Quotidian Investments Monthly Commentary – May 2021
“Nothing is either good or bad but thinking makes it so” is the most apposite description of the ongoing battle between the forces of good (as represented by the Federal Reserve, the USA’s Central Bank) and the powers of evil (economic analysts and equity market-makers) as the 2021 investment year moves tediously towards its midway point.
That quotation, of course, comes with my thanks to a very promising, up-and-coming English playwright (originally from a little hamlet near Stratford-upon-Avon) whose work I first had thrust upon me when I was aged fifteen. I must say that I found his style then rather laboured and cumbersome and his technique somewhat naïve and old-fashioned at that point in time but, by the time I reached the age of twenty-one I was quite amazed by how much he’d matured. Long may his elegance, finesse and panache with use of the English language continue to progress and brighten our lives.
On 31st May 2021 the FTSE100 index closed the month at 7022.61 (a rise of +0.76 in the month of May itself) and it stands at up +8.70% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 31st May shows a rise of +0.35% for the month and that means that the Fund is now up +5.35% for the 2021 year so far.
You will be aware from our earlier monthly reports this year that global equity markets (and, in particular those in the USA) have fluctuated this way and that but essentially been directionless since 2021 began. The good news is that, despite this period of lacklustre performance, we still remain nicely above the UK’s annual rate of inflation and so the real value of your capital is well ahead of the game (and we anticipate that this will continue to be the case). Indeed, we also believe that the second half of the year will be much more positive.
Our optimism is sustained by the massive financial stimulus injected into the US economy by the new Biden regime in the early stages of his Presidency. Whenever this form of financial impetus has been used in the past it has always created an impressive uplift in real asset values (ie. typically in the values of stocks, shares and property).
Economic theory could be interpreted to suggest that money essentially created out of thin air could be the cause of short-term gain (perhaps two or three years) but then followed by longer term pain and it has been the disagreement between those factions on opposing sides of this debate that has been the proximate cause of continuing equity market volatility.
However, we can argue with equal force against the negative narrative preferred by equity market-makers as they attempt to justify their reasons for adjusting prices downwards.
We are clear that the economic recovery since the pandemic has been in retreat is based on real activity and measurable growth and this gives further support to our confidence in equities.
There is every reason to suppose that the confected narrative of a rotation from growth stocks into value stocks being pushed by market-makers (and the market-analysts who serve them this garbage) will prove to be a red herring. In our view this has been a synthetic and deliberately misleading storyline created simply to inject concerns, doubts and fears into investor’s minds whilst resolutely maintaining complete silence about the hugely successful latest corporate results season (especially in the tech sector) in order to justify the wild gyrations in recent equity pricing.
Market analysts are generally held to fluctuate between mildly eccentric and a sandwich short of a picnic. Their findings are best received with a gentle (but not condescending) smile whilst simultaneously looking skywards. Market-makers, on the other hand, employ a wide range of devices (based largely on the psychology of fear and greed) designed to encourage investors to panic out of markets when they should be holding tight and to rush back in to investments when they should be sitting motionless on the sidelines.
It is also possible to interpret the 2021 disconnect between economic data and equity pricing (and its volatility) as the market reaction to a political difference of opinion and power struggle between the current chairman of the Federal Reserve (Jerome Powell) and the immediate past chair of that body (Janet Yellen). Powell is a right-wing Republican and Yellen a left-wing Democrat. No surprises that there are differences of opinion then.
As the man currently in the hot seat, Powell, quite rightly seeks to maintain and defend his authority from unwelcome and politically motivated interference by his predecessor. For example, it was Yellen (in her new role as Secretary of the US Treasury) who, last month, proposed and promoted a global minimum corporation tax rate designed to prevent profit shifting by companies as a means of minimising or avoiding tax. There is increasing pressure from Biden in the US and Macron et al in the EU for this to be adopted (or imposed) globally at the G7 meeting this month (11th – 13th June).
Powell and Yellen also seem to disagree on the likelihood of future inflation in the USA and the most effective interest rate policy to adopt in order to control it. Between them they make Tom and Jerry look like the very model of organisation, common purpose and friendship. Not helpful when investors are seeking to forecast and navigate stock-market gyrations with any degree of accuracy.
On 25th May we learned via forecasts from the National Association for Business Economics (NABE) that the US economy is expected to rise by 6.70% this year and that inflation in that country is expected to stand at 2.80% for 2021 and then fall to 2.30% next year. How strange that analysts and market-makers have been promoting scare stories of 5% inflation in the US being on the horizon.
It might well be that US inflation will rise in future years as a consequence of Biden’s remarkable stimulus program but the Federal Reserve has declared time and again that it is ‘on the case’. It is dovish about inflation and states that it does not intend to raise interest rates for at least two or three years into the future. It has also reaffirmed that it continues to closely monitor the situation, will tolerate inflation at its current levels and still has all the tools necessary (and will use them without causing unwanted economic damage) to deal comfortably with any spike higher if and when that becomes the case.
In our opinion, those statements from the policymakers at the Fed make a nonsense of the charges of complacency and of causing an ‘inevitable’ increase in inflation made against them by the usual suspects in US investment banks (who largely comprise the bulk of equity market-makers) and who have used these assertions as an excuse to manipulate equity prices and cause the quite ridiculous volatility we have witnessed in recent months.
As for Biden’s role in all this, he presents himself as a pillar of rectitude despite having poured ever more freshly printed money into the rampantly hot US economy. He has already shown himself to be way out of his depth and is seen as weak and a figure of fun by America’s enemies in China, Russia and Iran.
That, rather neatly, brings us back to the meaning of the opening Shakespearean quotation; fundamentally people think what they choose to think and believe what they prefer to believe.
Quarterly corporate results issued in January and updated again in April (together with hugely positive expectations of future sales and profits) suggest very clearly that a number of highly successful companies have been severely underestimated and undervalued. This will no doubt correct itself in the course of the second half of this year.
As ever, as the 2021-year progresses, if our analysis and judgement prove to be off beam then we will make any necessary and appropriate adjustments to our current portfolio in order to continue to achieve the attractive investment returns that usually emerge from being in the right sectors of the right markets at the right time.
On the penultimate working day of the month we received details of a court judgement issued in Holland that could have severe implications for the oil industry and have equally worrying knock-on effects to commerce and industry specifically and investment generally.
In a judgement that is full of opinion and sadly lacking in facts, a court in the Hague has ordered Royal Dutch Shell to cut its carbon emissions by 45% (as compared with its 2019 levels) by the end of 2030 and not, as had previously been targeted, by 2035.
In this unexpected and unprecedented ruling, Shell’s “sustainability policy” was deemed to have been “insufficiently concrete” and it was told by the court that it had a ‘duty of care’ to ensure that the level of its carbon emission reductions should be brought into line with the Paris climate agreement (which is not actually law in any jurisdiction in the world but merely a cobbled together piece of empty rhetoric comprising wishful thinking, idealistic aspirations and hopeful targets).
Further, the court averred that “the interest served by the reduction of carbon emission obligations outweighs the Shell group’s commercial interests”. I would read that sentence again just to emphasise and fully appreciate the extraordinary implications of that blatantly political statement.
It is a fundamental challenge to the continued existence of capitalism and the profit motive inherent in it. Lest one forgets, capitalism has been the prime route out of poverty for generations upon generations of the world’s population. Indeed, free trade and capitalism are the positive processes by which prosperity is spread as the wealth thus created cascades through the economy, thus enriching all. Prosperity underpins social cohesion; social cohesion, in turn, underpins political stability and political stability is the bedrock of a collective and peaceful society.
The EU and its anti-democratic system adopts a completely different philosophy which is why its functionaries continue to invent judgements such as this Shell farce and imposes silly fines that have no legal basis and (having made a political and financial splash) are usually withdrawn.
This perfectly ridiculous judgement is nothing more than the opinion of a very small (but active) group of climate activists. If it is not challenged and if this piece of opportunism is allowed to stand then capitalism will be under the existentional threat of legal precedent.
Quaintly and ludicrously, in giving its judgement the court actually stated that “the company (Shell) had not acted unlawfully” but that the court was concerned that there could be “an imminent violation” of the emission reduction obligation”. Apparently it would seem from that statement that the law is now to be applied to possible (but not actual) future events on the whim and opinion of a politically biased judge!
In a mature, democratic and free society the accepted norm is that the legislature (its Parliament) makes the law, through a process of debate and free voting, and the legal profession then simply administers and applies it. Lawyers would be acting ‘ultra vires’ the instant they step over that demarcation line and attempt to make the law themselves.
What we are seeing here is a blatant attempt to impose left-wing dogma through the back door with unelected socialist and woke lawyers making the law up as they go along and cutting out the democratic process altogether. This may have been the behaviour of soviet Russia (and may still be under the Putin regime), it may be the way that communist China’s leaders rule the Chinese people and it may be the preferred means of control in Iran too, but it is not the way that Great Britain and the rest of the capitalist world has done things for a thousand years or more and it needs to be ensured that this form of unelected rule being slipped past by stealth and quasi-legal ‘judgements’ is overturned.
The EU clearly persists in its underhand attempts to extend its regulatory and judicial reach and seeks to impose its ideology through the use of deliberately blinkered ‘judgements’ or via the introduction of ‘practice notes’. These devices are used simply because the EU leaders must know that its political dogma would be highly unikely to pass through the normal procedures of law-making.
In this particular instance, yet again a pompous EU judge has overplayed her hand and in the short term may appear to have won a battle but, in the longer term will lose the war. This perverse judgement must and surely will therefore be appealed and overturned as soon as the “law’s delays and the insolence of office” (Shakespeare again comes to my rescue) allows.
There have been a series of these attempts in recent years to invent and apply quasi-legal judgements against the interests of free and democratic systems of commerce and trade. You may recall the extraordinary interventions of Margarethe Vestager (leader of the European Commission’s anti-trust authority) and yet another self-important left-wing EU functionary who has tried to impose swingeing fines on a number of big-tech companies for having the temerity to organise themselves in a highly tax-efficient manner (and without breaking any laws whatsoever in the process).
In 2016 she imposed a fine of £11.1 billion on Apple…..and in a sleazy manoeuvre instructed the Irish government to pay that fine to the EU and then recoup it from Apple.
She similarly imposed a £215 million fine on Amazon based, it would seem, simply on the fact that it is hugely successful.
After years of appeal, argument and resistance, the Apple fine was eventually rescinded and (as you may have seen) on 12th May 2021 the judgement against Amazon was quietly withdrawn too.
Amusingly, the Amazon farrago and its initial ‘verdict’ had been based on ‘sweetheart’ tax deals that Luxembourg had agreed with Amazon many years ago. By strange coincidence the Prime Minister of Luxembourg at the time that these legally sound tax arrangements were made was a certain Jean-Claude Junker who, (just to be sure that all necessary power was in his own hands) had made himself the Finance Minister of Luxembourg too.
Who was it that said ‘power corrupts and absolute power corrupts absolutely’?