Heroes: Finance and All That 

 

‘And when we dream it, when we dream it, when we dream it 

Let’s dream it, we’ll dream it for free, free money’ 

 
There is a great deal wrong with our economy. This isn’t new it has been creeping up on us for years. 

Thatcherism and its adherence to free-market theory did for much of our industry. We tried hiding behind niche, luxury brands such as Rolls Royce Motors and Bentley, both now German-owned and thriving. 

In addition, free-markets meant ‘we were open for business’, which translated as any overseas predator can buy our companies. If we tried to buy theirs we were hit with a myriad of obstacles, E.G., Canada.  

Big Bang delivered the City as a centre of excellence for financial services with the added benefit of straddling time zones. Our banks inability to compete post-GFC in investment banking, allied to Brexit has seen this fall away. 

The City is now not a place to raise capital; IPOs last year barely reached $1bn, whereas globally $123bn was raised. As a result our stock market now ranking a mere 10th in the world. 
 

‘The City is now not a place to raise capital…our stock market now ranking a mere 10th in the world’

 
In the editorial to ‘What Can we Expect From 2024’, I described the water companies as ‘a typical example of why capitalism in its current post-Thatcherism state no longer serves the people. They are symbols of greed, and mis-management, there to serve only their investors’ 

Thames Water is a barely alive disaster zone whose second largest investor, the University Superannuation Scheme (USS), reported a loss of almost £600m last year after writing down the value of the company as it struggles to shore up its balance sheet. 

The USS, the largest private pension fund in the UK, holds a 20% stake in the business. The revaluation from £956m to £364m, values Thames, Britain’s biggest water company, at £1.9bn down from C. £5bn in 2022. 

Thames is struggling to raise the funds needed to tackle a debt pile of around £18bn and increase investment to tackle sewage overflows and water leaks. 

Thames, which serves C.25% of English households, admitted to MPs last year that it does not currently have enough cash to cover its debt repayments, including £190m in April. 

Another national scandal is the Post Office and their employees who were wrongly accused of stealing, and how many of them are still waiting for compensation 4-years after winning a landmark court case proving their innocence. 
 

‘Another national scandal is the Post Office…every year they stretch this out a few more die and the compensation bill goes down

 
Now, much has been said about this already, there is even a TV series about it, as such I will be brief. 

Noel Thomas, who was sentenced to nine months in prison in 2006 after being prosecuted but whose conviction was quashed in 2021, said: ‘I might never see [full compensation] because a lot of my friends have gone. A lot of people I met from this process have passed away.’ 

Put simply this is just another example of how the current model of capitalism fails people. Fat cats and their lawyers just delay, and delay. Every year they stretch this out a few more die and the compensation bill goes down. 

What does the regulator do; nothing? What does the government do; nothing? It might be more appropriate to ask, do they care? No.  

And now back to the City. This weeks the FTSE100 celebrates its 40th anniversary. 

I noticed another article on DIY regarding this, and there were a few points that interested me. 

‘Over the past 40 years the index has returned £23.19 for each pound invested. That’s well ahead of inflation as £1 in 1984 is worth £3.10 today, amply illustrating the wealth-building nature of investing in shares‘. 

Dividends maketh the investment; Dividend comprise >75% of the return. ‘In capital growth terms an investor able to track the performance of the index from its starting point would have £5.47 for each £1 invested compared to the £23.19 quoted above once reinvested dividends are factored in.’  

Now the latter, with dividends reinvested doesn’t sound bad. However, we need to allow for the impact of compounding. The annualised rate from owning the Footsie for 40 years is slightly more than 8%, which, whilst it outstrips inflation, isn’t in Warren Buffett territory. 

From its starting point of 1,000 the index is now C. 7,700. Which, if you consider that at the close of the millennium it reached close to 7,000, the last 24-years haven’t been much to shout about. 

Of course, the real question here is what does all of this mean for the economy, for businesses investment. What does Morgan Stanley think? 
 

• Unemployment is expected to reach to 5% next year and 5.2% in 2025.  
• UK inflation is expected to average 2.8% over the year, down from 3.9% in November. 

 
‘The UK economy is stuck in a fragile equilibrium, with a challenging policy mix. Exit is unlikely to be painless – we see a technical recession at the turn of the year and a weak economy over 2024.’ 
 

‘we see a technical recession at the turn of the year and a weak economy over 2024’

 
Irrespective of previous economic mismanagement, the country is still rich in research and intellectual knowledge, prerequisites for a successful 21st-century economies. Sadly, this opportunity is being squandered, and the 2024 electoral debate will be about culture wars and immigration, when the focus should be on transitioning the economy to green energy, which is an economic opportunity to build new industries and level-up, rather than a Marxist plot. 

The biggest pool of capital in this country is locked away in our pension funds. Pensions are the  single most important way we save. Rather than being a source of finance they have been set up to deliberately avoid the ‘risk’ of investing in British companies. A report entitled ‘Britain plc in Liquidation’ found that in 1990 UK pension funds owned more than £1tn worth of UK companies; now they hold less than £100bn (1). Increasingly, they invest in safety-first government bonds or overseas.  

As a result, rather than making pension funds safe they are killing our economy and paradoxically themselves. The report estimated that we have C. 5,700 pension schemes with total assets of C.£1.7tn. unfortunately, 2/3 of the schemes are in deficit 
 

‘we have C. 5,700 pension schemes with total assets of C.£1.7tn. unfortunately, 2/3 of the schemes are in deficit’

 
Since 2006, the valuation of a like-for-like company quoted on the London stock market compared with stock markets in the US or Europe has fallen on average by a third. In trying to reverse this British companies become very short term, withdrawing from markets to hoard their profits, failing to develop new products and placating shareholders with big dividends and share buy-backs. Wages are held down, and raising funds for vital investment is avoided as it may further depress share prices. 
 

• Until 2000, British companies were buying more assets overseas than selling them. 
• 20- years ago, 66% of all dividends were paid to British shareholders so the cash stayed here; the report finds that now only 25% ends up in British hands.  

 
In addition, British companies have been impacted by accounting rules that forced them to pay £250bn over the past decade into their company pension funds to compensate for alleged funding shortfalls that in fact were an accounting fiction.  

All of the above have contributed to the fact that we have created no great companies in the past 20 years; instead, 50 firms that would have been in the FTSE 100 are now foreign-owned. Brexit has closed vital markets, marginalised the City and has led to a further markdown of corporate valuations accelerating the doom loop.  
 

‘Brexit has closed vital markets, marginalised the City and has led to a further markdown of corporate valuations accelerating the doom loop’

 
In the view of free-marketers this cannot happen, they believe we live in a ‘borderless world‘ in which capital flows seamlessly to wherever there is profit. It doesn’t; in the real world investors see no reasons to invest in ailing economy, which perpetuates the doom loop. Instead, they become predators pickings-off what they can.  

What needs to change? 

If all pension funds directed more of their assets to the UK, it would lift corporate Britain off the rocks. This is a situation where state action is more important than free-markets markets. We have far too many small pension funds that could / should be consolidated into super pension funds, E.G., the existing Pension Protection Fund (PPF). Scale allows greater focus on return seeking assets, and spreads risk. 

The Canada Pension Plan Investment Board (CPPIB) has assets close to CAD 500m, and a total equity (public and private) allocation  of 53%. (1) 

The chancellor, Jeremy Hunt, is aware of this issue of scale, and November’s autumn statement, he announced small pension funds could join the PPF – and a consultation was launched on creating a pension fund ‘consolidator’ by 2026. However, he is hamstrung by the Tory right who believe that the government is becoming socialist by interfering in the private sector. 

Unsurprisingly, they are wrong; we would enjoy better pensions if the funds produce greater returns as the payback for better managed risk. This is the type of proposal that a future Labour government  should be focussed on together with their planned public wealth fund as part of its £28bn green prosperity plan. 

Investment must be the key. Currently, we have the lowest level of investment in the G7, allied to degenerative levels of inequality, shrinking productive capacity, crumbling public infrastructure and a complete lack of economic planning. In short, decline. 
 

‘we have the lowest level of investment in the G7, allied to degenerative levels of inequality, shrinking productive capacity, crumbling public infrastructure and a complete lack of economic planning’

 
Inequality is growing; the wealth of the top 0.1% has almost tripled since the 1980s, whilst wages in real terms are lower now than they were in 1997.  

Neoliberalism has ruled economic thinking since Thatcher came to power in1979, as a result most under 60’s have never experienced different economic theory. Politicians haven’t offered changes only variations on a theme, which they fixate on small boats or debt ceilings, rather than addressing a broken economy. 

Between 1970 and 1990, UK annual investment rates averaged 23.7% of GDP. This has now fallen to an average of just 17.9%, whilst dividends for shareholders have risen. In effect, we have prioritised profits for shareholders over jobs for workers. 
 

‘we have prioritised profits for shareholders over jobs for workers’

 
Other countries, less fixated on free-markets are starting to employ differing forms of public intervention, not least because the imminent impact of decarbonisation and automation will exacerbate current problems.  

Whereas Keynesianism can point to successes,  such as Roosevelt’s ‘new deal ‘, monetarism / neoliberalism has delivered little. 80-yrs ago it was Keynes who dominated the Bretton Woods conference which rebuilt the post-WW2 world. 

Keynes’s theories held that if economies fell into recession, it was the job of the state to raise public spending in order to maintain full employment.  

Sometimes, to go forwards you need to learn from the past. The US fared better recovered far quicker after the crash of 1929  because they reflated their economies, whereas we resorted to austerity. In 2008 both countries did the same, arguably we have been is long slow recession ever since. 

Doing the same thing and expecting different results…. 
 

‘I drag you down, I use you up 

Mr. Self Destruct’ 

 
 Notes: 
 
 

1. Source, the investor advisory consultancy Ondra 

 
Philip’s column has the feel of a macro version of Christmas credit card bills landing on the doormat – and it’s not pretty; it’s difficult to see how Mr Sunak can deliver ‘change’ given that his party has failed to navigate the various icebergs of the past 13 years, but has the tool maker’s son got anything different in his tool kit? Or perhaps Reform will en-Tice Mr Farage to give it another crack at the helm of the party that ‘speaks for the working class’?

One thing’s for sure – it’s not going to be boring:

Small wonder we are in the economic doldrums, no one does any work.

Everybody I speak to seems to see the 8^th January as “the first day back”. Whatever Christmas might be, it goes on too long! The only saving grace being that politicians are also away so there is less stupidity than usual.

Having said that, the junior doctors strike seems to have at least registered with the government, though, of course, any thought of them dealing with it looks as far away as ever.

As such I decided to look at the economy, only I wish I hadn’t; it’s an ocean of gloom.

As with much else that is wrong with the country, the economy is the victim of right-wing dogma. Since 1979, economic policy has been based on free-markets and balanced budgets. When the latter didn’t happen we had unnecessary austerity aimed at fixing it.

None of it has worked for the majority. Yes, rentiers have had a beano, but an economy must serve the whole, not just parts.

The Tory’s are utterly devoid of anything new. If, perchance, something new was suggested there would be outcry from the hard-right that it’s socialism.

There is a common theme here, the tails wags the dog, minority rule.

Labour are so fixated by not losing that they offer little alternative. They might not be so stupid, so fixated on culture wars, etc., but little will change.

 The climate crisis sums us up. The Tory’ commit f*** all, Labour are agonising over £28bn, while the US commit $700bn. We are small people with small ideas.

Lyrically, we have ‘Free Money’ from Patti Smith and ‘Mr Self-destruct’ by Nine Inch Nails. Enjoy!
 
@coldwarsteve
 

Philip Gilbert is a city-based corporate financier, and former investment banker.

Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s

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