach of Goldfinger thieves. Just don’t forget your access code.

Forecasting is difficult, as they say, especially for the future. Yet a pair of ugly twins is visible, in the shape of inflation and interest rates, which are likely to dominate the political and financial debate in 2022. Inflation is already with us, and measured by the “discredited” but widely followed Retail Prices Index, is running at over 7 per cent. The generation-long fall in the cost of money appears to be coming to an end with the symbolic rise in Bank Rate. More significant rises look nailed on.

The runaway price of gas will ensure that inflation stays high into the spring.The formula for the domestic price cap will impose another rise on consumers just as the rise in National Insurance hits pay packets in April. This rise is another government sleight of hand. Billed as 1.25 per cent, it is in fact a 2.5 per cent payroll tax increase when the parallel rise in employer’s NI is added in.

Furthermore, it is not paid by those who are retired, regardless of income. It is neither national nor insurance but a dishonest way of taxing the income of those of working age. The Resolution Foundation calculates that the rise will cut an average of £600 from next year’s wages, while it expects fuel bills to go up by the same amount. The trades union leaders’ description of this as a “cost of living catastrophe” is hardly an exaggeration.

This pincer movement of rising prices and falling incomes will force government action, and recycle some of the extra tax raised from NI into unplanned spending. A direct payment to poorer households is bureaucratic and certain to have awkward side-effects. The cost of the subsidies to wind and solar, long buried in the gas bill, has been exposed, revealing the real price to consumers of the dash to go green. The renewables lobby is pressing for the subsidy to be moved to general taxation, which would conveniently allow the true cost to disappear from public view once more.

The neatest way to soften the blow would be to take VAT off domestic energy, as the Conservatives once promised to do, before the European Union’s VAT rules prevented any cut below today’s 5 per cent.

This would do nothing for the underlying problem – indeed, any attempt to keep the price down would stimulate demand – which is the failure to exploit Britain’s own reserves. It’s worth repeating that the British Geological Survey estimated the Bowland basin gas reserves under north west England at 1300 trillion cubic feet (central estimate); extracting just 25 trillion would be worth £1 trillion at today’s elevated prices. There are still fields in the North Sea which are commercial if the climate change hysteria can be faced down. It would take political courage of an order not seen by this administration to do so.

Whether domestically or elsewhere in the world, today’s prices will stimulate a frenzy to find more hydrocarbons, just as the prices of the exotic metals needed for electric cars are stimulating efforts to find them outside China. In commodities, the key phrase is: Today’s shortage is tomorrow’s glut.

If you wish to be optimistic about inflation in 2023, here is Capital Economics’ Commodities Watch: “While there isn’t a single cause of these shortages, there is one common theme: in all cases, prices now appear to be close to a peak (if they haven’t peaked already). The prices of commodities which have risen most are likely to see the largest falls over the next year or so.”

So it is likely that today’s inflationary surge is just that. The monetary background is ominous, but few of the other conditions for a sustained rise in prices are present. Labour is organised only in the public sector, as the trades unions have failed to make headway recruiting in the productive sectors of the economy. The shortage of components, most obvious in microchips, is already stimulating investment in new capacity across the world, which implies a glut in 2023.

None of this will prevent the steady rise in interest rates which is needed to bring the economy back towards a balance between capital supply and demand. Dearer money will accelerate bankruptcies of zombie businesses which have been kept alive by free money, and start to show the cost of the government’s fiscal incontinence. Rising interest rates should, eventually, stop the runaway inflation in house prices, but the impact on the public finances will be quicker and more dramatic.

Economist Michal Stelmach at KPMG expects three further Bank Rate rises by the end of 2022-23, which “could add as much as £11bn to borrowing that year.” On the other hand, the stock market is signalling that the UK economy will put in a sprightly performance, as the forced savings from the pandemic start to get converted into holidays, nights out and new cars for old. The new year may make us poorer, but if the state of the public finances forces more prudent behaviour from this fiscally incontinent administration, it may yet be worth while.

It’s an ill wind

It is impossible to miss the ads for cheap champagne, sandwiched between exhortations to get jabbed. The shops are stocked with the stuff which they expected to sell to restaurants and clubs over Christmas before we decided to hunker down at home. Sainsburys still have some Heidseck for £14, although the offer of a further 25 per cent discount for a dozen evaporated before you could get the capsule off. Tesco’s £10 (Clubcard) De Vallois lasted little longer. Nicholas de Montbart is £12.49 at Aldi, Comte de Senneval £13.99 at Lidl.

You have never heard of any of them, but it doesn’t matter. Supermarket champagne should not be drunk on arrival. Keep it for a year, or preferably longer, and be amazed at how it has transformed into something you can offer your friends which they won’t empty into the nearest potted plant.

Fizzy New Year!

Oh no! The cost of borrowing £100,000 has gone up by £150 a year! How could the Monetary Policy Committee hit us so hard while Covid rampages through the country? In fact, yesterday’s rise in Bank Rate to the dizzy heights of 0.25 per cent mostly betrays how absurdly low it had become, as if nearly-free money was the answer to all the nation’s woes. Still, we rejoice at a sinner that repenteth, especially when the sinner has been under such political pressure to delay (again) the moment to admit economic reality.

In practice, the increase in borrowing costs will have very little impact outside the money markets. Some of the unprofitable mortgage offers will disappear, but for most consumers the cost of a loan detached itself from Bank Rate long ago. Still, it is a valuable signal which breaks the spell, and a timely reminder that interest rates can go up as well as down, something of a novelty for much of the UK population.

Such a small number will have no discernible impact on inflation, which the Bank of England now expects to hit 6 per cent. It’s just as well the MPC is pretending to ignore the “discredited” Retail Prices Index, which has already hit 7 per cent, the highest for more than 30 years, and could well go up further when the next domestic gas price cap is imposed. The impact of that will co-incide with the 2.5 per cent rise in tax from National Insurance increases in April, to produce a vicious cut in living standards for the worse-off quarter of the population.

This is hardly the fault of the MPC. It is far more responsible for dithering for so long and pretending that 0.1 per cent Bank Rate was appropriate. The fault goes back to Mark Carney, the previous governor whose predictions were so impressively wrong and who missed chances to start on the road to sensible interest rates.

Perhaps, since bottling the decision last month, the committee listened to the words of Mr Carney’s predecessor, which finally allowed the scales to fall from their eyes. Last month Mervyn King spelled out brutally just how dangerous a path we are on. In what was dubbed his “King Canute lecture”, he warned that: “The case for substantial monetary expansion in March 2020 was framed as a response to ‘dysfunctional markets.’ But the monetary injection was not withdrawn once financial markets were operating normally. The stimulus was then justified in terms of ‘supporting the economy.’”

This latter is little more than wishful thinking, or a determination to ignore how important money is in influencing future inflation rates. Milton Friedman’s mantra that “inflation is always and everywhere a monetary phenomenon” has been quietly forgotten, when years of monetary expansion failed to produce inflation.

Well, we are about to find out whether it was just that the response has been much slower than it used to be. Nowhere is UK inflation more embedded than in the housing market, its double-digit rise supported by a raft of subsidies like the Green Homes Grant, now scrapped, which reached 47,500 homes rather than its 600,000 target, with admin costs of £1,000 per home. That “slam dunk fail” as Meg Hillier described it, is a mere rounding error when set against Help to Buy, the incentive which doubled housebuilders’ profit margins and boosted demand already inflamed by the (entirely unnecessary) stamp duty concessions.

Only this week, with timing that at least proved there were no leaks from the MPC, the Bank eased the rules to allow aspiring homeowners and their lenders to take on more risk. Successive policies which have encouraged this, accompanied by mortgage rates below inflation, have succeeded in taking prices and thus home ownership beyond the reach of millions for whom it is a natural choice. The remedy is not yet more subsidies, but conditions which reverse some of the recent rises in house prices. In essence, this means dearer money and tighter, rather than looser, lending conditions.

It is far from clear whether the MPC has yet grasped this, since the programme of money printing known as quantitative easing is being allowed to run on. The Bank buys government bonds, keeping the price artificially low, and allowing the government to borrow more cheaply. Stopping it yesterday would have sent a more powerful signal that this particular game is up.

More generally, it looks as though the generation-long bull market in bonds, driven by low inflation and minimal interest rates across the world, is finally coming to an end. There have been moments like this before, and the market has rallied, but the prospect now is for more rate rises to come. Today, lending to the UK government for 10 years will earn just 0.83 per cent per annum. Set against the Bank’s own forecast for inflation, that looks like money down the drain.

Search for “Cambo” on Royal no-longer-Dutch Shell’s website, and the answer comes up “0 results.” Please forget that we ever thought of exploiting this oilfield, is the unspoken message. Of course, a little North Sea prospect hardly registered on the Shell scale, even before the board crumbled under pressure and pulled out. The calculation of too much political pain for another marginal development shows how oil companies are mesmerised by the destructive antics of a tiny minority of fanatics who know they are right and everyone else is wrong.

Shell might just as well have admitted as much. Its comment that the economics are not strong enough at present is farcical. The oil price has risen by a half and gas prices have trebled in the last year, and there was no hint last June, when the formal development plan was submitted, that Cambo might not be a commercial proposition. Shell’s majority partner in Cambo, Siccar Point Energy, is whistling cheerfully about future development, but without Shell’s technological clout, Siccar may lack the expertise, and in the current climate any publicly listed oil major would hesitate before stepping up.

It’s not just the oil companies that are running scared. The Offshore Petroleum Regulator for Environment and Decommissioning (the clue is in the name) is as independent as all other regulators are in dealing with this shameless government, where short-term popularity over-rides all else. Any regulator under political pressure can find more reasons why it’s essential to spend more for health’n’safety, while the lack of explicit UK government support for Cambo is surprising only because it would have presented an opportunity to put one over Nicola Sturgeon when she turned against the project.

Such is the background as Britain blunders towards a cold, high-cost energy future. The immediate crisis is in gas, where a combination of below-average early winter temperatures in continental Europe, a lack of wind in the North Sea, and reserves at their seasonal lowest for eight years is ensuring that what looked like a spike in prices may turn out to be a plateau. It is unlikely that President Putin will feel moved to increase supplies of Russian gas – and some observers reckon he can’t anyway, for technical reasons.

The UK has no reserves to speak of, and retail companies will be obliged to keep paying up, ensuring that more of them fail, thus raising the burden on those that remain, who can pass it on under the rules. When the next price cap is fixed, the impact on domestic prices will be dramatic. It will come in just as pay packets are being docked by the rise in National Insurance payments next April.

More state intervention to soften the blow would seem inevitable, regardless of the baleful impact on the public finances. At about the same time, it is a racing certainty that some of the failed energy companies will be revealed as frauds, mechanisms for gathering capital by direct debit and paying it out to owners who have disappeared.

The longer term picture in the UK is of the nation’s hydrocarbon resources being sacrificed for a negligible reduction in world output of CO2, more reliance on imports from unsavoury regimes and less employment at home, all in pursuit of the myth that heat pumps, insulation and renewables can replace oil and gas. Perhaps we shall all be powered by moonbeams instead. Cambo is an indicator, not a game-changer, but if Siccar can find partners for its project that are not scared of the Extinction mob, we should be grateful for small mercies.

For the managers, not the owners

Why do fund management groups merge? The stated objective is to offer more, and by implication better, expertise in understanding markets and picking stocks. If 20 analysts is good, then surely 40 analysts is twice as good! If only life was so simple. The record shows that mergers are generally followed by corporate blood-letting, internecine strife or just miserable performance.

Exhibit A here is Staberdeen, the shotgun marriage of Standard Life and Aberdeen Asset Management, which after internal upheavals emerged as Abrdn. The shortage of vowels in the name might have been solved with the purchase of fund administrators ii, but sadly there seems to be no intention to call the new company Abirdin.

Other miserable marriages include Henderson and Janus, although Jupiter’s merger with Merian might do better, despite much guff about heritage and innovative management. As is traditional, some of the funds will be renamed, thus making it harder for long-term holders to keep track of their investment.

This week’s get-together is Liontrust’s takeover of Majedie Asset Management, itself no slouch in hoovering up other managers, despite emphasising its “boutique” nature. The deal is apparently “a compelling cultural and strategic fit” which will be a comfort to the owners of the £5.8bn that Majedie manages. They might prefer good performance from the funds, but it will be impossible to work out what difference, if any, this compelling fit makes.

So what’s the answer to our question? Simple, really. Fund managers, and their managers, are rewarded with a percentage of the money they control, so the bigger the sums, the bigger the rewards. Bigger groups can afford more salesmen and promotions, and intermediaries will always seek the comfort and perceived lower risk of the bigger funds. Growing by outperforming the benchmark is hard, slow and uncertain. It’s so much easier to bring in new capital.

Neil Collins and Jonathan Ford have today launched a podcast, A Long Time in Finance. Go to the App store or Spotify to find out why it’s not easy being green.

Paul Marshall is not a happy man. The boss of $55bn hedge fund managers Marshall Wace writes in the FT that London’s stock market has become a global backwater, a stagnant pool left behind by the surging rivers in New York and Beijing. The reason, he reckons, is British investors’ supposed obsession with income, which forces companies to pay so much in dividends that there is little left for investing in tomorrow’s growth. The UK’s biggest quoted companies are stodgy businesses with high yields and a dreary outlook, while those with genuine growth prospects do not get the rating they deserve.

The immediate cause of his ire is the somewhat unlikely case of Scottish & Southern Energy, which last month produced some perfectly respectable results, and promised to spend a lot more plonking windmills on the Dogger Bank in the North Sea. The shareholders were invited to contribute to this adventure by taking a cut in the dividend. Sir Paul’s fund has £130m invested in SSE. The shares fell by 5 per cent on the news.

He decided that it was sad to see this, given the following wind (sorry) of government subsidies and incentives for renewables, and he surmised that those short-sighted income funds were dumping the shares because of the dividend cut. Well, maybe. Alternatively, the price fall may reflect the difficulty of turning a conventional electricity company into one powered by the wind – which as we saw for several weeks last month, cannot be relied upon to blow when we want it.

However, Sir Paul’s more general point has some force. The London Stock Exchange is indeed a backwater when measured against the trading volumes and share ratings in New York or Beijing, but the harder question is what can be done about it. The FTSE 100 index contains two of the world’s major oil companies, two of its biggest tobacco companies, three world-scale banks and a major mining company. They can hardly be thrown out because they have poor growth prospects. Incidentally, they have been little help to the income funds Mr Marshall so dislikes; All bar BAT have cut their dividends in recent years.

In the cold logic of fund management, the key measure of success is not performance, nice to have though it is, but the ability to attract more capital on which fees can be charged. If calling your fund an income fund brings in the money, then the manager can hardly be blamed for concentrating on income.

One way it’s suggested to release London’s crouching tiger is to scrap some of the rules which companies must follow to get a proper listing, although this is a two-edged sword. Many fund managers are grateful in hindsight that they couldn’t buy shares in The Hut Group because of its voting structure. The shares soared, and have since collapsed faster than a mobile home in a gale. This week the Financial Conduct Authority dramatically widened the goal to allow future Huts to get in, a move that should help somewhat, although pricing exciting new issues remains hard. So far, half of this year’s initial public offerings in the UK are below their launch price.

Other companies might be put off by the growing influence of things that seem to have little to do with shareholder value and which might actually damage returns, particularly ESG, environmental, social and governance. A survey from currency brokers HYCM found that less than half of affluent private investors gave it priority when investing. Besides, with no definition of what ESG actually is, companies may struggle to comply. Never mind, Marshall Wace is on the case. “Marshall Wace endeavors to integrate Sustainable Investing principles into various investment strategies. We consider ESG factors and data for idea generation, identification of thematic opportunities and risk assessments”. Best of luck with the North Sea windmills, then.

Simple? Efficient? If only…

Who says the government has no sense of humour? Here is Lucy Frazer, financial secretary to the Treasury, explaining why HMRC will not be told to change the rules on capital gains or inheritance tax: “The government will continue to keep the tax system under constant review to ensure it is simple and efficient.”

Perhaps Ms Frazer finds filling in the tax return easy-peasy, but whatever else the system is, simple it is not. Tolley’s current tax guide has 45 chapters and has doubled in size in a decade. The Office of Tax Simplification (the clue is in the name) had recommended reform of CGT to bring the rates into line with those for income tax, by lowering the tax-free threshold and increasing the rate. No thanks, said Ms Frazer, it would all be too difficult, with knock-on effects and more work for hard-pressed tax inspectors. Into the long grass it goes.

It may stay there until after the election, but the Treasury’s desperate need for more money will surely ensure that the proposal will be retrieved after that, whatever the election result. The contrast between the tax on income and that on capital will become more painfully obvious from April, when National Insurance (effectively a second income tax) rises by 2.5 per cent, including the employer’s contribution. The growing gap between the tax on the lower-paid and that paid by the owners of capital is a direct affront to “levelling up”, but perhaps that was what Ms Frazer meant about simplicity.

No LV lost here

Next week the policyholders of LV= are scheduled to vote on their management’s proposal to sell the business they own to a private equity firm, Bain & Co. There is a strong chance that they will decline the offer of £100 each and a boost to with-profit savings plans. Judging by the last-minute burst of advertising, it seems that the company’s management has noticed. Please don’t call it panic, call it a carefully calibrated campaign to ensure that there is a strong, informed turnout.

Not all advertising is wasted, so it may be enough to turn the tide, but the LV board has not distinguished itself in this affair, and there seems no pressing reason to sell out of mutuality just now for the price of dinner for two.


Rishi Sunak, Britain’s incontinent chancellor, is busy painting himself as the adult in the Downing Street room but, as they used to say on dud cheques, words and figures do not agree. This week the bill for his bung to homeowners in the form of the stamp duty holiday came in at £6.4bn, with half of the saving going on houses costing over £500,000. It does not need a degree in economics to work out that if you cut a tax and make something cheaper to buy, the sellers will quickly adjust their prices to capture the change.

It is not as if we have no recent examples of this process at work. The Help to Buy scheme immediately allowed housebuilders to raise their prices, and effectively doubled their profit margins. The first-time buyer was helped, all right, but at the cost of having to pay more in the first place – now a record 5 1/2 times his income on average, according to the Nationwide Building Society.

The entirely predictable result of the stamp duty holiday has been another twist to the house price spiral, with last month’s Halifax house price index 8.1 per cent up on the year before. Quite why this form of inflation alone is considered good news betrays our addiction to domestic property, and a government terrified of the consequences of the fall in prices which is so long overdue.

The fall may come closer next month, unless the Monetary Policy Committee at the Bank of England bottles it again and fails to raise Bank Rate. It is hard to see what more the MPC needs before pulling the trigger, but like central banks everywhere, it is in thrall to financial repression, that process which demands trivial interest rates to keep the cost of government deficits (and mortgages) down. The prospects should this process one day end are so hideous to contemplate that it does not take much to defer a difficult decision for another month, whatever the statistics say. This is what Mervyn King described this week as “the King Canute theory of inflation”. Let’s hope the waves are paying more attention this time.

Don’t bother to protest at executive pay

It’s always sad to see another City tradition fading away, and the annual protest about executive pay will be missed more than most. It will not disappear entirely, as the business pages of the newspapers will continue to work up their conventional indignation, but they will not be joined by the market’s largest investor. Legal & General Investment Management has decided that it will no longer complain about boardroom fees, on the grounds that the companies take no notice of their complaints.

Here’s Angeli Benham, senior global ESG manager at LGIM, talking to the FT: “For example, they write to us saying they’re going to increase the chief executive’s bonus from 150 per cent of salary to 200 per cent of salary. Our feedback is to say LGIM cannot support that, but they do it anyway.” Ms Benham does not add that since the bulk of the £1.33tn under management is in tracker funds, the offending executives know that any suggestion the shares might be sold is an empty threat. However much fuss she makes, LGIM will hold the shares if they qualify for the tracker in question, and not if they don’t.

As she also does not add, the rewards to her colleagues at the top of L&G are, ahem, highly competitive, so a period of silence would at least avoid charges of hypocrisy. However, she is surely right to point out that boards take no notice of shareholder protests, even if we can understand why the payments are being made. In recent years a whole new industry has sprung up, specialising in setting executive rewards. The report from the rem. com. in the annual accounts is frequently 30 pages or more, almost impenetrable to outsiders, and justifying the happy outcome for the execs, whether or not the shareholders have prospered.

Ms Benham is finding other things to protest about, promising to “educate the market on areas like income inequality and climate change”, presumably because the average executive has failed to notice them. As one of comments to the FT article put it: “Raising important issues and then being totally ignored by management is exactly how most employees at LGIM feel.” Cruel, cruel.

How long have you got?

In between all the blood-letting at the Daily Mail (out with the new editor and in with the old) the Rothermere family is finding time to take the rump of Daily Mail & General Trust private on the cheap. Since they own a majority of the shares along with all the votes, it’s hard to see why they wouldn’t. One of the buyer’s most effective weapons is the complexity of the terms being offered to outsiders, and Rothermere is a serial offender here.

This offer is 155p a share in cash, 568p and 0.5749 shares in Cazoo (a second-hand car business) as a special dividend (subject to tax adjustment) for every DMGT A share. Compared to the last deal, less than three years ago, which squeezed the last voting shares from outside hands, this is quite straightforward. Then a holder got 0.19933 of a Euromoney share, 68.13p in cash, and saw precisely 0.46409 shaved off each A share he started with.

It was all a fine demonstration of the investment banker’s art, but it was essentially impossible to work out whether this division between insiders and outsiders was fair. This time the outside shareholders have the choice between accepting an offer which woefully undervalues their holding, or being locked in as a non-voting minority in the hope that one day the irritation factor will produce an offer closer to the value of the group. Given the timescale that the Rothermere dynasty works to, it could be a very long wait.

Well now, here’s a surprise: an intelligent decision by the board of Royal Dutch Shell. It breaks a long sequence of bloomers, going back to the over-generous bid for BG Group six long years ago. But let’s start with the good news, to abandon the awkward dual-listed structure and bring the business to the UK, clipping Royal Dutch off the name en route. As has been suggested here and here, this would have been entirely reasonable after a judge in a lower court in The Netherlands ruled that she knew better than the company and demanded that it do more to reduce its CO2 emissions. A clear case of judicial over-reach, the ruling broke new ground in dictating how a multi-national company should behave to reach some target, even before it had committed any offence.

Shell did complain, in a low-key way, and has appealed the ruling. An earlier move to emigrate would have sent a clear message that there is a cost to crowd-pleasing rulings like this one. As it is, Shell’s new share buy-back policy provides a handy cover to the decision to go, allowing the company to waffle on about how difficult it all is when there are two classes of share. That the classes are there in the first place is a direct result of Dutch with-holding tax on dividends. When the Unilever directors decided it would be a good idea to move the share quote to Rotterdam (sic) the Dutch government promised to reform the tax. When the power play was stymied, and Unilever decided that London was somehow better than a Dutch shipping port, the promise was quickly dropped.

Now, of course, the carrot is being exhumed as part of the Dutch government’s desperate attempt to prevent the move. Ben van Buerden, Shell’s CEO, is not as transparently partisan as Unilever’s Dutchman, who paid the price with his job shortly afterwards. Unfortunately, the charge sheet against Mr van Buerden is already quite long enough. When Shell was paying £47bn for BG, he explained how it would underwrite the dividend for years to come. Well, four years to come, as it turned out, before coping with the debt run up to pay for BG became too much.

Following that strange moment in April last year when the price of oil became negative, the Shell board panicked and slashed two-thirds off a dividend that had only gone up (slowly) for the previous 50 years. Just six months later, it was raised (a bit) along with routine corporate waffle about sustainably growing it in future. Six months later, it was raised again, making three different policies in less than two years. Five weeks ago, when asked whether the company planned to “do a Unilever”, Mr van Buerden reeled off a highly technical list of why it was not worth doing. For a business that must plan for the long term, it is less than impressive.

Mr van Buerden is already serving out time, and while his successor will not have to seek approval of Shell group plans from the eccentric Dutch courts, the phenomenon that produced the ruling is not confined to The Netherlands. The climate hysterics have discovered a potent weapon for winning judgments right across the West, exploiting poorly-drafted environmental legislation and judges who are constantly told about evil oil companies. For many fund managers. the possibility of reputational damage for being seen to associate with “polluters” far outweighs the potential reward from holding oil company shares. Far better, they argue, not to think about them at all.

The feeling is mutual

The motto of the Backscratchers’ Mutual Friendly Society is: You scratch my back, and I’ll scratch it too. Of course this would not apply to the Liverpool Victoria Friendly Society, or LV= as it is now excitingly rebranded, in its slow-motion waltz into the arms of new ownership, if not quite new management. This never-ending process seemed to produce an unlikely denouement with the preferred partner being Bain & Co, a private equity business.

It is hardly an obvious fit, but the policyholders might have worn it until they saw the pitiful rewards they were being offered to approve: £100 each for the 1.16m “members”, and a modest boost to the policy value of the 297,000 with-profits policyholders. (LV=’s general insurance business was sold last year). Had chairman Alan Cook (he of the Post Office persecution of innocent sub-postmasters) and CEO Mark Hartigan (salary £1.2m, and likely to stay on with a private equity rewards package) not havered around for a year, and adopted their “don’t bother your pretty little heads with the details” approach, they might have got the deal approved.

That looks highly unlikely now. There is hardly time before next month’s meeting to produce the workings behind these numbers, even if Messrs Cook and Hartigan finally decide to publish them. Causing trouble on the sidelines is Royal London, which has indicated a marginally higher bid than Bain’s £530m, but could offer continued mutuality, or ownership by the policyholders, if it chose to. The LV= members might prefer that, even if it meant giving up the fabulous riches of £100 a head. Either way, persevering now with the meeting to rubber-stamp the Bain proposal looks like a bad idea.

Powerhouse breakdown

The economic cost of the HS2 rail line was always going to outweigh its gains, but it now appears that the political cost is pretty steep, too. No analysis of the line, inside or outside government, came close to making an economic case, and over the years one justification has followed another, from the advantage to business from getting to/from Birmingham a few minutes faster, to relieving capacity pressure to Liverpool and Manchester. Even before Covid provided all those extra empty seats, that looked unconvincing.

There have been many opportunities to scrap the line – even now, barely a tenth of the total cost has been spent digging up The Chilterns and demolishing half of Euston – but the most egregious reason to go on was the “level up the north” routine. Now one northern arm has been chopped off and the hapless Grant Shapps has to justify the amputation on behalf of his boss.

This venture was doomed from the start, as almost everyone outside government pointed out. It might have made some sort of sense if the work was started from the north, as our rail correspondent IK Gricer has long argued. Instead, as the website Conservative Home observed, “we have a very British solution – a half-built railway.”

Have you got your ESG investment? Do you get a tiny warm glow knowing that your Widow’s Mite is nudging the world’s big businesses towards better behaviour? As with the song of the Old Dope Pedlar, who is doing well by doing good, money has been pouring into ESG, and almost every advertisement from open-ended funds soliciting capital burnishes their green credentials. Many of them promise to invest only in companies that meet environmental, social and governance standards, implying that investors can indeed make an above-average return as well as saving the planet by buying these funds.

The suggestion is nonsense, of course. When an oil company sells its fields, the CEO may feel virtuous for producing less CO2, and be pleased to get the activists off his back, but the buyer has no intention of letting the black stuff rot in the ground, and a private company can get away with corner-cutting. If a bank decides not to lend to support any more mines, there are plenty of other lenders, and there is almost no evidence of so-called polluters having to pay a penalty interest rate in the bond markets.

It may be nonsense, but it is convincing nonsense. The primary task of a fund management business is not to enrich the customers, but to gather more capital. If looking green brings in the dosh, then green the business will look. Depending on how you measure it, funds in the US promising good ESG behaviour now cover a third of all funds under management. So is ESG marketing just “cynical, and occasionally meaningless, jargon aimed mainly at asset gathering and fee optimization, as opposed to any useful social or societal objective”? Michael Edesess certainly thinks so. Amplifying his work in Advisor Perspectives, William Bernstein has analysed ESG and non-ESG funds in the US run by the same management houses. In “The futility of ESG investing” he concludes that the non-ESG funds outperformed the others. It’s likely that the same would apply in the UK.

This is not merely a short-term effect. Mr Bernstein’s analysis of sector performance over the last century puts tobacco and alcohol in the top five out of 40 categories, despite decades of efforts to demonise them. “No matter how much you or I might abhor companies that pollute the planet, gouge the sick with criminally high pharmaceutical prices, produce dangerous weapons for public purchase, or poison our democracy with dangerous conspiracy theories, we can’t make the shares of those companies disappear; someone will own them, and the more abhorrent those companies are, the higher the return those shareholders will reap.”

It’s no wonder that retail investors, or indeed activists, are confused. A recent survey showed that two-thirds of those calling themselves professional investors struggle with defining exactly what ESG means, because the agencies that offer to rate these qualities produce wildly different scores at company level. When the Association of Investment Companies asked investors what they considered most important, ESG came fifth in their priorities.

Duncan Macinnes at fund managers Ruffer has a slightly different explanation for thinking that oil company shares are not the ESG villains they are routinely painted. His portfolios are overweight oil, on the argument that the crude price will continue to reflect the lack of new supplies as the majors wind down exploration to provide the financial fuel to invest in renewables. Mr Macinnes guesses this will release $20bn over five years for BP alone. Some, perhaps much, of that will be wasted, but if the company really can emerge as a champion of green energy, those dumping the shares today might look rather foolish.

Primark: dearer than the clothes

There were many warm words this week for Associated British Foods, better known as the owner of Primark, purveyor of dirt-cheap clothes to the masses. It has been quietly expanding into the US, that graveyard for UK retailers, and so far, so good, doubtless helped by its pledge to stay this side of the Mississippi river to avoid overstretch.

ABF is controlled by the Weston family, and is famous for taking the long view (and for resisting pressure to spin off Primark from British Sugar and its other food interests). It is now rewarding shareholders with a new, more expansive, dividend policy, which was good for a 10 per cent jump in the share price. Yet for all the plaudits about what a good company it is, ABF shares have not been a great investment. Investors who missed the jump in the price in 2012, as the market woke up to the prospects for Primark, have endured a negative total return according to Morningstar.

This is a fine company, and a worthy flag-carrier for British retailing. It may be a leader when it comes to ESG. It may even conquer the world’s toughest retail market. It may indeed be at “an inflection point” as the veteran Clive Black at Shore Capital averrs, but at £20 a share, a price first reached eight years ago, it is already priced for something close to perfection.

“If you take away supply but demand does not change, the only thing that happens is prices go up.” This is surely so obvious that it does not need stating, but it seems that Bernard Looney feels he still has some educating to do. The boss of BP could hardly complain about high oil and gas prices, which have turned the company into a “cash machine” in the last few months, but then he invited the climate activists to consider the effect of stopping hydrocarbon extraction from the North Sea.

The world is going to need oil and gas for many decades yet, however fast other energy sources grow, and each barrel that is not pulled out from beneath Britannia’s waves must be replaced by one from somewhere overseas. We are already seeing how Russia can play global politics with the supply of gas, as prices soar and small energy supply companies fail. Less output from the North Sea spells more dependency on the likes of Saudi Arabia, Iran and Venezuela, shifting jobs and wealth to regimes not known for their tolerance of activists, climate or otherwise.

There is another, more subtle effect of forcing the big companies to scale back their e&p. The buyers of the businesses they are selling are frequently privately owned, essentially unknown, entities. Those buyers are unlikely to operate to the pollution standards we expect from Big Oil, and they are almost impervious to the pressure that BP and Royal Dutch Shell face daily. Larry Fink, the boss of Blackrock, managers of £7tn of other people’s money, spelt this out at COP26 this week, arguing against oil companies getting rid of their assets, as this shifts production into ”opaque” private markets. He added: “Hydrocarbon companies are part of the solution, not the problem.’’

Their underlying problem is that they have no more idea of a solution than anyone else. Oil and gas is what they know; their expertise in wind, wave, solar and electricity is being learned or expensively acquired at the shareholders’ expense. Getting out of what you know can mean serious value destruction, as Anglo American has just demonstrated. In June the mining giant sloughed off its coal business, Thugela. The move won green plaudits, but has hardly been value-adding. Since then Anglo shares have fallen by a tenth, while Thugela has almost trebled.

Meanwhile, as the hot air was blowing at COP26, it has been failing to blow in the North Sea. The market’s two favourite green energy businesses, Orsted and Vestas Wind, both disappointed this week. Orsted, which makes the monster windmills, cut its margin forecast for the second time this year, and warned of an “increasingly challenging global business environment for renewables”. Vestas, which runs them, has taken a nasty hit from settled conditions, once described by CEO Mads Nipper as like managing a farm when it doesn’t rain. The shares have fallen by a fifth this week.

Even more unsettling than settled weather, it seems that the cost of the turbines is not falling anything like as fast as the prime minister claims. Low bids have tended to be “contracts for difference”, which are effectively options to supply, rather than an estimate of construction costs. A study culled from the published accounts shows that getting that price below £100 per megawatt hour of capacity – even before the cost of back-up or storage – is going to be hard, especially on the farther reaches of the Dogger Bank.

A price of £100/MWH is more than twice today’s market, and there may be worse to come.The electricity grid balances supply and demand, and reports each source of juice throughout the day. On Monday, the record shows that the windmills hardly turned during the peak period for electricity demand. That the lights stayed on (how embarrassing would that have been in Glasgow?) was thanks to the fuel the world’s leaders were so busy demonising, burned in the last remaining coal-fired furnaces of Drax’s power station.

So far, so awkward, but the real extent of the little crisis on Monday afternoon is reflected in the price the network had to pay; £4000/MWH (that’s £4 per kilowatt hour, compared to the current national household average of 14.4p) or nearly 100 times what might be regarded as the market norm. Sadly for the shareholders in Drax, this bonanza did not last long, and the managers are unlikely to crow about it, since they are keen to present their company as a leader in the green revolution, thanks to their burning of imported wood pellets.

As for Shell and BP, increasing numbers of investors regard the shares as wasting assets, headed for extinction or irrelevance, and are dumping them for what they can fetch. On Monday eight million Shell shares changed hands, or around £130m-worth. The pressure to “do more green” and increasingly abandon the companies’ core competences is only going to grow. It’s reflected in the Shell board’s incompetence when it comes to setting a dividend policy which lasts more than a few months. It’s reflected in Mr Looney’s cry of despair about the law of supply and demand. Both companies are returning capital to their shareholders as fast as they decently can, given the likely volatility of the oil price. In the circumstances, it may be the least worst thing they can do.

It’s the way he tells them

Wirecard is the gift that keeps on giving, at least to readers of the FT, the paper that exposed Germany’s biggest (known) fraud. A cracking article this week revealed that “one of Austria’s most senior military officials has been removed from a sensitive government position amid concerns over his links to Jan Marsalek, the former chief operating officer” of the company. Mr Marsalek was last seen en route to Minsk, and the official, Gustav Gustenau, was until recently head of the office of security policy within the Austrian ministry of defence.

As the FT discovered when it first broke the story, the locals have an idiosyncratic way of dealing with embarrassing stories – they try and shoot the whistleblower. The German securities authority, rather than investigate the Wirecard scandal, launched legal proceedings against the paper, suggesting that it had exploited inside information. Mr Gustenau’s response to enquiries? “It would be gratifying if the completely unfounded public debate about my person could cease.”