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By Ewen Stewart, on 31 March 10
We are indebted to Ewen Stewart of Arden Partners for permission to publish his report: A Game of Two Halves – Equities to Win. Please see that report for full detail.
Summary
2009 was a remarkable year for the global economy and a remarkable year for equities. In this note we try to explain why 2009 turned out as it did and examine the prospects for 2010 and beyond.
We have called this note ‘A Game of Two Halves – Equities to Win’ because we believe that although the short-term trends for the UK economy are improving the longer-term forecast looks troubled indeed. Despite this, we believe the outlook for UK equities remains positive.
The first few months of 2010 may well surprise on the upside in terms of employment, house prices, consumer-spend and even, ultimately, GDP. But this is no ‘V’ shaped recovery.
We argue that trend growth, longer term, is likely to significantly disappoint. We argue that the UK’s superior growth, relative to many other developed nations, in the noughties was largely an illusion and we struggle to find the dynamo for growth over the next few years. We believe that the unwinding of the extraordinary fiscal and monetary stimulus, is a necessity, but will also be very difficult to achieve painlessly.
We believe the markets are still underestimating the structural problems with the public sector deficit and that politicians of all colours will be forced to deal with it. The consequences of not doing so would result in rising interest rates and a collapse in international confidence. The deficit remains the key issue for the UK and it may well bring substantial political challenges in itself. Indeed perhaps we should not have called this ‘A Game of Two Halves’ but a ‘Back to the Future – Welcome Mr Heath and the 1970s’?
Despite this, we are not bears of equities. It is true that current valuations are not particularly cheap by historic standards but the UK stock market is fairly defensive and internationally diverse. We believe equities look attractive against cash, bonds and, ultimately, real estate. We are concerned about a potential rise in inflation and again equities are a good hedge.
We have set a year end target of 5750 for the FTSE 100. Sector valuations do not follow a clear pattern and we believe this offers a number of anomalies. We have outlined our suggested sector weights below. As a generalisation, we seek overseas earnings – especially the US$, moderate leverage and strong cash flow as the place to be in 2010 with a return to M&A being more pronounced than perhaps expected.
Policy reaction
The extreme cannot become the norm?
It may be a blessing that Ben Bernanke made the study of the 1930s great depression his speciality. We say may because, while the unprecedented global response undoubtedly has alleviated economic implosion, it does remain to be seen if the ‘nationalisation’ of deficits, the eclipse of moral hazard and the unique policy of both near-zero global interest rates and, in many parts of the globe, with quantitative easing (QE), has succeeded in sending growth back on an inflation-free growth projectory or whether the underlying malaise has been merely kicked into the medium grass. These issues are global, with substantial government deficits, trade and growth imbalances impacting upon different regions.
 Source: Bank of England Stability Report, December 2009.
The economic policy reaction in the UK has been greater and more prolonged than any G20 nation, which is partially demonstrated by the chart above. The Bank of England cut interest rates to 0.5% (the lowest since the foundation of the Bank in 1694); 2009 saw a programme of QE to the tune of £200bn (equivalent to 25% of all outstanding gilt stock) and government spending was accelerated, despite plummeting tax receipts. The fiscal deficit is forecast by the Treasury to peak at 12.6% of GDP – a figure roughly twice as large as the UK’s 1975-1977 IMF crisis, and on a par with Greece.
Read on: A Game of Two Halves – Equities to Win
By Steven Baker MP, on 30 March 10
The Belfast Telegraph reports Toby’s efforts to deliver “Big banking lessons from little Presbyterian Mutual“:
Investors at the Presbyterian Mutual Society are the only depositors in the UK likely to lose personal savings as a result of the banking crisis.
The organisation, which operated under an FSA exemption intended for credit unions in Northern Ireland, does not benefit from a Government guarantee scheme which protected savers’ money and put an end to the run on Northern Rock.
When customers attempted to withdraw £50m during the height of the banking crisis in October 2008, the PMS paid out £21m before entering administration in order to safeguard its remaining reserves, which totalled, by that stage, just £4m.
As the Northern Ireland Executive and the Government at Westminster wrangle over responsibility for the crisis, a charity and pressure group, formed to promote the principles of honest money, has formulated a plan which could refund the society’s savers, without necessitating a bailout at public expense.
The Cobden Centre, spearheaded by seafood entrepreneur Toby Baxendale, is keen to see the Bank of England issue new notes and coins to PMS investors who currently cannot access their money. Any inflationary effect would be mitigated by erasing deposits and allowing the Government to recover the society’s investments, to set against the national debt.
As the article hints, this measure is not inflationary. The inflation already happened when demand deposits were loaned. This measure is anti-deflationary. Think of it as a just and fair version of QE based on sound property rights.
Read more.
Further reading
By Steven Baker MP, on 30 March 10
This post is taken from Mises, The Theory of Money and Credit (1934), chapter 4 Money and the State (PDF, HTML). Follow this link for the series.
The Position of the State in the Market
The position of the state in the market differs in no way from that of any other parties to commercial transactions. Like these others, the state exchanges commodities and money on terms which are governed by the laws of price. It exercises its sovereign rights over its subjects to levy compulsory contributions from them; but in all other respects it adapts itself like everybody else to the commercial organization of society. As a buyer or seller the state has to conform to the conditions of the market. If it wishes to alter any of the exchange ratios established in the market, it can only do this through the market’s own mechanism. As a rule it will be able to act more effectively than anyone else, thanks to the resources at its command outside the market. It is responsible for the most pronounced disturbances of the market because it is able to exercise the strongest influence on demand and supply. But it is nonetheless subject to the rules of the market and cannot set aside the laws of the pricing process. In an economic system based on private ownership of the means of production, no government regulation can alter the terms of exchange except by altering the factors that determine them.
Kings and republics have repeatedly refused to recognize this. Diocletian’s edict de pretiis rerum venalium, the price regulations of the Middle Ages, and the maximum prices of the French Revolution are the most well-known examples of the failure of authoritative interference with the market. These attempts at intervention were not frustrated by the fact that they were valid only within the state boundaries and ignored elsewhere. It is a mistake to imagine that similar regulations would have led to the desired result even in an isolated state. It was the functional, not the geographical, limitations of the government that rendered them abortive. They could have achieved their aim only in a socialistic state with a centralized organization of production and distribution. In a state that leaves production and distribution to individual enterprise, such measures must necessarily fail of their effect.
The concept of money as a creature of law and the state is clearly untenable. It is not justified by a single phenomenon of the market. To ascribe to the state the power of dictating the laws of exchange, is to ignore the fundamental principles of money-using society.
Further Reading
Please see our literature for a range of further reading.
By Steven Baker MP, on 29 March 10
You may have noticed that tonight will be a live debate between the three politicians vying to become Chancellor. It will be broadcast on Channel 4 from 8pm. As part of this Reuters will be live blogging and I’ve been invited to contribute. You can follow the conversation here.
via The Filter^: Blogging the Chancellors.
By Toby Baxendale, on 29 March 10
Sean Corrigan points out how the USA’s interest bill is twice the size of all private gross spending on industrial equipment!
There has been a massive upsurge in corporate debt which has paid , you guessed it, bonuses, dividends and not real investment – read more…
See also Material Evidence, 12 Mar 2010, on surging productivity:
By Dr Tim Evans, on 28 March 10
I am delighted to welcome Sam Bowman as TCC’s newly appointed Education Network Executive Director. A first class graduate in History and Economics from University College Cork (UCC) in Ireland, Sam is currently doing an MA at London University’s School of Oriental and African Studies. A former national vice-chair of the Young Progressive Democrats in Ireland, in 2009, he won a full scholarship to the Mises University Economics Conference at Auburn, Alabama, in the US. Winner in 2009 of the John B. O’Brien Annual Prize in History at UCC, in 2010, he won the title of ‘Outstanding Delegate’ in the London International Model United Nations.
Currently, as well as being a part-time intern student with the Adam Smith Institute Sam is putting the finishing touches to TCC’s bi-weekly Austrian reading group seminars. Here, his purpose is to create a small group of roughly ten to twelve undergraduate and postgraduate humanities students and give them a strong grounding in the Austrian school of economics. On this, Sam comments: “This will encourage participants to do Austrian-related work in their fields and form a cadre of intelligent Austrians who will work to promote Austrian thought in British academia. To this end, group’s members will ideally be interested in pursuing academic careers in the humanities and social sciences.”
Following an agreement with the General Director of the Institute of Economics Affairs, Mark Littlewood, the group will meet and be hosted at the IEA’s offices in Westminster. To be initially advertised to students through the University of London’s email service, personal connections and friendly blogs, Sam also expects to involve students from the Universities of Birmingham, East Anglia and alumni of the Mises University.
Concerning the vision of the venture he says: “My ultimate aim is for the group to read Murray Rothbard’s Man, Economy and State. This will give members of the group the firm foundations in Austrian economic thought, which will have practical benefits for students attending the group and can be applied in their academic work. It will also provide a foundation for further study and discussion of the Austrian school. This reading group will offer students the chance to develop their knowledge of Austrian economics and at the same time produce a group of dedicated, enthusiastic proponents of liberty who can spread their ideas. If the first year proves successful, it can be recreated in other British cities and universities under the auspices of The Cobden Centre, and help to create a new generation of Austrian scholars in British academia”.
So, if you want to take part in this venture why not contact Sam directly? You can email him here.
By Dr Tim Evans, on 27 March 10
On Thursday evening, I had the pleasure of chairing a private dinner in Westminster where TCC’s Chairman, Toby Baxendale, was the guest speaker. There were seventeen people present.
The event brought together an array of friends from journalism, the think tanks, and scholarly life – as well as from across the political spectrum. For me, it was interesting to see just how warmly TCC’s honest money agenda was welcomed by most present. While the ensuing discussion and debate was vigorous, Toby’s performance not only impressed everyone present, but it continued to bring together key players concerned with the practicalities of successful reform.
In this context, the dinner was not only significant and enjoyable – it was a rude success.
By Dr Tim Evans, on 27 March 10
Following the honour of chairing an Economic Policy Centre dinner in London on Tuesday evening, Wednesday saw me travel to Gent in Belgium where I was delighted to deliver an hour long lecture – followed by another hour of questions and answers – to the fabulously sound students of the Liberal Students Movement – LVSV. As one of Belgian’s leading student societies, now approaching their 80th anniversary, not only is this group astonishingly active, but also they muster huge audiences.
Prior to the formal proceedings of the evening, the group’s committee took me out to a wonderful dinner. Telling me how delighted they were to have me with them, and commenting that “my reputation preceded me” (I think that was a complement!), they informed me that many people in the audience were already well versed in Mises, Rothbard and the teachings of the Austrian School of Economics. Moreover, they said that we would be joined by students and friends from the Rothbard Institute, which indeed we were.
While I performed well and all the feedback from those who attended has been positive, it was a real delight for me to give my talk in the city’s Liberal Archive building. Indeed, to speak in a library lined with a vast collection of sound classical liberal texts and which includes all the modern greats only added to the sense of occasion. I was also delighted to learn that its excellent array of books – including those of an Austrian disposition – are also being regularly accessed and used by an ever-larger number of PhD students.
In true Belgian style the evening ended with around a third of the audience (30 people) retiring to a local beer garden where we enjoyed the warmth of good intellectual company and what turned out to be a wonderful Spring evening. That said, right at the end of the evening, I was somewhat surprised yet delighted to see many of the youngsters with me handing around copies of the Adam Smith Institute’s latest offering – A Beginners Guide to Liberty – which they had just imported from London. Funny old world!
By Dr Tim Evans, on 27 March 10
Following TCC’s recent launch of its Education Network I was delighted to speak to a fabulously bright group of six formers at Hampton School in Middlesex last Monday. Studying a mixture of A-Level subjects including politics, economics and history these students were not only intelligent and receptive to new ideas but they demonstrated an excellent breadth and depth of knowledge.
Well versed in the ideas and publications of friends at the Adam Smith Institute, these students are also getting into their Ayn Rand, Ludwig von Mises and Murray Rothbard. Eager to discuss free market critiques of central banking and monopoly fiat currencies, I was not surprised to learn that this school is one of the highest performing in the country. Later, I was delighted to meet the headmaster Barry Martin and to discuss with him return visits in the future. Excellent.
By Chris Neal, on 26 March 10
I have just listened to the Budget Debate and quite frankly am growing more and more tired of the political point scoring arena that Parliament has become. It was unbridled electioneering, totally populist and I am sure none of us are fooled.
The implied nonsense that Belize are now cooperating with UK tax authorities to ensnare Michael Ashcroft when he has done nothing contrary to current tax laws was pathetic. Do they think we have forgotten that the Labour Peers Paul and Cohen are also non-domiciled for tax purposes? To use the Budget which should present a sober look at the Nations books for such gerrymandering is an insult to the shareholders/electorate they purport to serve.
I therefore exercise my right to express an opinion and to look objectively at how the current ‘management’ are looking after my interests; after all I have been obliged by them over the years to contribute lavishly to their misguided vision for our wellbeing!
Quite simply if this was an AGM and I was a shareholder with voting rights I would back a motion to sack the lot of them based on performance. In that sense I cannot wait for the forthcoming election to register my vote of no confidence. I am particularly unhappy at the parlous state of our benefits-driven society. The Conservatives are at least offering some reasonable solutions to tackling the welfare state thanks largely to the excellent work undertaken by Iain Duncan Smith’s think tank the Centre for Social Justice. The Party are undoubtedly more compassionate than they were in the Thatcher era and, unlike Lord Tebbit’s solution for the unemployed “get on your bike and find a job”, contemporary caring Conservative Policy prime facie is to ride alongside!
I watched Channel Four News last night and was captivated by John Snow interviewing some of the good folk of Luton; a large number of his interviewees stated that they wouldn’t vote. How many times do politicians need to hear that people don’t bother voting because of the mess they have made of our democracy before they listen to vox pop and try to understand our frustrations with politics and politicians? Our Cobden Centre colleague Douglas Carswell MP sets out the reasons why people have disengaged in ‘The Plan’ the book he co-authored with Daniel Hannan MEP. They correctly deduce that voter apathy is mainly due to the inability of politicians to effect change. Carswell quotes doorstep comments such as “you’re all the same”, “it doesn’t matter how I vote, nothing changes” and “you make promises but you never deliver”. Carswell and Hannan go onto unpack the route that led to this apathy and make some sound policy recommendations to effect rapid change but, sorry chaps, this is not rapid enough for me so I have decided to go one step further motivated in part by the following:
- (updated)Approximate UK Income Tax receipts £146bn versus welfare payments £196bn. However well the Chancellor spins these numbers this shareholder ain’t happy!!
- Benefits saved Tax and NI gained per person returning to work >£8000 per annum (source CSJ). ((NI – National Insurance is a clever idea that helps citizens save for benefits, retirement and other social needs. It is run by the Government in much the same way as Bernie Madoff ran his quaint little investor scheme except, as it is run by the state, it is entirely legal. Therefore none of the people running it will be held accountable and go to jail for 150 years when the shareholders realise that all of their money and more is being spent straight away and not invested for their future benefit.))
- NHS cost per capita £860 per annum this doubles for the unemployed perhaps because they constantly need to prove they are sick to continue receiving benefits as well as the inherent problems some genuinely face to their wellbeing by being unemployed. For a thorough evaluation, read the CSJ reports.
- Pure and simple, ‘helping one another’. do you remember that old-fashioned and now outdated idea ‘neighbourliness’?
- The parable of the talents: Matthew 25:14-30 so good it was repeated in Luke 19:12-27.
It is entirely correct that a caring, prosperous and civilised society should look after those unable to fend for themselves but when in 1945 Atlee’s Post War Labour Government began implementing the recommendations of the 1942 Beveridge report they weren’t up front about this creeping socialist agenda that has led to an unacceptable reliance on state handouts sadly not by the deserving in society but the most devious who often exhibit brilliant cunning and guile at exploiting our overly complex system. Oh that those talents could be harnessed elsewhere for good! Others newly unemployed soon see how they work the system and join their ranks. “Up to three generations of some families have never worked and are entrenched in economic dependency” this is oft rolled out, well known and needs proactive solutions. We can trust some politicians like Iain Duncan Smith, Philippa Stroud, Steve Baker, Douglas Carswell and Frank Field amongst others to make their voices heard in the corridors of power but we should not sit back and wait for them to legislate a way out of this mess.
I have come to the conclusion that instead of raging at the machine we should attempt to solve our own problems in our own communities and not rely on politicians and the state.
Why? Simply because problems like unemployment are corrosive not just to those going through the process but to communities, society in general and we as ‘shareholders’ cannot afford to fund it anymore.
This thought process and the closure of my own business due to the downturn allowed me the time to set up a Job Club in my home town Edenbridge, then neighbouring Oxted, now Richmond Borough and soon Sutton. I have also founded a charity GB Job Clubs to train and resource other volunteers to set up clubs in their own communities. This was all inspired by a Conservatives Social Action seminar on ‘How to Start a Job Club’ in March 2009.
Remember David Cameron’s speech to the Open University on May 26th 2009 advocating localism? The Conservatives have been very proactive in encouraging social action as this doesn’t require legislation or an election to implement. Iain Duncan Smith encapsulated this when he said,“Our approach is based on the belief that people must take responsibility for their own choices but that government has a responsibility to help people make the right choices.”
Well said Sir, however, I come from the viewpoint that the Government is not there to provide everything for us; if we take control of our own destinies then we might actually wrestle some control back from the state who continue in their desire to nanny us from cradle to grave. If we serve ourselves more and rely less on state provision we can shrink Government, yep that’s right fewer politicians, dismantle quangocracy, reduce red tape oh boy the list goes on! Maybe in time we can insist on a reduction in the funds we are required to invest to keep UK Plc afloat!
I recently compared notes with some fellow Job Club leaders and between our six clubs discovered that we had helped 105 folk back to work over the last six months. If the cost/saving benefit is £8000 per annum per person we have saved the exchequer and more importantly ourselves as tax payers/shareholders £840,000 per annum. That is the result of only six Job Clubs run voluntarily at little or negligible cost to anyone. That’s right there is hardly any cost involved in setting up and running a Job Club and we don’t want ‘government funding’ or put it another way some of our tax bucks back! Why not? It would probably require our application and subsequent performance to be assessed by one of those quangos or an army of civil servants wrapping us up in red tape and emasculating our ability to deliver.
GB Job Clubs now has 25 ‘Get Britain Working’ inspired Job Clubs listed on the Directory page of its website, www.gbjobclubs.org. If the success rate of our six clubs is replicated in all 25 , we would save ‘ourselves’ £3,500,000 per annum. How about 500 clubs up and down the country each succeeding to get just one person per month back to work that equates to a saving of £48,000,000.
Now I like numbers like this and, as a shareholder, they excite me! Detractors will point out that finding people jobs is reliant on the economy and that £48m is a drop in the ocean in an overall spend of £185bn. I know, but every single person we have helped is worth much more than money. We are seeing lives transformed by opportunity and communities in a small but visible way impacted by helping one another and this is undoubtedly great for social cohesion. This can spread like a virus. Just imagine that, instead of aspiring to be in gangs and earn illicit money from delivering drugs, the new role model is someone in a community who has set up his/her own business and can legitimately employ someone.
I have used GB Job Clubs as a launching pad for a microfinance and mentoring project named the Jericho Programme where we incubate small ventures in communities up and down the country. The first pilot scheme is now underway in Edenbridge where we have backed two heroes from the Job Club to start their own garden maintenance business. It takes guts to wean yourself off state support especially when you have three children as is the case with one of our entrepreneurs but they are going for it with gusto. All it has taken is encouragement, support from a mentor, a small loan for equipment, a van donated by the local council and the goodwill of a community. Cobden Centre founder Toby Baxendale has joined me in funding six such projects in the UK and once we can prove they work we will set about raising funds and recruiting fellow mentors to empower these latent entrepreneurial heroes that exist in our midst.
We can’t cure all our problems ourselves but we must take more control of socio-economic issues where we are able. We will reap great dividends and that has got to be great news for all shareholders!
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