The figure of £394bn, this year’s gap between tax in and spending out for the UK government, is almost unimaginably large. It means that in a single year the state will have borrowed the equivalent of £5,800 for each of the country’s 68m citizens, man, woman and child. Perhaps you did not notice this money disappearing from your wealth, but you are going to have to pay it back.

The good news is that the repayment terms are, by all past measures, exceedingly generous. There is no deadline, and the interest charged is less than 1 per cent. This gives the chancellor an opportunity to explain that repayment of the Covid crisis spending should be treated same way as a mortgage on your house.

That sum may look dauntingly large, but every year you pay the interest plus a small amount of capital. In time, the outstanding mortgage shrinks, while (you hope) you are earning more, which reduces the burden.

So the chancellor might look at his debt mountain in the same way. For this year (and next, on the latest figures) government borrowings will be measured in hundreds of billions. He decides that, say £550bn is attributable to the pandemic, borrows it at a cost of £5bn a year by issuing long-dated gilts, designates it Covid rescue debt, and treats it like a mortgage.

So every year paying the interest on this debt – say £5bn – will be the state’s highest spending priority, along with a similar amount for capital repayment. Elsewhere, the public finances will still have to be brought under control, rather as you might have to cut up your credit card while continuing to pay the mortgage. The process is protracted and painful, but less daunting than forever staring up at the debt mountain.

Gradually, the mountain shrinks, slowly if governments are usually incompetent, faster if they get better at it, to the point where the Covid payments no longer dominate the public accounts. Eventually some future chancellor can proudly announce that the debt has been paid off.

This is a confidence trick, of course, which only a government able to print its own money could manage, but it would allow a little optimism to emerge. Probably not a good idea to call the manoeuvre War Loan, though.

Are those shares really yours?

Do you own shares in BP, GlaxoSmithKline, Lloyds Banking, BT or indeed, in any other quoted security? No, I mean really own, rather than own a computerised credit entry on some platform website, which allows you to buy, sell and collect dividends.

In the eyes of the law, you are not the owner of the shares themselves. Most of the time, this hardly matters. If you feel strongly enough about some company policy to want to vote at the annual meeting, or to accept a contested takeover bid, well, tough.

Some brokers and platforms are better communicators than others, but your name is not on the register, so there is no right to the communication which is sent to shareholders who are. Worse still, if a company in the chain of ownership between you and the register fails, your position as “owner” of the shares is not at all clear.

The Law Commission has been chewing this arcane problem, of what it calls “intermediated securities”, and points to the “legal uncertainty around…what happens when an intermediary in the chain becomes insolvent.”

What indeed, seems to be the answer. The best outcome (presumably) would be a quick rescue from one or more of the many businesses which work in this chain. The worst would be an indefinite delay before the “owner” could be reunited with her shares, with uncertainty over dividends and an inability to sell.

In 2018, we almost had a voting test case, when the Dutchmen running Unilever tried to bounce the company into fleeing to Rotterdam. The proposal was savagely criticised, and was eventually withdrawn, costing the CEO his job. But a little-noticed condition demanded that half the shareholders by number (not by size of shareholding) had to vote in favour. With no definition of what constitutes an individual shareholder, those of us on platforms would have howled for our individual vote.

Modern technology, which has allowed the platforms to grow fat, could solve this easily enough, by obliging them to allow their customers to attend meetings and vote their shares. The knottier problem of a failure in the chain probably needs legislation. In the meantime, the industry could help itself by cross-guaranteeing prompt help for the clients if some intermediary goes bust. The lawyers also suggest using “distributed ledger technology”. The rest of us recognise this as blockchain, even if we struggle to understand how it works.

Moral high ground for grocers

So you are the marketing director of one of the UK’s big grocers. In common with all your competitors, you have taken advantage of the chancellor’s largesse with our money and saved the business rates bill. Keeping going during the pandemic has raised costs, perhaps by more than the bung from the taxpayer (worth roughly £2bn to the industry) but the saving has helped to pay the dividend.

The grocers have had some stick for this including, somewhat disingenuously, from John Roberts, the boss and major shareholder in appliance vendor AO. He suggests the executives “should go and ask their mum if she would be proud” of taking the subsidy.

As an on-line retailer, he has no shops on which he must pay business rates, but the more interesting question is whether one of the big grocers should break ranks and pay up. This would grab the moral high ground, and make your store more attractive to woke shoppers. Unfortunately, given the indifferent response to the shocking revelations at Boohoo, we may talk about caring for others, but we buy on price.

It’s 2050. You wake in your cosy, insulated house, turn on the windfarm-powered lights, cook up a breakfast coffee on the hydrogen stove before jumping into your electric car. You whizz silently along roads with air as fresh as a mountain stream past happy e-bikers and carbon-neutral schools to your heat-pump powered office.

So, viewed from Britain in 2020, can you spot the odd one out? Here’s a clue: the e-bikers get no subsidy. Everything else on this list loses money, and needs state support on a massive scale to get even halfway to the nirvana glimpsed by the prime minister this week. Today’s subsidy, of course, is tomorrow’s tax rise.

Home insulation? £2bn is barely enough to get some sort of programme started. The disruption from insulating your home will be enough to discourage us from taking up this offer, almost regardless of the accompanying bribe. As we saw with double glazing and solar panels, the cowboy installers and fraudsters will be the principal beneficiaries.

WIndfarms? The easier sites are already filled up, driving development further offshore to have any chance of quadrupling today’s contribution. The bulk of new contracts are going to overseas manufacturers, while evidence of catastrophic damage to seabirds is growing, and nobody knows the long-term cost of maintaining this hi-tech engineering in a hostile environment.

Hydrogen home cooking? Hydrogen is much harder to handle than natural gas, and a compulsory conversion programme – the only practical way to exploit the existing pipework – would meet stiff resistance. Besides, like electricity, hydrogen is not a fuel but an energy transmission mechanism. Making it from actual fuel is like trying to pull yourself up by your own bootstraps.

Heat pumps? The capital cost typically runs into tens of thousands of pounds per dwelling, even where your garden is big enough to take one. They are also likely to be rather more expensive to maintain than your ‘fridge.

As for the electric car, despite subsidies of thousands of pounds per vehicle, with promises to spend billions more on sockets to charge them, motorists remain suspicious. After all, it is only a few short years since we were being urged to buy a diesel car, to make each barrel of oil go further. Now diesel is officially an evil producer of particulates that kill children.

Reconfiguring the electricity grid for electric vehicles will cost much more than the £2.5bn allocated in the government’s plan. Then there is the £40bn a year raised from fuel duties which will disappear if electricity takes over. It is almost a rounding error in the context of the hundreds of billions which the UK is going to waste with this week’s fashionable projects. They may indeed create thousands of jobs, but then so would digging large holes and filling them in again. Jobs that destroy wealth rather than creating it make us all poorer.

The government’s cheerleaders may argue that no price is too high to pay for “saving the planet”, but this week’s programme, if it is really implemented, will be ruinously expensive. After a year when the UK economy has shrunk by a tenth, we cannot afford more government repression, even cloaked in greenery. A smaller economy makes paying for the NHS, for example, much harder. Worse still, Britain’s self-harm makes almost no difference to global CO2 emissions, when China makes meaningless pledges of good behaviour while building two coal-fired power stations a week. How they must be laughing at us.

This is what a bear market looks like

The chart from commercial estate agents CBRE looks reassuring. Its Property Values Index has recovered splendidly from the depths of March and is almost unchanged on the year. Industrials have forged ahead, and even retail is only marginally down.

Does anyone seriously believe this can be right? The idea that a bog-standard office block is worth 99 per cent of what it was in January is laughable. City centres are struggling, shops everywhere are closing, and the upwards-only rent review is being destroyed under the hammer-blows of the Creditors Voluntary Arrangement. Nobody seriously expects that work and spending patterns in 2022 will look anything like those in 2019.

The pandemic has exposed the cosy relationship between property businesses and those paid to value the assets. It has been most acute in the £12bn of open-ended property funds, most of which were forced to close in March to prevent a rush of investors to the exit. The standard excuse was the difficulty of valuing things during the first Covid wave, although the real reason was that the prices offered would be just too horrible to contemplate.

Most funds have now re-opened, although the values often seem to owe more to estate agents’ relentless optimism than to real life. Units in Legal & General UK Property, one of the biggest, are only 3.2 per cent cheaper today than on 18 March, when the doors were closed.

Last week Land Securities, the UK’s biggest listed property company, reported a 9.5 per cent fall in net asset value, to £10.79 a share. The shares stand at a 35 per cent discount to that new valuation. There are significant differences between a fund and a share, but the most important is that share prices look forward, while fund prices look back.

Land’s shares started falling in mid-February, when Covid seemed like someone else’s problem far, far away. In today’s changed world, the share prices of commercial property companies are signalling the start of a long and disruptive bear market for offices, shopping malls and non-food shops, as rents fall and yields rise. Those with capital in property funds should take note.

The popularity of these funds is an enduring mystery, probably owing more to the commissions they generate for intermediaries than to any fondness for office blocks. For supposedly liquid investments, property funds could hardly be less well suited. If you really want to double down on property after buying your house, buy the shares, not the funds.

At first sight, it looks like a near-certain way to lose money. An index-tracking fund waits until a share has risen far enough to get into the fund’s chosen index, and then buys it. Conversely, when a price falls so far the share drops out of the index, the fund then sells it. Surely, an intelligent investor can beat that?

Apparently not. According to a deep analysis by the Financial Times, actively-managed investment funds struggle to beat their benchmarks. Over five years, only a quarter do so, and over 15 years it’s closer to one in 10. The figures relate to the US, but there is no reason to believe the picture is much different in the UK.

It’s a grim indictment of the traditional fund management industry. The long-term gains from running active funds accrue almost entirely to the managers, rather than to the punters whose capital they are using. The managers deny this, of course, but the investors have noticed, and are voting with their money, buying trackers or Exchange Traded Funds and selling out of the actively-managed competition.

The switchers have concluded that the fees saved from buying a low-cost ETF outweigh the talent of a highly-paid fund manager. There are exceptions, of course, and all fees are coming down, but cutting them is a slow and painful process. After all, persuading a successful active manager to reduce his fee looks uncomfortably like punishment for good behaviour.

The industry’s response has been consolidation and investment in cost-saving technology. Yet this can only go so far if the underlying problem is that consistent out-performance is very rare. If the past really isn’t a good guide to the future (as the sales literature must state) then there is not even any point in trying to find that manager.

Curiously, as the trackers and the ETFs continue to soak up investors’ capital – Morningstar estimates that $9tn is now in passively-managed funds – this should give the clever active manager an edge over her passive competitors. The active breed desperately need a reason to justify their existence, since the last one, that they would outperform in turbulent markets, has been thoroughly disproved this year, on both sides of the Atlantic.

Nobody will weep for the demise of the overpaid, just about competent fund manager, but the trend is taking investors still further away from involvement with the ultimate users of their capital. Choosing a fund whose investment principles coincide with your view of what businesses should or shouldn’t do is a poor substitute for directly backing individual companies.

Those investors who pick their own shares are a dwindling minority of the market – but at least we save the management fees, and there’s comfort in knowing that there are many professionals whose stock-picking is even worse.

Dear Chancellor: grab it while you can

It did not take long for the media guns to train their sights on the Office of Tax Simplification’s suggestions for reforming capital gains tax. The Daily Mail caught the tone: “Those who inherit property, second-home owners, buy-to-let landlords and entrepreneurs who sell their businesses could be among the hardest hit by the proposed tax grab.”

Well, yes, they sound like best candidates for the grab which everyone agrees is going to be needed one day. CGT could certainly do with some simplification. Today’s cat’s-cradle of rates, exemptions and allowances is a tax accountant’s delight, which is why it raises just £8bn, compared to the £180bn from income tax.

Bill Dodwell, the report’s author, has spent his working life immersed in tax, but one proposal, removing the capital gains reset on death, would cause no end of misery. The price paid by the deceased for a long-held asset is probably lost, or the taxman could argue that a property upgrade was mere maintenance.

Rising shares and house prices have shown that we are not in all this Covid crisis together. Those of us on the Mail’s list should pay more.

Not Rolling in it

Can it really be only six weeks since Rolls-Royce was gasping for financial air, launching a “recapitalisation package” to raise £2bn from a 10-for-3 rescue rights issue? indeed it can, yet this week the aero-engine maker was bouncing, Tiggerishly, with excitement over small nuclear reactors.

To read one of this strange year’s most bizarre press releases, Rolls bangs on about the wonders of these things, which have been powering nuclear submarines for decades, to keep the landlubbers’ lights on. For students of Eng. Lang,, the release is all written in the future perfect, rather than the future conditional, even though the venture is highly conditional, needing a £2bn bung from the rest of us for starters.

Leading this sort of adventure is just what the Rolls rescuers do not want to hear. Making aero-engines is difficult and hugely expensive (even when they come up to spec.) and all the money so recently raised will be needed to keep the company in the game.

There is clearly quite a lot of expertise from making the reactors, but Rolls simply cannot afford another line of business. Besides, the history of UK nuclear reactors is one of constant disappointment, as the latest game-changer bursts its budget.

Small reactors, by definition, cannot match the economies of scale from big ones, and the savings from reproducing the same design all over the place depend on on how happy we are to have one in the next street. About as happy as Rolls shareholders would be to fund them, probably. These units may have a future, but if ever there was a time for the company to stick to its knitting, this is surely it.

Barclays is the Bank That Lived A Little, in Philip Augar’s brilliant chronicle of decline from one of the world’s most valuable banks to a battered shell. From its peak of £7 in 2006, the share price had fallen to £2 in 2017 when the book was published. He tracked the dozens of non-executive directors, the constant changes of direction and the political infighting. It’s a great read.

He cannot have known that the worst was still to come. Today the Barclays share price is 110p and the bank is barred from paying dividends. Like its UK competitors, it is being forced to run as an arm of social security, making sensible analysis of the stock’s value almost impossible.

Almost, but not quite. Britain’s banks are facing the worst economic outlook in decades with capital reserves far above anything seen in those decades. Barclays’ own core capital ratio is 14.6 per cent. The new Stasi-style lockdown will hardly help on the bad debt front, but Barclays’ third-quarter results provided a pleasant surprise, with provisions much lower and profits twice the size that analysts had expected. The impairment reserve is £9.6bn. Meanwhile, at £19bn, Barclays’ market value is implying economic armageddon.

All the banks are now chafing at their own lockdown. They are willing and able to restart paying dividends, if only to highlight that share prices standing at less than half tangible net asset value are surely too low. For the long-suffering shareholders in Barclays, there is the added novelty of a convincing business case with a stable chief executive on top.

Jes Staley has resisted the pressure to follow Lloyds Banking and Natwest and get out of capital markets. That tricky business has been Barclays’ stand-out performer this year. More of a novelty, given Mr Augar’s grim history, Mr Staley has been in charge for five years, promising both a further “couple” and the prospect of an orderly handover.

That time horizon should soothe the regulator’s fears that Mr Staley might pay a bumper dividend and depart, leaving the bank vulnerable to having to ask for the money back again in a rights issue if things exceed the reasonable worst-case scenario (as current parlance has it). UK bank boards should be given back the right to decide what they can afford to pay, and allow the Barclays shareholders to live a little.

QE – ?Que?

So here’s how Quantitative Easing works. The Bank of England raises cash for the government by creating and selling bonds to the market. With QE, the Bank buys back some of those bonds for cash. The sellers, forced to find alternative investments, go and do something useful with it, which helps revive the UK economy.

This week the Bank launched another £150bn buy-back programme, taking the total this year to £450bn. Added to previous purchases, there will be £875bn on the Bank’s balance sheet, or about half of the UK government’s total non-index-linked debt.

These staggering sums dwarf the Bank’s reserves, but since it is owned by the state, the governor need not worry about paying its debts. The state can always print more pounds to meet interest and redemption payments. So the question that exercises economists everywhere is: if half the national debt is owned by the Bank (which is owned by the issuer of the debt), what is the true figure for the national debt?

There are no definitive answers. Common sense might suggest that this looks like a magic money tree, and governments that continually print notes to pay its bills will end up with Weimar or Zimbabwean hyper-inflation as the paper progressively loses its value.

Elsewhere, it has not worked out that way. In the decade since the banking crisis, inflation has stubbornly refused even to hold at 2 per cent, and today investors seem happy to earn less than 1 per cent lending to the UK government for 30 years, almost guaranteeing a long-term loss on their investment.

At some stage, the penny (and the bond prices) will drop, potentially imposing catastrophic losses on holders of government debt. Some of us have been predicting this for several years now, and have been proved impressively wrong. There is no sign of inflation; the world is awash with goods, cereal harvests have broken all records again, and rising unemployment is an awkward backdrop to wage claims.

The pain of this latest emergency borrowing is still a long way down the track, but it will bear hardest on those whose life prospects have already been damaged by the UK government which forbids them earning a living. You didn’t kill granny, but when taxes go up, prospects go down and the price of protecting her becomes apparent, you may wish you had.

Road works ahead

We were almost back to the good old days of motoring last month. New car registrations were marginally ahead of last year, as the effects of pent-up demand rolled through the market. Yet just as the motorway seems clear until it suddenly jams, there’s trouble ahead.

Pantheon Macro’s analysis concludes that the V-shaped sales recovery won’t last, judging by falling Google searches for the UK’s most popular models, and slumping consumer confidence even before the Guy Fawkes Day lockdown. As Sue Robinson of the motor trade body put it mournfully: “There is no evidence that dealerships have caused the spread of Covid-19 and shutting showrooms for four weeks can damage the livelihoods of the 590,000 people employed in vehicle retail as well as the 168,000 people employed in vehicle manufacturing.”

However, there is not so much a traffic jam as an almighty pile-up just down the road. The threat to extend London’s congestion charge may have been seen off, but the extension of the Ultra Low Emissions Zone to the north and south circulars next October threatens breakdown for the motor trade.

Older, non-compliant cars will be forced off the capital’s roads, to the benefit of the better-off. Ms Robinson and her members might dream of a bumper year as we all buy new cars. More likely is a simmering resentment from those who can neither afford to pay the charge nor trade up. It will not be pretty.

It is rare indeed for the Financial Conduct Authority to get something (nearly) right, but it happened this week with its investigation into the strange story of Aviva and its preference shares. The report, mercifully brief at 33 pages (that’s brief by modern standards, believe me) is a gripping tale of how the board of a big company can debate a question exhaustively, take expensive counsel and fail to reach a conclusion that common sense would have indicated in about ten minutes.

Aviva, the disfunctional giant of the insurance industry, has £450m in preference shares left over from previous eras. From 2026, these do not count for insurance solvency, nor are the dividend payments offsettable against tax. They are also “irredeemable”, providing holders with (by today’s standards) a handsome, near-fireproof perpetual stream of income.

When, on 8 March 2018, Aviva suggested that it might possibly redeem them at par (well below the market price), the prefs immediately lost between a fifth and a quarter of their value. After a fortnight of protests and damaging headlines, the company announced that it had abandoned any thought of redemption, and would also compensate investors who had sold at the depressed price.

The redemption of the board’s reputation was rather harder, and the incident contributed to the departure of CEO Mark Wilson soon afterwards. (His rather tragic representation is part of the 33 pages.) The chairman, City grandee Adrian Montague, and finance director have also gone since then, although Montague was already well past his sell-by date.

Missing from the FCA’s blow-by-blow account are the names of any of the participants, whether directors or advisers. Also missing is the suggestion that any director might have to pay for such an impressive level of incompetence. At least the shareholders have been spared the usual spectacle of being punished for the sins of the executives.

Aviva has had two CEOs since then, but it is far from clear whether the latest, Amanda Blanc, under new chairman George Culmer can stop the rot. With this disastrous decision-making so elegantly chronicled by the FCA, long-suffering shareholders can only hope that (as the investment boiler-plate puts it) past performance is no guide for the future.

A pretty little problem for Tesla

Nobody buys shares in Tesla, a mid-sized motor manufacturer, because they look cheap. They buy them because they seem to keep going up, or because they believe in the vision of St Elon, or because the electric Tesla is the car of the future.

All these things may be true, but even if they were, it is more than a few volts short of an investment case. Tesla has been profitable for four straight quarters – a novelty for this chronically loss-making company – but only thanks to selling carbon credits to allow other carmakers to avoid onerous penalties.

The thought of paying hard cash to a competitor is concentrating corporate minds no end, so the big boys are spending billions developing their own electric cars. Ah, the Tesla faithful respond, look at sales in China, the world’s biggest market. So, courtesy of Neil Campling of Mirabaud Securities, are the most recent monthly sales of Teslas, despite multiple price cuts and increased capacity; May: 11,565, June: 14,976, July: 11,456, August: 11,811 and September: 11,329.

The figures for smaller but fashion-leading markets show a similar trend of Tesla’s falling market share. In Norway, it has slumped from 16 per cent to 7 per cent this year.

So not so electrifying, then, perhaps because $42,000 for the cheapest Tesla in China is quite a stretch even for an affluent buyer. Perhaps, also, because coming pootling over the hill is the Hong Guang Mini EV, a pretty little electric runabout selling locally at, er, $4,162, or $5,607 fully loaded.

It may look like a toy, but it is a fully-compliant four-seater motor car. The prospect of it one day being released into European showrooms at anything like this price should strike fear into the hearts of motor manufacturers. Its arrival would also force metropolitan authorities to think again about their passion for electric cars.

It is certainly not going to help Tesla, which is one reason why Mr Campling is sticking with his sell recommendation for the shares, despite having been wrong all year. Last year he stuck to his guns on another share where he was the only bear among dozens of analysts. That was Wirecard.

Free banking, RIP

Long, long ago, in the days when savings paid a measurable interest rate, Midland Bank’s masters had a brilliant idea: they launched an account which attracted no charges as long as it was in credit. The other banks were forced to follow suit at ruinous expense, and have been trying to work out an exit plan almost ever since.

So it was only fitting that HSBC, today’s owner of Midland, should mutter about introducing bank charges (or “negative interest rates” as the current jargon has it) for the privilege of allowing them to look after your money. No plans, of course, just musing, said the bank.

The big UK banks have been reduced to an arm of social services since they were told they were not allowed to pay a dividend, despite capital buffers fatter than they have ever been. Perhaps, since we are all in this together, it is only fair to ask the customers to do their bit, and suffer along with the shareholders.

Shell shock

Good news, of a sort, from Royal Dutch Shell. The ailing oil company has increased the dividend, and now promises to raise it at 4 per cent a year. Only six months ago, in what was clearly a panic attack, the quarterly payout was cut from 47c to a somewhat arbitrary 16c. So at this rate of increase, it will be a mere 27 years before the dividend is restored. Roll on 2047!

While we were all flapping about lockdowns, the UK’s entire system of regulating the prices of utilities was fatally undermined last month. The Competition and Markets Authority over-ruled Ofwat, the water regulator, and awarded higher returns to Anglian, Yorkshire, Northumbrian and Bristol water companies.

All four companies are owned by the usual opaque mixture of private equity, pension funds and foreign governments, so there is no share price to reflect their good fortune. However, the market was quick to see the cracks in the current regulatory regime for electricity and gas; since the CMA’s ruling was published, the price of National Grid has risen by 11 per cent.

It is a terrible precedent. From now on, every company negotiating with its regulator will know that there is a higher authority which really calls the shots. Never mind that the CMA lacks the expertise to make a balanced decision, the regulators who are merely staging posts on the route to the final outcome. No point in the company agreeing a tough ruling when it can go on to the CMA.

Ofwat’s chief regulation officer David Black has boiled over, accusing the CMA of running a hurried and botched process which lacked “explanation, reasoning or analysis”. Considering that Ofwat spent the last two years coming to its adjudication, the CMA’s facile analysis from the chair of the enquiry group Kip Meek looks thin indeed.

The broader point is the shameful way that the water industry has behaved since privatisation. As the quoted companies have been taken over, their starting equity has been steadily replaced by debt, while dividends and rewards to top executives have taken precedence over fixing leaks and cutting pollution. Since only three of the original 10 regional companies remain listed, the industry has successfully avoided much public scrutiny.

Previous prices and targets set by Ofwat had manifestly failed to force better behaviour, and its rulings on this round of pricing were openly designed to address some of these sins of the past. All that is now in jeopardy, with the CMA looking like the plaything – or worse – of the regulated utilities.

Mr Black is considering a judicial review. He needs to launch one pronto, and to win it. If not, the regulator’s credibility will be destroyed, and the effort made to balance the incentives for better behaviour from the water companies against the price consumers pay for water will have been in vain. There is a rulebook designed to ensure harmony between the CMA and Ofwat. The rest of us – and Mr Meek – might read it.

Don’t shoot the auditor

“When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.” As Samuel Johnson remarked in 1777, so the Financial Reporting Council in 2020. Aware of its forthcoming demise, the FRC seems to have decided to show its teeth. The accounting watchdog has analysed 216 sets of accounts; fully 96 of them were not up to scratch, and in 14 figures needed restating.

In some cases the directors were just too optimistic, and the “frequency of restatements relating to cash flow statements remains a concern”. For an increasing number of companies, this is the most important statement in the accounts, as physical assets give way to brands, patents and know-how. It is also the best forward indicator of trouble; you can make losses, but if you run out of cash, the end is nigh.

It is nigh for the FRC. After the damning verdict of the Kingman report (“a ramshackle house . . . constructed in a different era”) two years ago, the body has not been hanged only because the government has yet to get around to organising its replacement.

Yet despite the FRC’s findings, it seems that the auditors are starting to stand up to company boards. Big accounting firms are fed up with being savaged for not spotting problems, and the existential risk to EY over the failures of Wirecard, NMC Health and Finablr has served to concentrate minds elsewhere.

Thus Deloitte has stepped down from EG Group, the highly-leveraged business owned by the Issa brothers who are trying to buy Asda from Walmart. PWC has quit at Boohoo, the cheap fashion kings with questions to answer about conditions among its suppliers in Leicester. BDO resigned the audit of restructured retailer Poundstretcher after refusing to sign off last year’s cash flow forecast.

Firms must state why they are resigning, but the reasons are seldom as specific as in the Poundstretcher case. “Governance shortcomings” provides a convenient catch-all, especially in cases like Boohoo and EG. The more convincing answer is simply that the skimpy rewards from auditing are not worth the reputational risk.

The FRC’s comments will hardly help here. David Rule, its executive director of supervision, told The Times that accounts must “explain not only how the pandemic has affected company performance but also how it might affect a company’s future prospects”. Well, best of luck with that. We’d all like the answer as we peer into the corona virus mists, trying not to catch it.

Auditing has long been the Cinderella of the accounting profession, but as accounts get more complicated for outsiders (Royal Dutch Shell’s p&l, anyone?) that is changing. Audit fees are going up fast, and the audit partners are being invited to the fat-cat ball. As for the poor old FRC, it is promised glamorous new clothes, becoming the Audit, Reporting and Governance Authority. This year, next year, sometime…

Shell shock

Are the executives of BP and Royal Dutch Shell listening to the stock market? Share prices of both companies have more than halved in the last year, a scale of collapse unthinkable in the past. Some of this is due to nerves about the oil price, but mostly it reflects fears that both companies will squander their assets in their stampede to go green.

In fact, neither company has the expertise to make decent returns from renewable energy. They are world leaders at finding, extracting and selling oil and gas, a business which will be essential for energy supply for at least another decade. Rather than pour this wonderful competitive advantage down a green drain, far better to get costs down and dividends back up, and allow the owners of the businesses to decide where to put their money.

The Bank of England denies it, but we are being softened up for negative interest rates. This Alice-in-Wonderland concept, where savers pay someone else to look after their cash, betrays how desperate the bankers are to try and revive our crashed economy. It cannot be said too often that this really is a very bad idea.

Negative interest rates are well established in Switzerland, for example. They are used to discourage foreigners from fleeing to a safe currency haven, and they were imposed to try and stop the Swiss franc from rising so far that it threatened domestic manufacturers. This is not the problem the UK faces.

Bank Rate has already been cut to a smidgeon above zero – a rate that would earn just £1,000 on a deposit of a million for a year. The idea that investment committees which are not investing at these rates would suddenly rush out and spend the money rather than pay a bank to look after it is self-evidently absurd.

As for individual savers, the BoE has sense enough to see that it would make the banks even more unpopular with customers who are addicted to free-in-credit banking. This is a hangover from the days when cash earned a return, and ever since it stopped doing so, the banks have been trying to work out how to end it. Should one of the big four start to charge for current accounts, its retail deposits would drain away. Should the others follow in short order, we would suspect collusion, and we would be right.

Rather than pay charges, we would suddenly have a renewed appetite for cash. Conveniently, the new plastic notes take up almost no space and, unlike the old paper ones, do not rot if buried in a box in the garden. If enough of us did this, the impact of negative rates would be to reduce, rather than increase, the velocity of money circulating in the economy, while leaving the banks with less to lend. This is not the route to economic recovery.

It irks to feel pity for the big banks, but they face more misery almost whatever happens. They will have to pursue the billions in bad or fraudulent loans which the government has guaranteed in the great lockdown panic. The difference between their cost of money and what they can earn without risk, the so-called net interest margin, is already wafer-thin.

The banks may be economically vital, but they might wonder what’s in it for their impoverished shareholders. Barred from paying dividends this year, they are effectively being run as a branch of social services, which is why at 27p Lloyds Banking shares are lower than they were in the depths of the banking crisis.

At less than half the value of their tangible assets, all the big banks are theoretically worth more dead than alive. In other words, should Lloyds, Natwest or Barclays signal that they were liquidating the business and returning the assets to the owners, the share prices would leap. In practice, the government would find a way to stop it, but the threat might concentrate official minds. Such a thought should ensure that they rule out negative interest rates. Oh, and dividends should be set by bank boards, not by official diktat.

Vanity project on track (well, nearly)

Some poor sap called Andrew Stephenson MP has the unenviable task of putting lipstick on the pig that is HS2. From his trough of the Department for Transport, the first of the promised six-monthly reviews of this benighted project emerged this week.

Mr Stephenson has done his best to seem upbeat, but it is clear that this vast vanity project is going to cause endless political misery. The cost – sorry, “funding envelope” – is still £44.6bn for getting to Birmingham, and between £72bn and £98bn for reaching Manchester and the north. Yet even in the brief period since the prime minister’s decision to build, build, build, the costs have gone up again.

“HS2 is currently reporting cost pressures of £0.8bn” explains Mr Stephenson, in the deathless prose of DaFT, while softening us up for worse news (thank you, Covid, for providing useful cover) on buildings on the route which contain unexpected asbestos, or the expense in knocking Euston station about.

Assuming he is not reshuffled to some more agreeable position, poor Mr Stephenson must produce one of these reports every six months. Still, if you want a lesson in obfuscation disguised as clarity, take a look.

It’s an oil company, stupid

On August 10 this year, the board of BP revealed its exciting new strategy to go “from international oil company to integrated energy company” with a “decade of delivery towards net zero ambition.” The “reset” (ie cut) dividend was “resilient” and the prospect was of 7 to 9 per cent growth in gross earnings until 2025. The shares were 302p.

The analysts were appalled. The numbers in the endlessly detailed presentation added up to little more than a green wish list. In the ensuing 10 weeks the BP share price has fallen by a third, more or less in a straight line, to today’s 208p, their worst for 26 years.

Perhaps it was the thought that BP has had these warm and fashionable thoughts before, with the previous management’s “Beyond Petroleum” or perhaps it is the growing realisation that new energy is difficult, expensive, and with no guarantee that Big Oil is going to be any good at it.

BP, like Royal Dutch Shell, is an oil (and gas) company. This is where their assets and expertise lie. The world will need lots of both for decades to come, and these two can provide it cheaply. They should pay out the profits and let the shareholders decide where to invest them.

It sounds like another crackpot scheme to shore up the housing market, in the baleful tradition of Help to Buy. Yet the idea of long term fixed-rate mortgages, plugged again this week by the prime minister, may be rather less daft than George Osborne’s expensive folly. The true cost of that little crowd-pleaser is only now becoming apparent.

A research paper from the London School of Economics concluded that it worked fine in areas where it was not needed, while pushing up prices in areas of the country which were already expensive. It has done nothing to stop the rise of the resentful renter, now often in her mid-30s. Twenty years ago, three-quarters of 32-year-olds owned their own home. The latest figure from the Office for National Statistics is around half.

Like so many superficially attractive schemes, Help to Buy is easy to start, and politically almost impossible to stop. The housebuilders, wallowing in windfall profits, are lobbying furiously for a further feast from the trough. Long-term fixed-rate mortgages present the perfect reason to fend them off, and might even help “generation rent” into houses they want to live in, rather than buying a ticky-tacky box as a desperate first step onto the housing ladder.

As the Centre for Policy Studies has argued, a 95 per cent repayment mortgage is not a problem for a good borrower if the interest rate is fixed for 20 years ahead at a price he can afford. Stress tests for rising interest rates become irrelevant for both lender and borrower. Today’s ultra-low interest rates – the UK government can borrow for 30 years at under 1 per cent – provide an unprecedented opportunity.

The banks are not the natural lenders of this long-term money, but the life companies and pension funds are desperate to find assets which match their long-term liabilities, and which actually yield something.

Still, there is no idea so good that government interference cannot muck it up, and the prime minister’s suggestion of government guarantees for these mortgages sounds suspiciously like yet another expensive mistake in the making. Far better to set the rules to encourage the natural lenders and let the market work. Oh, and please scrap the wretched Help to Buy.

Well, we can all dream

“Listen to what the government ministers are saying, and bet on the opposite happening” has never been more apposite than this week, as the Conservative virtual party conference thrilled us all.

Here is the chancellor telling us about the sacred responsibility to balance the books, when we all know it cannot be done, especially when he is still pursuing his open chequebook policy. Neither growth nor tax rises will eliminate the deficit, and until the markets start to fret at the speed of money printing, Rishi Sunak will be able to bask in the sort of warm glow few chancellors ever see.

Then came the prime minister’s green dream of wind power for all, with the vista of thousands of happy workers churning out turbine blades for the world while we drive around in our electric cars. This is a virtual reality which could only be sustained in front of a virtual audience.

If the offshore wind target of 40 gigawatts (up from 10GW today) sounds familiar, it’s because we’ve heard it all before. In 2007 the Labour government promised 33GW by 2020. To realise the updated fantasy requires a new turbine (probably made in China) to be planted every weekday for the next decade, at a cost of perhaps £50bn. Even if this was physically possible, the climate sceptics at the Global Warming Policy Forum calculate the investment as equivalent to a 200 per cent rise in electricity prices.

This is little more than a guess, but the same can be said of the true cost of wind power. Add in the need for (gas) back-up when the wind doesn’t blow, expensive maintenance costs and the reconfiguration of the electricity grid, and it is far more expensive than the headline suggests.

Still, we apparently have money to burn, whatever Mr Sunak’s Augustinian words. HS2, Hinkley Point, hydrogen home heating, electric cars and tax cuts as well …O, brave new world!

Not following the science

Back in the real world, here’s a sad little example of how sentiment beats science. In western Cumbria, an area not overendowed with employment possibilities, the (Labour) council has approved a new coal mine. A coal mine! Such a dirty, polluting, regressive proposal cannot possibly be allowed, and the wretched Robert Jenrick, he of the Isle of Dogs print works scandal, is dithering about whether to stop it.

The usual suspects are urging him to do so, as you would expect. Never mind that this mine would not produce coal to burn in power stations, but a higher grade that is needed to turn iron into steel, and which is currently imported. Never mind about the 500 local jobs it would create. Don’t give us the facts, we’ve already made up our minds.

Ben van Beurden is sorry: “It is very painful to know that you will end up saying goodbye to quite a few good people.” Well, not that sorry: the decision to axe between 7,000 and 9,000 of these good people is buried at the bottom of this week’s third-quarter update from Royal Dutch Shell, after the usual bewildering guff like “The CFFO can be impacted by margining resulting from movements in the forward commodity curves up until the last day of the quarter.”

Indeed, the CEO’s rather stilted regret is not even in the statement, but a long way down a cheesy interview on the company website. Rather further up the interview is a sort of Bob the Builder exhortation: “Can Shell transform? Yes. And we will.”

The trouble is, nobody can be sure what Shell will transform into, only that Mr van Beurden is trying to turn an oil company into something else, and that it will be eye-wateringly expensive. His record at forecasting hardly inspires confidence. Five years ago, when Shell overpaid handsomely for BG Group (to get its oil reserves) Mr van Beurden justified the price by claiming that it secured the dividend for years ahead.

Not that many years, it turns out. The debt taken on to pay for BG now threatens the balance sheet, so the board slashed the payout in a Covid-induced panic in March. That supposedly rock-solid dividend was the reason why so many of us held Shell shares even if (like the analysts) we frequently found the other numbers incomprehensible.

Now we are promised more asset write-offs, and this “transformation.” A braver board would understand that these things are expensive and the returns highly uncertain, and that Shell’s core competence is in oil and gas, neither of which is going to disappear.

A smaller business that focused on exploiting low-cost reserves might begin to repair that butchered dividend and halved share price. It could start with another redundancy, that of a CEO who has exhausted his credibility.

Wiring diagram

The Wirecard story is the gift that keeps on giving. Germany’s biggest-ever collapse has turned into the teutonic equivalent of Theranos, and a book and movie rights are surely not far away. This week the Financial Times has written another chapter, with evidence that EY, the Wirecard auditor, was warned by one of its own employees of possible fraud four years ago, but continued to give the company a clean bill of health.

As the FT reveals, Wirecard’s contacts ran right up to the German Chancellery, and right up to the moment when the carefully-constructed edifice came crashing down.

Long before it did, Neil Campling at Mirabaud Securities had been the only analyst with a “sell” recommendation on the stock (his target price: zero) and the FT’s Dan McCrum had put his career on the line with the paper’s revelations. His articles produced the most bizarre response from BaFin, the German financial regulator; rather than investigating the allegations, it filed a criminal complaint against two FT journalists.

As if to show just how teutonic the regulator is, BaFin’s president Felix Hufeld is now arguing that under German law BaFin did not itself have the right to launch a special audit of Wirecard’s accounts, but could only refer the matter to an obscure, private sector outfit called the Financial Reporting Enforcement Panel. This is a pitiful excuse for any self-respecting regulator. Wirecard had collapsed before the panel produced any results.

The damage is still continuing, but it is not only BaFin that has much further to go. EY’s global chairman Carmine Di Sibio has written to clients claiming that EY was ultimately “successful in uncovering the fraud”. This is a bit rich, but perhaps serves as a first line of defence against the inevitable legal actions the auditor will face. This is a €1.9bn fraud, a size big enough to pose an existential threat to EY, so any attempt at damage limitation is understandable.

Wirecard was Germany’s only significant tech company and a member of the Dax30 index, while its collapse exposed the country’s financial regulator as a paper tiger. The British government’s astonishing mismanagement of Covid is making us all poorer, but there is nothing like the misfortunes of others to cheer us up. The Germans have a word for this: shadenfreude.

Starting our descent

Two weeks ago I suggested here that the risk of shares in British Airways’ owner IAG falling below the 92p rescue rights price was trivial. The legion of bankers would earn £70m in fees for little more than producing a 258-page prospectus for the €2.74bn capital raise.

Well, the underwriters may yet escape, but it’s going to be close. From 163p when the issue was launched the shares have slumped to 95p (ex-rights). Goldman Sachs, Morgan Stanley, Deutsche Bank and Rothschilds may yet find themselves reluctant holders. As the old saw has it, forecasting is always difficult, especially for the future. They still get the £70m, though.

Nobody loves UK shares. Even the domestically-focused individuals are selling up and sending their savings overseas. According to the Investment Association, we have cut our holdings from 23 per cent in 2015 to just 14 per cent at the end of June, selling £13bn of British shares since the start of the Covid crisis.

It is easy to construct the bear case: government incompetence in handling the crisis has made it worse, chaos could follow a no-deal Brexit, and sterling has been weakening. Measured in dollars, the FTSE100 index has miserably underperformed every major market this year.

Pick out the bones, and it’s clear why. The index is heavy with banks, oil companies and some big, deadbeat businesses like Aviva and Standard Life Aberdeen. Both BT and Vodafone have problems which will require a lot of cash to fix, while Land Securities and British Land reflect the collapse in commercial property values.

All these stocks have taken a terrible pasting, but as a result they matter much less than they did. Only Royal Dutch Shell and HSBC remain in the top 10 by market value, with Lloyds the next bank at number 25. All the big bank shares sell at less than half their stated net tangible asset value. Even if it is a racing certainty that they will have to make massive extra provisions against loans this year, their shares far below the real value of their assets.

So what? Firstly, it seems unlikely that the FTSE100 will continue to underperform, now that the dinosaurs have fallen so far down the league table. And whisper it quietly, but there might just be some bargains there.

In New York, private equity has more money than it knows how to invest – $47.6bn according to data crunchers Preqin. This is not to be confused with the $13.5bn raised in the first half of this year for special purpose acquisition companies, which sound to the uninitiated like a modern-day version of the South Sea Bubble.

Currently, most of this money is looking for the Next Big Thing in technology, but there may not be enough big things to go round, or the prices may get even more elevated than they are today.

Those British dinosaurs will not offer the same excitement, but some of them are more valuable dead than alive. Both BP and Shell are committed to spending billions going green, while their shareholders pay. Only the managements believe their businesses are immortal, and both companies have broken trust by slashing the dividends.

Or how about Imperial Group, still 31st in the FTSE, having sacrificed the dividend after failing to diversify away from smokes? Some latter-day KKR, armed with private equity billions, might find a replay of Barbarians at the Gate far more lucrative than tilting at tech windmills.

To: Secretary of State for Transport

Dear Grant Shapps

I’m sorry to bother you at this difficult time, what with re-nationalising the railways and demands for money with menaces from the airlines, but I wonder whether you could encourage a little adjustment that is not a request for money. Yes! A letter without a plea for a bailout! I thought that might grab your attention.

As you know, Heathrow airport is not prospering. Our lenders have already waived covenant rights, and between ourselves, there is a distinct possibility that it might go bust if passenger numbers do not pick up pretty soon.

But we must look ahead, so I am writing about our plan for a third runway. You may think we hardly need both of them at today’s traffic levels, but the years we have spent agonising over it have run up quite a pretty bill, even though nothing has actually been built.

That irritating fellow Jock Lowe – I’ll come back to him in a minute – has disclosed that the Civil Aviation Authority will allow £550m to be added to the airport’s regulated capital base. This would mean still higher landing fees and fares, and while it might push some airlines over the edge, it would be jolly helpful to our shareholders. True, those owners (including Ferrovial of Spain, the Qataris and the British Universities pension fund) have paid themselves £4.5bn in dividends and allowed Heathrow to run up vast debts building vanity project terminals, but that money is gone.

Besides, in the scheme of government spending nowadays, £550m is no more than a rounding error. For that money, people might expect an actual runway rather than than a vast lawyers’ bill and some distinctly dodgy plans, but it just shows how out of touch the public is with costs in the real world.

Oh yes, Jock Lowe. He heads a group which wants to extend one of the existing runways so planes can take off and land at the same time, and which would cut early morning noise over west London. We’ve used every device we can think of to shut him up, but he’s still at it. Irritatingly, safety experts have cleared the plan for take-off, and of course it is far cheaper than anything we have come up with.

This argument may be one for another day, and another Secretary of State, but you should expect trouble from the usual suspects. If the CAA really does allow that £550m to be put on the customers’ bill, the awkward squad will ask whether the shareholders should stump up after they helped themselves to so much. You can always argue that it is nothing to do with you. Best of luck with that.

Yours sincerely

John Holland-Kaye, CEO, Heathrow Airport