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The tone of this month’s report has changed from one extreme to the other in just the last three stock-market trading days of September. From a position of being nicely in profit on the 27th of the month, three successive days of extreme negativity (particularly in the Nasdaq index) saw equity prices substantially and unnecessarily marked down. As ever, though, on the final day of the month we are obliged to value on a mark-to-market basis.

On 30th September 2021 the FTSE100 index closed the month at 7086.42 (a fall of -0.47% in the month of September itself) and it now stands at up 9.69% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 30th September shows a fall of -4.98% for the month and so the Fund is now up 9.84% to this same date.

Yet again these price reductions in such a short space of time are unjustified from an economic perspective and are more related to the political opinions of two key figures in US financial policy making.

As we stated in last month’s report, much of the volatility in equity markets throughout this year can be ascribed to confected ‘concerns’ expressed by analysts and market-makers in relation to the potential for upward spikes in future inflation (largely in their attempts to justify the irrational marking-down of equity prices) and they reflect ongoing differences of opinion between Jerome Powell (chairman of the Federal Reserve) and Janet Yellen (who was his immediate predecessor at the Federal Reserve and is now the Secretary of the Treasury in Biden’s government).

These disagreements can best be illustrated by comparing the political beliefs of the two individuals concerned. Yellen was originally appointed to the Federal Reserve board by Bill Clinton and then raised to chairman by Obama (so is, broadly, left wing). She was dismissed as chairman of the Fed by Trump who then replaced her with Powell (conservative).

On a multiplicity of occasions throughout this year Jerome Powell has stated that “if sustained higher inflation were to become a serious concern then the Federal Reserve Open Market Committee (FOMC) would certainly respond and use all its monetary tools to assure that inflation runs at levels that are consistent with our goal”.

Despite this clear assurance market makers have continued to blame “inflationary concerns” as a limp pretext to manipulate equity prices and this same tired attempt at justification has been trotted out again this week. It simply does not stand up to scrutiny.

The initial ‘explanation’ offered on 27th September to vindicate a 4% mark-down in the Nasdaq index was that the yield on US 10-year Treasury Bonds had spiked from its opening level on that day of 1.484% to a figure of 1.551%. Seemingly these ‘experts’ consider that a yield figure of 1.50% is a tipping point and any higher yield figure is deemed to be a negative indicator for shares.

Strangely, on 31st March the yield on 10-year Treasuries had spiked to 1.763% but, stranger still, the Nasdaq index resembled a mill pond and equity prices remained unmoved. Obviously, we mere investors are not expected to have memories, employ logic or use the power of thought.

At the same time as market-makers were citing concerns over “surging inflation” the Bank of England stated confidently that any spike in inflation would be “transitory”.

We therefore see this severe mark-down as an injection of fear in the hope of dislodging unsteady or unwary investors (just before what is expected to be an impressive third-quarter results season). Yields on Treasury Bonds are dynamic and ever variable and, no doubt, before too long the 10-year yield will fall again below this apparently so vital 1.50% figure. We’ll see what happens then.

Never one to miss the opportunity to pour petrol onto an already excessive blaze, Janet Yellen (a woman unencumbered by modesty and never guilty of over-thinking) felt the need to tell the world that the US Treasury would run out of money by 18th October and therefore that the USA might not be able to pay its bills and thus could default on its debts. Subtlety is clearly not her strong suit either.

Her statement comes from the oft-used equity-market playbook of nonsense stories and, if nothing else, gives Edward Lear a good run for his money. However, one of the few advantages of advancing age is that one has seen and heard an awful lot of whoppers before but our political leaders don’t seem to believe that there are many people outside their political bubble who have the power of recall and who are not prepared to suspend disbelief or swallow fairy stories. When faced with dubious and politically based assertions my inner geek does tend to emerge.

Like Christmas, this pantomime comes around on a regular basis year after year and, to date, the USA has never yet defaulted. As in so many years past a last-minute fix (much in the style of Errol Flynn) will be found and salvation will be clutched from the gaping maw of Janet Yellen.

The first three weeks of October will see the release of third-quarter corporate financial reports. For those companies that currently comprise the portfolio holdings of the Quotidian Fund we anticipate a continuation of impressive performance figures and, if that indeed proves to be the case, then we expect the prices that have been artificially marked down in these past three days of short-term mayhem to be restored to their former glory.

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Traditionally the month of August is the main holiday season in the Northern Hemisphere (which is home to all the major stock-markets of the world) and market-makers abandon their trading desks in droves for a welcome and often extended period of rest and relaxation. At the best of times thin trading volumes leave shares open to volatility and it is a relief to welcome September and the return to what passes for investment normality as the leading players return to their offices.

On 31st August 2021 the FTSE100 index closed the month at 7,119.70 (a rise of +1.24% in the month of August itself) and it now stands at up +10.20% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 31st August shows a rise of +3.90% for the month and so the Fund is now up +15.60% to this same date.

One of the economic issues we covered in last month’s report was “The Biden effect” which related to his self-defeating attempt to impose a common global level of corporation tax. That proposal hasn’t survived its first encounter with economic reality but I have little doubt that this buffoon will persist with his blinkered bid to introduce a socialist tax agenda. Socialism, of course, sounds blissfully attractive in theory but has never actually worked in practice and it has a well-earned soubriquet as “the equal sharing of misery”.

Biden has unmistakably shown himself to be weak, incoherent, incapable and way out of his depth but, not content with exposing his own naivety with this ill-thought-through stratagem, he took another false step (a wild lunge in the dark might be a better description) when, without prior consultation with his NATO partners nor with sufficiently early warning, he simply gave an artificially and unnecessarily abrupt period of notice to remove the nation-building and peace-keeping US armed forces from the potential powder-keg of Afghanistan.

The New World Order ushered in following the Second World War saw the USA effectively appoint itself as the world’s policeman. We all know, of course, that with constabulary duties to be done (to be done) a policeman’s lot is not a happy one. This is especially so when the chief of police is a bumbling, incompetent idiot. Biden’s approach to this responsibility and duty of care can seemingly be summarised as “tell me what I need to know but don’t tell me what I don’t want to hear”. But, as a prominent and prescient Sixties philosopher once said; “living is easy with eyes closed, misunderstanding all you see.”

Putting aside the potential consequences of this move in relation to global stability and peace, the longer-term impact on the global economy is highly likely to be profoundly damaging to the western world’s interests.

Afghanistan is a rich source of rare earth metals (cobalt and lithium in particular) which are essential components for the politically motivated, proposed and fast approaching ‘green’ era of electricity replacing carbon-based sources of fuel.

China already provides 85% of the world’s rare earth metals and, as it shares a land border with Afghanistan, it will no doubt seek to absorb unopposed a substantial quantity of that country’s natural resources too until it effectively achieves a monopoly.

China’s obvious ambitions towards world domination will then be given even greater weight. Incidentally, as a light-hearted comment on that weighty note: a valuable recent study has shown that women who carry a little extra poundage tend to live longer than the men who mention it.

Meanwhile, as the West continues its idealistic (not to say naïve) march towards the well-meaning but daft and unrealistic goal of net zero carbon emissions by 2050 (and ultimate commercial suicide), China (closely matched by India) continues to prosper and builds hundreds of new coal-powered power stations whilst Western economies sleepwalk into windmills of confusion, tidal waves of uncertainty and solar rays of eventual economic upheaval, mayhem and calamity. Presumably, whilst politicians pursue their fantasies and virtue-signalling at our expense, the huge levels of carbon emissions produced by China and India will only exist in a parallel universe to the one the rest of us currently occupy.

And finally, much of the volatility in equity markets this year can be ascribed to confected ‘concerns’ expressed by analysts and market-makers in relation to the potential for upward spikes in future inflation (largely in their attempts to justify the irrational marking-down of equity prices).

In a speech delivered on 27th August, and for the umpteenth time in 2021, Jerome Powell (Chairman of the Federal Reserve, America’s central bank) stated that “if sustained higher inflation were to become a serious concern then the Federal Reserve Open Market Committee (FOMO) would certainly respond and use all our monetary tools to assure that inflation runs at levels that are consistent with our goal”.

The message couldn’t be clearer but, no doubt, market makers will continue to blame “inflationary concerns” as a limp excuse to manipulate prices; their cynical actions are designed simply to introduce fear and uncertainty into an investor’s mind and they should be seen for what they are.

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The 2021 second quarter corporate results season has been in full swing through the month of July and this will continue for the first fortnight of August. Of the results issued to date, the figures reported have generally been better across the board than analyst’s expectations. Indeed, three-fifths of the companies that comprise the S&P500 Index have now reported and, in aggregate, they show a positive surprise of +17.75% above anticipations. Every market sector is positive, the lowest sector (Utilities) showing positive to the tune of +4.56% and the highest (Consumer Discretionary) being +31.01%.

You will know from Quotidian’s earlier 2021 monthly briefings that this doesn’t come as a surprise to us; we have very little regard for what that self-regarding and dull body of analytical pessimists have been predicting since January and have continuously expressed our view that market valuations (especially in the USA) have not reflected the reality of the economic rebound and corporate successes.

Two-thirds of Quotidian’s investment holdings have now registered their latest numbers and all bar one (the exception being Amazon) have been nicely above expectations and some (Google and Apple) have been exceptional by every metric.

Despite this compelling evidence of strong economic performance (particularly in the USA) the global markets saw intra-month gains almost wiped out by a return to confected ‘concerns’ about global inflation, about regulation of technology companies in China and about the potential of rising interest rates. The result of these limp excuses for intelligent analysis and perceptive thought was the (temporary) reoccurrence of emotionally-based and pessimistic stock pricing in the last two trading days of the month (which saw 3% wiped off the gains made earlier in July).

On 31st July 2021 the FTSE100 index closed the month at 7032.30 (a fall of -0.07% in the month of July itself) and it now stands at up +8.85% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 31st July shows a rise of +0.85% for the month and so the Fund is now up +11.27% to this same date.

In the last two weeks of July there has been a great deal of selling pressure in the China stock-market. This has been motivated by a series of targeted crackdowns by the Chinese regulators who have specifically aimed their fire at the Technology, Delivery and Education sectors. In respect of the Education sector businesses Chinese regulators seem determined to turn them into “not for profit” organisations.

These central government actions emphasise the essential difference between a command economy (as operated in China) and a free-market economy (as typically operated in the western world).

We can best illustrate the effect of these crackdowns by confirming that two of the major investment funds focused on China have very recently seen their values fall as follows:

In the month of July the Fidelity China Special Situations Fund has fallen -15%. Similarly, the J P Morgan China Growth and Income Fund has fallen by -24% in that month too

These equity mark-downs remain localised to Chinese companies and there is no clear and obvious reason why these self-inflicted woes should infect other major global markets but we well recall that the last three ‘shock’ global stock-market sell-offs have each had their genesis in China. We remain vigilant.

The Biden effect…..global corporation tax

Despite all the evidence contradicting his preferred political viewpoint, Joe Biden is still fighting dogmatic, left-wing economic arguments that were lost over 60 years ago. It’s an old cliché that a sure sign of madness (or sheer stupidity) is to keep on doing the same things but expecting to achieve a different outcome. Buffoons like Biden and his coterie still believe that taxing the successful and subsidising the indolent will produce a vibrant economy.

The latest idiocy in a long string of mis-steps and error strewn ‘policy’ since his inauguration is his misguided attempt to impose a global minimum level of corporation tax (initially set at 15%) which was unveiled at the recent G7 leaders meeting in Cornwall (an ideal location where the abundant hot air met the economically open mouths and empty heads of the delegates). With the full confidence of their own economic ignorance they all voted in favour of this destructive nonsense.

A few years ago and a little further around England’s south coast an equally empty-headed monarch called King Cnut (not a man wracked by self-doubt) convinced himself that by his own sheer brilliance and perfection he could turn back the tide simply through the medium of his own status and greatness. This plan (which had all the hallmarks of Biden’s blinkered taxation proposal) was eventually aborted at the very moment that Cnut’s head disappeared beneath the waves. The same fate will befall Biden’s ill-advised scheme. Governments generally (and the UK’s in particular) would do much better to rein in their spendthrift ways and, simultaneously, look very closely at controlling waste and making desperately needed economies in state-sponsored organisations. History clearly shows that taxing success and subsidising failure has never worked.

Indeed, just a matter of days after the G7 leaders had gone back to running their candy-floss stalls and local Punch and Judy shows (same cast, different story) and the army of journalists and TV cameras had decamped and returned to their castles in the air, the cracks in unity began to appear. Ireland opted out as soon as its representatives had returned home and packed away the sun-tan lotion whilst the UK immediately sought out an exemption for the City of London from this proposed new tax.

With that in mind, it is interesting to note that the City of London generates approximately 22 per cent of the UK’s GDP and that the UK financial services industry paid £76bn in tax in 2020 (equivalent to 10.1% of the total tax contribution to the UK).

As ever, the EU took a while longer to wave the white flag but by the second week of July it too had shelved plans for a sweeping new digital tax whilst Biden’s plan to coerce another 139 nations into agreeing this flawed approach also fell short.

Whilst all this was taking place in Wonderland, Apple (a company that really knows how to run a business successfully and, as a result, has more cash than the US Treasury) issued its latest set of accounts which showed that it had paid dividends of £600 million to its Irish parent company in September 2020 (a sum which was closely followed by another £120 million in December of that same year).

Apple, rather like King Lear, is more sinned against than sinning. Its contribution to the Irish economy helps to keep that whole unsteady ship afloat. Profit-shifting is perfectly legal and will continue for as long as the grass is green and the sky is blue (and for as long as the deluded, brainless and self-harming wishes of Biden and his ilk try to tax them out of existence).

Pensions Lifetime Limit

The concept of a “Lifetime Limit” on pension funds was first introduced in 2006 by Gordon Brown and the limit at inception was set at £1.6 million (and index linked). With indexation, that limit grew to a peak of £1.8 million by 2014. The Chancellor at that stage (George Osborne: never one to miss a sleazy, well-disguised taxation opportunity) then began to reduce the “Lifetime Limit” in successive years since then and it has now fallen to £1,073,100 for the 2021/22 tax year.

The latest statement from the Treasury the week before last suggests that this figure will be reduced yet again, and the hint was that it would now be set at £800,000. When this was mooted in its announcement, a senior figure at the Treasury was quoted as saying “Our job is to keep people out of poverty not to enrich the middle classes”…..!!! The arrogance and ignorance behind that statement is breath-taking. Does the UK really have a Conservative government at the present time or is the country actually being run by unelected, left-wing civil servants?

As a result of this blinkered and un-conservative thinking there have already been some extremely unhelpful side-effects. For example, the medical profession has already seen a mass exodus of doctors retiring early or leaving the profession altogether (or moving abroad) as a direct result of the tax bills they’ve already received in relation to (unknowingly) having exceeded the pension lifetime limit (or from fearing that they will be unable to avoid exceeding it in the future). To penalise the responsible and successful in order to reward the irresponsible, the apathetic and the indolent does not seem to be a well-thought-out strategy. I question whether this is indeed the intended Conservative policy?

Given the unseemly way that successive governments have continued to lower the Lifetime Limit it is highly likely that even very modest pension provisions currently will indeed be likely to exceed the maximum limit in the future…..and any pension value above that lifetime limit will be subject to tax at 25%. It gives rise to a very serious question as to whether investors should now avoid UK pension schemes as the main vehicle with which to save for their retirement. It also begs the question (yet again) as to whether the UK currently has a Conservative government?

Northern Ireland protocol

I am obliged to Dr Martin Parsons for the following piece of intelligence relating to the Northern Ireland Protocol which continues to bedevil long-standing and profitable trade between two component parts of the United Kingdom (two parts of the same singular nation state):

The 1970 UN Declaration on the Principles of International Law states that “Any attempt aimed at the partial or total disruption of the national unity and territorial integrity of a state or country or at its political independence is incompatible with the purposes and principles of the UN Charter. Interference with a country’s internal trade is also prohibited by Article 1 of the International Covenant on Civil and Political Rights (which all EU countries have signed up to). Despite that, the EU continues to justify its deliberate weaponizing of the NI protocol to make it extremely difficult (if not impossible) for the people of Northern Ireland to buy the produce of its own nation in its own nation. The financial and investment relevance of this to our monthly report is the negative commercial, economic and opportunity cost effects it is having on the British economy.

This is a quite absurd situation which (apart from its profound security and social implications) is proving detrimental to the profitable economic interests of the United Kingdom. The EU’s actions are clearly in breach of the legislation outlined above but the UK government seems unwilling to take more robust action; I wonder why.

Mifid 2

In April the government strongly hinted that it intended to repeal MIFID 2 (Markets in Financial Instruments Directive), the legislation introduced in January 2018 by the EU as a means of regulating the financial services industry). Mifid 2 built upon and replaced its elder brother Mifid 1 which originally came into force in 2007.

As with all EU legislation Mifid was over-fussy, grossly over-complicated and simply had the effect of stifling the financial services industry in pointless, unproductive and expensive red tape. Our monthly report in April 2021 set out a more comprehensive explanation of where and how Mifid 2 contributed to the joy of nations.

In the last week of July, the FCA confirmed that a new UK regime would come into force on 1st January 2022 (effectively replacing Mifid). This new system is called the Investment Firms Prudential Regime (IFPR) and will impact all UK investment firms currently authorised under Mifid.

Joy unconfined; except that, at first blush, far from replacing the overwhelming, counter-productive idiocy of Mifid 2, IFPR appears to maintain everything that made Mifid 2 pointless and then add even more meaningless, needless and futile bureaucracy to it. So much for the government’s supposed intention to repeal Mifid and replace it with something purposeful, worthy and useful. The UK government’s words do not match its actions.

Another opportunity lost for making the UK’s financial services sector more competent, efficient and competitive globally. This is particularly relevant given the Memorandum of Understanding on Financial Services Regulatory Co-operation between the UK and Singapore having been signed in July.

Conservatives have a hard-won historical reputation for being business-friendly and financially prudent not for being financially incontinent. Reputations take years to establish but can be lost in short order through inattentiveness, being taken for granted and taking one’s eyes off the ball. Boris caveat……or should that be caveat Boris.