Quick Take on Brexit

Here’s my very quick take on UK’s vote to leave EU.

I think a lot of voters felt very patronised by the political ‘elite’ of UK, EU and further afield over this subject. “Project Fear” inasmuch as it existed therefore probably backfired.

  1. It won’t be the financial cataclysm George Osborne suggested — weaker GBP great for exporters, and might make consumers think twice about some of their purchasing.
  2. There will be no emergency budget, and NHS spending won’t be slashed.
  3. It’s a good thing for EU as it will trigger some much-needed re-thinking of the whole ‘European Project’ in order to head off Czech, Netherlands and others that might be next to leave.
  4. Trade between UK & EU will barely be affected – UK will continue to buy a lot of EU’s exports; unless of course EU makes it hard for UK to export its own goods back to EU by raising tariffs. Nobody wants a trade war.

I’m buying GBPUSD at $1.33


Let’s face it: Britain’s a mess.
London is creaking under the weight of residents and tourists visiting one of the world’s trendiest cities. Its infrastructure was not designed for this. But corporate incompetence adds to the misery.
On 3 January I had the misfortune to be travelling back from north London to Jersey, via a British Airways flight from Gatwick Airport.
I had be forewarned of potential delays on the main train line so fortunately I left plenty of time. That was just as well. The Transport for London travel planner told me to use the tube to get from Southgate to Victoria and then suggested a train to East Grinstead plus a bus from there to Gatwick. In the past I have regularly done the entire journey from Southgate to Gatwick in about 80mins.
At Victoria, there was not a single sign explaining what was happening: the only indication there were problems was that the Gatwick Express didn’t indicate any ‘next train’. ‎It would have been helpful had Southern Rail made some information available to travellers, but based on my previous experiences with Southern and their apparent contempt for their customers I’m not at all surprised by the absence of assistance.
Scanning the information boards I was surprised to see a direct train to Gatwick (via Horsham)‎ indicated. On previous occasions when there’s been engineering work, my experience of the ‘rail replacement’ service has been rather poor: long queues to board and slow journeys. So absent any information I presumed the Horsham train would be fine.
Two hours later (for a journey more typically 35-45mins) a very full train arrived at Gatwick. It felt like we stopped at every little station on the way plus a level crossing… yet I barely saw a single passenger board or leave the train. So why all the extra stops, Southern Rail?
My total journey time was 170mins, more than double the usual time.
Having navigated security at Gatwick I headed for the British Airways lounge. Around 40mins‎ before the scheduled time the gate was announced and so we trooped to the gate. The next surprise was to see people still coming off the plane, meaning a good 30min wait before boarding would be likely. Then the bad news: the plane was broken and they were looking for a replacement as it wasn’t fixable quickly. I asked gate staff why the gate had been called if this were the case and they told me the problem developed on the ground but this turned out to be not true: the pilot later told us they believed exhaust fumes might have been leaking into the cabin air system during the inbound journey. So it must have been pretty obvious the flight would be delayed. Thus calling passengers to the gate was just wasting their time.
The next surprise was that the new aircraft was on a different stand (45L when we were at 55D). One might imagine that we could have been bussed from 55D to the plane… but no. Instead we had to reverse through the domestic departures then check in again at gate 45L (where there were initially no gate staff). When asked why we couldn’t be bussed, we were told there might not be buses available. Imagine the irony therefore when we step out of gate 45L onto waiting buses, for the usual scenic tour of the airport to find our plane.
I was amused (somewhat) watching the gate staff as this situation unfolded. Surely, at a busy airport a broken plane happens regularly? Yet to observe the situation you’d probably think it was something they’d never encountered before. Yet it’s really not rocket science. Bizarrely, my TripIt Pro app told me about the delay and the gate change long before British Airways bothered to inform its customers.
70mins late pushing back, part of which we’re ‎told is because they had to get permission for passengers to return from domestic gates to get to 45L (which would have been avoided by using buses direct from 55D).
Look, accidents happen but really what distinguishes a world-class company is how they deal with these situations. On this occasion, Southern Rail, Gatwick Airport and British Airways all failed to distinguish themselves.

Jersey Is Not Bust, @OliverBullough

Reading today’s Guardian article, The Fall of Jersey leaves one hoping for better-quality journalism… or certainly some balanced reporting.

Oliver Bullough argues that Jersey is heading towards an abyss financially, as its government deficit is forecast to expand to £125mn by 2019. Let’s put the numbers in perspective to start with.

Checking the States of Jersey’s Annual Accounts, which are easy to find on the government’s website, I would draw attention to the following:

  • Jersey’s forecast deficit of £125mn in 2019 represents around 3% of the island’s £4bn GDP. By comparison, according to UK’s ONS Britain’s general government deficit in 2015 was 5.1% of GDP and peaked in 2009/10 at 10.8%.
  • Jersey has barely any external debt; UK has £1.6 trillion (87.5% of GDP).
  • Jersey’s balance sheet shows £3.3bn (almost 100% of GDP) fixed assets. It’s almost impossible to find a comparable number for UK, but one figure suggests £158bn of liquid assets (8% of GDP).
  • UK central government expenditure is running at 35%-40% of GDP; Jersey’s (£674mn) is substantially less than 20% of GDP.

So, Jersey starts from a much, much better position financially than UK.

Mr Bullough then goes on to conflate Britain & the United Kingdom: yes, Jersey’s status is peculiar but it is far from unique. In fact there’s a term for it: Crown Dependencies. All have their own governments and the power to levy their own taxes (yes, Mr Bullough, Jersey people do pay tax).

It is also rather inaccurate to describe Jersey as “London without the rules or the taxes”. Jersey has a well-regulated financial services industry and does levy taxes — just not the same taxes as UK. Whilst some people might describe this as “unfair tax competition” in almost all other walks of life, we see competition as a good thing, so why is tax competition not also a good thing?

The article also talks about the Tax Justice Network and studies that “highlighted Jersey’s role in sucking wealth out of countries that need it most”. Let’s think about that for a second: for a start, Jersey isn’t “sucking” at all. People bring their businesses, their wealth and themselves to the island for any number of reasons, but if we’re talking about the “countries that need it most” then I suspect often that’s exactly the problem: a lot of governments in the Developing World just cannot be trusted. Indeed, when Cyprus is “bailing in” depositors (effectively, expropriating their money) who could blame a government in the Third World for thinking it’s OK to nick a bit off the rich every now & again to pay for their profligacy (or even just their lifestyles)? So a wealth-creator based in one of those countries might seek to put her money somewhere safe, just so it’s out of their reach. That’s not necessarily tax avoidance, tax evasion or anything untoward — it’s prudent risk management. Situations like the introduction of exchange controls, re-balancing of fixed exchange rates etc (think China, Argentina for example) are other examples of where Jersey has something to offer. All the evidence suggests that once governments clean themselves up and demonstrate they can be trusted, capital flight ceases and indeed reverses.

There is also a continued willful misunderstanding about what “tax neutrality” means with respect to vehicles such as offshore funds. If a fund has investors from UK, France, USA, Singapore etc etc it’s really important that the investors aren’t taxed twice. That doesn’t mean they’re not taxed at all: rather, that they are taxed in their home jurisdiction, not Jersey. Hundreds of jurisdictions (including Luxembourg & Malta) offer similar structures for the same reason. Does that mean they’re “aiding & abetting” tax avoidance? I think not.

I have some sympathy for Richard Murphy when he says Jersey’s business model is “fucked”. Tax transparency, moves such as OECD’s initiative on Base Erosion & Profit Shifting and just a shake-up in banking & finance generally; all have served to threaten Jersey’s continued affluence. Indeed, Jersey’s Gross Value Added is already more than 10% smaller than it was in 2000, having shrunk in ten of the next 13 years. Almost exactly 100% of this reduction has come from a collapse in financial services (from £2.52bn in 2000 to £1.69bn in 2014, a 33% fall).

The article quotes Unite that, “it’s depressing… seeing where the island’s heading.” But in part, unions are to blame because as tax revenues fell after the new Zero-Ten regime was introduced, the local population (many employed by government) resisted the idea of cuts in employment or public services. Having got used to the drug of finance money, they could no longer imagine life without it. Ministers need to get more realistic about the way they articulate this to voters.

Mr Bullough then goes on to look at Jersey’s tourism industry: to be sure, numbers have collapsed from 1.5mn people in 1979 to 338,000 in 2014. I couldn’t find a good break-out of tourism (the GVA report shows “Hotels, restaurants & bars” as a single category but then doesn’t mention all the other income derived from tourists when they are here); however one thing I’m certain of: the average tourist today is probably spending several times as much as a tourist in 1979. The hotels have gone up-market, offering spa facilities, Michelin-starred restaurants and so forth. The flights between Jersey & UK have never been more packed in my six years here, so someone is still visiting.

On the subject of Jersey’s agriculture, I’m not sure where Mr Bullough was walking but I can confidently assure him there are a lot of cows here. But there do seem to be some issues with farming here, although it’s not really an area I know much about (so feel free to email me if you do!)

It’s a bit unfair to blame Jersey for the UK’s mortgage crisis. Yes, banks may well have used Jersey-domiciled vehicles to package up loans, but all these UK banks were regulated by the (then) Financial Services Authority & the Bank of England; if a balance sheet has a bunch of assets on it that are rather vaguely described, would you not, as regulator, ask questions about these? Furthermore, typically opaque investments attract a larger ‘haircut’ in regulatory capital calculations, meaning they might hide the true nature of the underlying assets but not necessarily help the bank give a false impression of the state of its balance sheet. I don’t have time to dig into the extent to which Enron was using Jersey vehicles to, “hide the extent of its debts”… will come back on that later.

I love the quote, “Jersey did not contribute a penny to cleaning up the mess it had made”. What mess? These were UK banks, lending in UK & elsewhere and regulated by UK regulators. If their regulators failed to notice what was going on under their noses, in what way does it become Jersey’s responsibility to clean up the mess?

It’s also not true that Jersey isn’t conscious of its dependence on financial services and isn’t trying to do anything about changing this. For example, one of Senator Philip Ozouf’s roles is to develop a larger information technology sector in the island. The recently-published Innovation Report identified some key issues for Jersey to resolve in order to make this a reality, and let’s face it — Jersey’s never going to be Silicon Valley… or even Silicon Roundabout, but technology business have the perfect ‘footprint’ for the island — high revenue, relatively low employment. With a little more commitment from government it’s conceivable this could be a 5% of GVA sector in the not-too-distant future.

No doubt, things need to change in Jersey, but I found the tone of this piece disappointingly shrill.





Inter-company Credit & Inventories

I attended an excellent dinner a few weeks ago, hosted by UBS Jersey. The speaker was their Global Economist, Paul Donovan, author of The Truth About Inflation.

During his interesting & thought-provoking talk he spent some time discussing small businesses. In the UK, according to a Parliamentary Briefing, Small & Medium Sized Enterprises (SMEs) represent 60% of private sector employment & 47% of private sector turnover.

During and following the Global Financial Crisis of 2008, banks withdrew credit from the private sector corporate market (amongst other things). Furthermore, according to Donovan, inter-company credit collapsed as large firms were no longer willing (or able) to extend credit to smaller customers.

When this happened, small companies were forced to shrink their balance sheets. One way to do that was to reduce inventories.

Now, anything that encourages smaller firms to be more efficient is probably a good thing, but given their significant contribution to GDP, what other consequences might arise?

Let’s consider basic materials such as oil, copper or grains. When times are good & the economy’s growing, the temptation for a manufacturer is to expand inventory in anticipation of both increased demand for their goods and (perhaps) because they believe the price of the inputs may rise as everyone else is doing the same thing. So as the growth phase gets underway, commodity demand growth accelerates. This is what we saw 2003-2007 (although the effect was further exacerbated by the creation of investable commodity products sucking vast sums of additional capital into a relatively small market). When growth stalls, the cycle goes into reverse: not only do manufacturers have lower actual demand for the basic materials inputs, but they have inventories that they run down. So commodity demand tends to fall off a cliff initially, before stabilising once de-stocking is complete. Again, this occurred during the last cycle 2008 onwards.

What Donovan is saying though is that there may be no resumption of the previous tendency to build inventories through the recovery. As a result, primary commodity businesses never saw the kind of ‘super-growth’ phase of previous recoveries – demand is essentially growing lock-step with the global economy. The ‘rising tide’ is indeed floating all boats, but the commodity boat is floating at the same rate as everybody else this time.

If he’s right, this might alter the way we need to look at natural resource companies from a valuation perspective.

China Slowdown: Are There Lessons From Japan?

I have been wondering for some time whether there might be clues in the future trajectory of the Chinese economy & stock-markets in the behaviour of other large economies that have emerged since World War II. As neighbours, Japan seemed like the obvious starting point.

I started off by looking at both countries’ GDP Deflators & Nominal GDP per Capita against local equity market performance. I used data from the excellent Quandl service.

From 1952 to 1980, Japanese nominal GDP per capita grew at an annual average rate of 12.8%, ranging from around 5% to 20% per year. The Nikkei index pretty much tracked this, growing 11.2% per year. What’s interesting is the next part. In the 1980s, Japanese growth slowed dramatically, averaging 5.7% per year; yet the Nikkei surged ahead gaining an average 19.5% annually.

So what was happening, and could this pattern repeat in China?

One thought was that it might have been spurred by an increase in consumer expenditure. Yet the data suggest that as a proportion of GDP, this element grew only from about 48.6% in 1970 to a peak of 56.1% in 1983 before falling back slightly towards the end of the 1980s. Likewise government expenditure grew only slightly (from 10.7% to around 14%). The one indicator that appeared to track the explosive growth of equity prices through the 1980s was the proportion of the economy represented by the Service Sector. This rose steadily from 29% in 1974 to 39% fifteen years later (the year the stock market in Japan peaked), even as manufacturing growth slowed almost to nothing.

So, back to China. Over the past couple of decades, Chinese equity markets have tracked nominal GDP per capita pretty well:

And where’s China’s service sector? Right around the level of Japan’s in 1974… So is it possible that overall growth rates in China might slow but the equity market could grow? Based on the evidence of Japan, I’d say it was entirely plausible.


This article first appeared on LinkedIn 9 September 2015



Is It Always Good to Share?

The Sharing Economy has attracted tremendous interest over the past few years: firms like Uber, AirBnB, TaskRabbit and Zilok offer people the ability to monetize assets that they’re not using all the time, or to find customers more easily than was the case pre-internet.

As a homeowner, I’ve become an enthusiastic user of AirBnB: the guests I’ve hosted at my farmhouse in Jersey have been charming, interesting and fun; I’ve used Uber a few times (though it doesn’t work that well on my Blackberry Passport) and I’d be happy to rent one of my three drum-kits using Zilok when I eventually get around to sorting it out. It makes sense: these are under-utilized assets (I really should practise the drums more); why not let someone else share them?

As a citizen of the world, I’d like to think that the Sharing Economy is good for the environment: if sharing car journeys using a service like RelayRides means fewer car journeys — or even fewer cars manufactured — then that’s got to be a good thing, right? On the other hand, if AirBnB makes accommodation so much more accessible that we take more trips, then perhaps not.

As an investor, I’m interested in the long-term impact this will have on our economy. So I’ve been reading & asking. The first piece I read was an excellent essay by Juliet Schor. She makes some very good points:

  • If a company like Zipcar simply replaces a traditional car rental firm, there’s probably not much economic impact;
  • If a site like AirBnB makes it easier to host and easier to find cheap accommodation, slippage is reduced and the economy becomes more efficient… which probably leads to more transactions occurring at a given level of GDP than would previously have been the case.

She also points to a lot of controversy over whether the Sharing Economy is basically a form of what we in financial services term “regulatory arbitrage”: AirBnB hosts are not subject to the same rules as the hotels they supplant; there’s no minimum wage on TaskRabbit. This is picked up by an article in The Economist: governments are struggling to shoe-horn decades-old legislation into working in the internet age, and it is difficult.

The part that interests me most is the bit that isn’t getting such good coverage, as far as I can tell. If durable goods like drum-kits & jet-washers are easily shared, to what extent do consumers stop buying these items, knowing they can just borrow them as required? According to the World Bank, Household Final Consumption represents close to 70% of USA’s GDP. Clearly, it makes no sense to share stuff one uses all the time (e.g. your fridge); looking at the data in a little more detail (from the Bureau of Economic Affairs) I was I admit surprised to see that fully two-thirds of the average American household’s expenditure goes on services. Of the other third (that part going on goods) two-thirds goes on non-durables. So, we’re left with ‘just’ 11% of consumption spent on durable goods. That’s a much smaller proportion than I’d have guessed and so perhaps I worry too much about the impact on GDP of everyone going out & sharing all their stuff.

I suppose the other side of the same coin is, how come there aren’t loads more internet businesses trying to help people share services, since they’re a much bigger market?


This article first appeared on LinkedIn 8 September 2015

Wage Inequality: How Not to Fix It

There was a great little piece on Business Insider this morning about Patricia Arquette’s acceptance speech at the Oscars. It got me thinking.

Let me start by saying that I am a firm believer in equality in all areas: male/female, black/white, whatever. Whilst there are undoubtedly differences in individuals’ capabilities that’s what makes the world an interesting place and there is absolutely no justification for discriminating in favour or against someone simply because of their gender, race or any other trait.

I’m just not at all convinced that legislation is always helpful. Take the following example. When my two sons were younger, they attended the local Preparatory School. One of the women teachers there went on maternity leave several times, returning briefly between each stint to teach for maybe a term. This is difficult for both the kids and the school to manage: they have to expend management time locating & interviewing temporary teachers to cover the role, and then even if those teachers are fantastic, they have to let them go when the original employee deigns to return. The kids likewise have to adjust to repeated changes of teacher. Like it or not, as chief executive of a business like that, wouldn’t part of you be saying to yourself (not out loud, for obvious reasons), “Why hire women [who go on maternity leave] when we can hire men [who generally don’t]?”

This is not an isolated example. In a small business where perhaps there is a single employee in a key role (say, specialist lawyer, CFO, etc) how can they deal effectively with this situation? Often, by not hiring a women of child-bearing age in the first place. I’m pretty sure this is a common occurrence – it would certainly help explain the gender pay gap.

Now, I fully support the idea of both parents wishing to spend time with their children, especially when they are pre-school age, as there’s plenty of evidence that this is a great thing from a social and educational point of view. Giving fathers the same rights as mothers to take parenting leave is all very well — but it doesn’t solve the problem, it makes it even more difficult for small businesses to know what to do.


This article first appeared on LinkedIn 23 February 2015

Putting the Gini Back in the Bottle

An article by The Economist on Twitter caught my eye a couple of days ago.

It shows that the wealthiest 0.1% of Americans control around 22% of the nation’s wealth — almost exactly the same proportion as the bottom 90% of citizens. This hasn’t happened since the late 1930s and the article seems to be lamenting the passing of a period where wealth was more evenly distributed.

One problem here is that there probably isn’t any really good data on income or wealth inequality going back further than the early 1900s; because I’m pretty sure that if there were, we’d see that the post-WW2 period was the outlier.


I’m not arguing that wealth inequality is necessarily good, just that it’s probably natural.

I’m not too concerned about the Paris Hiltons of the world…. “rags to riches and back again in three generations” comes to mind; I’m sure they’ll fritter it all away if they’re not smart enough to look after it — or their parents will follow Warren Buffet and give it all away rather than passing it to his offspring.

At the other end of the spectrum though, think about the technology sector, for example. Innovations like Apple’s App Store have made application development tremendously accessible: it’s literally now possible for a team of maybe half a dozen teenagers with a good idea and some coding skills to put together an app in a relatively short space of time that could gross tens or even hundreds of millions of dollars in revenues. Not every app is going to succeed, but how many pursuits were there in, say 1965 (when I was born) where someone potentially without any formal qualifications and with very little capital could make that kind of money?

On a slightly larger scale, look at Finnish game developer SuperCell. Following $12mn of VC investment in 2011, they developed two games, one of which was Clash of Clans — an app that grossed nearly $900mn in 2013. I don’t know how many employees they had in 2011-12 when the game was developed, but I’ll bet it was a pretty small core development team.

To me, this is a kind of democratization – literally with nothing but a laptop and an idea, it’s possible for a talented coder anywhere in the world to come up with something pretty awesome and sell it globally. Of course, if they succeed they will make a ton of money and in doing so “mess up” the Gini coefficient; but honestly, who’d want to live in a world without that possibility?


This article first appeared on LinkedIn 11 November 2014

Should You Pay The Ransom?

The recent surge in popularity of “ransom-ware”, along with Islamic State’s penchant for hostage-taking got me thinking about kidnapping & ransom.

In last weekend’s FT, Tim Harford reviewed the work of Reinhard Selten on the ‘Chain Store Paradox’ and it struck me that there was a strong parallel between the rational response of a monopoly chain-store owner to new entrants into the market, and the question of whether an individual should pay the ransom to a kidnapper.

As a parent (of two teenaged sons) I can of course appreciate that on a personal level, if anything happened to anyone in my family I would stop at nothing to get them back safely. Yet in doing so, I would in a small way be perpetuating the ‘business’ of kidnapping. Governments face the same dilemma and there has been much media coverage (e.g. this article in The Guardian) recently of the question as to whether some European governments are compromising US & UK’s harder stance on the issue by paying ransom to get their citizens back.

In Harford’s article he points out that Selten considered two possible extreme responses for the monopoly chain-store owner: either step aside, keep prices high and expect to lose some market share; or alternatively crush the upstart by dropping prices.

It seems to me that to have any chance at all of eradicating hostage-taking, destroying the economic model is the only way to do so. That means firstly governments agreeing not to pay ransom, ever. And perhaps it also means making the paying of ransom by individuals or corporates a criminal offence. This might seem extreme, but I think it’s probably the only way. It’s also pretty unlikely to come to pass unfortunately since even the permanent members of the UN Security Council don’t appear to be able to trust each other to keep their words on this matter.


This article first appeared on LinkedIn 23 September 2014

Dying on Payday

This is from the egalitarian Sweden:

“In this paper, we study the short-run effect of salary receipt on mortality among Swedish public sector employees. By exploiting variation in pay-days across work-places, we completely control for mortality patterns related to, for example, public holidays and other special days or events coinciding with paydays and for general within-month and within-week mortality patterns. We find a dramatic increase in mortality on the day salaries arrive. The increase is especially pronounced for younger workers and for deaths due to activity-related causes such as heart conditions and strokes. Additionally, the effect is entirely driven by an increase in mortality among low income individuals, who are more likely to experience liquidity constraints. All things considered, our results suggest that an increase in general economic activity upon salary receipt is an important cause of the excess mortality.”


This article first appeared on LinkedIn 20 August 2014