Labour was Profligate

May 1, 2015


(Click the chart for an unfuzzy version)

The New Stateman, Paul Krugman and FT Alphaville have recently given credence to the notion that Labour were fiscally responsible going into the financial crisis.

While Finland and Denmark were achieving a surplus amounting to 5% of GDP in 2007 the UK ran a deficit of 3%. The difference 8% of GDP makes is huge. The UK’s GDP was £1,732 billion in 2014, 8% of that is £138.5 billion. When a politician or economist uses a low percentage you can be sure it’s a gargantuan number.

Sweden, Germany, the Netherlands, Luxembourg, Belgium, Estonia, Ireland, Cyprus and Spain along with Finland and Denmark had surpluses in 2007. With the exception of Germany and Cyprus they all ran surpluses in 2006 too when the UK had a deficit of 2.9%.

The United Kingdom’s descent from fiscal Europa League contender to QPR-like also-ran was complete just in time for the recession. While Portugal matched the UK’s 3% deficit going into the financial crisis only Hungary had a worse deficit than Labour’s Britain. Hungary.

Pedants corner: these figures are based on Maastricht criteria so are marginally less favourable to the UK than the UK government’s preferred figures. Also, the chart says EU countries but data from the non-EU Norway is included over the past four years – I have no idea why Eurostat has them in this dataset .


50% Income Tax likely to cost Britain £600m pa

April 22, 2009

“Likely”, the possible cost could be over £1bn.

Loss of Revenue

This chart is from the very recent Institute For Fiscal Studies briefing note that was anticipating a 45% rate (see page 14 for chart):

The most startling aspect when the IFS looked at the sums:

It would appear that the Treasury has not allowed the behavioral response to affect revenues other than income tax receipts.

This is quite extraordinary. A very cheap piece of electioneering by Labour will turn into a very expensive debt for taxpayers.

The Negative Correlation of BATS

April 10, 2009

Since the FTSE-100’s closing low of March 5th 2009 British American Tobacco has been negatively correlated to the index.

The beta of BAT over this time has been -0.2617 [1]. Undoubtedly a short-term phenom but rather startling nevertheless.


What can we take from this snippet of info? Perhaps more evidence of “sector rotation” and a rebuke to the idea that “money on the side” is re-entering the market.

Other big cap “defensives” are showing little correlation to the index. Imperial Tobacco is also showing a negative correlation but far slighter than BATS (a beta of -0.074) while Glaxo is showing a very slight positive correlation of +0.069.


[1] For some reason Google’s dataset is missing 27th March for both the FTSE 100 and All-Share, I’ve simply taken that day out of the calculation for all the above.

“We have not lost wealth, but just the illusion of wealth.”

April 10, 2009

So says Jeremy Grantham in his January 2009 investment letter.

I’d like to add a Battlestar-style “So say we all” and end the post. Unfortunately, politicians are doing their damnedest to recreate the illusion of limitless credit by borrowing even more.

Edinburgh IT and its NAV (feat. Trustnet vs AIC)

April 10, 2009

A recent comment of mine on investment trusts at The Fool, it received a chunky number of recs:

You’re right to be put off [by Edinburgh Investment Trust].

First a point on how Trustnet measures discount/premium to NAV. Trustnet’s figures measure NAV with debt at par (nominal) value whereas others, including the AIC, measure debt at fair (market) value. For investment trusts with little or no debt this makes little difference. Edinburgh IT just so happens to be one of the most indebted investment trusts out there [1]!

The level of debt, via debenture stock, outstanding at Edinburgh leads to a large swing in discount/premium depending on how you value the debt. An idle look at the AIC’s website ([2]) currently shows a premium of nearly 10% while Trustnet shows a small discount. The AIC figure itself is misleading, imho, since it doesn’t take into account accumulated income. Edinburgh IT release NAVs daily based on par and fair value, cum and without income [3]. If this is all rather confusing the AIC have a good explanation of net asset values on their website [4].

Using March 11th as an example the Edinburgh share price finished the day at 297p, the following day Edinburgh released NAV figures that were between 270.71p and 318.39p, quite a difference! Personally I use the debt at fair value and cum income (for income ITs where this is going to skew the figure). For Edinburgh this was 282.06p on March 11th, still a premium of 5.3%.

So why the drastic reduction in discount for Edinburgh recently? Three factors stand out for me:

1. The appointment of Neil Woodford as fund manager.

2. The protection of income, in the short-term at least, that most Investment Trusts offer as they have a revenue reserve.

3. The structural advantage that a discount to NAV offers to the underlying yield – if you buy on a 10% discount you’re effectively buying a 10% higher underlying dividend (excluding charges).

2 & 3 can be applied to all Growth & Income investment trusts and most are now trading at a premium to NAV for these reasons. Personally I think its a little silly buying an Investment Trust on a 5% premium when, once the stockmarket recovers, you’re likely to see that premium become a 10% discount. For those reliant on a steady and increasing income such as retirees the peace of mind may be worthwhile but even then its difficult to justify.

I’d avoid Edinburgh right now. The downside risk is far higher than buying into Woodford’s Invesco Perpetual (High) Income funds which don’t have the leverage and aren’t in danger of reverting back to a high discount to NAV.


[1] See pages 45-47 of the EDIN annual report available at:

[2]AIC’s pricing for EDIN:

[3]EDIN NAV news releases:

[4] The AIC’s explanation of NAV:|Net+asset+value

The blogosphere and Jeremy Siegel

March 1, 2009

Jeremy Siegel’s Wall Street Journal article brought about much rancor and ridicule in the Blogosphere, along with a counter-attack. While Siegel’s math may be dodgy there is a more pertinent point: why should equity holders of an index such as the S&P 500 worry about vast losses from such small constituents? There doesn’t seem to be any reason for index holders to worry about such losses, any capital re-building by banks is unlikely to be a major drag on the S&P now.

So the mental abstraction of saying the S&P 500 is 94% in real companies and 6% in zombie banks and crushed autos which give ‘option value’ seems valid. There is some cherry picking going on here however. Defenders of Siegel have largely ignored the bullish outliers, i.e. the energy companies, who have not yet seen the drop in oil price vanquish their low historic P/Es.

To show how screwed up using a composite P/E is right now – here is a comparison between P/E and Robert Shiller’s P/E10:

The recent inversion between P/E and 10-year P/E is unprecedented!

Buffett’s sub-prime doin’ just fine

March 1, 2009

Berkshire Hathaway bought Clayton Homes[1], America’s largest provider and financier of “manufactured homes” (aka prefabs), in 2003. Based on reams of newsprint and political waffle this is probably the worst investment in the world. Except it isn’t, of course! Warren Buffett tells us why, from Berkshire Hathaway’s 2008 annual report[2]:

Clayton’s 198,888 borrowers…have continued to pay normally throughout the housing crash, handing us no unexpected losses… Their median FICO score is 644, compared to a national median of 723, and about 35% are below 620, the segment usually designated “sub-prime.”

Yet at year end, our delinquency rate on loans we have originated was 3.6%, up only modestly from 2.9% in 2006 and 2.9% in 2004… Clayton’s foreclosures during 2008 were 3.0% of originated loans compared to 3.8% in 2006 and 5.3% in 2004.

Why are our borrowers – characteristically people with modest incomes and far-from-great credit scores – performing so well? The answer is elementary, going right back to Lending 101. Our borrowers simply looked at how full-bore mortgage payments would compare with their actual – not hoped-for – income and then decided whether they could live with that commitment. Simply put, they took out a mortgage with the intention of paying it off, whatever the course of home prices.

Just as important is what our borrowers did not do. They did not count on making their loan payments by means of refinancing. They did not sign up for “teaser” rates that upon reset were outsized relative to their income. And they did not assume that they could always sell their home at a profit if their mortgage payments became onerous. Jimmy Stewart would have loved these folks.

[1] For anyone with an interest in Buffett the purchase is a fascinating tale:

[2] T’is brilliant as usual:
Pages 10-12 for the Clayton Homes info and more mortgage insight.

Dear Merv,

February 11, 2009

Sterling fell on your chattering about printing money (aka “quantitative easing”) today. No matter the complexity of the situation or good intentions don’t you realise that this is a punishment to savers who keep their money on deposit That it is a poverty-creating measure for vulnerable people on fixed incomes? That you are helping the most reckless – be they wannabe BTL billionaires or purchasers of HBOS debt?

Being one of the 364 economists who rallied against Thatcher and was proven wrong please forgive me for being nervous about your monetary policy decision making. You may need reminding about a very basic lesson. Please watch the following video replacing the “Fed” with “BoE”, Bush with Brown and Helicopter Ben for, erm, you.


A not-so-loyal citizen of Great Britain.

The premium of Investment Trusts

February 11, 2009

Comment on this FT Alphaville blogpost: “Coming up, worst year on record for dividends”

“Widows and orphans” investment trusts* such as Temple Bar and City of London are now trading on premiums despite holding most of their assets in large FTSE-100 constituents. The little item called “revenue reserve” on the balance sheet has gained in value recently!

*You’re supposed to call them “investment companies” nowadays, pfft.

Blowing away the cobwebs

February 11, 2009

A lapsed blogger returns, honest!