The price of everything

Building concerns

 

 
“As for the rest of the billions, it’s not clear precisely where that money went. There are some clues. FIFA’s personnel ­expenses were $397 million. But good luck finding Blatter’s pay in the annual report. “We have hidden it so you cannot find it,” says Markus Kattner, FIFA’s head of finance and administration. “We’re not publishing it, first of all, because we don’t have to.”

-       From ‘A League of His Own’ by Bloomberg Business.

FIFA headquarters seem more like a nuclear bunker than a swanky executive facility – or perhaps they are both. They take up 11 acres on the Zürichberg, cost 240 million Swiss francs, and of the building’s eight storeys, five of them are underground. They incorporate a fitness centre, a meditation room and a full size football pitch. Bloomberg Business reports that cell phones are rendered inoperative by the black, Brazilian granite in the bowels of the building, and that executive committee meetings are held on the third subterranean level, in a conference room that has a floor of lapis lazuli. PhDs are probably de rigueur, in case you rub up against the likes of Doctors Strangelove, No, or Mengele.

 

Buildings make a statement about their owners. FIFA-Hauptquartier seems to be saying: our owners have a shedload of cash. When the building was inaugurated, high winds and driving rain forced the anticipated flag ceremony indoors. That didn’t faze Obergruppenführer Sepp Blatter (for the avoidance of any doubt, we are not suggesting that Sepp Blatter is or has ever been a Nazi paramilitary, although The Guardian has called him “the most successful non-homicidal dictator of the past century”), who opined artfully that

 

“The sky is touched with tears but we can live with that because football also has to live in all weather conditions and rain is a gift from heaven.”

 

Grand High Ming Blatter, who has been compared by Osiris Guzman, president of Dominican Republic soccer, to Jesus Christ, Nelson Mandela and Winston Churchill, also observed of his headquarters’ vast glass frontage that it

 

“would allow light to shine through the building and create the transparency we all stand for.”

 

Well, quite. Apart from in those five underground levels where you can’t receive a mobile phone signal, and where FIFA’s legal department requires that some visitors sign nondisclosure agreements for otherwise routine meetings.

 

But if FIFA had shareholders, it is likely they would be somewhat less impressed by the gaudy awfulness and conspicuous consumptiveness of it all.

 

When it comes to the corporate HQ, less can sometimes be more. When Tom Murphy joined Capital Cities Broadcasting, corporate HQ was a dilapidated former convent. He was asked to project a more professional image for the company. He responded by painting the two sides of the building facing the road. The other two sides he left untouched. Over a period of nineteen years, he generated a remarkable compound annual return to shareholders of over 22 percent.

 

Most corporate executives also feel obligated to a) please Wall Street and b) court the media assiduously. Their time might be better spent on running their businesses in the best interests of their shareholders. The crowns of our titans of finance have clearly lost some of their sheen over recent years. But the tendency to follow the crowd was well expressed by Citigroup’s Chuck Prince when he infamously told the FT in July 2007 that

 

“When the music stops.. things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

 

Adam Smith in ‘Supermoney’ wrote a passage so wonderful and so relevant to our current situation that we may have become addicted to its re-use:

 

“We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment the Black Horsemen will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no-one wants to leave while there is still time, so that everyone keeps asking, “What time is it ? What time is it ?” But none of the clocks have any hands.”

 

The clocks may not have hands, but the ticking goes on. Bond markets are living on borrowed time. Bill Gross may have been a few years early, but he was fundamentally right to suggest that they are resting on a bed of nitroglycerine. The rally in many stock markets is starting to look a little tired, too. Valuations have certainly become stretched. What is the pragmatic solution ? We think it’s to throw in your lot with:

 

• Successful businesses from all over the world
• With competent and honourable management
• Who don’t squander money on trophy corporate headquarters
• Who think like owners because they are owners
• With companies that have little or no debt
• And, finally and crucially, not consciously to overpay for the shares of those businesses.

 

If only there were some way of finding such attractive investments.

 

 

Follow the conversation on twitter: @timfprice

On not adding, but taking away

 

 
“Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world.”

-       Charlie Munger.

According to the French author and pilot Antoine de Saint-Exupéry, a designer knows he has achieved perfection not when there is nothing left to add, but when there is nothing left to take away. The great value investors know this, too. The world of the equity investor is a big place. An informal calculation puts the number of listed companies in the world at roughly 50,000. That is clearly too big a number for any individual or organisation to analyse in any depth. So how to sort the wheat from the chaff ? How, in other words, to sort the Apples from the lemons ?

It helps to know what you should be looking for. We would suggest the primary filter contains an assessment of just three components:

• Business
• People
• Price.

To be worthy of consideration for investment, all three should be exceptional.

• Does the business incorporate what Warren Buffett described as a “wide moat” – a future-proofed barrier to competition; a compelling ‘edge’ that separates it from its peers, somewhat akin to a monopoly ?
  
  
• Are the managers of the business principled, eminently capable, and shareholder-friendly ?
  
  
• Are the shares of the business available at a meaningful, almost tangible discount to its inherent worth ?

If all three characteristics are on offer, prospects for a successful investment are hugely skewed in your favour.

Some of these assessments are subjective. Investing is not an exact science, because people are not 100% automatons, and businesses are run by people, and their products and services are sold to people. Homo economicus does not exist, except in economics courses. Nevertheless, we would suggest that on this sort of rough and ready screening, 95% of listed companies fall away, having failed to make the cut. This sort of screening saves an inordinate amount of time.

Another way to maximise one’s firepower as an investor and address as much of the investible universe as possible is to delegate at least some of the responsibility for finding these companies to a sufficiently qualified specialist value fund manager with the right mind-set – especially if one is interested in far-flung territories. But again, most of the fund management universe is likely to be unfit for the task. Why ? The following quotation from Jeremy Grantham explains why:

“The central truth of the investment business is that investment behaviour is driven by career risk. In the professional investment business we are all agents, managing other people’s money. The prime directive, as Keynes knew so well, is first and last to keep your job. To do this, he explained that you must never, ever be wrong on your own. To prevent this calamity, professional investors pay ruthless attention to what other investors in general are doing. The great majority “go with the flow,” either completely or partially. This creates herding, or momentum, which drives prices far above or far below fair price. There are many other efficiencies in market pricing, but this is by far the largest.”

The fund management business is obsessed with scale. As in any other profession dominated by men, size matters. The more assets under management, the more fees for the manager. But strict value investing, of the sort practised by the likes of Ben Graham, has natural limits to capacity. (This likely explains in part why Berkshire Hathaway’s best investment days were its earlier ones.) So in our own practice, all things being equal, we favour working with fund managers who are willing to close their funds rather than sacrifice investment performance in the cause of building scale.

We would suggest that 95% of fund managers, too, fall outside the realm of true value investing, for reasons of career risk, a fundamental misalignment of interests with their investors, or for other mostly commercial reasons. Hence the reference to Saint-Exupéry. We are not looking to add, but to take away. We want to compress our target market, not to make it as wide as possible.

In this interview extract, value manager Jean-Marie Eveillard describes the current environment for finding value in the markets today as like trying to find needles in haystacks. He touches on the difficulties of value investing, some of which are psychological, and some of which have to do with a misalignment of discipline and patience between client and manager. No investment strategy works every year, and no investment strategy ever will. But true value investing probably has a greater claim to success versus any other strategy over the medium and longer term. Whether clients are capable of waiting for the medium and longer term is another question.

We came across an intriguing fund manager in Asia a few months ago who neatly addressed the critical issue. There are lots of things to be genuinely worried about in markets today. The trick, as per Saint-Exupéry again, is to remove all those things that we simply cannot do anything about, that are not in our power to influence or even truly anticipate. The owner of a biscuit company, he said, “doesn’t sit fretting about Portuguese debt [or Grexit, or Brixit, or a rise in US interest rates..] but simply worries about selling more biscuits than the guy down the road.”

So we concentrate on stripping away, not adding, on paring away the irrelevant until we can focus our energies on finding the handful of exceptional businesses, at exceptional values, or exceptional fund managers, that offer us a “margin of safety” and the prospect of meaningful capital growth at relatively low risk. Jean-Marie Eveillard may be being overly pessimistic. The numbers of such opportunities may be small, but they are most certainly out there (most notably in Asia, and especially in Japan). The thrill of the chase, and of finding them, is half the fun.

 

Follow the conversation on twitter: @timfprice

Major drag, huh ?

 

“We’re not gonna make it, are we ? People, I mean.”

“It is in your nature to destroy yourselves.”

“Yeah. Major drag, huh ?”

-       From James Cameron’s ‘Terminator 2: Judgment Day’.

Here is a thought experiment. It is January 2000. The last wild Pyrenean ibex has been found dead, squashed by a tree. America Online has just announced an agreement to buy Time Warner for $162 billion – the largest corporate merger in history. It is all very exciting. Suddenly, a sourceless wind rises; papers blow across the pavement; windows rattle; the air fills with electrical crackling. Arnold Schwarzenegger emerges from the darkness. “It is 2015,” he tells you in his distinctive Austrian drawl. “The US unemployment rate is 5.4%. The S&P 500 is at a record high. We have record M&A activity. The corporate debt markets are booming. High end real estate is on fire. A Picasso has just broken the record for artwork sold at auction.”

 

“So where are US interest rates ?” you ask the Austrian Oak. “Where are Fed Funds ?”

 

He is impassive.

 

“Fed Funds are at zero. The Fed Funds Target Rate for the upper bound is 0.25%.”

 

“Wow,” you respond.

 

Too right. If you could have told anyone back in 2000 just how insane monetary policy would have become by 2015, they probably wouldn’t have believed you.

 

But it is what it is.

 

Human beings are suckers for a narrative. We love stories, perhaps more than we like reality itself. A team of equity analysts at Citigroup – no stranger to boom and bust, having gone bankrupt itself at least twice – has just published “It’s bubble time”, a note on the current madness of markets.

 

Citi identify four key drivers to bubble conditions:

• A ‘new paradigm’ story with convincing fundamentals
• Excess liquidity
• A demand / supply imbalance
• Business risk amongst asset managers.

 

Doug Noland takes up the story:

 

“By their nature, the final phase of an epic Bubble will indeed “destroy many contrarian investors.” There’s a confluence of important dynamics at play. First, during final Bubble phases, officials are by then responding to serious fundamental deterioration with heightened policy desperation. So-called “bears” - positioned based on negative fundamental factors – are squashed by the policy whirlwind. Meanwhile, flows gravitate to the most bullish and aggressive (tending to be those content to overlook weak fundamentals and fragilities).

“Such a backdrop foments dangerous Bubble Dynamics. “Money” chases inflating risk markets, while a depleting few retain the resources or willingness to take the other side of this “bull” trade. The upshot is a self-reinforcing market supply/demand imbalance. Over time, as bull market psychology and speculative impulses build, unhinged markets succumb to upside dislocation and “melt-up” dynamics: Too many anxious buyers facing a dearth of sellers.”

 

There is, of course, a crowning irony in the supposed custodian of monetary stability, the Fed, being behind most of the fundamentals (overly easy monetary policy, and huge surplus liquidity), but we’ll pass over that. Janet Yellen is only human too, after all, presumably.

 

And there’s another gigantic irony at work – the suggestion that the financial services industry is itself hard-wired for the creation of bubbles:

 

“From Citi: “Business/Career risk: A weary client once defined a bubble to us: ‘something I get fired for not owning’. It is career-threatening for an asset manager to fight a big bubble. For example, the late 1990s TMT bubble almost destroyed the value-based fund management community. Any bond manager hoping that valuations were mean-reverting would have been fired many years ago. Big bubbles are especially dangerous. TMT stocks already represented a large part of equity market benchmarks when they rerated aggressively in the late 1990s. By contrast, Biotech stocks might currently be expensive but their small market cap means they are still not a big benchmark risk. You don’t get fired for not owning Biotech stocks now, but you did get fired for not owning TMT stocks in the late 1990s. Bubbles are obvious in hindsight, but they are very hard to fight in real time. Indeed, proper bubbles are so overwhelming that they force sceptical fund managers to buy into them in order to reduce benchmark risk and avoid significant asset outflows. As these sceptics capitulate, of course they contribute to the bubble and so force other sceptics to capitulate and so on and on until there are no sceptics left to capitulate. It makes sense for an asset management company to manage its business risk but this can end up contributing to the madness.”

 

There is a rational question to pose at this point: why follow the benchmark, in anything ? Bond indices allocate the largest weights to the most heavily indebted issuers. From the perspective of quality, this is clearly nonsense. Equity indices allocate the largest weights to yesterday’s winners, which tells you precisely nothing about the future – only that investment policy out of the rear view mirror might not be the best tactic for survival in a world of dynamic change. The rational response is to throw the benchmark out of the window and practise something more sensible.

 

Doug Noland, again:

“I would, however, suggest that it is not so much that “modern fund management is almost hard-wired to produce bubbles” as it is that the entire financial services complex has been transformed by central banks inflating serial Bubbles. Inflation psychology has become deeply, deeply ingrained: everything revolves around purchasing securities that will benefit from ongoing central bank market manipulations and interventions. To survive has meant to climb aboard the great bull. This ensures the entire industry is now on the same side of the “trade” – with functioning “two-way” markets relegated to history. And markets will remain seductively “abundantly liquid” only so long as bullish psychology is sustained.”

 

There is something exquisitely awful about the whole mess. The central bank is tasked with maintaining monetary stability and yet is in the midst of inflating the most terrifying bubble in history. Fund managers are tasked with shepherding their clients’ assets through this uncertainty and yet they are the very players gate-crashing the party even as the cop cars arrive outside.

 

From ‘Supermoney’ by Adam Smith:

 

“We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment the Black Horsemen will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no-one wants to leave while there is still time, so that everyone keeps asking, “What time is it ? What time is it ?” But none of the clocks have any hands.”

 

By the time the sequel to ‘Terminator’ has come around, Arnie’s killer cyborg has morphed into an altruist fighting for humanity and not against it. “Come with me if you want to live.” The advice he might give comes straight from the American author Philip Wylie (hat-tip to Rob Chapman):

 

“Ignorance is not bliss – it is oblivion. Determined ignorance is the hastiest kind of oblivion.”

 

As investors, we have all been warned. Not by the future, but by the past.

 

 

Follow the conversation on twitter: @timfprice

Goodbye to all that

 

“Funny how bonds were labelled “certificates of confiscation” back in the early 1980’s when yields were 14%. What should we call them now ?”

-       Bill Gross.

The American bond fund manager Bill Gross titles his latest commentary ‘A Sense of an Ending’. Bond markets seem to have taken on an elegiac quality of late. It feels like the uneasy period of near calm and heightened reality that occurs just before an outbreak of war.

It may be that war has already been declared – on central bank price manipulation, by the free market. The so-called ‘risk-free rate’ in Europe is best encapsulated in the form of the German government bond market. In the course of the last two weeks, the price of the long Bund (the German equivalent of a US Treasury bond), the 2.5% bond maturing in August 2046, has fallen from a price of 160 to a price of 135. That is a decline of 25% within the course of a fortnight. Some risk-free rate. Doubtless some highly leveraged corpses will float to the surface over coming weeks.

If some central bank official, politician or bureaucrat issued a policy statement of import that might have been accountable for such a precipitous fall, we missed it. Humans love a narrative, so the search for a plausible reason for the sell-off will no doubt continue. We think the likely explanation is a simple one, and Bill Gross alludes to it without specifically calling it. Perhaps the great bond bull market is over.

Bond fund managers will miss it. Obviously. It feels like Bill Gross is now on the wrong side of history. There is no need to mourn his metaphorical passing – a secular bull market in bonds that began in 1981 made him a billionaire in the process.

What equity fund managers will make of it is unclear. We think the omens are not particularly favourable, at least not in the major stock markets. Robert Shiller’s cyclically adjusted p/e ratio for the S&P 500 index, a smoothed average of historic p/e ratios, stands at 27.4 times. Its long run average is 16.6. The US market, on a Shiller p/e basis, has only been more expensive during two periods in history. The first was 1929. The second was the dotcom insanity of the late 1990s. Neither ended well.

In the euro zone, the rough equivalent of a Shiller p/e flashing red lies in the Bund market. All Bund yields under five year maturities are negative. Investors are welcome to buy debt securities that guarantee that long term holders will lose money, but we do not intend to join them.

Quite why investors are willing to behave this way is an interesting question. You’ll have to ask them. One reason might be that they are terrified of all alternative assets. But that’s like responding to a fire on the fortieth floor by throwing yourself out of the window.

Another reason might be that investors are front-running the European Central Bank, which has publicly stated that it will be buying €60 billion worth of this crap every month for the foreseeable future. This is known in the trade as Greater Fool Theory. As Warren Buffett pretty much said, if you’re playing poker and having yet worked out who the Greater Fool at the table is, it’s probably you.

The conventionally accepted reason for German bond yields offering guaranteed loss-making returns to investors is Quantitative Easing. Under a programme of QE, central banks conjure up money out of thin air and give it to financial institutions in return for their bonds. The banks are presumably then meant to lend this money back out, as opposed to hoarding it, which they appear to be doing. Somehow this crude inflationism is meant to ignite an economic boom. We may get a boom, but it may not be of the sort that central banks desire. It might be the type of boom that describes a loud, deep sound as from a gigantic explosion.

The conditions are certainly ripe for one. The independent analyst Russell Napier takes up the story. He poses the attractions of an innovative albeit hypothetical new fund, namely a room full of euro banknotes:

“The attraction of a banknote fund arises due to an arbitrage which creates a limit to monetary policy. It is that limit which contains the key information about financial market reactions for investors. QE cannot force the price of government debt securities much higher and yields much lower, as increasingly banknotes and even bank deposits become attractive to investors compared to government debt. A limit to QE is a big story.

“Such an arbitrage opportunity would limit the profits one makes in such bonds during a deflation and both notes and deposits offer major protection from capital losses should there be a major change in inflationary expectations. This would be a world of deflation where the scale of negative nominal rates would have a floor. Indeed, bond yields could overshoot into negative territory and then rise into a deflation as the limits to negative nominal yields became increasingly clear. Thus the recent rise in the yields of Euroland government securities may not be a signal of inflation at all, but rather a realization that we have reached the arbitrage limits of how far yields can fall.

“A world of less growth and deflation, but one where interest rates are clearly stuck in nominal terms, is a very dangerous world for equity investors with surprisingly few gains for bond investors.

“Historically the shift from deposits to banknotes was associated with the fear of commercial bank insolvency or illiquidity. That was called a bank run. Today a bank run is the natural consequence of forcing too much central bank liquidity (bank reserves) onto a system which simply does not want them. A banker does not want to accept this short-term funding if he cannot lend the proceeds at a profit.

“The only way for the banking system in aggregate to repel such funding is to offer interest rates on deposits (bank liabilities) which force investors into banknotes (someone else’s liability). Tighter regulation and collapsing long-term interest rates mean that profits from lending for Euroland bankers are increasingly illusory. Banks are keen to repel deposits given the lack of opportunity to use them. If QE reduces the banks’ ability to lend money and also creates an arbitrage from bank deposits into banknotes, will it reflate the economy?

“If you think the answer is ‘no’ then European QE will have to stop with fairly negative consequences for the equity market and positive implications for the Euro exchange rate. Evidence of selling of government debt securities with negative yields is thus not necessarily a sign of inflation. A move to bank deposits or banknotes from government debt securities can instead indicate that the limits for QE have been reached.”

A few phrases there pique our interest. “A very dangerous world for equity investors” is one of them.

If bonds are a waste of time and the equity market is dangerous, and cash yields either nothing or less than nothing, what is the rational investor to do ?

Not all equity markets are created equal, and clearly not all equities are, either. For most rational investors, equity as an asset class looks much more attractive relative to debt. The rational investor then looks to reduce his risk by only selecting equities that offer what Benjamin Graham called a “margin of safety”. The rational investor today should attempt to buy the shares of high quality businesses with principled management without consciously overpaying for them. Such shares do exist, they just require veering off benchmark constraints.

UK investors are now watching in disbelief as David Cameron returns to Downing Street without any credible apparent opposition. This may turn out to be something of a pyrrhic victory. Despite its claims to fiscal responsibility, the coalition government accumulated more debt in five years than the previous Labour administration did over the previous thirteen. There are now the early signs of a bond market earthquake to match last week’s political one. After five years of phoney austerity, the real type must surely start now.

 

Follow the conversation on twitter: @timfprice

Unsafe at any price

 

 

“Everyone is bullish. Contrarians know that must be bearish. However, everyone has been bullish for a while, yet the S&P 500 rose to a record high of 2117 on April 24. That’s because everyone has finally figured out that fighting the Fed in particular and central banks in general is dumb. So we are all smart now. As a result, bullish sentiment is at a record high, though the bull market, which is more than six years old, is no spring chicken.”

-       Dr. Ed Yardeni, ‘We are all bulls now’.

There is one thing riskier than investing in a free market: investing in a rigged market when you think the central bank has your back. At some point, the free market returns with a vengeance, like a coiled spring made out of pure risk. This may account for the confusion last week in the German government bond market, where 10 year yields suddenly spiked from just 8 basis points to 37 basis points. That may not seem like much, but with yields so slender, a move of that magnitude is easily enough to put a few leveraged funds out of business. And there is a practical proof that attempting to front-run central banks is ultimately a fool’s errand, in the form of Robert Schuettinger and Eamonn Butler’s ‘Forty centuries of wage and price controls’ – a magnificent, if depressing, history of dumb governments’ consistently doomed attempts to buck the market.

 

There comes a point when the game of playing in the government bond market simply isn’t worth the candle. Western government bond markets long since entered the realm of the pointless, at least for any rational investor. Vanishingly thin yields have transformed the nature of the bond markets, in the same way that crowding into supposedly safe stocks makes them dramatically unsafe, because a price boosted by the popularity of the crowd removes the last vestige of any margin of safety in the first place. Let’s face facts: government bonds now offer return-free risk, and nothing more. That holds whether you’re contemplating 10 year US Treasury yields (2.1%), 10 year UK Gilt yields (1.84%), 10 year German government bond yields (0.37%) or bug-in-search-of-a-windshield 10 year Japanese government bond yields (0.32%). To repeat, bonds have never been more expensive in human history, and yet their supply has never been higher. There’s a six-letter reason why, and it’s spelt BUBBLE. (In the interests of complete transparency, there’s also a 12-letter reason why, and it’s spelt MANIPULATION.)

 

Time will tell whether last week’s spike in German Bund yields amounts to a sea-change in the mood of the bond market, or just another brief tumble as bond traders insist on continuing to ascend their wall of insanity. Rational investors will not care because rational investors will not be wasting their time in markets offering such a ridiculous risk-to-reward ratio.

 

But the mother of all cognitive dissonances is not the German bond market but the Japanese. Bloomberg’s William Pesek highlights the tortured logic plaguing Bank of Japan Governor Haruhiko Kuroda as he attempts to escape from the corner of the bond market he has painted himself into:

 

“Aside from the debt binge's many failures to date, Japan's financial markets are now struggling with a lack of liquidity. Major traders like Royal Bank of Scotland are beginning to leave Japan. And Japan's bizarrely low 10-year yields, which are currently at 0.32 percent, also suggest something's amiss in the country's markets. It defies the basic tenets of economics for the nation with the largest total debt, largest ratio of geriatrics and low rates of immigration to have lower bond yields than countries like Singapore, Sweden or Switzerland.”

 

When one of the world’s government bond markets finally blows up (Japan still looks like the primary candidate, but stranger things have happened), economists will scratch their heads and wonder where it all went wrong. Wiser souls will wonder how economists could ever have thought that money printing was the answer to anything. Quantitative easing is, fundamentally, simply a flashy coinage to disguise a blatant attempt to control government bond prices. In his introduction to Schuettinger and Butler’s book, David Meiselman asks:

 

“What, then, have price controls achieved in the recurrent struggle to restrain inflation and overcome shortages ? The historical record is a grimly uniform sequence of repeated failure. Indeed, there is not a single episode where price controls have worked to stop inflation or cure shortages. Instead of curbing inflation, price controls add other complications to the inflation disease, such as black markets and shortages that reflect the waste and misallocation of resources caused by the price controls themselves. Instead of eliminating shortages, price controls cause or worsen shortages. By giving producers and consumers the wrong signals because “low” prices to producers limit supply and “low” prices to consumers stimulate demand, price controls widen the gap between supply and demand.

 

“Despite the clear lessons of history, many governments and public officials still hold the erroneous belief that price controls can and do control inflation. They thereby pursue monetary and fiscal policies that cause inflation, convinced that the inevitable cannot happen. When the inevitable does happen, public policy fails and hopes are dashed. Blunders mount, and faith in governments and government officials whose policies caused the mess declines. Political and economic freedoms are impaired and general civility suffers.”

 

This week, the UK electorate goes to the polls. The country is still bankrupt. The campaigning has been long, tiresome and utterly uneventful. Judging from the leaders’ debate last week, Labour remains in complete denial about the chronic overspending of its last term in office. But the current coalition government has barely been more honest about the success of its own debt reduction programme, during which the UK Chancellor has added more to the public debt in five years than the previous government did in 13.

 

Quantitative easing is a squalid little lie. It appeals to economists with no grasp of history. It pretends that too much debt can be simply resolved through futile attempts at price controls and money printing. The practical outcome of QE is that it turns the bond market into a no-go area for any rational investor. We are now in the terminal stages of QE, during which the practical limitations of this fatuous and discredited policy are being revealed. When you devalue money and distort the supposed risk-free rate, you devalue every aspect of the capital structure. The solution is to avoid bond markets almost entirely, and seek shelter in either cash or productive equity assets offering a genuine ‘margin of safety’ amid a world made mad by demented financial engineers.

 

 

Follow the conversation on twitter: @timfprice