Lawson’s Law of taxation states that taxes should be simple, low and compulsory. If, like him, a chancellor can abolish one tax in every Budget, even better. Philip Hammond’s opportunity, if he cares to grasp it, is to tick all four boxes by attacking stamp duty (again).

His predecessors have made a simple tax complex and burdensome. They have also turned it into a £8bn a year earner for the treasury, so abolishing it, as a study from the London School of Economics suggests, would be more than one day’s work. Yet it is now a serious drag on mobility, both within the country and across age groups.

The true cost is hidden in transactions that do not take place. When the purchase of  a £1m house attracts £43,750 in stamp duty, as the excellent HMRC website calculator shows, there’s not much incentive to downsize. However, us owners of such houses who have been made millionaires by the housing boom know that our council tax bills are too low.

Radical reform of the system is hardly necessary when higher bands could be swiftly introduced.  Instead of painful payments to the state when the buyers can least afford them, the local authority would have a predictable income flow from the wealthiest owners. Unfortunately, if the leaks are to be believed, we will merely get stamp duty cuts for first-time buyers, adding another layer of complexity to what is already a very bad tax. Still, we can all dream.

Will Amazon stick the (gum)boot in?

Who’s afraid of Amazon? Just about everybody, it seems. Of all the sectors the brute might choose to disrupt next, providers of disposable cups, mops, plastic bottles, syringes and designer shopping bags are unlikely to be top of the list. Well, not according to Morgan Stanley, whose analysts fear for Bunzl’s business model.

Their argument knocked shares in the company, which has quietly prospered by providing these bits and bobs, down to their lowest since January. To which Shore Capital Markets replied: “Amazonian attack! Really? Are these businesses going to ditch Bunzl in favour of Amazon, which is possibly the greatest threat to the profitability of their own businesses?”

Well, maybe. The Amazonians are said to be preparing an assault on the medical supply industry in the US, while the Whole Foods chain, bought in the summer is now offering cut-price turkeys for Thanksgiving. The US supermarket groups are not joining in the celebrations. They are expected to make a profit and pay dividends, while Amazon’s price is driven by massive sales growth, (relatively) trivial profits, and no dividend for the foreseeable future.

The curiosity is that many investors hold shares in both, predator and prey, seeing no conflict in applying these contrasting criteria in their valuations.  As for the threat to Bunzl, Amazon may indeed become the store that ate the world, but it’s hard to believe that Jeff Bezos is going into the desperately fiddly business of supplying plastic cutlery, brooms or gumboots to customers who would rather concentrate on other things.

Careful what you wish for

Alas, poor Libor. Goodhart’s Law states (roughly) that putting too much pressure on an indicator will break it, in this case hammered out of shape by traders gaming the system. From January 2022, the central banks have decreed that the London inter-bank offered rate will no longer be the benchmark against which over $400tn of debt and derivatives is priced.

That’s the easy bit. Much harder is finding an adequate replacement. Libor’s cousin Sonia, the sterling overnight interest average, is a contender, as is the bruiser from America, BTFR, the broad treasury finance rate. The boffins at Bond Vigilantes, who worry about these things, point out that Sonia is unsecured, while BTFR is secured. And there’s apparently “still some confusion over how these overnight rates will be extrapolated to create a full curve.”

Of course. We may think we don’t need to worry our pretty little heads about this, but many thought the same about Mifid II and boy, was that the wrong decision, as we’ll find out in the New Year.

This is my FT column from Saturday

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Much wailing and gnashing of teeth from Britain’s Society of Motor Manufacturers and Traders, as the wheels came off  new car sales last month. Claims that today’s diesels are really not at all like yesterday’s noxious Volkswagens have failed to bring in the buyers.

The salesmen reckon we’ll be back once we get over the wage squeeze. However, the numbers may be signalling something much more fundemental, that our love affair with the motor car is finally over. The market is evolving rapidly; buyers can hardy keep up, but more disconcertingly for the motor traders, may not want to.

The lure of the shiny new motor to the millennium generation appears to be fading. Where previous generations almost defined themselves by the car they drove, today’s twenty-somethings increasingly see them merely as a means of conveyance. The increasing hostility to private cars in cities, the arrival of Uber and the prospect of self-driving cars will only reinforce this view.

It hardly helps that government policy is driving into a cul de sac. The pledge to outlaw sales of non-electric cars by 2040 is the sort of over-the-horizon crowdpleaser like the Climate Change Act, gathering political plaudits and leaving a future administration to work out how to pay the bill. There has been no thought about how to replace £40bn a year of fuel duty or to re-engineer the national grid, far less a convincing case to show that electric cars are really cleaner. As an FT analysis of full life-cycle costs concluded, some of the “greenest” cars on the road are petrol-powered.

The real cost is currently disguised by subsidies for purchase, duty-free fuel and concessions on parking, supported by the fiction that electric cars do not cause congestion. When subsidies were withdrawn in Denmark, sales collapsed. There is also limited public enthusiasm for hanging around motorway service stations waiting for your car to recharge.

The traditional driver of new car sales is that the replacement is like your old car, only better, and that there’s a decent residual price when you sell. The carmakers have already exploited this heavily with their financing deals, but if the replacement looks more like a smartphone on wheels, second-hand cars will depreciate as fast. That’s if you want a car at all. Bob Lutz, the former vice-chairman of General Motors, reckons you won’t, and that his industry has no future. The SMMT can only hope he’s wrong.

 

A leak of nuclear material

Traditional nuclear power stations are an economic dead end, so the UK government wants to encourage the sort of generation used in nuclear submarines instead. You can tell how confident the proponents are, since the toxic word “nuclear” has been dropped in favour of calling them “small modular reactors” which sounds much less scary.

We’re promised taxpayers’ support to develop SMRs, which appear to offer a sensible alternative to wealth-destroying monsters like Hinkley Point. Unfortunately, leaks from a report into these bite-sized power stations suggest that the case for them is no better than for their overweight cousins.

This shouldn’t come as a complete surprise. Nuclear power has always been a race between improving technology and rising safety standards, even when the plants have been in isolated locations. The fans of SMRs claim the report is out of date, but since the business department commissioned it from EY in the first place, this looks pretty thin. And who wouldn’t welcome a nice little SMR in their back yard?

 

A quick guide to new issues

Do not buy into an Initial Public Offering if most of the capital raised is going out of the business, or if it replaces existing debt (because the capital has already left). Do not buy if private equity is selling. Do not believe any forward-looking statements, because if the prospects really were that good, the vendors would wait and get a higher price. Do not buy any share that has been listed for less than a year. You will miss some bargains, but you will avoid many more disappointments. Leave it to the professionals to lose other people’s money.

 

This is my FT column from Saturday

 

 

Martin Sorrell frets that brand owners are cutting back on advertising. Well, he would, as boss of WPP, the owner of the world’s biggest ad agencies. The carnivores snapping at the heels of the big herbivores have encouraged the likes of Proctor & Gamble and Unilever to look to the bottom line, and spending less on promotions is a quick fix.

We are, he complains, all short-termists now. The average big US company is paying out all its profits in dividends and share buybacks, and its CEO lasts less than seven years. As he puts it: “Management is abrogating responsibility for reinvesting retained earnings back to share owners.”

Well, up to a point, Sir Martin. Most major companies seem in rude financial health, while Amazon’s hugely successful no-profit business model is about as long term as commerce ever gets. Besides, worries about short-termism go back even further than his 31-year reign at WPP; they can be found in the Harvard Business Review in 1980, which argued that US companies were eating their seed corn.

WPP’s bigger worry today is how to make money in the brave new world of digital media, to get past the robot eyeballs and reach the human viewers. Yet this is not impossible. The ridiculous campaign to encourage still more claims for PPI mis-selling (a sort of QE for the masses) has encouraged 1.2m visits to the Financial Conduct Authority’s website. We do notice ads – if there’s something in it for us.

Killing ’em with information

HSBC rounded off the bank reporting season last week. Its statement runs to 58 pages – and that’s just for the third quarter. Some inside the bank, and even a few outside it, may understand the tsunami of information, but for most of us the words might as well have been written in mandarin, which would at least allow HSBC’s millions of Chinese customers to be baffled in their own language.

Shareholders might worry that the bank’s common equity tier one ratio fell slightly, or that IFRS9 will shave a little more off next year. They might value “management’s view of adjusted revenue” or the “transitional own-funds disclosure”, but above all, shareholders need confidence that advances will be repaid. So when finance director Iain Mackay says he has $10bn of “excess capital” looking for a home, they should pay attention.

Excess capital is a comfort to the bank’s supervisors and a terrible temptation for a banker. Sibley’s Law says that you know what a bank will do with too much money, even if you don’t know which wall it will water with it. For HSBC, handing it to the shareholders appears to be something of a last resort.

The latest dividend gets only a passing mention (it was declared last month) and the board is merely “confident of maintaining this level”.  There’s also a share buy-back programme to help mop up those shares issued to holders who opt for scrip instead of cash, and to provide fees for the bankers’ bankers.

In the bad old days when banks did not disclose profits, the level and direction of the dividend was the best guide to what was really going on in the marble halls. It’s not immediately obvious that today’s mind-numbingly detailed disclosure is much better.

When Peace reigns

Is John Peace a sell signal? Not so long ago he chaired three FTSE100 companies, in defiance of the compliance police. He’s now down to one, the rather accident-prone Burberry, which last week announced the departure of Christopher Bailey, the design guru whom the rest of us could see wasn’t cut from CEO material.

When Sir John took the chair at Standard Chartered in 2009, the bank appeared to have sailed through the banking crisis. It turned out merely to get into the mire later, and as this week’s results showed, it’s still struggling to get out of it.

His third chair was at Experian, the credit-checking business whose database has not yet been hacked. He stood down three years ago, since when the shares have done rather well. Perhaps there’s something to be said for rationing FTSE chairmanships, after all.

This is my FT column from Saturday

Yes, it’s the Hammond Horror Show, and it’s going to be a bloodbath in the public finances. The dollop of cream that Spreadsheet Phil had supposedly prepared by a combination of spending cuts and accounting sleight-of-hand for next month’s Budget has been turned sour by the Office for Budget Responsibility.

The cream’s gone off because, frankly, we’re just not pulling our weight. British productivity used to grow at a stolid 2 per cent a year, but in the last decade it’s hardly grown at all. The OBR, which had assumed a return to trend (as it has done ever since 2009) has now decided to abandon this assumption, a decision which wipes out two-thirds of the £26bn Budget wriggle-room the treasury had created for the chancellor.

If we want to get richer, we must be more productive, so there’s a “productivity crisis”. Never mind that unemployment is at a 42-year low, we are miserably unproductive compared to other countries, and thus doomed to stagnant standards of living. These figures imply that instead of getting more efficient, we are simply employing more people.

But what if we are measuring the wrong things? It’s simple to count cars from a factory (although less simple to capture model improvements) but in a service economy like Britain’s, measuring output is hard. Is a longer newspaper article more productive than a shorter one? What about making phone calls on the train? Search? Emails? Same day delivery? All short-circuit problems which took hours or even days to solve in the pre-internet era.

Charlie Bean, late of the Bank of England, wrote last year that “official statistics may be missing an important aspect of the contemporary economy”. Kevin Gardiner, global investment strategist at Rothschild, is also highly sceptical: “Product proliferation and complexity, quality change, innovation and altered delivery get in the way of determining ‘final’ output.”

For good measure, he also points out that the much-derided zero-hours contracts amount to just 3 per cent of the record 27m jobs in Britain. Most new jobs are full-time, in the private sector where the employer must believe they add value. So the productivity crisis is more of a productivity puzzle. Not that the OBR’s gloomy forecasts should concern the chancellor; he has his own job to worry about.

White elephant’s minders fight back

The Hinkley Point counter-attack is under way. Is the £20bn nuclear power station “risky and expensive” as the National Audit Office concluded? Goodness, no, the officials from the Department for Business, Energy and Industrial Strategy told the Public Accounts Committee.

Never mind that the juice will cost more than twice as much as today’s power prices, it’s critical for keeping the lights on in 2025. As the officials did not say, that’s because the rules essentially preclude the building of cheap, gas-fired power stations at a time when gas has never been more plentiful or widely sourced.

And it’s jolly unfair to compare the runaway cost of nuclear with the falling cost of windfarms, said Alex Chisholm, the department’s permanent secretary, because the wind doesn’t always blow. Thus the defence of this money sink will continue, long enough to ensure that too much money has been poured down it to stop the project.

One in the eye for corporate governance

Hooray for Diageo, Aviva and GKN. Boo to G4S, Carnival and GlaxoSmithKline, respectively the top and bottom companies in Ken Olisa’s FTSE100 corporate governance league table for the Institute of Directors. Returns to shareholders is just one of 47 “indicators” which include gender diversity, board structure, membership of do-gooding bodies, or whether there’s a fountain in the Head Office foyer (well, perhaps not quite).

Mr Olisa has useful, if bruising, experience here, as a director of ENRC until 2011, which crashed through the corporate governance guidelines before bludgeoning the minority shareholders to sell out in 2013.

One company that might have propped up the 2017 league table slipped out of the FTSE100 because it has returned £4.3bn to its owners. Despite having an executive chairman, no women executives on the board, not belonging to the IoD, and not signing the UN Global Compact, Melrose has turned each pound invested in 2005 into £17.79 today.

This is my FT column from Saturday

 

James Murdoch, the chairman of Sky, faces a torrid time on Thursday at the company’s annual meeting. For the second year running, shareholders have been urged by the governance police to vote against his re-election. It’s unlikely that Sky’s 40 per cent shareholder will take their advice, since it is controlled by Mr Murdoch’s father, so his position is hardly under threat.

Mr Murdoch Jr might even welcome this distraction. Sky’s business model, which forces subscribers to take channels that they never watch, while continually raising the price of the footie, is showing signs of fatigue. Viewing figures have dropped sharply, helped down by illegal workarounds of subscriptions. The future looks like a pay-per-view fight between deep-pocketed content providers, while the football fans might eventually prefer to pick their teams’ games rather than have Sky tell them what they can watch.

The Sky share price is supported by the belief that Rupert Murdoch’s 21st Century Fox will eventually be allowed to buy out the 60 per cent in public hands. Were this prop to be removed, investors would be forced to look at the real prospects for subscription television.

They could look nervously at BT, the Beattie-come-lately to this game, where problems are piling up on and off the pitch. The head of BT TV left in the summer, only months after signing the £1.2bn cheque for football rights. An Italian accounting fraud has been a huge embarrassment, while the pressure to upgrade the network to fibre is relentless.

The company’s previous fantasy guidance about raising the dividend by 10 per cent a year has been replaced with a commitment to a “progressive” payout. However, when Jan du Plessis gets into the chair next month, he might see that even this lowered target is too ambitious.

If BT’s trading problems were not enough, there’s the looming iceberg of the pension liabilities. Saeed Baradar, of brokers Louis Capital, has led the pack on BT this year. Catching up, the analysts at Morgan Stanley think the deficit has ballooned from £7bn to £13bn, and argue that the balance sheet can’t stand paying for football, fibre and today’s dividend.

The question is whether the shares, down 26 per cent this year to 280p, have been punished enough. A 30 per cent cut in the dividend would produce a 4 per cent yield – still not obviously cheap for a business with such deep-seated problems. Mr Murdoch must be grateful he has only one of them.

Help to Builders

So Theresa May is to send another £10bn of taxpayers’ money to the housebuilders. Invented by George Osborne, Help to Buy tackled the shortage of housing supply by stimulating demand, allowing housebuilders typically to raise their prices by 10 per cent and doubling their profit margins.

The shares have multiplied by between four and six times in five years. Five years is also the time limit when the subsidy starts to run out and when the helped-to-buy owners might think about moving up the ladder. Unless house price inflation continues (thus making the affordability problem worse) the vendors may find that their property, stripped of the bung from the taxpayer, is worth less than they paid for it.

Meanwhile, the government is spending a further £2bn on new council houses, enough to make a tiny difference to supply. The two numbers seem to be the wrong way round.

How to lose £106bn

Ah, those balmy days when trains, gas, electricity and water were in public hands, and nobody worried about profit gouging by rapacious private oligopolies. It’s uncomfortably clear that the generation who never experienced this nirvana believes nationalisation is the answer to every problem with utilities.

Those with longer memories might recall terrible trains, trying to get a telephone, and sewage in the river, with state-owned industries run for the benefit of employees. We are reminded of the cost of these financial dinosaurs by Prof. David Myddelton, the distinguished accountant. He has calculated that the accumulated losses of the major nationalised industries between 1948 and 1970 add up to £105bn in today’s money. Of course, it will all be different next time.

This is my FT column from Saturday

 

Can you tell your contango from your backwardation? Whether commodity futures are above or below spot prices indicates the market’s view of their likely direction of travel, and for much of the last two years, a surplus of supply meant that future prices for crude oil have been above those for near delivery.

Now, though, it seems that something has changed. It’s nearly a year since the Organisation of Petroleum Exporting Countries agreed a much-mocked rationing plan, but the deal has mostly held, while half-price oil has stimulated world-wide demand. Now contango has been replaced by backwardation, and spot Brent crude is up to $58, a two-year high.

It is not only OPEC which has undergone a quiet revolution. The oil companies have transformed themselves since the slump destroyed the economics of their grandiose schemes. BP’s chief executive Bob Dudley told an FT conference earlier this month that its cost of extracting a barrel from the North Sea had been halved from $30, and should reach $12 by 2020. Efficiency gains mean that projects which had looked marginal at $100 are now worth doing at $50.

The share prices of Big Oil seem not to have recognised this revolution. Their low ratings owe more to yesterday’s doom-laden warnings of “stranded reserves” and predictions of the end of the oil age. The sterling yield from BP’s dividend varies with the exchange rate, but the last four quarterly payments add up to a return of 6.8 per cent at 474p.

It’s a similar story for (us) shareholders in Royal Dutch Shell. Oilers are never going to be rated as growth stocks, but they are currently being treated as if they are high-risk annuities, paying capital out from a dying industry. Oil is going to drive the world’s economy for many years yet, even if one day it doesn’t drive your car. In the meantime, those dividends look more secure than at any time since the price slump.

How to save £86bn with no pain

Perhaps you thought that £56bn was a bargain price to shave a few minutes off the time needed to escape Birmingham to London on the train. Unfortunately, the promoters of HS2 are now explaining that this is only the down payment. Without another £30bn or so, you’ll spend so long fighting through an overcrowded Euston that any advantage will be trampled underfoot.

The extra money would (supposedly) buy Crossrail 2, the line on the map connecting Dalston to Wimbledon. Without it, HS2 “won’t work properly.” As an example of the contempt shown for any rail project outside the capital, this is a peach.

While billions are wasted on a vanity project which everyone, including the National Audit Office, knows is not worth doing, electrification of existing lines has almost stopped: it will be diesel only between Oxford and Cambridge, Cardiff and Swansea, Kettering and Sheffield, Windermere and Oxenholme. Manchester to Leeds is “under review.”

The cost of all of them together is a mere rounding error in HS2 money, and in an attempt to shame the government into more rational behaviour, IPPR North, a think-tank, calculates transport spending at £282 per head in the north, against £680 in London. It is still not too late to pull the plug on the HS2 money sink. That would surely be better than waiting for Chancellor John McDonnell’s first financial crisis to force its cancellation.

Get well soon

“Investing in price” is a popular retail euphemism for failure to sell enough stuff more expensively, but Card Factory is holding prices down to put the bite on less efficient competitors. This means a short term pain in the p&l for long term gain, the way responsible managements are supposed to behave.

Oh no, it’s a profit warning!  The shares fell by a fifth in disappointment. Putting up prices would avoid this unpleasantness, but would damage the strategy of long term card-market dominance. It’s a classic demonstration of stock market short-termism. Of course, the pain is real and the gain uncertain, but this is a well-run, highly competitive company whose management deserves the benefit of the doubt. Too bad that at the moment, it doesn’t get it.

This is my FT column from Saturday (my 250th, actually)

Many years ago, when we were very young, Price Waterhouse announced that it wanted to merge with Cooper Brothers. Some of us said this was a bad idea, since it would cut the number of internationally significant firms of accountants from an already skinny six to five. The authorities either lacked the will or the powers to prevent the deal.

The world turned, and Enron blew up, taking Arthur Andersen with it, so today there are just four giant accounting groups. They rotate the major assignments between them, brought in to investigate each others’ failings, because there is no realistic alternative. They are so much bigger than the pack that no amount of merging would create a fifth international firm to match them. They are so far ahead of the competition that big companies hardly dare risk appointing an auditor outside the fab four.

Except we now know that KPMG is not fab at all. It gave HBOS a clean bill of health months before the bank had to be rescued, and had to suffer an investigation by the Financial Reporting Council. Fortunately, this industry watchdog concluded that the firm’s 2008 audit was just fine. Unfortunately, this conclusion was so far removed from common sense as to make the FRC the laughing stock of the City. As for Deloitte’s audit of the collapsing Royal Bank of Scotland, the FRC didn’t even feel it needed any special look.

KPMG was also the auditor to the Gupta family interests in South Africa, until it quit last year, as the full extent of the “state capture” scandal emerged. Perhaps the auditors hadn’t noticed. Some of the senior executives there have departed, but were KPMG an incorporated, listed company, the combination of two massive failures like this would be enough to claim the top executives and perhaps threaten the survival of the enterprise.

Accountants are not like that, being more like franchise operations in each country. Their published financial information falls far short of the disclosure the law demands from their clients, and the almost watertight compartments are enough to withstand even icebergs as big as these. The bottom line, as KPMG, PwC, Deloitte and E&Y might put it, is that they are too few to fail.

Staying on the rails

When the analysts at Liberum concluded that “the politics are difficult to navigate” when calling the turn in Stagecoach shares, they may not have seen that the politics could get a whole lot more difficult. Labour’s advisers are now cheerfully suggesting that privatised rail and water companies be renationalised at below-market prices, because the shareholders have done too well out of them in the past.

In addition to buses, Stagecoach holds the east coast rail franchise, and holders have done so well that the share price has fallen by two-thirds in two years. In a forensic analysis, Liberum cannot quite recommend a purchase, seeing value only at 155p.

However, at 164p the shares yield (an uncovered) 7.3 per cent. The problems on the railway are at least partly the fault of state-owned Network Rail, so some face-saving way of navigating an improvement in the contract will have to be found. The fall looks overdone – unless Jeremy Corbyn is our next prime minister…

Please print this

The ink in the cartridge that you put into your printer is more expensive than champagne, and lasts about as long as an opened bottle. Now the French, suitably enough, are fighting back. Under the splendidly-named Halte a l’Obsolescence Programmee, it is a criminal offence to deliberately reduce the lifespan of a product to increase the rate of replacement.

HP, Canon, Epson and Brother all follow the same business model, of cheap hardware and overpriced ink, keeping an iron grip on the price of replacement cartridges and encouraging us to junk the printers at the first blocked jet. Home printers may be a miracle of modern technology, but this strategy is as wasteful as it is infuriating, and out of step with the spirit of the age. Not exactly champagne, but this French law would be a useful post-Brexit import.

This is my FT column from Saturday