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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.”

Ah, those Budget traditions. Where would we be without them? Top of the list must come the Augustinian projection for the fall in the gap between spending and income, a mysterious process whereby a few years out it magically falls close to zero. This has not actually happened since Gordon Brown claimed to have balanced the Budget by fiddling the figures, all those years ago, but here it is once more. At least with Mr Brown, you knew whose Budget it was. Richi Sunak’s is, essentially, his master’s voice. The idea of treasury independence is laughable.

On the published charts, there is nothing so vulgar as actual numbers, merely a projection of both government income and spending as a percentage of future gross domestic product, itself a guess, or estimate as the Office for Budget Responsibility prefers to call it. Its first estimate is for a Panglossian 6.5 per cent growth figure for the current year. It is a measure of how the OBR is now viewed as the nearest thing we have to an economic oracle that this remarkable figure has not been widely questioned. Where the Treasury forecasts were (obviously) an inside job, the OBR stands slightly outside the process, transferring its credibility to the chancellor of the day.

Its latest projection is positively glowing, especially when set against its last one, made in the gloom of last March, when the 2021/22 deficit was going to be a pandemic-driven 10.3 per cent, followed by an unsustainable 4.5 per cent for 2022/23. The last financial year turned out to be less ghastly than feared (a 7.9 per cent deficit) and this year’s 3.3 per cent looks manageable, assuming its growth estimate is right. Thereafter, the magic is set to work, with the deficit falling to 2.4 per cent, then 1.7, and finally to a mere 1.5 per cent by 2026/27.

These are, remember, projected percentages of projections, which is why nobody believes the later numbers. They are just there to show how responsible the government intends to be, other things being equal. Things never are, especially with a financially incontinent prime minister, a chancellor too weak to stand up to him, and the next general election to win. Still, we take great comfort in the ritual projections. Along with the traditional aspiration to roll back the state, it’s just part of the Budget show, after all. St Augustine would understand.

Drax it! We’re not green after all

They feel rather hard-done-by at Drax, owners of what used to be Britain’s largest coal-fired power station. Just when they should be flaunting their charms at the Glasgow greenfeast, along come the spoilsports from S&P, the ratings agency, and drop the company from their Global Clean Energy Index. The compilers have now decided that Drax isn’t really green after all. Given the company’s immense efforts to stop burning any more of the coal beneath their feet, the Draxers are understandably upset.

So far, this setback has not been translated into damage to the shares of this £2bn company, which boasts of providing 11 per cent of the UK’s “renewable” electricity. Perhaps it’s just a slow-burn reaction, but S&P is not the only outfit questioning whether brown might be a better colour to describe the new, coal-free Drax. An outfit called Ember has decided that Drax’s Selby plant is the third-largest emitter of CO2 in Europe, after Belchatow in Poland and Neurath in Germany, both burners of low-grade coal.

The trouble is, Ember may have a point. Instead of coal, Drax now burns wood, which is not obviously a better fuel than coal for CO2 emissions. The trees are cut in north America, turned into wood pellets, shipped across the Atlantic and stored in carefully-controlled domes (lest the pellets spontaneously combust) before going into the old coal furnaces. Under the UK rules, the trees are considered as renewable – which they are, of course, if you wait long enough – and so this bizarre process attracts grants (about £800m so far, and counting) and allows electricity supply companies to claim they are selling green electricity.

So how green is green here? Not green enough, say S&P, although navigating through last month’s “consultation on index universe expansion” is enough to make anyone go green about the gills. Drax is advertising enthusiastically that it is part of the solution rather than the problem, but its whole process looks uncomfortably like subsidy farming. Not a great basis on which to build a long-term business.

The name’s Bond, Aston Martin Bond

The buyers of shares in Aston Martin Lagonda at the launch three years ago have discovered the hard way that dreaming can be expensive. Successive falls in the share price and recapitalisations almost wiped them out. Now we are being offered another way to risk our money on this iconic brand name in the form of bonds to help finance Aston’s new HQ at Silverstone. Fortunately for the Aston Martinista, the return on the bonds does not depend on their actually winning anything in the ferociously competitive world of Formula One. They carry a coupon of 7 per cent, last for five years, and if the demand is there, could raise up to £250m. The risk is even higher than the performance of the cars, and the near-100-page prospectus seems almost designed to discourage buyers, in contrast to that of the share sale. Seems about right.

If you have nothing substantial to say, make sure you say it at great length, larding it generously with adjectives, uplifting sentiments and visions of the broad sunlit uplands in the far distance. Thus it was this week that Boris Johnson launched his Net Zero Strategy, 1,868 pages (and counting, thanks to Simon Evans of Carbon Brief) of aspirations, plans and dreams for the carbon-free future. There is almost no meaningful number with a pound sign in front of it anywhere. Please do not call this magical thinking.

Besides, there is nothing magical about a heat pump, which is merely a reverse refrigerator, so why should they not get 25 to 50 per cent cheaper to install in four years’ time? Why not suggest that they will be no more expensive to buy and run than gas boilers by 2030? Ah, that one is easy: “rebalance” energy prices to make it so, but nothing as vulgar as an admission of higher taxes on gas. There are over 200 pages of this sort of well-meaning drivel, larded with uplifting examples of sterling progress, soothing expressions about working with the grain of the market, avoiding one-size-fits-all and coy little admissions like “electric heating appliances, such as heat pumps, are only low-carbon if the electricity used to run them is generated from low-carbon sources.”

Heat pumps are the former double-glazing salesman’s dream come true, but they are hardly the answer to a warm and cosy home. Just as your refrigerator has to work hardest to stay cool when you want it most in hot weather, so heat pumps are at their least effective when it’s cold outside. If you want a proper hot bath in the winter, you’ll need an immersion heater. Never mind: improving technology will conquer thermodynamics. Oh, and the fans in next door’s air-sourced heat pumps will be completely silent, too.

Buried in the text is the occasional corker, like: “We are considering how we can kick start the green finance market and have
consulted on introducing mandatory disclosure requirements for mortgage lenders on the energy performance of homes on which they lend, and on setting voluntary improvement targets to be met by 2030.” Alas, there is no space to explain what this sinister little comment really means. It suggests that mortgage lenders will take a sniffy view (ie charge a higher rate of interest, or lend a smaller percentage of the purchase price) if the windows rattle or the roof insulation is inadequate – or perhaps if you haven’t got a heat pump. Still, it’s all voluntary, you’ll note, so no need to get upset.

It’s a comfort to learn that “We have seen the impact of overreliance on gas pushing up prices for hardworking people but our plan to expand our domestic renewables will push down electricity wholesale prices” Ah yes, it’s the Saudi Arabia of wind again. Oh, and connoisseurs of charts should not miss page 67 of the main document.

It’s no coincidence that this Net Zero Strategy has been launched just ahead of what promises to be a grim Budget and the looming car crash that is COP26 next month. It gives the prime minister a fine text to preach from, to show the world he (and his wife) is deadly serious about all this, even if they have no idea how we can get there, and refuse even to contemplate the cost that “hard-working families” are going to have to pay. But then economics was always something of a closed book to our dear leader.

Don’t Bank on a rate rise

Silvana Tenreyro is in no doubt. For the Bank of England’s Monetary Policy Committee to raise interest rates next month would be “self-defeating”. Her views matter more than most since she is a member of the MPC. As do those of Catherine Mann, a new appointee, who argues that “there’s a lot of endogenous tightening of financial conditions already in train in the UK. That means that I can wait on active tightening through a Bank Rate rise.” Do not confuse this Catherine Mann with the author of romantic fiction, although some might argue that to put off raising from 0.1 per cent when retail price inflation is galloping towards 5 per cent requires a particularly rosy view of the future.

The MPC’s Ms Mann was previously at the OECD, that hangover from the post-war Bretton Woods settlement, whose executives enjoy enviable tax privileges and which has long outlived its usefulness. Its forecasting record is no better than a dozen other economics bodies. But given these two dovish views, neither she nor Ms Tenreyro is likely to vote for an increase next month. Others, perhaps even a majority, may do so, but intriguingly, the pair may be right to try and put off a rise, despite the belief in the money markets that one is coming.

The clue is in the mysterious phrase “endogenous tightening”. In English, it means that if money market rates rise in anticipation of a higher Bank Rate, then that will tighten conditions sufficiently to choke off inflation without actually needing the rise at all. If this seems bizarre, it has worked in the past, and merely betrays the importance of psychology in people’s behaviour. Of course, this ruse only works to buy time. If inflation turns out to be more than a shudder through the consumer prices index which will look like a bad dream by next year, contrary to the views of Ms Tenreyro and Ms Mann, then the MPC will have to raise rates much further to bring it back to the 2 per cent target. Whoever said central banking was dull?

Saving the Scottish

It is not quite 20 years since two big shareholders in Scottish Investment Trust decided that its performance was so dull that it should be broken up. The board, stuffed with Scotland’s great and good, saw that attack off, but the victory was a Pyrrhic one for the shareholders, who have endured two decades of sub-par performance. Now, at last, change is coming, and it might even be an improvement, as the Scottish (not to be confused with the sector’s soaraway star, Scottish Mortgage) is to be absorbed into the snappily-titled JP Morgan Global Growth & Income.

On the whole, investment trusts are a good idea. They combine transparency, low charges and the discipline of the Companies Acts, and over time produce better returns than their higher-cost cousins, investment funds. These funds are “open-ended” but can be closed without notice as holders discovered in the last market crash. Investment trusts are “closed-ended” which are always open to sellers, although you may not like the price you are offered.

Shares in the Scottish, for example, recently sold for 11 per cent less than the value of its assets, thanks to years of waiting for its ugly investment ducklings like Glaxo, BT and NatWest to turn into swans. The takeover is in effect a mercy killing of this failed approach, and in future the portfolio will be whatever JP Morgan’s army of analysts fancy, anywhere in the world. Shares in the Scottish jumped by 8 per cent in relief, and in the hope of better performance.

There are far too many investment trusts, so this takeover, to produce a £1.2bn trust, is encouraging. Unfortunately, most trusts are too small to be considered by many investors, and the minimum they will look at is being raised all the time. Boards of those little trusts are reluctant to take the role of Christmas turkeys, while those running better performers are reluctant to pay up for a portfolio they don’t like and will only liquidate. Someone, some day, will find a way to square this circle, and hoover up the tail of trusts which are there because they’re there, to everyone’s benefit except the redundant directors. Someday…

The UK economy, and its capital markets, stand on the edge of a precipice marked inflation. If that seems like hyperbole, consider how much is crucially dependent on today’s ultra-low interest rates. Swathes of British industry are being kept alive because debt servicing costs are so low. House prices, driven up by tax breaks, are being sustained by a mortgage price war among the banks. Awash with cash, they are fighting for borrowers who are categorised as “low risk” by the authorities.

Both public and private sectors are hooked on the drug of almost-free money. We are sufficiently addicted that we can somehow claim, with a straight face, that Bank Rate of 0.1 per cent is some sort of new normal, that money will always be available to tide us over, and besides, even if rates double to the dizzy heights of 0.2 per cent, it will make almost no difference.

This is dangerous nonsense, and if the Bank of England’s Monetary Policy Committee was truly independent, it would have started raising rates already to head off rising inflation, as its remit demands. In fact, it has not even stopped the last of quantitative easing, that device to disguise money-printing. A couple of the MPC members are in hand-wringing mode, but none has yet voted for higher rates. To an outsider, this looks very much like regulatory capture: the Bank may be nominally independent, but the treasury is in effect calling the shots.

It’s not hard to see why. The National Debt may be high, but the post-dated cheques will really only start to be presented next year. Should the cost to the government of funding its deficit rise by just 1 per cent, it will add £700m to the new borrowing needed, and a rise of 1 per cent would be only the start. Should the semi-captive buyers get spooked and strike, they might start demanding a return on their money that exceeds inflation. In the US, headline inflation has already passed 5 per cent, and forecasts here of more than 4 per cent are no longer dismissed as scare-mongering. This also has a knock-on effect on the cost of servicing index-linked debt.

The idea that this is merely a passing surge in prices before stability resumes looks more fanciful by the day. The most fundemental cost of all, that of energy, is rising strongly, and is set to go on up. Thanks in part to the dramatic cuts in exploration and production budgets forced upon the oil majors, “worldwide oil demand may match or exceed world-wide pumping capability, including OPEC pumping full out,” according to a study by Goehring & Rozencwajg. Grant’s Interest Rate observer describes this as “a bull market both great and rare.”

It would mark the end of the 40-year bull market in government bonds and its associated equity boom. Jonathan Ruffer, who can remember it starting, is confident it is over, although the precise timing of the turn is impossible to predict. His unlovely metaphor compares today’s financial position to “sitting on an open AGA with bare buttocks.” We are near the end of silly money “because events have conspired to close off any escape route from the impasse which the whole world faces. The inescapable problem is that of indebtedness.”

There are already some signs of nerves in the debt markets. The yield on the 10-year gilt is at a two-year high. At 1.07 per cent, it is still well below the rate of inflation, guaranteeing losses for long-term holders. The rule of thumb for corporate failure is that things get worse slowly, and then suddenly. You may not time the moment, but like Mr Ruffer, you may be confident it will come.

Let others buy these shares

Collins’s first rule of investing is: do not buy a share that has been listed on the public markets for less than a year. Considering that any healthy stock market requires new companies to join, to replace those which fail or are taken over, this seems to strike at the heart of what investing is all about, especially after a bumper year that has seen £14bn raised in London so far. But the arrival of another business, while good for the market as a whole, does not mean you have to rush in.

In theory, the prospectus that must accompany an issue of shares is as comprehensive a document as a company will ever publish. In practice, there are well-paid advisers whose bonuses depend on a successful sale and who will stress that opportunities like this one do not come around often, hinting that the offer price may never be seen again. Above all, the insiders doing the selling know far more about the business than even the most detailed prospectus can tell you.

This week saw a particularly painful demonstration of that first rule. Just over a year ago The Hut Group came to market at 500p a share. Dazzled by the prospect of a British digital champion, buyers started the shares trading at 600p, and ran them all the way to 800p in January. This week, after a catastrophic day of the company failing to explain what the business was about, the shares have collapsed to 270p.

THG, as founder Matthew Moulding has renamed it, is a classic, if extreme, example of investors getting carried away with the prospect of something they don’t really understand, but are caught up in the excitement. For a gem of this genre, the prospectus for Aston Martin remains as classic as the cars. It implied that the dream brand would rub off on the shares. It didn’t. Floated in 2019 at the equivalent of £10,000 each (sic), the shares now cost £18.

The impulse that took some investors into THG, that they really ought to have exposure to technology stocks regardless, has helped foreign exchange transfer group Wise, cyber-security group Darktrace, and DNA sequencers Oxford Nanopore to healthy premiums over this summer’s flotation prices. All look like proper businesses with fine prospects. Not owning them might prove expensive, but if they are really that good, they will still be there to buy after the anniversary of their flotation.

The joke is over. The stand-up comedian that is our prime minister suspended reality for an entertaining 20 minutes on Wednesday before providing more evidence that he is economically illiterate. Whether he simply does not understand the extent of the squeeze facing the cost of living, or whether he really believes that things will magically improve by bullying employers into paying more, is almost irrelevant.

That squeeze, the culmination of years of complacency regarding energy supplies this winter, promises a violent increase in the cost of domestic gas. We can expect ministerial claims that this is a international lack of fuel as the world economy opens up after the pandemic, but Britain’s energy shortage has been years in the making, thanks to the war on coal, the pressure on oil companies to stop developing reserves, the lack of gas storage, and the naive belief that the wind will always blow to keep the windmills turning.

Since the only way to raise the ease the shortfall in the supply of gas is to pump more from Russia, we are now faced with the unedifying prospect of being dependent on mild weather and the goodwill of Vladimir Putin to keep us warm through the winter. He is unlikely to agree out of the kindness of his heart. As he is blamed, however, it is worth remembering that Russia is already fulfilling all its contractual obligations.

As for the UK, if recent policy is any guide, the response will be a fresh round of subsidies to soften the blow, with the real cost disguised as another increase in the deficit, to add to all the other free lunches that pass for Johnsonian policy. So far, he has got away with it, but it is crucially dependent on cheap borrowing, and there are early signs that this era is coming to an end.

The yield on 10-year government stocks has risen to its highest in 2 1/2 years. At 1.07 per cent, it is still ridiculously low, but a 1 per cent rise in the cost of new borrowing adds over £700m to next year’s interest bill. At the Bank of England’s forecast of inflation, the buyers of these gilts are losing 3 per cent of their capital a year, while the markets are implying 6 per cent inflation, powered by the gas price cap. It would be impossible not to raise interest rates if that came about, and history shows that once they start to rise, they can go a very long way.

This week also saw more evidence of inflation running away already. The Halifax house price index has risen by 7.4 per cent in the last 12 months, helped by the desire for more domestic space in the pandemic along with the increased savings to pay for it.

It is a stark reminder of the gulf between home-owners and the rest. Each rise takes home ownership further away from those without access to capital, and highlights the hopeless task of saving to buy. This is surely the biggest social divide in Britain today, and each rise attracts more money into domestic property, pushing up prices further. This is reinforced by the fiction that it is important to be able to pass on the family home to the offspring (who will sell it as soon as you die). We are not so much a nation of home-owners as a nation of property hoarders.

The solution is obvious, and painful. Higher interest rates will help savers and bring an end to near-zero mortgage rates. They might also shake faith in the belief that house prices can only go one way, and start a much-needed bear market in domestic property. Of course in his conference speech Rishi Sunak tried to reassure the markets that it is immoral for governments to stack up debt on future generations, while he is doing just that. It’s an illustration of the old adage: listen to what the government is saying, and bet on the opposite happening.

Jargon busters

Who says they have no sense of humour at the FT? Had you wanted to add the scary article (above, on property hoarding) to “MyFT” you might have been redirected to this page:

“Sorry”, it says, “the page you are trying to access does not exist.”

There follows a selection of alternative explanations why the page could not be found.

Stagflation: The cost of pages rose drastically, while the page production rate slowed down.

Liquidity traps: We injected some extra money into the technology team but there was little or no interest so they simply kept it, thus failing to stimulate the page economy.

Tragedy of the Commons: Everyone wanted to view this page, but no-one was willing to maintain it.

Speculative bubble: The page never actually existed and was fundamentally impossible, but everyone bought into it in a frenzy and it’s all now ending in tears.

You get the idea.

Would you like a share in a nuclear power station? A slice of Sizewell C that the UK government is taking from the Chinese, now that they are no longer our friends, but are voracious interlopers set on World Domination? This week’s fantasy deal involves offering their 20 per cent to the investing public. It is about as likely to fly as Hinkley Point, the only nuclear power station currently being built in Britain, is to come in below budget.

Investing in UK nuclear power is jinxed. Even when the fleet was privatised in 1996, it dared not speak its name, sailing under the bland “British Energy” label. Its unhappy history on the public markets is chronicled here and is surely enough to discourage even the most pro-nuclear investors this time.

The problem with nuclear is not safety (it’s safer, on all rational measures, than any other significant source of energy) but the widespread fear that any amount of radiation, however small, is lethal. The result has been escalating safety measures, so that the cost of building new stations outruns any gains from previous experience, even where local opposition can be overcome.

Successive UK governments have decided that the political cost of more nuclear was more than they could tolerate, but this kite-flying about offering shares in Sizewell C may indicate an understanding that without more nuclear power, hitting the UK’s zero-carbon targets is effectively impossible.

Unfortunately, the experience with British Energy, for those old enough to remember, should be enough to dissuade anyone from buying shares in a new reactor. The long-term reward may be keeping the lights on, but history says the risks are such that investors are likely to lose their shirts in the meantime.

They’d be BATty not to

Last week British American Tobacco tapped the bond markets. Nobody noticed. The €2bn raised is little more than routine housekeeping for a company this big, but the terms highlighted the dramatic mismatch between BAT the borrower and BAT the purveyor of death sticks to the world. Nobody loves the latter; many investment mandates specifically bar funds from buying tobacco shares, while others just don’t want to be seen owning them.

It’s a different story in the bond markets. If you can bear to struggle through the 150-page prospectus (including 27 pages of risk factors) for the pair of perpetual subordinated fixed-to-reset rate non-call securities, you would learn that the company is paying 3 per cent for five-year money and 3.75 per cent for 8-year money. Should BAT decide not to redeem either at their first end-dates, the interest is reset at higher rates.

The details need not concern us here. They show that BAT can borrow at much less than 4 per cent, while the shares at £26 (after a nasty fall this week) yield over 8 per cent on the last twelve-months’ dividends. Tobacco companies are always under siege, in the long term they are expected to be as dead as their customers. The prospect is of a mix of ever-tightening legislation and legal action, as it has been for decades now. Yet there can hardly be anyone on the planet who fails to understand the serious health risks, and as a result, there are no new entrants to the industry, allowing tobacco to become the ultimate oligopolistic cash-generating business.

The mismatch between the different capital markets is absurdly wide, and really demands that BAT looks again at its dividend policy. Instead of forever paying out to us ungrateful shareholders, BAT should use the cash flow to buy in its own shares. At a price of £26 the money saved from not paying the 213p (the last four quarterly dividends) would purchase the entire outstanding share capital inside a decade. In practice, the lenders might get nervous long before that happened, but probably not before the process had driven the price to the point where paying dividends once again made more sense.

I’m sorry, I’ll read that again

“BHP shareholders urged to vote against climate plan” read the headline in the FT on Tuesday. “Glass Lewis says miner’s targets for reduced gas emissions not based on science”. Just for a moment, it seemed that the worm had turned, and that BHP shareholders were being urged to put their interests ahead of the global warming bandwagon.

Glass Lewis is a “proxy advisory services company” which tells big shareholders how to vote, thus saving fund managers the bother of actually trying to understand the issues before them. Alas, it turns out that’s not Glass’s advice on BHP at all. It has decided that the miner’s Climate Transition Action Plan to cut its carbon emissions is just not good enough. Worse, it may not be sufficiently scientific.

That’s almost certainly true, since whatever the UK’s Climate Change Commission may say, the science on the impact of rising CO2 emissions is all over the place. The board of BHP – which is soon to decamp from London to become a pure Aussie company – might ask its major shareholders where they think their interests lie. Winning iron ore from the Australian desert and shipping it to China will always take rather more energy than the local sunshine can provide.

BHP generated much synthetic outrage with its plan to leave London, but the decision to get out of oil and gas looks much more painful. The sale to Woodside Petroleum smacks of passing the environmental buck, since the hydrocarbons will still be extracted. Now ratings agency S&P is worrying that BHP’s near-total reliance on iron ore threatens its credit rating. The timing of the sale looks rotten, too. Since the news broke in August BHP shares have slumped from £23.58 to £18.88 in London, while Woodside shares are up by a fifth. The buyer is too small to find the estimated $13bn in cash, so it is paying in shares, which BHP has promised to give to its shareholders. A much-needed slice of luck for them, then.

Once upon a time, you could be sure of Shell. If you go down to the investment woods today, the one thing you can be sure of is (another) big surprise. What used to be one of the stock market’s most reliable and predictable income generators suffered another spasm this week with the sale of an asset which it had described as “core” only a matter of months ago. This time it’s the shale oil and gas interests in the Permian basin in the US, one of the most prolific such areas in the world, sold off for $9.5bn.

Is this a good price? Who knows? The way the Shell board is behaving, it is hard to be confident, and the deal has too many of the marks of a forced sale. All but $2.5bn of the proceeds are promised back to us shareholders, which was enough to give the shares a bit of a kick up this week. The mechanism for those “additional shareholder distributions” will have to wait until the deal closes, but forecasting anything from this sprawling business has become almost impossible.

The rot set in last year, following the bizarre spectacle of the oil price falling below zero. This clearly so spooked the Shell board that they slashed two-thirds off a dividend which had only gone up for more than half a century. The short-sightedness of this move was highlighted just months later, when Shell announced that it seemed the oil world was not coming to an end after all. Instead, it would start raising the payout again, albeit at 4 per cent compound, a rate which would take 28 years to regain its previous level.

Another policy quickly followed, that the payout would now go up rather faster than previously indicated, and that share buybacks would restart. Meanwhile, a lower court in The Netherlands decided that it knew better than the board how the company should behave, and ordered it to speed up its carbon dioxide reduction plans. This was and remains a heaven-sent opportunity to follow Unilever’s example and reincorporate the business in the UK, but instead the CEO has kowtowed and promised to try and comply with this blatant judicial over-reach.

This week’s news, and the steady trickle of previously-announced buybacks, have taken the share price back to an 18-month high, but valuing the business remains as hard as when the dividend was cut. Analysts’ forecasts are little more than guesswork, and pages of figures with the results look impressive but are of little help to investors. The two figures that do mean something, the size of the group debt and the dividend, provide little guide to how the board will behave in future. From the outside, Shell looks like a business that is running before the green wind, with little or no idea of where it is going.

Not doing well by doing good

Before the end of the year, we are promised an exciting opportunity to earn even less on our savings than we do already: green bonds from the government’s own retail savings arm. Apparently, these things will have a three-year life, with interest rolled up and added to the repayment. The tax status is unknown.

This week saw the wholesale version launched, in the form of a 12-year, £10bn offer of government securities offering a yield of 0.87 per cent. Such is the demand to be seen to be doing something for the planet that the return is 0.025 per cent below that on the equivalent conventional gilt. The proceeds will go to whatever the government deems to be green, but in practice the money will disappear into the great government machine.

The lower interest rate will save about £28m over 12 years, or about 15 minutes of state spending, so you have to believe that every little helps. There is no financial reason why the institutions should pay up in this way, but it’s a small investment in a bit of virtue signalling. If they (or you) want to be seen to be making a little sacrifice in the great green cause, it’s a shame not to take the money.

What planet are they on?

Are you ESG’d out yet? Even before you’ve remembered that it stands for environmental, social and governance, there are signs that investors are suffering from ESG fatigue. A survey by Investing Reviews asked respondents which campaigns really got to them, and the patronising, woke offering from Jupiter topped the poll. Whether it was the image of the hermit crab (is this the fund manager, or the bewildered punter?) or the cheesy copy in its ads trumpeting how green Jupiter’s people are, we don’t know.

We do know that the record of the group’s funds is pretty crab-like, while Jupiter Fund Management shares are so deep in the mud that they cost the same as they did nine years ago. Still, at least the management under Andrew Formica has prospered mightily. ESG virtue-signalling is clearly good for some.

Incidentally, the runner-up in the irritation stakes is, predictably enough, abrdn, the boiled-down, unpronounceable remains of Standard Life Aberdeen. You can just imagine the consultants saying: let’s include this name for a laugh, along with some more serious proposals for the name change. The board will never buy it…

Coalman offers to deliver

They are also jolly green at Drax, owners of the UK’s biggest coal-fired power station which has pledged not to burn any more of the millions of tonnes under its feet after September next year. We could keep going, CEO Will Gardiner told the FT, if that would help everyone round the next energy corner. Very decent of him, and (at current prices) no need for a subsidy, which makes a pleasant change from almost all other offers of help. It might not look that good just ahead of the climate love-in at COP26, though.

Drax knows all about this game, since it has prospered mightily from subsidy farming in the UK’s energy market. It burns wood pellets, made from American trees and shipped across the Atlantic, burning oil as they go. On arrival, it counts as biomass (good) rather than the fossil fuel it might otherwise have eventually become. As Aneurin Bevan put it in 1945: “This island is made mainly of coal and surrounded by fish. Only an organizing genius could produce a shortage of coal and fish at the same time.”