MoneyWeek - 24.06.2022_downmagaz.net

ANALYSIS PROFILE PLUS Timber The man who A plug-in jeep takes a revolutionised rule the road tumble crypto CARS MAKE IT, KEEP IT, SPEND IT 24 JUNE 2022 | ISSUE 1109 The next storm Why investors should brace for a wave of government defaults BRITAIN’S BEST-SELLING FINANCIAL MAGAZINE MONEYWEEK.COM



24 June 2022 | Issue 1109 Britain’s best-selling financial magazine From the editor-in-chief... If you have lost a cryptocurrency – they seem to lot of money on move together) and that you cryptocurrencies must inform HMRC of the loss in the last for it to be allowable. few months, You will be wondering where I wonder how you feel about the future gains I mention will the rich celebrities (mostly in come from. That makes sense. the US) who encouraged you There’s plenty of bad news out to get in. Reese Witherspoon there at the moment (see page has marketed crypto. So have 4 for why a recession is close Gwyneth Paltrow, Larry David to a certainty, page 16 for the (his ad has the benefit of being a inadequacies of the central tiny bit funny), Paris Hilton (not banks who are supposed to be funny) Matt Damon (funny but ©Getty Images preventing it and page 22 for not supposed to be funny) and details on the stunning levels of Kim Kardashian – among many Gisele and Tom Brady: the most irritating crypto ad public debt globally). others. But the bit of marketing But maybe it isn’t all bad. I have found most irritating so “The celebrity crypto ads remind me a little too Matthew Lynn argues there are far comes from Gisele and Tom much of the sub-prime crisis” long-term upsides to a recession Brady (I’m classifying it as not funny at all person in the US had been persuaded that (see page 14). There is also some small good on any level). they could both stick it to the man and news for those just reaching retirement. In an ad for FTX, Brady is seen calling make a quick buck by buying a pile of Annuity rates are up a little: if you want a variety of people (let’s call everyone, he low-quality flats and flipping them. The to swap what is left of your savings for a says) and encouraging them to get into celebrity bitcoin ads marked the same part long-term guaranteed income, you will get the crypto markets one way or another. of the cycle – and once again, the less able more for your money now than you did Are you in, he asks them. I’m in, they say. take the hit. Most of the bankers and fund last year. Those far from retirement should I bet they wish they weren’t. There’s been managers who facilitated the sub-prime also be cheered: with global stockmarkets a small bounce this week, but not one bubble were fine. The holders of the flats off 20% or so, they too are getting more that goes much way towards mitigating were not. Giselle and Brady look fine. Those for their money. Finally, see page 28 for the the 70% fall in bitcoin from its highs of with undiversified portfolios majoring in story of Vitalik Buterin, the crypto guru November last year. crypto are all too often not fine. who reckons that anyone really into crypto You might wonder why this is the for the long term should also “welcome most irritating ad. The answer is that the Taking the losses a bear market”. He won’t, I assume, be majority of the people Brady calls do not The only upside (and I am stretching here) crystallising his losses for tax purposes. look like they can afford to lose money is that there is some gain in crystallising in the way that he can (one of the lucky losses in order to set them against future recipients of his advice is his plumber) and gains in the following four years. If you the whole thing reminds me a little too do so, remember that you must not buy much of the sub-prime crisis. Think the bit said asset back within 30 days (although towards the end where every low-income if you must you could buy another Somerset Webb [email protected] Lawsuit of the week ©Alamy Good week for: Cover illustration: Adam Stower. Photos: Alamy; Getty Images; Jeep A 314-year-old Spanish galleon known as the ©Getty Images Media rights for the Indian Premier League cricket competition “mother of all shipwrecks” has become the have sold for $6.2bn for five years, says Variety. Disney paid “mother of all legal battles”, says Joshua Keating $3.01bn for TV rights, billionaire Mukesh Ambani paid $3.05bn for on Grid. The San José sank off the coast of what is streaming rights, and rights outside India sold for $135m. The now Colombia after a battle with a British fleet, price per match of $15m is second only to the US National carrying treasure worth as much as $20bn today. Football League ($35m) among major sporting events. Now new footage of the wreck has brought fresh attention to a long-running dispute about who The auction of a Nobel Peace Prize awarded to Russian journalist owns it. Colombia says the ship is in its waters. Dmitry Muratov has raised $103.5m for Unicef, the United Nations Spain claims it as a former “ship of state” under children’s agency, says The Guardian. The proceeds of the auction international law. The Qhara Qhara, a Bolivian – which was won by an unidentified phone bidder – will go to help indigenous group, say the treasure was stolen Ukrainian refugees. Muratov, the editor of the now-closed Novaya from their ancestors. And Sea Search Armada, a Gazeta newspaper, was awarded the prize last October. salvage company, says it found the wreck 34 years before the discovery was announced in 2015. Bad week for: moneyweek.com Chinese internet firm NetEase saw its shares drop 8% on Monday after one of its social-media accounts made a mocking reference to Chinese president Xi Jinping, says the Financial Times. A post on the Weibo account for the Diablo Immortal game read “Why hasn’t the bear stepped down”. Xi is often parodied as Winnie the Pooh, who is consequently censored from the Chinese internet. A filling station manager in California was fired after costing his employee $16,000 by putting a decimal point in the wrong place, says CBS Sacramento. John Szczecina entered the price of petrol at $0.69 per gallon rather than $6.99. The mistake was not fixed for three hours, during which customers spread the word about ultra-cheap fuel and long queues formed to take advantage. 24 June 2022

4 Markets Central banks on course for recession Alex Rankine Markets editor “The central-banking playbook of the ©Getty Images Copper is the most economically sensitive metal 2010s is failing,” says The Economist. Policymaking that was designed for an era respite either, since ten-year Treasuries are policy committee (MPC) followed with a of low global inflation is leaving central currently on track for their worst first half far more cautious 0.25 percentage-point banks “slow on their feet” and behind the since 1788. hike of its own, taking UK interest rates curve on inflation. Now they are racing to 1.25%. Such “an incremental strategy to catch up. Last week, America’s Federal Talk of a coming recession has also allows the rate-setting committee to observe Reserve raised interest rates by 0.75%, the started to weigh on commodity markets, more data as it comes in, and fine-tune its biggest hike since 1994. The Fed wants says Randall Forsyth in Barron’s. Nearby approach as circumstances dictate”. investors to believe it will act decisively to crude-oil futures ended the week at tame inflation, “yet it is loath to admit that $109.56 a barrel, down 9.21%. Meanwhile, The modest increase was typical of doing so will probably require a recession”. copper, the most “economically sensitive the “head-in-the-sand behaviour that has commodity”, has fallen by 18.5% since it cost the Bank of England so much of its The historical record is not encouraging, reached a high in March. inflation-fighting credibility”, says Liam agrees Jon Sindreu in The Wall Street Halligan in The Daily Telegraph. Tweaking Journal. “‘Soft landings’ are easier to find The Bank of England bottles it rates is hardly an adequate response when in the legendarium of central banks than annual inflation is running at more than in historical reality.” Of the 12 times since While the Fed resorts to “shock and four times the 2% target and the Bank itself the 1950s that the Fed has embarked on a awe” tactics to tame inflation, the Bank expects CPI inflation to peak at 11% this major tightening cycle, “nine ended with of England is “playing a game of slowly, autumn. “The MPC needs to demonstrate a recession… The BOE [Bank of England] slowly”, says Laith Khalaf of AJ Bell. The that it… can beat inflation – before its has a better record, but roughly half of its day after the Fed’s three-quarter point independence is taken away.” rate-increase campaigns since the 1950s interest-rate hike, the Bank’s monetary still ended with a UK recession”. For tighter monetary policy to have any effect on inflation it needs to mean pricier credit or lower asset prices. “That this can happen without affecting anyone’s ‘real’ material conditions is wishful textbook thinking.” The sell-off widens Asset prices are certainly slumping. Both the S&P 500 and the tech-heavy Nasdaq index have lost ground in ten of the past 11 weeks. The S&P 500 suffered its worst week since March 2020 last week, plunging 5.8%, and is down 22% so far this year in total return terms. That puts it on track for its worst first-half performance since 1932, says Jim Reid of Deutsche Bank. Bonds, a traditional safe-haven, have offered no Japan bucks the tightening trend The Bank of Japan (BOJ) has its A weaker yen will make food more expensive ©Getty Images Traders who think the BOJ printer “on overdrive”, says will be forced to tighten policy George Saravelos of Deutsche Investors are sceptical about remains low for now – at 2.5% – have been shorting ten-year Bank. While other global Japan’s ability to keep money but a weak yen makes imports Japanese government bonds central banks tighten policy, easy for much longer, says expensive, which is a severe (JGBs), sending yields towards Japan is resisting pressure Reshma Kapadia in Barron’s. concern for a major energy and the 0.25% cap that the bank from markets to follow suit. At Japan’s “decades long battle food importer. Meanwhile, the targets. Betting against the the current pace, it’s on course with deflation” explains the ageing population relies on BOJ is a dangerous play, so to buy ¥10trn in government BOJ’s reluctance to recognise fixed income. “Inflation is dangerous in fact that it is bonds this month. Relative to the new danger. Inflation kryptonite to those assets.” “known in bond markets as the GDP, that equates to the US Fed widowmaker trade”, say Anna buying $300bn of bonds per Hirtenstein and Julie month; in reality the Fed Steinberg in The Wall Street bought $120bn per month last Journal. Yet with inflation year. Is the BOJ so determined stirring, some believe that this to generate inflation that it is time is different. “I don’t really “willing to absorb the entirety see how they can hold this. of the Japanese government We are positioned for them bond stock?” ultimately having to move to a different policy,” says The BOJ’s decision to buck John Roe of Legal & General. the global tightening trend has “A surprise BOJ move could sent the yen down 16% against trigger substantial turbulence the dollar so far in 2022, to its in global markets.” lowest level in 24 years. moneyweek.com 24 June 2022

Markets 5 The big Swiss A new headache for the ECB currency shift European Central Bank (ECB) president Christine Lagarde ©Getty Images Lagarde: struggling to find the answers The Swiss National Bank (SNB) was a synchronised swimmer has raised interest rates for the as a teenager, says Jill Treanor of roughly 4%. For now Rome help is tied to structural reforms first time since 2007. The 0.5% in The Sunday Times. Now, she is maintaining the confidence that might drag Italy out of its increase – which took rates is “struggling to keep her head of markets, thanks to the long economic stagnation. The from -0.75% to -0.25% – above water” as the eurozone’s leadership of its prime minister, ECB also has a clearer plan for surprised traders last week, periphery feels the pressure from Mario Draghi, Lagarde’s how to fight eurozone break- sending the currency up 3% tighter monetary policy and predecessor at the ECB. Yet his up risks – something it sorely against the dollar, its biggest Italian and Spanish bond yields “grand coalition” government lacked in 2011. one-day gain in almost seven soar to eight-year highs. “is showing increasingly years. It is also approaching obvious signs of running out of Still, the ECB’s recent parity with the euro, trading as Last week, the spread steam” ahead of elections due behaviour doesn’t inspire much high as CHF1.01 on 17 June. between German and Italian next year. “The personal aura of confidence, says Jeremy Warner ten-year government bond ‘Super Mario’ may no longer be in The Daily Telegraph. Why The SNB has spent much of yields spiked to 250 basis points of great help in protecting Italy it is still persisting with asset the last 15 years trying to stop (2.5%). That is well short of from market storms.” purchases and negative interest the franc from rising, say Sam the 500-plus basis points that rates when inflation is at 8% Jones and Tommy Stubbington it reached at the height of the Comparisons with the “is anyone’s guess”. Perhaps it in the Financial Times. The 2011-2012 eurozone debt crisis, eurozone debt crisis are is because while other central franc tends to strengthen at but it was enough to force the overdone, say Martin Arnold banks can just balance between times of global crisis, but a ECB’s governing council to and Amy Kazmin in the the twin threats of inflation strong currency hurts Swiss assemble for an emergency Financial Times. Things have and stagnation, the ECB exporters. As well as negative meeting in Frankfurt. The changed over the past decade. must also try to hold the euro interest rates, the SNB has also central bankers unveiled a new Italy stands to receive €200bn in together. “Europe’s monetary engaged in vast quantitative “anti-fragmentation tool”. The grants and cheap loans from the union is a bit like a bumblebee; easing, such that it now holds suggestion that the ECB will EU’s post-pandemic recovery aerodynamically it shouldn’t assets worth CHF1.056trn act to keep spreads down “buys fund. That will provide an fly, yet somehow it does. For (£890bn), or 140% of Swiss GDP, time”, Silvia Merler of Algebris economic boost worth 12.5% how much longer must again be making its portfolio “larger than Investments tells the Financial of GDP over five years. That in doubt.” the sovereign wealth funds of Times. But with details still many petrostates”. scarce, it “does not take them out of the corner yet”. The SNB’s change of heart reflects fears that a weak Italy’s debt challenge currency will cause it to import inflation from the eurozone, Italy – whose €2.759trn stock of says George Saravelos of debt is worth almost 150% of Deutsche Bank. Swiss inflation GDP – is the key concern, says is 2.9% – less than elsewhere, Jérôme Gautheret in Le Monde. but still at a 14-year high. The A debt crisis in the eurozone’s bank has also signalled “an third-largest economy would explicit readiness to sell down pose an existential risk to the FX reserves in case of an unduly single currency. The spike weakening Swiss franc”. It has in yields leaves the Italian also stopped referring to the treasury paying interest rates franc as “highly valued” in a signal that its days of fighting to hold the franc down are over. This shift confirms the franc’s status as “the best hedge against global stagflation”. Viewpoint n Rising rates squeeze US house prices “The average stock in the Nasdaq… is US residential mortgage rates Source: Wall Street Journal / Freddie Mac US mortgage rates have surged down 40%-50% from peak levels, with to their highest level since many down much more than that. The Average 30-year fixed rate November 2008, says The Wall fever dreams of many investors have Street Journal. While US already been completely decimated… 7% interest rates have risen by Despite these stock price declines, I do 1.5 percentage points so far this not believe that equity markets have yet 6% year, the average rate on a hit bottom for this cycle… I expect 30-year fixed mortgage is up another leg down in equity markets… as 5% even more, rising by 2.7 ramifications of monetary and fiscal percentage points to hit 5.78%. policy withdrawal become clearer and as 4% While the Fed doesn’t directly corporate earnings and capital spending set mortgage rates, they are decline. We are witnessing the first hint 3% heavily influenced by its of stagflation since the 1970s, which is monetary policy and conditions not yet priced in: almost two-thirds of 2% in bond markets. The end of the Nasdaq by market cap still trades quantitative easing is also with a price to sales [ratio] above four… 2008 2010 2012 2014 2016 2018 2020 2022 having an impact as the Fed there are signs that core inflation may be winds down purchases of cooling a little bit… but tight supplies in mortgage-backed securities – oil and gas markets are one or two home loans that are bundled up pieces of bad news away from another and sold on to investors. The spike that would increase inflation and resulting rise in mortgage costs recession risks further.” is already starting to cool the booming post-pandemic US Michael Cembalest, JPMorgan property market. moneyweek.com 24 June 2022

6 Shares An ugly turn for Revlon Asos gets clobbered The cosmetics group has fallen into bankruptcy after struggling for years “Fast fashion is a throwaway business. But aren’t the with too much debt and not enough innovation. Nicole García Mérida reports shares meant to be more durable than the clothes? “Wall Street can only apply so much cover-up $3.8bn in liabilities may be messy. The firm “has Asos seems hell-bent on and blush to a broken capital structure”, says to navigate conflict sparked by its more recent testing that theory. Its market Lex in the Financial Times. American cosmetics efforts to stave off bankruptcy”. In 2020, it was value is unravelling even group Revlon is now past that point. The firm has sued by several of its lenders after it rejigged faster than its togs,” says entered Chapter 11 bankruptcy after a prolonged ownership of many of its brand assets so that they Alistair Obsorne in The period of underperformance, made worse could be used as collateral for a new financial Times. Shares in the online by supply-chain issues and ongoing inflation clothing retailer slumped by (Chapter 11 filings let a company restructure, lifeline. Citigroup, Revlon’s loan-agent 32% to 783p after a profits rather than go into liquidation). bank, then made a bizarre error in warning from new CEO José which it accidentally paid nearly Antonio Ramos Calamonte. The filing is a long-overdue reckoning that had $900m owed to the suing lenders They were trading at more been “delayed by acquiescent capital markets”. with its own money. Some of the than 5,000p a year ago. Revlon has “not kept up with beauty trends” and lenders returned those funds, “upstart brands” that have won over younger ut others have held onto Asos now expects to make generations of cosmetics users. Now monetary ound $500m. A judge ruled £20m-£60m in pre-tax profit policy is getting tighter, markets were no longer st year the recipients of the this year, down from the willing to prop the struggling business up. “It cidental payment could keep already-trimmed guidance of would have been better off taking a hard look at e money, effectively meaning £110m-£140m it offered in itself in the mirror years ago.” at Citigroup becomes a October. Part of the problem editor of Revlon. Citigroup is that “customers are A complicated bankruptcy appealing that decision. sending more clobber back” as inflationary pressures Shareholders are likely to see much or all of ope for a makeover change shopping behaviour. their investments wiped out – chief among them billionaire Ron Perelman, who took control in a f Revlon exits Chapter 11 in Rising rates of return are a hostile takeover in 1985 and continued to own etter shape, “there is hope warning signal for consumer around 85% of the shares. Perelman “built a or a makeover”, says Andrea discretionary demand, says reputation for elsted on Bloomberg. “Mid- Lex in the Financial Times. always riding arket beauty has been a “The next phase will come to its rescue ugh place to be.” The firm when the pace of sales, when its future as been squeezed between before returns, slips into looked bleak, he new innovators and the negative territory.” Asos often through dustry giants L’Oréal and should not feel singled out. rescue loans or stee Lauder. But reopening “Online UK fashion rivals cash infusions”, conomies are boosting such as Boohoo and THG say Becky Yerak osmetic sales. And cash- have also received market and Soma trapped consumers may spankings.” Still, it’s Biswas in The ead to beauty counters remarkable how much the Wall Street rather than clothing shops in valuation of what was once a Journal. “Now a recession. “But a reinvented stockmarket darling has he faces losing Revlon will need to be contracted: it now trades on control.” nimble. This time round, the 12 times forecast earnings. ems to buy might equally But the outlook could get What’s emerge from TikTok as the worse, not least because more, rejigging drugstore aisle.” Asos – like other firms– built Revlon’s up inventories in expectation ©Getty Images of supply-chain snags. ©Alamy “Expect more discounting Euromoney is a tempting target from retailers… as they unwind hoarded stocks.” A mooted £1.6bn private equity slightly beyond the firm’s pre- meaning strong, stable cash bid for Euromoney is “more pandemic share-price high. “A flow. Management forecasts Asos’s woes make proof there’s value in Britain’s proper bid from the buyout duo high single or double-digit Primark’s refusal to sell stockmarkets”, says Alistair may prove hard to resist.” growth and rising margins. “It’s online look wise, says Nils Osborne in The Times. The no surprise that Euromoney is Pratley in The business media, data and “Investors will be tempted to an attractive target.” Guardian. It should events group had previously accept,” agrees Lex in the make operating rejected four offers from Financial Times. The implied A buyout wouldn’t even profits of almost Astorg and Epiris at between valuation is a 50% premium to need much “fancy financing” £800m this year. £11.75 and £13.50. However, a Euromoney’s long-term to produce good returns, says The firm has new approach of £14.61 is only average and comes despite a Karen Kwok on Breakingviews. dabbled in click recent rough patch. Underlying Assuming profits are in line and collect, on revenue shrunk by an average with forecasts, relatively the basis that of 2% per year between 2014 modest gearing of three times customers who and 2021. That said, the group earnings before interest, tax, come to stores will looks well placed for recovery depreciation and amortisation often buy more, now. Events, which account for (Ebitda) could yield an 18% while avoiding roughly a quarter of sales, have annual return. So this offer may “fiddly returns”. bounced back after the not be the end. “A juicy return Watching Asos, pandemic. Half-year sales up may attract other private equity one must think by nearly two-thirds year on buyers eager for targets at a Primark will now year. And 70% of revenue, time when highly leveraged have even greater come from subscriptions, deals are proving tricky.” conviction in its strategy. ”Just 24 June 2022 copy the bits that work and steer clear of the hassle.” moneyweek.com

Shares 7 MoneyWeek’s comprehensive guide to this week’s share tips Six to buy Adidas old. It’s an early-stage firm benefited from business the consumer market, focusing nd comes with risks, but failures after the government’s on four areas: photo booths Investors’ Chronicle he shares could deliver pandemic support was removed. (the origins of its name), Adidas trades at a discount significant rewards. 44p The UK’s “bleak economic laundry, printing and food. It to its main rival Nike, despite prospects suggest a lot more has long-standing relationships growing its shtead winding-up work” will have with major site owners and so annual net to be done. Two-thirds of its equipment is usually found income faster The Times Begbies’ profits come from in prime locations. Photo-Me for most of the The risk of “business doom”, past decade. Its strong ecession and insolvencies is looking to grow brand identity could in the US could soar as its number of units position it well in a businesses struggle in operation, and recession. Prolonged – Ashtead’s main market – with the aftermaths hopes to install 100 lockdowns in China has overshadowed bullish of Brexit, the machines per month are hurting demand guidance for the tool-hire pandemic, soaring by 2023. 81.2p in Asia, but growth company. However, the return energy prices, in the country “looks of live events and the restart of and supply-chain Chemring delayed rather than over”. onstruction projects after the issues. This is good Management has listened pandemic has fuelled demand news for Begbies, The Telegraph to investors and learnt for heavy equipment. Supply- which has an The idea of “spending from past mistakes, leaving hain disruptions also “undemanding” more on the armed it well positioned in the means clients are searching valuation. It forces to provide athleisure market. €169.68 for larger fleets. If smaller acquired three business- greater security” rivals are squeezed, Ashtead recovery firms over the last year, has become “widely AEX Gold could take more market share. so it will be even better placed to accepted”. This bodes well for Higher rental rates are helping cope with demand. 147.48p Chemring, which develops and The Mail on Sunday to combat inflationary manufactures countermeasures Greenland has large reserves pressures. Recession is a risk, Photo-Me such as flares, as well as sensor of metals and minerals. “The but Ashtead is financially technologies. A 4.1% increase case for digging them out of secure, and diversifying into Shares in the US defence budget means the ground has taken on a new speciality-tool rentals could The management of this demand for its products should urgency”, as Russia’s invasion of “lessen the pain” from a drop instant-service equipment rise, as the US makes up just Ukraine and China’s “growing off in new projects should company is confident that it has over half of its sales. A “solid” antagonism towards the West” demand decrease. 3,410p the pricing power necessary performance over the first half spur governments to think to manage current challenges. of the year allowed it to reduce about supply chains. AEX’s Begbies Traynor The company operates, sells debt and acquisitions seem more Nalunaq gold mine should be and services a range of vending likely after the integration of an in production by 2024 and it’s The Sunday Times machine equipment aimed at artificial-intelligence specialist it expanding its assets beyond Corporate restructuring firm bought last year. 314.5p Begbies Traynor has already The Times ...and the rest has done a good job of demand” of the metal, which Shares in Hilton diversifying its products Investors’ Chronicle is essential for the transition to Food are trading and footprint. Buy clean energy. The group expects “lower than (1,064p). Shares in buy- Investors began selling off to be a low-cost producer, their post- to-let lender Paragon Industrials Reit after a profit so should move quickly into pandemic pit” Banking Group offer warning from Amazon, which profitability. Buy (18p). as investors a “generous yield” and raised concerns that the are anxious are trading at a lower warehouse market had become Shares that squeezed premium to book value. too dependant on the consumers Buy (481.2p). Premier e-commerce giant. However, Shares in retailer Watches of might spend Inn owner Whitbread the company deals in the smaller Switzerland have dropped 48% less on meat is an obvious takeover multi-let industrial units that year-to-date, as sceptics worry products. target for a private- have sources of growth beyond the company will struggle to But the company should be equity buyer, given its valuable online shopping. Buy (175p). keep momentum. This presents insulated from the worst. It portfolio of hotels in the UK and a “compelling entry point” into has large-scale agreements Germany and its low levels of The Mail on Sunday a high-quality company in a with established retailers and debt. Buy (2,658p). “resilient” sector with potential Early stage mining group for growth. Buy (792.4p). First Tin intends to help “bridge the gap between supply and ©Adidas; Hilton Food; Photo Me An American view IPO watch A world powered by electricity rather than fossil fuels needs a The value of initial public offerings (IPOs) in the US and Europe is large and resilient power grid, says Avi Salzman in Barron’s. down 90% from last year, says the Financial Times. A total of 628 Building this will require hundreds of billions of dollars in companies raised $192bn in the first five months of 2021, while investment – and that’s a great opportunity for Eaton, which only 157 firms have raised $17.9bn in the same period this year. makes everything from transformers to circuit breakers. Demand Worldwide, the value of IPOs has fallen by 71%. The war in is strong – its order backlog rose 76% in the last quarter. Earnings Ukraine, higher market volatility and the threat of recession has are set to grow 14% this year and forecasts have been going up reduced demand for new listings from investors. The US market since the start of the year, unlike those for most companies. Yet has also been particularly affected by fewer debuts of special the shares are still down by almost 20% this year and on a price/ purpose acquisition companies (Spacs), following disappointing earnings (p/e) ratio of 17.5 times forecast earnings, the company is share-price performance, closer scrutiny by regulators and trading at a discount to rivals such as Quanta and ABB. banks being less willing to underwrite them. moneyweek.com 24 June 2022

8 Politics & economics France heads for political paralysis A “stunning setback” for the president in elections leaves France rudderless. Emily Hohler reports “Ungovernable!” was Le Parisien’s front Macron: Jupiter has been humbled ©Getty Images page verdict the morning after France’s final round of legislative elections on Sunday, Les Republicains can be relied upon What we are seeing is democracy in which saw president Emmanuel Macron’s to haggle over every bill, agrees Anne- crisis, says Le Monde. It takes the form of an Ensemble alliance win just 245 of the 577 Elisabeth Moutet in The Telegraph. “And unprecedented level of abstention – turnout seats in the National Assembly. It captured they’re the nice ones.” Mélenchon and his in the second round was just 46% – and it the mood, says the Financial Times. The Socialist and Green allies “have vowed to has “just sent nearly 100 representatives of country now faces “a period of exceptional bring the ‘Yellow Vests’ voices, and tactics, a far-right party to parliament”. This places political instability, with the real threat inside the National Assembly”. A vote of no “immense responsibility” on Macron. of legislative paralysis”. In a “stunning confidence is already planned for 5 July. Voters have not denied him the right to setback” for a president re-elected to office lead – they still chose him to be their just two months ago, Macron must now Macron’s mistake was his failure president – but they do seem to be insisting “contend with the smallest share of seats for to realise that voters chose him two that he “radically change his method”; a winning alliance since 1958. It is only the months ago as the least worst option. To that he “no longer govern alone, or almost second time since then that France has had a “compound the bitter taste” there was no alone” and that he debates and persuades minority government.” “vibrant, hopeful address” following his instead of imposing. victory. Then he picked a “boring PM”, The conservative Les Republicains (LR), the“dour” Elisabeth Borne. The man During his campaign, he theorised about which has 64 seats and was the most nicknamed Jupiter by the French media a “refoundation” of democratic life. He now likely party to strike a deal with Macron for his style of one-man government might has an opportunity to put that into practice. to give him a parliamentary majority, has have been tolerated when things were going Some see a “silver lining” for democracy already rejected the idea of an alliance. “reasonably well”, but with the Yellow Vests in the result, says Victor Mallet in the FT. With the new assembly “brimming with revolt, the pandemic and now the cost-of- The election of so many new MPs from implacable critics”, his “best hope” will be living crisis, his popularity is dropping “like parties complaining of under-representation to gather support issue by issue. The left, for a stone”. He only has himself to blame for may show “disillusioned voters that they instance, could support climate measures; the “coming chaos in parliament (and very can have a voice even in a system without the right, pension reform. possibly the streets)”. proportional representation”. Expect chaos in parliament However, even “selective cooperation would require a constructive attitude that regrettably seems alien to French parliamentary politics – even more so now that extremists dominate the opposition”. Marine Le Pen, of the far right, and Jean- Luc Mélenchon, the “demagogue now in indisputable command of the left-of-centre parties” grouped under the acronym NUPES (New Ecological and Social Popular Union) , are both “more at home with invective than scrutinising legislation”. Overall, it’s bad news for Macron’s ambitious reform agenda – which includes an unpopular plan to raise the official retirement age from 62 to 65. Global trade body awakens from coma Biden: obstructive to trade ©Getty Images The World Trade Organisation to the global financial crash and and China’s continued 24 June 2022 “looks to be back in business” ensuing populist backlash insistence on claiming the after agreeing a package of against open borders, Donald “special benefits granted to deals last week, including a Trump’s trade war with China, developing economies”, says partial waiver on Covid vaccine and the pandemic which Mihir Sharma in Bloomberg. patents and cuts to fishing “gummed up global trade” and China has benefited by far the subsidies, say Markus Wagner cast doubt on the “wisdom of most from the WTO. Now is the and Welhuan Zhou in The extended supply chains”, the time for it to “step up and take Conversation. It was the first WTO is “arguably needed more responsibility for keeping the meeting of the WTO’s highest- today than when it was created organisation afloat by decision making body since in 1995”. Open trade remains redefining its role”. The US, for 2017. Its “rule-making function” key to global prosperity and its part, must renew its has been “largely comatose” issues such as climate policy commitment to arbitration. “It for the past 20 years. need to be discussed at a global isn’t India or developing-world forum. The world also needs an intransigence that is keeping What matters is whether “arbiter of disputes”. the WTO close to death.” For all the deals are actually the Western spin, they are implemented, says the The real stumbling blocks to being “far more cooperative”. It Financial Times. In many the WTO’s revival are the US, is rather the “entitlement of respects, the WTO remains “on which under Joe Biden has China and the US” that is to life support”. But keeping it retained Tump’s “obstructive blame and it is therefore down alive is important. Although approach to global trade” in to them to act. globalisation has stalled thanks the belief it is being exploited, moneyweek.com

Politics & economics 9 China seeks to expand its might The Middle Kingdom seems to be making moves to challenge US hegemony in the South Pacific China’s drive to boost its Affairs. Countering the US influence in the South Pacific presence in the Indo-Pacific has “set alarm bells ringing” is part and parcel of this among major Western project, and is but a step in powers and “revived the broader plan of creating uncomfortable memories” a sphere of influence of events in the region in the comprising not just the run-up to the Second World countries in its region, but War, says Hiroyuki Akita over the entire “emerging, in Nikkei Asia. Then, it was non-Western and largely Japan’s southward advance nondemocratic world”. This that alarmed governments would provide a strong base around the world. Now, for China’s power projection China’s moves in the region while restricting US actions are “spooking” countries and “spelling the end for US including Australia and the global hegemony”. US. Chinese foreign minister ©Getty Images Wang Yi wrapped up a tour Alarm bells ring in the West: Chinese premier Li Keqiang Not the end of the world of seven South Pacific islands secures ties with Solomon Islands PM Manasseh Sogavare Yet “hysterical moves” by and East Timor earlier this month, meeting would strengthen China’s influence and its the US to scold governments and sanction with foreign ministers in the region and presence near key sea lanes. officials are an overreaction and represent pledging economic aid. Quite, says an editorial on Bloomberg. the latest in a “long line of US failures to It would threaten the “power-projection interact productively” with the region, Power-projection superhighway superhighway” that links US forces in says Blake Herzinger in Foreign Policy. A leaked draft of a proposed deal with ten Hawaii to the region and would give China After all, the US is hardly innocent when it countries in the area showed that China a foothold to extend the reach of its navy comes to establishing military bases for the had ambitions to build police forces and and threaten lines of communication purpose of power projection in the area. governance and security systems, which to Australia and New Zealand. Yet US A limited Chinese presence in Cambodia is would bolster its clout in the region – engagement with the region has been “hardly the end of the world”, nor is it Western nations suspect that Beijing’s “mystifyingly inconsistent” over the past likely to have appreciable effects on US ultimate goal is to build military bases three decades and attempts to deepen operations in Asia. there. The deal was ultimately rejected, economic and security ties have “fizzled says Bloomberg, but that won’t end China’s out”. “To head off further Chinese “Although Washington can and should efforts to exert influence in the region. expansion, the US will need to demonstrate work to keep countries out of Beijing’s orbit, Indeed, China has already signed a that it understands the region’s long-term it is nonsensical to punish states that do elect security pact with the Solomon Islands priorities and can meet them better than to partner with China or, more commonly, and has been “secretly building a naval China can”, and work with partners play both sides of the fence. There are no facility in Cambodia for the exclusive use such as Australia and Japan to develop a states in the region that can afford to get of its military”, say Ellen Nakashima and strategy offering trade and development along without China, but most still want Cate Cadell in The Washington Post. Both opportunities for Pacific Islanders. some level of connection with the US, countries have denied that this is the case Chinese president Xi Jinping’s grand whether that is an economic relationship or and have taken “extraordinary measures strategy has long been to help China attain security partnership or both. By making a to conceal the operation”. But powers with what it considers to be its rightful place in scene, Washington appears anxious rather interests in the region are rattled, as the base the world, says Nadège Rolland in Foreign than confident, and less like a partner that has something of its own to offer.” Who would be the PM’s “ethics adviser”? Geidt: who would replace him? Johnson’s Covid rule-breaking independent public servant” as That’s perhaps just as well ©Alamy and partying. The final straw a special adviser. The reality is for “who in their right mind” Boris Johnson’s ethics adviser came when the PM asked for that the code is whatever the would want to replace Geidt, Christopher Geidt quit last week advice on his intention to prime minister says it is, and the asks Jonn Elledge in The New over concerns that the prime maintain tariffs on a “crucial only way the adviser can Statesman. Westminster is minister intended to industry” – which officials say exercise power is by “making a “littered with the tattered deliberately breach the was steel – a move that risked noise and resigning as a reputations” of people who ministerial code, says Jim breaching international law. warning to the political and thought it wise to “provide Pickard in the Financial Times. That Johnson planned to go media class that something political cover for this Geidt’s “surprise” exit came ahead with them anyway put is up”. charlatan”. It isn’t just doing bad after only 14 months on the job. the adviser in an “odious and things that defines Johnson’s He claims he had already been impossible position”, he said. This should have triggered a leadership, but doing so on the brink of resigning over crisis and perhaps the PM’s without caring who sees it. This whole episode should resignation. As it was, the Johnson has realised that the moneyweek.com have been a “political departure was “barely noticed trick to surviving political sensation”, says David Allen outside the political and media scandals is “just don’t resign”. Green on Al Jazeera. The PM class, and even their attention In a few days’ time, the news commands great power, and has quickly moved on”. Instead will have moved on, and anyone the so-called “ministerial code” of resigning, the PM shrugged, who remembers it will look like is one of the ways that power and he might now seek to “rid “obsessives who need to get a can be made accountable. It himself of this turbulent form of life”. Once again, it looks like the sets out rules on conduct and oversight” by not seeking to PM will “get away with it”. appoints a “distinguished and replace the adviser at all. 24 July 2022

10 News Battle Creek, Michigan parts might be worth groceries in 2012 to become a 20% more than Kellogg’s global snacks giant (just this Not so grrreat: “Kellogg is joining $24bn market cap, based the corporate vogue for splitting itself on peer-group valuations, week it announced a $2.9bn in three,” says Dasha Afanasieva on but that takes no account deal to buy energy-bar maker Breakingviews. The US food company of the “transaction Clif Bar). A snack-focused plans to spin off its North American costs, market risk and additional Kellogg might do the same. cereals business and its plant-based foods overheads involved in turning one Yet the spin-off will leave arm as two separate companies, leaving company into three”. the cereals business as a it with faster-growing, higher-margin “standalone husk business biscuits, snacks and international cereals. It looks like Kellogg has a case in an out-of-favour category Management claims this will let each of “Mondelez envy”, says Aaron without the benefits of business focus on its own objectives, but Back in The Wall Street Journal. “the financial rationale for the carve-up That firm’s shares have done synergies from the bigger looks underwhelming”. The sum of the well since spinning off its US group”. Overall, it’s not clear how that benefits shareholders. Oklahoma City Going private: Energy billionaire Harold Hamm is offering to buy out minority shareholders in shale-oil pioneer Continental Resources at $70 per share, in a deal that would value the entire company at $25bn, says the Financial Times. Hamm, who founded Continental in 1967 and owns 83% of the shares, believes that delisting “will give him the freedom to pursue exploration more intensely”. Institutional investors “want oil and gas companies to generate buckets of free cash flow to be paid out in the form of dividends”, while “wildcatters” such as Hamm would prefer to use that money to ramp up production. Hamm’s starting offer of $70 is not far from the firm’s all- time peak back in 2014 when shale last boomed, says Liam Denning on Bloomberg. However, in valuation terms, Continental today trades at a 60% discount to the S&P 500, compared with just 10% back then. Investors are unwilling to pay up for energy stocks – perhaps due to “bad memories, uneasiness about the future and the return of higher yields” – while “environmental scrutiny of oil and gas is far more intense”. It’s easy to see why “being public has simply ceased to be useful”. Bogota reform” led to weeks of protests and Colombia The left takes Colombia: Gustavo lost its investment- Petro (pictured) was elected president grade status last year. of Colombia on Sunday, making A freeze on oil and him the country’s first left-of- gas exploration would centre leader. His win also hands be a “rather abrupt power to a 62-year-old former change” for a nation that member of the M-19 guerrilla is both heavily reliant on oil group, which “kidnapped, exports and expected to run out murdered” and “robbed banks”, says The Times. Petro’s election of reserves by 2030. The reason manifesto includes free university Petro won is because he engaged with the education, higher taxes on unproductive deep and complex divisions in his country, land, pension reform, a ban on new oil and gas adds The Times. An opportunistic China is prospecting, and, adds Bloomberg, a guarantee of “making hay” from the recent wave of new public-sector jobs for the unemployed. Colombia left-of-centre governments in the region. has made a “good recovery” from the pandemic, Unless the US engages, too, it will soon be but “deep-seated problems” remain. The country asking itself, “Who lost Latin America?” suffers from severe inequality. “Botched tax The way we live now… a dystopian nightmare made real Deadly tug-of-war, murderous revealed that it will also be hosting marbles and an innocent game of its own Squid Games “for real”. The grandmother’s footsteps turned into reality-show will see 456 contestants a bloodbath by a gun-toting robot – compete for £3.8m (those who don’t these are the horrors of Netflix’s hit make it will not, they are assured, be dystopian drama Squid Game, harmed). The original show was a where poor contestants compete for satire – at the end it is revealed that a huge wad of cash, or die in the the game’s main purpose is to attempt. Squid Game was Netflix’s provide entertainment for the rich, most watched programme ever, says for whom the prize money is loose iNews, bringing in more than one change. So it seems that Netflix has billion viewers within 28 days of cast us, the potential audience, as the release and spawning a myriad of baddies, watching desperate people spin-off products and merchandise. compete for money for laughs as Now, just days after the second “the chasm between the richest and season was confirmed, Netflix has poorest grows wider by the day”. ©Netflix ©Alamy; Getty Images Squid Game: now we’re all the bad guys 24 June 2022 moneyweek.com

News 11 Kaliningrad Kaliningrad: Russia’s outpost on the Baltic ©Alamy Russia threatens action on goods blockade: Russia warned that it would respond to Lithuania’s blockade on the transit of sanctioned goods to Russia’s enclave of Kaliningrad, says Reuters. Lithuania says it is merely applying EU sanctions. Nikolai Patrushev, secretary of Russia’s Security Council, said the action broke agreements with the West over its enclave of Kaliningrad, sandwiched between Poland and Lithuania on the Baltic Sea, and would have “serious negative” consequences. (Lithuania is a member of Nato and the EU; Kaliningrad has long been strategically important for Russia.) The EU called for calm and for the issue to be resolved diplomatically. Meanwhile, Ukraine’s bid to join the EU looked likely to be accepted at a summit to be held just after MoneyWeek went to press. Ukraine’s president Volodymyr Zelenksy warned this could provoke retaliation from Russia. Putin insists he has “nothing against” the idea, but his spokesman said the situation was being watched closely for the military implications. Zhengzhou Protests thwarted by Covid tech: Thousands of depositors in China have been fighting for months to recover their savings after a bank run raised concerns over the financial health of the country’s small lenders, says Cheng Long in the Financial Times. The missing funds, held at four rural banks in Henan, are believed to amount to 39 billion yuan (£5bn). The authorities claim that Henan Xincaifu Group Investment Holding, a private investment firm with stakes in all four lenders, colluded with bank employees to illicitly attract public funds via online platforms, resulting in the deposits being frozen, according to Amanda Lee in the South China Morning Post. Scrutiny of the small-bank sector has become more intense in recent years in a bid to limit financial risks as the economy turns down and to improve corporate governance. Despite that tighter scrutiny, shareholders of small banks have continued to abuse their positions, according to an editorial in the state-owned Economic Daily. Unusually for China, a series of small protests over the issue broke out in Henan’s capital, Zhengzhou. The authorities clamped down with the technology China uses to control outbreaks of Covid-19 – savers suspected to be involved in the protests were suddenly forced into quarantine. Baar, Switzerland Pretoria Raking it in: Mining group Glencore’s first-half profit from Ramaphosa mired in corruption allegations: South commodities trading will be bigger than it typically makes Africa’s main opposition party, Democratic Alliance, in a full year as it “cashes in on soaring prices and volatility”, has asked the FBI to investigate charges of money says Bloomberg. The firm expects to make $3.2bn in the laundering against president Cyril Ramaphosa, six months to 30 June, compared with annual guidance of say Paul Vecchiatto and Amogelang Mbatha in $2.2bn-$3.2bn, it said in a trading update. Earnings from Bloomberg. The request follows a police complaint coal – which was second only to copper in its contributions filed earlier this month by former State Security to earnings last year, as prices spiked – are also set to beat Agency boss Arthur Fraser, an ally of former forecasts, despite rising royalties and energy costs that could go president Jacob Zuma, who accused Ramaphosa as high as $78 per tonne, up from $59 per tonne in February. (pictured) of concealing the theft of around $4m from “Glencore is a cash machine and dirty coal helps,” says his game farm in February 2020. According to Sithembile the Financial Times. That’s why the stock “has become so Mbete, a political scientist at the University of Pretoria, Fraser’s popular following Russia’s invasion of Ukraine, at least for involvement “points to the hand” of South Africa’s “deeply compromised” investors who can stomach the black stuff’s environmental state security agency which, under Zuma, became a “private resource”. impact”. Glencore is on track to generate half its market Ramaphosa, who has devoted much of his presidency to anti-corruption value in free cash flow over the next three years, reckon efforts and reforming the justice system, has chosen not to comment, says analysts at Deutsche Bank. It will hand any excess funds Joseph Cotterill in the Financial Times. The ruling ANC is due to choose over to shareholders, who could be on track for a return of its leader this year. The economy is stagnating and there are rolling power more than $6bn by the half-way point. “King Coal not only blackouts. It is looking “increasingly likely” that the ANC will lose its survives but thrives.” majority in the 2024 elections for the first time in 30 years. moneyweek.com 24 June 2022

12 Briefing The summer of discontent The rail workers are all out and look likely to continue through the summer. Comrades in other unions are joining the strikers. Could the next Labour government be to blame? Simon Wilson reports What’s the strike about? Same as most strikes: pay and conditions. The RMT rail union wants a 7.1% pay rise (two points below May’s inflation rate, but reflecting where RPI was in December, when the talks began). They also want no compulsory redundancies (there are plans to close large numbers of ticket offices as more tickets are bought online). Network Rail, which is facing a budget freeze, says any wage increase has to come through cost savings and productivity – a position aligned with the Treasury’s message elsewhere in the public sector. It also wants 1,800 job cuts and to modernise working practices. RMT boss Mick Lynch, who has the overwhelming backing of the 40,000 railway workers, warned that strikes could continue on and off for the rest of the year if there’s no deal. But compared with the heady days of the 1970s the union’s wishlist ©Alamy is “tame”, says The Economist. “The RMT boss Mick Lynch: tame by Seventies’ standards most militant union in Britain hints that But even if you have some sympathy with rubbish collections in some parts of the it would accept a deal that kept wages flat the strikers, Mick Lynch will soon lose the country, while others have seen late postal after inflation.” By comparison, in a 1972 public if the strikes continue, and ultimately deliveries. Teachers and doctors are dispute, when inflation was about 7%, a deal must be done, says Alistair Osborne threatening to strike if the government miners demanded a 25% rise – and got it. in The Times. At root, the dispute is about doesn’t meet their pay demands. “But the whether the post-pandemic railways – with country is not heading back to the 1970s,” Do the strikers have a case? passenger numbers still 25% down – can be says The Guardian. The number of days The RMT has a reputation for put on a financially stable footing. If they lost to strikes remains tiny compared with intransigence, though Lynch argues that all can’t, there will definitely be fewer jobs for the endemic industrial strife of 50 years its opposition to modernisation is simply RMT members. ago, and only 24% of workers are union about protecting workers’ existing terms. members – half as many as then, and It’s hard to work up much annoyance Will the strike work? mostly in the public sector. with the rail unions, says Peter Hitchens To judge by the RMT’s record of success in the Daily Mail, given that most of the in boosting pay and protecting conditions, Can the government handle this? disruption and chaos I’ve experienced over the strike may well help the union achieve One bright spot, says The Times, is that years of rail travel “has been organised by its goals. It is “easy to paint the RMT as our “economically illiterate” prime the rail companies or the government, not antiquated and, at times, insane”, says minister has at least given up his bizarre by RMT or Aslef militants”. A few days The Economist. The union’s leaders share fantasy – trotted out until a few months of strikes scarcely compares in “malice, the far-left’s soft spot for despotic regimes ago – that soaring wages were a “post- damage or stupidity to the militant, in Cuba and Venezuela, for example. It Brexit benefit”. He now needs to get a fanatical anti-rail policies followed by Tory is impossible, however, to argue that the grip on inflation – or face a “summer of and Labour governments for decades”. union is ineffective. While other unions discontent”. Alas, it is embarrassingly And if you think (like Unite) mistook clear, says The Daily Telegraph, that the railway workers are “Most rail disruption has size for power, the Johnson government has no real plan greedy, I suggest you been organised by the rail RMT has remained to revive economic growth or to bring look “at the fortunes separate, more agile down inflation, despite Britain already made by privatised companies and government” and better-organised, lagging behind much of the G7, and it is railway companies, while they make the and relentlessly focused on its members’ unwilling to do anything practical to stop system worse”. interests. Will they succeed this time? It’s the unions from bringing the country to a too early to say, says Stephen Bush in the halt. Instead, the Conservatives have been Does the public support it? Financial Times. But either way the strike busy framing the strikes as a “sort of sneak For now, the polls suggest it does, says is a “ very big moment in the life of the preview of what will happen on Labour’s Jeremy Warner in The Daily Telegraph. UK”. Either it will result in a settlement watch”, says Henry Hill on CapX. This There is “little sign of gratitude” for the “that will make the UK government’s distraction tactic is doomed to failure. £16bn plus of taxpayers’ money spent inflation strategy harder to deliver”, or we “Blaming one’s problems on the preceding bailing out the railways during the will discover that in the age of “working Labour government, as the Coalition did, pandemic, in a de facto nationalisation. from home”, the impact of a blunt-tool rail is one thing; blaming them on the next Meanwhile, Grant Shapps, the transport strike isn’t what it was. one strains credulity.” The Tories look secretary, is doing himself no favours by like “bystanders”, complaining about seeming to revel in the confrontation with Will the unrest spread? strikers – and much else – but failing to rail workers – all the “better to distract There are certainly more strikes to take action. If it carries on that way, voters from the government’s growing catalogue come. Barristers will walk out from will give them the same answer they gave of policy blunders”. And his talk of drafting next Monday, stopping criminal trials Ted Heath’s Tories in 1974. Who governs in agency workers was “fatuous” bluster. in courts. Wage disputes have halted Britain? “Not you”. 24 June 2022 moneyweek.com



14 City view A recession will do us good A period of slimming down is always painful, but it leaves us healthier for the long run Matthew Lynn Sunak should let the recession rip ©Getty Images real growth. With a round of bankruptcies City columnist the economy would be in better shape. can only be bought back into balance if The British economy looks in dire trouble you have more goods or less money. It Third, a period of retrenchment might right now. We have already seen two is difficult to magic more goods out of get people working properly again. A year consecutive months of falling output, nowhere, so the only real fix is for everyone of lockdown seems to have convinced and there is no reason to expect that to have less money. That only happens people that just about any job can be done trend to be reversed any time soon. with a recession, usually sparked when the from home, or even from a beach on the Inflation is running at 9%, pushing central bank starts to put up interest rates Mediterranean. It simply isn’t true. The down real wages at the fastest rate in aggressively. Without one, prices will carry country is already grinding to a halt: the living memory. The Bank of England has on rocketing upwards forever. airports are chaotic, transport systems already started raising interest rates, and are snarled up, and the machinery of will no doubt push them higher before Next, a recession will clear out all the government hardly functions any more. If the cycle is finished. The government is zombie companies. The high street is still jobs are scarce for a year or two that will raising taxes, both on individuals and on full of them and so are many other sectors. start to change. We will hear a lot less about companies, which will depress demand It may sound harsh, but the economy would home working, work-life balance and four- and investment. be better off without them. They use up day weeks. It might be tough, but it would land, keep workers in dead-end jobs and remind us all that work might be difficult Meanwhile the war in Ukraine is sending tie up capital that would be better deployed and demanding, but it needs to get done. Europe into a downturn, hitting trade with elsewhere. None of them are capable of any what remains our most important market. Make the most of Brexit Combine that with our economic woes and the UK looks certain to face a recession this Finally, it will force the government to year. The only real question is how deep and finally take advantage of Brexit. Since bad it will turn out to be. leaving the European Union, the UK has done virtually nothing to deregulate, or In normal times, the chancellor and to make businesses more competitive, Bank of England would be doing all they even though we need to find some way could to avoid one. Recessions hurt. to make up for losing easy access to our The country gets poorer, output falls, skills most important trading partner. With a are lost, and otherwise viable businesses recession, the government will have to go to the wall. It’s all bad. That is why we think about how we can grow again. And it usually do everything we can to avoid one, will have to start using the powers we have and, if it can’t be avoided, to make sure it taken back in a positive way. is as short and painless as possible. And yet, just possibly, this year might be the No one ever wants a recession but the exception to that rule. A recession might truth is that they are a normal part of the even do some good. Here’s why. business cycle. They used to come around at least once a decade, and although there Clear out the zombies was some pain, they cleared a lot of the dead wood and left the economy a little slimmer, First, it is the only real way to bring but also a lot healthier. For decades inflation under control. Double-digit governments and central banks have done price rises have never been curbed without everything possible to avoid any form of a a recession. Prices rise when too much downturn. Instead of fighting it, this time money is chasing too few goods, and that we should just let it happen – it might just do some good. City talk O EasyJet wants to depict its cost airlines tend to hold up step down next year, leaving early stages of considering a ©EasyJet in a downturn. “Passengers finance head Marc Ronchetti to possible offer” for the online problems with last-minute lack many better options. So take on the “challenge of retailer. Berlion Capital, run by cancellations and delays as an too do airline investors.” maintaining this record in THG investor and non-exec industry-wide issue, but the turbulent times”. director Iain McDonald, had firm “has handled things OHalma is a “FTSE 100 tabled 170p per share, but that especially badly”, says Cat OProperty developer Nick was rejected by THG on the Rutter Pooley in the Financial achiever easily overlooked”, grounds that it “significantly Times: last week, it cancelled says Alex Brummer in The Candy has said he “won’t be undervalued” the group. Thus 146 UK departures. “You might Daily Mail. The firm is a buying The Hut Group, the founder and CEO Matt think that flirting with a “loose confederation” of smashed up lean-to now Moulding, who floated THG at reputation for chaos and businesses across the world known as THG”, says Alastair 500p per share in 2020, has cancellations would hurt an that specialise in safety. Its Osborne in The Times. “What a seen the price collapse a airline… But all that seems to structure seems to help shock” considering his further 29% to 74.5p. “Maybe be outweighed by consumers’ “inoculate it against the private “candyfloss statement” last he’ll get a proper bid one day.” desperation to get away.” CEO equity predators”, as does the month that he “was in the very Johan Lundgren reckons the fact it spends a hefty 5.6% of disruption has had no impact revenue on R&D. Under CEO on demand. Meanwhile Andrew Williams, its market analysts are looking through value has grown from £500m the short-term financial impact to £7bn in the past 17 years, to next year. “Decent fuel and while dividends have grown for US dollar hedging” should 43 straight years. Williams has leave it well placed, while low- just announced that he will 24 June 2022 moneyweek.com

Investment strategy 15 Testing private equity Guru watch Private equity has grown ever more Sebastian Lyon, popular in recent years. But its founder and touted benefits are set to be tested CIO, Troy Asset Management John Stepek Executive editor “The liquidity- led stock market Private equity – put simply, investing in companies boom... peaked that aren’t publicly listed – has grown in over a year ago in popularity as an asset class over the last few years. February 2021, with the start Advocates point to the fact that private equity in the fall of ‘meme’ stocks… returns are simultaneously at least as attractive Central bankers are now, but less volatile than stockmarket returns (in belatedly, attempting to other words, investors endure fewer ups and remove the punch bowl by downs). Detractors note that this is purely down raising interest rates from to the use of borrowed money, a lack of liquidity, record low levels,” notes and the absence of “mark-to-market” accounting Keep your asset allocation simple Sebastian Lyon in the annual (see below), not to mention a more recent trend report for Personal Assets towards certain funds effectively re-selling assets investors we have the luxury of keeping our asset Trust, the investment trust to themselves at favourable terms and prices. allocation simple. You’re not running a pension he manages. “This is proving Cutting through the debate, however, one fund and thus have no need to justify your highly problematic for the thing is hard to dispute. In an environment in existence by buying into overly-complex (and valuations of asset prices, which we’ve gone from frenzied boom to painful expensive) strategies. which had been predicated bust for “growth” companies, At MoneyWeek, we suggest on (almost) free money”. and in which interest rates and “Private company you think in terms of just five inflation are both rising, it’s valuations are likely asset classes: bonds, equity, With inflation at its hard to imagine any realistic property, cash, and gold. They highest levels in 40 years, scenario where private company to have suffered” each have different qualities investors are having to navigate a new regime – and valuations haven’t suffered too. which make them useful under different economic it’s not all down to the impact As Mohamed El-Erian put it in the Financial circumstances. In this context, private equity is of the pandemic or the war in Times last month, it’ll be harder for private equity part of your equity exposure, and not something Ukraine. Long-standing firms to borrow money to take firms private, you “need” to own as a distinct asset class. “deflationary influences” and wobbly equity markets also mean that exit Secondly, it also implies that even if you are such as an appetite for valuations “are less certain”. That’s before you tempted to invest in private equity, you might even start to consider the pressures the new be best to wait it out for now. For example, ongoing globalisation are environment places on the portfolio companies discounts on private equity investment trusts waning. “The pendulum that themselves. It’s quite possible that some have been have expanded this year. But that might simply swung towards free trade for purchased at valuations which they will never be reflect concerns that the value of underlying so long seems to be able to justify, regardless of holding period. portfolios will be written down. As El-Erian swinging back.” Sustained points out, “historically, revaluations have tended wage rises are the biggest Don’t overcomplicate things to lag behind public markets by a minimum of inflation risk, especially as So what does this mean for you as an investor? six to nine months”. So there may well be better high government debt levels Firstly, it’s a useful reminder that as private opportunities to buy in the future. make it almost impossible to raise interest rates without I wish I knew what mark-to-market was, At the other end of the causing recession. but I’m too embarrassed to ask scale, one reason why private equity returns look less “How do we invest amid ©Getty Images “Marking to market” simply rough idea of what your house volatile than those of public these febrile conditions?” means updating the value of an is worth – and estate agents and equity markets is because Rather than the standard asset or a portfolio of assets to surveyors will certainly give the underlying assets are “balanced” portfolio of reflect the latest available prices you an opinion on the matter – revalued less frequently, and bonds and equities, Lyon for said assets. This is easy to but the truth is that you don’t valuations are arguably more favours using index-linked do when assets are publicly know for sure until you actually subjective. Private equity bonds and gold rather than listed, highly liquid (easily sell it. And on any given day, firms say this is reflective of conventional bonds. These bought and sold) and fungible you can only be loosely the fact that these “have held up relatively well (substitutable for one another). confident of your estimate. investments are meant to be in the recent bond market For example, FTSE 100 shares long term and that it protects sell-off”. The trust has also trade in huge quantities on a Why does any of this matter? investors from needless and cut its equity exposure, from daily basis, so you can be very One big problem in the 2008 artificial volatility. 46% in April 2021 to 38% by confident of the value of any financial crisis arose when April 2022, saying “returns shares in your portfolio simply banks were forced to write Critics, such as Cliff will be modest and we await by referring to the market price down the value of their holdings Asness of asset manager lower equity valuations at any given moment. of sub-prime mortgage-backed AQR, argue that this amounts before putting shareholders’ bonds. This “mark to market” to “volatility laundering” and savings to work.” It’s harder when transactions obligation meant banks’ that investors in private are less frequent, assets are not liabilities outweighed their equity are in fact often 24 June 2022 fungible, and the sales process assets, blowing a hole in their paying a premium for is more involved, however. For balance sheets and leaving illiquidity, which they may be example, you might have a them effectively insolvent. willing to do to avoid selling at bad times. moneyweek.com

16 %HVW RI WKH ƓQDQFLDO FROXPQLVWV Russian missiles and artillery have destroyed Ukrainian towns, smashed Money talks Who will stations, ports and telecoms towers, hit more than 1,000 schools and “When I left damaged roads and agricultural land, says The Economist. The cost of school I set out to get foot the bill rebuilding the country has been put at $200bn-$500bn. How will such a job and sums be raised and how will aid be organised to avoid “running foul of earn good money if I for Ukraine? institutional rules or political sensitivities”? And can Ukraine, notorious could. I’m for corruption, “handle the cash”? The EU has talked of borrowing the no different Editorial money collectively, but Germany and Holland are baulking. Though from anyone The Economist all agree that the EU should have a “leading role” – not least as Ukraine else. Some people think aims to “join the club” – the involvement of countries such as the US, making all this money is Britain and Japan alongside global lenders such as the IMF and World uncool. I don’t. I’m trying Bank suggests a “looser sort of cooperation”, with different priorities to do what I do to the and tasks. Yet “decentralisation risks duplication” and the “scramble for very best of my ability. funds” by contractors will be “fierce”: bringing private-sector investment I’m not embarrassed if to a country with a “reputation for corruption will take some doing”. that means I earn loads.” On the plus side, the ordinary people are already making plans. There’s a Paul McCartney (pictured), powerful sense that everyone is in this together. quoted in the Daily Mirror Britain’s The UK’s farmers are getting old, says Peter Gittins. The average age is 59; “[Inflation] is how farms need 40% are over 65. To attract younger blood, the government is temporarily a society reconciles new blood offering lump-sum exit payments of up to £100,000 to those prepared to sell, rent or give away their land. Given the “challenging economic inconsistent and Peter Gittins environment” – the average hill farmer made just £15,000 last year and overambitious claims The Conversation four million European farms shut between 2005 and 2015 – some may happily take a cheque, but for many farming is a lifestyle choice. And since on resources.” government subsidies are likely to continue, they may not end up better off. Former Tory minister Finally, while the move could entice young, entrepreneurial farmers into David Willetts, writing on the sector, the scheme could also benefit neighbouring farmers or investors Conservative Home seeking to diversify. Taking the plunge will not be easy for newcomers, either. Thanks to Brexit, the cost of living crisis and the planned “The best place for replacement of farm subsidies with new grants rewarding environmental my capital is in sustainability (a potential “bureaucratic nightmare”), there are many issues to consider. Significant start-up capital is needed, mistakes will be made, companies that I’m and then there’s the loss of large numbers of experienced farmers with their running. I could put “vital” knowledge. Newcomers face an uncertain future. £5m into a property in London and probably Fed’s tools There was a “key moment” in Federal Reserve chair Jerome Powell’s recent get a 15% yield, or I are not up press conference when he acknowledged that current inflation is “mainly could build a really to the job due to factors that have nothing to do with US credit conditions”, says great business and JW Mason. In effect, he admitted that, although the job “calls for a sewing sell it for several multiples JW Mason machine”, he plans to go on using his hammer. Macroeconomic orthodoxy more in five years’ time.” Barron’s puts economic management, mainly via the tool of interest rates, in the Dragon’s Den investor hands of the central bank, which assumes that although spending may “run Steven Bartlett, quoted in ahead or fall behind, depending mainly on developments in the financial The Sunday Times system” (eg, asset bubbles), the supply side or productive capacity grows at a stable pace. But what if the “disturbances” causing inflation come from the “I’ve never been supply side, such as Covid-19 or a war? And if wages aren’t what’s driving interested in money inflation, why are we addressing it by trying to lower wages? The Fed is shifting bargaining power from workers to employers, making it harder for itself. I’m not for workers to meet living costs, and discouraging house building, pushing driven by money. prices up in the long run. Push hard enough and it might actually tip the US As long as you have into recession. Powell knows “perfectly well” that he’s not addressing the enough, that’s good real sources of inflation. “But it’s his job, and he intends to go on doing it.” enough. There have been things that I’ve China is no China’s rise, economically and recently militarily, is one of the big stories of done that have brought financial the 21st century, says Ruchir Sharma. Since 2000, its share of global GDP in a good amount of superpower has shot from 4% to 18%; its share of global trade quintupled to 15%. money, and other things Yet “as an aspiring financial superpower, China is going nowhere”. The I’ve loved doing that Ruchir Sharma renminbi’s 3% share of global central-bank reserves is similar to far smaller have brought in no money Financial Times economies, such as Australia, and globally its stockmarket is “one of the at all. That we’re solvent is weakest performers”. The key “hurdle” is trust. A “meddling state” has entirely due to my wife.” printed huge amounts of money to stimulate growth, imposed controls to Author and broadcaster ©Getty Images prevent capital flight, made “erratic” attempts to control the market and Gyles Brandreth, quoted restricted its citizens from investing abroad. With its volatile stock prices in The Telegraph and “vastness of its money supply relative to its markets”, China is less comparable to emerging markets such as Brazil than to “frontier markets” “I don’t think I’ve such as Nigeria. No wonder foreigners own so few Chinese stocks. Not a made any big money single country uses it as a peg to manage its currency (more than 50% use mistakes. I’m not an the US dollar). Until Beijing has the confidence to “take the basic steps of lifting capital controls and making the renminbi fully convertible”, it will extravagant type. never “fully realise its superpower ambitions”. I’ve never taken cocaine 24 June 2022 and I’m not a real rock and roll star. I’ve never bought a guitar. I’ve never thrown a television out of a window. When I get money, a lot of the time it goes straight into a savings account” Singer Dick Valentine, quoted in The Mail on Sunday moneyweek.com

Best of the blogs 17 The origin of Whatever happened to the dignity and mystery? British cringe edwest.substack.com because, as James Marriott ©Alamy wrote in The Times, “it’s In the 1960s, London’s decline easier to rip someone off with Harry Potter, and fish and chips off, even our most “serious, as the capital of a global a smiling wide-eyed chatbot”. (“with the tedious proviso that, deep-rooted problems”. Family industrial power coincided The more informal and “I’m ackshuaaally, fish and chips was formation, for example – the with its rise as a centre of pop yer mate” a service provider is, brought over by immigrants”). “ultimate register of cultural culture, leading comedian Peter the worse it treats its customers. optimism” – has collapsed. Cook to warn that Britain was This applies to social classes None of this can replace “in danger of sinking giggling too. The more informal a ruling what really matters to a nation And yet our leaders remain into the sea”, says Ed West. elite behaves, the less they care – “a shared sense of identity “obsessed with fripperies”. Deep The satire boom led by Cook about “boring old customs”, and history, and the creation down they know that “it’s right ushered in a golden age of the less they can be trusted to of social capital that allows and healthy to honour the gods comedy, yet it also undermined do the right thing. prosocial norms to flourish”. of their ancestors” – but they the country’s institutions. And it matters because the don’t believe in them anymore. “Everyone is being satirical, The patriotism of the soft left “real purpose of patriotism So instead we get “British everything is a send-up,” Barry is posterity” – you care about cringe” – that attitude that was Humphries lamented even back British twee is “the patriotism of your ancestors because you “unleashed in the 1960s during then. “There’s an infuriating the soft left” –“consciously anti- care about your descendants. the satire boom, but which has frivolity, cynicism and finally nationalist yet obsessed with Instead, we laugh everything become the national vibe”. a vacuousness.” And here we defining British character and are. At the Queen’s coronation values”. It supposes that certain 70 years ago, the emphasis was British things are “uniquely on “dignity and mystery”. The terrible” – the government, the Jubilee in 2022 opened with prejudice of the great unwashed Her Majesty sitting down for – while other things are tea with Paddington Bear. Call “uniquely brilliant and envied”, it the triumph of “British twee”. such as the BBC and NHS. “British values” are defined by Twee has also been our love of queueing, gin, tea, appropriated by corporations What if Putin’s winning? The coming pension crisis glineq.blogspot.com unherd.com/thepost If you measure success by the extent to which stated objectives have been realised, Russia’s war with Investors are starting to wake up Ukraine has been a failure, says Branko Milanovic. But what if the stated objectives weren’t the real to the reality of slumping ones? Countries and their leaders aspire to two goods: sovereignty and wealth. There is a trade-off stockmarkets, economic between the two: countries can only become rich if they become less sovereign, that is, more integrated recession, rising interest rates with global trade. North Korea is more sovereign than Belgium, for example, if massively poorer. and permanently impaired supply chains, says Philip In the case of Russia, it is quite possible that Putin and his advisers are willing to pay the price of Pilkington. An overlooked being poorer for the prize of gaining greater sovereignty. Russia’s attempts to Westernise since Peter consequence is that we are the Great have been a failure. Russia failed to catch up with the West prior to 1917, was diminished heading for a pensions crisis. by giving independence to Finland and Poland, and, after the country broke up in 1992, it imported liberalism, which led to a dramatic impoverishment of the population. The result was a radical Investment analyst John curtailing of Russian autonomy as it “blindly followed” the West. The Russian elite would therefore Hussman has calculated that, if like to see a return of the Iron Curtain, but realise that this would not be welcomed by the population. markets are as overvalued as he Getting the West to erect it for them, for a policy that Russians would see as justified, would be ideal. believes and then crash, capital allocated to the standard Why utopias him economic prosperity, and in planning a utopia could only pension fund portfolio in 2021 are dangerous return he will spit in your face, if ever end in dictatorship. would return –2% every year for only to prove himself a man and 12 years. That means £100 bigthink.com not a machine. Human nature Earlier utopian writers were invested in 2021 would be worth is such, he argued, that people doing thought experiments, but around £80 at the end of the Nineteenth-century Russian would always prefer to be free in 19th-century Russia, utopian period. And this doesn’t even writers were “obsessed” in an imperfect world than tracts were written with real- factor in higher levels of with the idea of utopia, says unfree in a perfect one, and that world aspirations in mind, and inflation. The typical assumption Tim Brinkhof. They wrote gave rise to political movements, pension-fund managers work stories and treatises imagining Dostoevsky was right with disastrous consequences. with is that a fund should be how their own increasingly History has proved Dostoevsky growing around 6% a year if it is dysfunctional society could ©Getty Images right. “Every attempt at to meet its obligations. be replaced by one “devoid of creating a utopia as pictured by suffering or conflict”. Fyodor humanity’s greatest thinkers What we are facing is Dostoevsky was not impressed. has ended in failure. Many were “nothing short of a disaster” and Give a man every earthly full-blown catastrophes, giving it’s not clear what pension funds blessing, every happiness, give rise to regimes that were far or the government will do. moneyweek.com more destructive… than those The likelihood is of sad they replaced.” headlines telling the story of people who, through no fault of their own, see “the money they thought they were ferreting away for retirement disappear”. 24 June 2022

18 Funds Alex Darwall looks back on form His European investment trust deserves another look after a difficult spell Max King Novo Nordisk: a leader in diabetes treatments ©Getty Images but Gemehl adds that the Investment columnist valuation relative to government over the last five years, and including 10% each in RELX bonds is more attractive. In the Up until two years ago so remains a safe choice. If, and Experian, making this a last 20 years, this has only been European Opportunities however, Darwall has recovered “pan-European” portfolio. better in 2008, 2012 and 2020, Trust (LSE: EOT), managed his old form and learned some Borrowings to enhance all times of recession, so “if the by Alex Darwall, was the star lessons, EOT, trading on a 12% performance equivalent to 9% eurozone economy now tips performer of the European discount, may be the one for the of net assets indicate optimism into recession and earnings fall, sector. However, the collapse brave to invest in. about the portfolio and a eurozone equities are likely to of Wirecard, its largest holding relaxed view of the market. weaken further. The market’s at 13% of the portfolio, was a Focusing on stocks current valuation is pricing in a devastating blow to the trust This view is supported by sizeable economic slowdown, and to Darwall’s reputation. Darwall retains his style of high Cedric Gemehl of Gavekal, but not a deep recession”. conviction and low turnover. who points out that the forward What made the fiasco worse The top-ten holdings (out of price/earnings ratio of the But Darwall focuses on was not just the size of the 28) account for 74% of the European market has fallen stocks. “I invest in companies holding, but also that Darwall portfolio, one of the largest from 18.3 a year ago to 12.6, not economies. I haven’t built ignored repeated dire warnings being Novo Nordisk (as it is slightly below the median value the portfolio on a view of in the Financial Times of for BRGE), which, alongside of the last 20 years of 13.5. The inflation, but, for what it’s corporate misfeasance following Eli Lilly, dominates the global price/book ratio is right on the worth, I think inflation will be a a detailed investigation. market for the treatment of long-term median at 1.6 and the longer-term problem. European Although he extricated some diabetes and therefore obesity. dividend yield at 2.9% is close governments have hidebound value by bailing out at the last A third of the portfolio, much to the median (3.2%). their economies with more and minute, Darwall’s reputation higher than for FEV and more restrictions – for example, suffered a devastating blow. BRGE, is invested in the UK, The median implies that there the energy transition will be is downside as well as upside, at higher cost – while central BlackRock Greater Europe banks, especially in the UK, (LSE: BRGE) moved up to pole have lost the will to deal with position in the performance inflation,” he says. table and has remained there. The £550m trust has returned Darwall avoids those 63% over the last five years and problems by not investing trades at a 7% discount to net in businesses that are hurt asset value (NAV). However, by energy inflation, but in its growth focus has held it companies based on intellectual back over the last 12 months, in property that are able to which it has lost 15%. deal with inflation, that can “flourish through the cycle, Meanwhile, EOT, with which competitors find hard nearly £1bn of assets, has to imitate and regulators aren’t bounced back, returning 4%. interested in knocking”. Once It’s second only to the £1.3bn he finds these companies, he Fidelity European (LSE: FEV), sticks with them instead of which added 5%. FEV, which playing into market rotations or trades on an 8% discount, trends, without trying to time has been a consistent strong the cycle. It sounds like those performer since its launch over who gave up on Darwall two 30 years ago, returning 55% years ago should start listening. Activist watch Short positions... cashing in on lending out stocks US package delivery firm FedEx’s Q Investors in some funds might be losing out on Q Fans of actively managed funds, says share price had its biggest one-day revenues the funds make from lending out research group Morningstar, like to gain in around 36 years after the securities to short-sellers, says the Financial argue that while they may struggle to company announced it was Times. Securities lending, where an institution beat passively managed funds during increasing its quarterly dividend temporarily loans stocks, bonds, or exchange- bull markets, they really come into their by 53% as part of a deal with traded funds for a fee, was an $11bn business in own in bear markets, because they have activist investor D.E. Shaw, says 2021. A report by the European Securities and the flexibility to position themselves MarketWatch. The D.E. Shaw deal will Markets Authority has found that many fund defensively by holding cash and rotating also see a shake-up of its long-term groups return only half to two-thirds of the gross their portfolios. Unfortunately, this incentive compensation plan for revenues generated via securities lending to doesn’t seem to pay off in practice. shareholders, while three new their investors, while other managers return Markets have fallen sharply over the first directors will be appointed. FedEx will closer to 90%. The regulator believes all five months of this year. Yet the average also cut its capital spending in a move revenues from these transactions should be actively managed fund in the peer group that should lower its capital intensity returned to investors, after fees. BlackRock’s of the iShares Core MSCI Europe ETF and boost returns. The deal comes in-house lending agent retains 37.5% of gross has fallen by 9.2% compared with just just weeks after the appointment of revenues from securities lending transactions in 6.6% for the ETF. The average fund new chief executive Raj Europe, for example, while Vanguard pays its competing with the Vanguard S&P 500 Subramaniam, who replaced founder third-party agent, Better Finance, about 8%. UCITS ETF has fallen 8.8%, versus a 7.5% Fred Smith and is looking to take Better Finance suggests the maximum amount drop for the ETF; while the Xtrackers advantage of the post-pandemic managers should be allowed to deduct for MSCI World ETF has fallen 7.6% versus boom in parcel delivery volumes. in-house lending should be limited to 10%. 9.2% for its average active peer. 24 June 2022 moneyweek.com



20 Analysis Lumber takes a another tumble Wood plays a key role in US housing. Slow growth has hurt prices – but not for long, says David J. Stevenson We are all familiar with the classic commodities such as In America, timber doesn’t become lumber until it’s been processed oil, copper and precious metals. However, US lumber – known as timber in the UK, although Americans draw spurred by record-low mortgage rates, and embarked a distinction between the two – isn’t such an obvious on more home renovation. Demand for single-family choice for those looking to invest in basic materials. houses was strong. And with existing dwellings in Yet it has shown over the last couple of years that it can short supply, all that extra buying filtered through into rise – and fall – very quickly. higher house prices and more housebuilding. Thus the requirement for more lumber products grew sharply. Between 1992 and early 2020, apart from a couple of temporary surges, US lumber traded between $200 “Prices Supply shortfalls and $430 per 1,000 board feet (this is the standard soared measurement gauge – a unit of volume equivalent to a from $260 Supply was not able to keep pace. The initial response board one inch thick, one foot wide and one foot long, per 1,000 by sawmills to Covid-19 restrictions had been to or 144 cubic inches in total volume). Then came the board feet to furlough employees and curb output. By April 2020, US Covid-19 fallout. From a low of around $260 per 1,000 $1,700” wood production had declined by 15% compared with board feet at the start of April 2020, the price soared to 2019 levels. As falling supply coincided with surging $1,700 in just over a year. After several intervening ups demand, the lumber price soared more than sixfold and downs, it has now come down to about $600. from the beginning of April 2020 to May 2021. What sparked the take off and subsequent volatility? “From 2020 to the first half of 2021, it really was And what happens now? To answer these questions, we an issue of production at the mill,” says Dustin Jalbert need to look closely at the fundamentals. of Fastmarkets RISI in Fortune. “There just wasn’t enough sawmill output, not enough wood products Driven by housing output, to meet demand.” First, what exactly is lumber? In the US, the term refers The problem about this surge was that buyers to sawn wood only, while timber means felled trees reacted by opting for alternatives, such as composite with the bark still on (and even sometimes trees that materials, and this punctured the lumber-price bubble. have not yet been cut down). Lumber is big business. “The culprit [of the correction] was the demand Measured by revenue, the lumber wholesaling industry side,” Stinson Dean of Deacon Lumber told Fortune is worth around $200bn, according to data from magazine in September 2021. Homebuilders felt the industry monitor IBISWorld (clearly this value depends “full brunt” of rising lumber prices “and completely hit on the lumber price). On average, the US market has the brakes”. Within three months, lumber had toppled grown by 14% a year between 2017 and 2022. back to the region of $500 per 1,000 board feet. America’s lumber industry has three sub-sections: However, this wasn’t the end of the volatility. logging, sawmill and wood panel. The first two are Lumber had shown how it could respond to a demand largely self-explanatory, while the wood-panelling shock. In November last year it also experienced industry manufactures a variety of products such as significant supply-side interruption. The US only plywood, veneer, trusses, I-joists, oriented strand board produces enough softwood lumber to satisfy about and particleboard. Most of these products are employed in construction. Plywood and veneer are probably moneyweek.com familiar to you. Oriented strand board is widely used for sheathing (a building’s wooden outer casing before brickwork is installed) and subflooring. Particleboard features mainly in furniture making. Trusses provide structural support for flooring and roofing. I-joists have great strength compared with their size and weight, so applications include shouldering heavy loads. As that list makes clear, residential property is a crucial demand driver for lumber and has played a major role in recent price volatility. In 2006, US housing starts hit an all-time high of 2.5 million units after a steady improvement following the 1990 recession. Then the global financial crisis (GFC), which began with a wave of mortgage defaults, prompted a stunning 80% plunge in starts. This was devastating for lumber demand and led to the closure of several US mills. After those turbulent times, the US saw a progressive recovery in housing starts to roughly 1.6 million at the start of 2020. That’s when Covid-19 hit, triggering a sharp drop in starts to below one million. However, this decline wasn’t a carbon copy of the GFC. The spate of lockdowns hugely increased the number of people working from home. In addition, buyers ramped up residential real-estate buying, 24 June 2022

Analysis 21 “Annual Thus builders have begun to retrench. Single-family supply of home completions, starts and building permits all new housing dropped in April, according to the Census Bureau. is 100,000 units below As a result, lumber orders have slowed and wood demand” is piling up at mills, lumber-pricing service Random Lengths tells The Wall Street Journal. “Triple-digit discounts [have become] the rule rather than the exception.” Only 12% of monthly building-product survey respondents had slightly low to very tight lumber and wood panels inventories in April, down from 61% a year earlier, says John Burns Real Estate Consulting. Canfor, one of Canada’s biggest lumber producers, said its Canadian sawmills have been operating at about 80% of production capacity since late March. “Global supply challenges are continuing to significantly limit our ability to transport products to our customers, and our inventory levels remain very high,” says CEO Don Kayne in The Wall Street Journal. ©Alamy Long-term housing crunch 70% of its total requirements. Almost all the rest So where do US housing starts and the lumber price go comes from Canada. Last November, record rainfall in from here? For the former, “it looks like more declines lumber-producing south-western British Columbia and are imminent in the upcoming months, and we’ll the US Pacific Northwest disrupted logging supplies. probably return to pre-pandemic home sales activity By early March this year, lumber prices reached nearly after the remarkable surge over the past two years”, $1,500 per 1,000 board feet again. says National Association of Realtors’ chief economist Lawrence Yun. What’s more, fears of a US recession in However, since then prices have again plunged – the second half of 2022 are mounting. “It is our belief by some 60% – due to a different kind of demand: that we are past peak demand, and this commodity shock. Rising interest and mortgage rates have spurred bull wave is over,” Kyle Little, chief operating officer concerns about demand for housing. US existing home at Sherwood Lumber, tells Fortune magazine. “It sales declined – for a third consecutive month – by 2.4% is now moving to its next cycle. Lack of clarity on in April 2022 to a seasonally adjusted annual rate of future demand is putting significant pressure on the 5.61 million. That was the lowest level since June 2020. commodity price down the road.” On this basis, the outlook for lumber isn’t exciting. However, the US still has a housing shortage. “There is less housing available for rent and sale than at any time in 30 years, and things are only getting worse,” said Moody’s Analytics last year. “The annual supply of new housing units is running an estimated 100,000 below new housing demand, creating the largest shortfall in nearly a half century, equal to almost a year of new construction at its current pace.” Last month, US president Joe Biden announced plans to address the country’s housing shortfall, with a goal of closing the construction gap within five years. This could take time to come to fruition, especially if the economy slows down, but over the medium and longer term, strong US housing demand is likely to be supportive for lumber prices. Indeed, if the coming downturn leads supply to be cut sharply again, it may even increase the chance that lumber prices once again repeat their 2021 surge as activity picks up. A bullish play on lumber – and a bearish bet, too Despite the bearish sentiment in both the cap is now less than $300m. Analysts’ energy, mining or property development). lumber industry and the US stockmarket, average earnings per share (EPS) forecasts Of the three biggest Reits, Rayonier is the stocks within the sector have generally held for 2022, 2023 and 2024 are $1.12, $1.38 and purest play on timber and Weyerhaeuser up well. Of course, this could mean that $1.68, according to MarketWatch data. This has the largest manufacturing operations. most are due for a pullback. So here are two would put the stock on a price/earnings (p/e) PotlatchDeltic (NYSE: PCH), which recently stock selections to cover both the potential ratio of 8.75 this year, falling in subsequent announced a deal to buy smaller peer downside and upside in lumber prices. years. There’s almost no long-term net debt. Catchmark, lies in the middle. It owns about The stock does not pay a dividend. 1.8 million acres of timberland in Alabama, LL Flooring (NYSE: LL) is one of Arkansas, Idaho, Louisiana, Minnesota and America’s leading speciality retailers of The obvious way to bet on a rebound in Mississippi, as well as six sawmills and a hard-surface flooring, with more than 430 lumber prices is through producers. Many plywood mill. stores nationwide. The company sells more US-listed firms in this sector use a real than 500 varieties of hard-surface floors, estate investment trust (Reit) structure for At the last price of $45.20, Potlatch’s plus a range of flooring enhancements and tax purposes. (Reits don’t pay corporate tax shares are almost 30% down from their May accessories. The fact that it requires lumber on their profits as long as they pay out at 2021 highs and now have a $3.1bn market as an input to many of its products means it least 90% of their profits as dividends.) cap. Net debt is about $430m compared with should benefit from lower prices. shareholders’ funds of $1.53bn. Analysts’ The Reits have three main business lines: average EPS estimates for 2022 are $5.14, At a current price of $9.80, the shares sale of cut unfinished wood (ie, timber), sale according to MarketWatch, putting the stock have fallen 70% since they peaked at about of lumber and other wood-based products, on a p/e of 8.8. The dividend yield is 3.9%. $33.70 towards the end of 2020. The market and real-estate (leasing and selling land for moneyweek.com 24 June 2022

22 Cover story Governments will sink in a world drowning in debt Rising interest rates and soaring inflation will leave many governments with unsustainable debts. Get set for a wave of sovereign defaults, says Jonathan Compton It is unlikely that Barbados, Lebanon or Sri Lanka time and that, unsurprisingly, China has roared into ©Alamy ever enters your investment thinking. Perhaps now the room to the extent that the increase since 2007 they should. For although all are minnows in a sea of in money terms in its non-financial-sector corporate whales in financial terms, they are – to mix animal debt and household debt has been greater than all the metaphors – dead canaries in the coal mine. In the last advanced economies combined. four years, each has gone bankrupt. Barbados defaulted on its foreign debt when a new government took office Debt is always a high-wire balancing act, requiring in 2018, Lebanon stopped paying after a series of a combination of being able to pay the interest, giving economic crisis in 2020 and Sri Lanka did the same an impression you can repay the capital and, most amid an economic meltdown last month. importantly, convincing lenders you’re a good risk so that will pony up more loans. The spectacular surge All three went bust for what are effectively identical in debt was possible primarily because interest rates reasons, as did Argentina – which in 2020 defaulted for persistently declined to zero and were even negative the ninth time in its history – and others. Economists for several major countries. This allowed governments would vigorously disagree, citing various theories to issue bonds in record quantities not just for new instead, but the core problem in all cases is gargantuan borrowing, but also to replace older, more expensive government corruption – from elected politicians loans with larger but overall cheaper new ones. Thus to lowly bureaucrats – robbing their treasuries and despite ever-rising debts, their interest costs tumbled. misspending whatever is left, along with woeful tax collection systems. Couple this with a complete lack This has reversed. Central banks have under- of confidence in their legal systems and governance estimated inflation and are rushing to catch up with by domestic and foreign investors alike, and money a rapid series of interest-rate increases. Suddenly new flees abroad while economic activity plunges. Thus debt becomes more expensive. At the end of 2021, the Sri Lanka, long self-sufficient in food, is now begging governments of heavily indebted developed economies for foreign supplies as farmers can no longer afford to and raggedy republics alike were paying peanuts buy seeds or plant crops. in terms of the interest cost as a percentage of their revenue, such as France at a mere 3.3%, or Sudan at Sovereign default is a vague term, but one that can 5.2%. Globally, interest costs were about 6% of all be defined as the failure by a government to pay the government revenue last year. interest or capital on its foreign currency debt (usually bonds) when due. There are many sub-definitions of Yet as rates rise, the annual cost of borrowing default, such as failing to repay local government debt, reverts to the more normal level of low double digits, changing interest terms on loans, or radically debasing and higher for many countries. For the first time in the currency. However, there are four immutable nearly 20 years governments globally are going to find rules. Sovereign default is normal, cyclical and (with new funding for healthcare, pensions, education or very few exceptions) inevitable for every country. The infrastructure difficult, while painful cuts in previously contentious fourth rule is that sometimes it is the best untouchable areas will be required. The popular and option. These rules have been forgotten and although electoral reaction to this situation is unlikely to be one the world is slowly drowning in debt, investors are of calm acceptance. remarkably and foolishly unconcerned. Japan leads the way “Global debt An unprecedented bubble more than The financial strength of a given country is often doubled The huge growth in access and availability of credit measured by its debt-to-GDP ratio, the level of general dating from the World War II has stimulated an government debt relative to the size of the economy. As between 2008 unprecedented level of real economic growth and a rule of thumb, over 90% is a default red flag. Yet it is and 2020” wealth. There are multiple benefits to the ability to an imprecise tool, as demonstrated by Japan. Its debt-to borrow. For governments, it allows them to build GDP has been above that level since last century and necessary infrastructure. Companies can invest and is a world-beating 260%, yet it’s having no problem in expand, and thus employ more people. People get the paying its interest bill or raising new loans. Many other opportunity to enjoy a once inconceivable lifestyle, advanced economies are also well above red-flag levels, from home ownership to foreign holidays and a host of such as the UK, US and many eurozone countries. consumer goods. However, problems arise when the interest, the capital or both cannot be repaid. Japan offers a clue as to how some developed countries will – for a while at least – mitigate the We are in an unprecedented credit bubble. Before inevitable squeeze. In Japan, the largest holder of bonds the pandemic, the numbers were already alarming. is the central bank and because it is a government The total stock of global debt had already more than subsidiary, the government doesn’t have to pay these doubled between the 2008 financial crash and 2020 back. It also now purchases 70% of all new bonds. to $226trn or about 2.5 times the world’s total GDP. Most of the rest are bought by banks, insurance and Partially because of the costs of the pandemic it has trust firms, not because their directors are especially since soared to more $300trn (3.5 times global GDP), dim or patriotic, but because they are forced to by the according to the Institute for International Finance. government for their core reserves and key ratios. It’s Notable within these numbers is that government a brilliant three-card trick, which to date has allowed debt has overtaken all the rest combined for the first “stagnant” Japan to enjoy an enviably high standard of living and for decades to keep interest rates ultra-low. 24 June 2022 moneyweek.com

Sri Lanka’s farming crisis is leading to food shortages hope of relief to be had there. Since commodities and “Japan’s debt food account for a far higher proportion of personal to GDP ratio Other developed countries belatedly imitated Japan, expenditure in developing economies than in the is 260%, yet witness the “independent” Bank of England, which wealthiest economies and domestic consumption is it is having owns around a third of all UK government bonds. But, the key economic driver in most countries, this will no problem like all three-card tricks, eventually the sucker punters weaken economic growth and thus tax revenue. A few paying realise the con. In the case of Japan, the yen has been commodity-producing countries will escape, but the interest or tumbling because of low interest rates. In the UK and economies of many commodity producers perceived as raising new US, inflation, an end to quantitative easing and other “safe” have become more diversified, so benefit less. loans” factors are pushing interest rates higher. A holistic view of the risks However, there is one further trick that these countries have left, which will be the last throw before I mentioned that high debt-to-GDP ratios are only a governments must either slash borrowing – leading rough guide to financial strength. There are several to recession – or default. These central banks will reasons why they should be treated with caution. First, simply write off the bonds they have bought from their many countries may have a low ratio at the government governments. Purists will be appalled because their level, but corporate- and personal-level borrowing in books will no longer “balance”, but does anyone really foreign currencies has been growing. Such mismatches – believe the books of central banks balance anyway? borrowing in one currency to invest at home in another Meanwhile, bondholders will love it, since the risk of – are notoriously destabilising. them not being repaid diminishes because debt-to-GDP ratios will have been slashed. Next is capital flows. Smaller countries are usually very dependent on foreign investment. This is always These options are available only to some of the G20 fickle and can swing on election results, threats from advanced countries. Most other nations are already neighbours, or a rise in, say, energy and food prices. being squeezed, despite the reality that interest rates Weak or despotic leaders also spook the horses. remain far below long-term averages and massively Historical data shows a clear pattern. Sovereign defaults negative in real terms, even after recent rises. Thus always surge following a spike in interest rates and a many economies are in for a battering. slowdown or reversal in capital flows – the conditions that we are seeing today. Rising rates not only affect the price of credit, but also its availability. Suddenly, once-fêted borrowers Finally, despite America’s domestic problems are finding their friends have disappeared. Meanwhile, and impressively high debt-to-GDP ratio, investors the surges in commodity and food prices are shredding personal incomes. These are unlikely to revert to Continued on page 24 previous levels for many years, even if the invasion 24 June 2022 of Ukraine were to cease tomorrow, so there is no moneyweek.com

24 Cover story Continued from page 23 will continue to flee to the dollar during periods of ©Getty Images uncertainty. The dollar then strengthens, which always makes life difficult for smaller or developing economies. Two major international bodies exist to ensure that in theory defaults neither happen nor spread. The less important is the Paris Club, founded in 1956. With 22 permanent members from wealthy countries, plus international observers, it meets frequently to resolve problems in indebted countries. Recently it has linked up with a G20 initiative called the Common Framework with similar aims. It is highly politicised: its members’ prime concerns seem to be either to protect their domestic banks from losing their shirts from foolish lending, or areas of specific self-interest. Thus France will fight hard to rescue Tunisia, but not, say, Kenya, while Britain will do the opposite. The decline of the IMF The IMF was created at the Bretton Woods Conference “Only eight governments The better-known body is the International Monetary or utterly debased their currencies since 1900. I know have not Fund (IMF). Every United Nations country has to pay a major debt-default storm is coming because it has defaulted or into this, on a proportionate basis to the size of their started. Defaults are already on the rise and are going debased their economies and guarantee further funding (though up faster than the increasingly opaque data. Many currencies many – such as the US – are in arrears). Its theoretical defaults are bilateral – such as African and Asian since 1900” firepower after recent new commitments is immense at countries failing to repay loans to China or Russia – and a trillion dollars. Still, my hunch is that neither the IMF never reported. Most probably it spreads later this year nor the Paris Club will be able to cope in coming years, and next among smaller or less developed countries. Yet even if the IMF’s funders actually pay in. so large is the debt bubble that there have to be some major casualties further out as interest rates rise. The IMF was an idealistic and admirable creation (see below), but has become fossilised and disingenuous. For all the considerable academic work on signals I have watched its brazenness with admiration. Under of likely default, the best guide has been a country’s its constitution it can never write off a loan. However, it previous form. Proven serial defaulters – such as has special powers to suspend payments, in some cases Argentina, Greece, Mexico, Portugal, Spain and Turkey seemingly forever. It also claims to have suffered very – must be in the cross-hairs. So too may those with few losses, which is mischievously dishonest. alarming debt-to-GDP ratios and little hope of growing out of the problem, such as Italy or South Africa. For example, Pakistan has borrowed 22 times. It has However, the EU countries on the list will probably be never repaid a cent, except either through new loans part of the endgame, as every ruse will be tried to avoid from the IMF or from the Gulf states, who also appear such an event. Despite being a historic serial defaulter, never to have been repaid. The IMF’s largest borrower China is low on my list because it has very little foreign is Argentina, which has defaulted five times since 1980. debt. However, it ranks highly for the likelihood of a Like Pakistan, it goes through the pretence of repaying banking collapse, because of its domestic debt splurge. some debt, but takes more IMF money to do so. Should investors run for the hills? From government The result is that the IMF has created dependent bonds, yes – if only because the 40-year bull market vassal states to which it is in turn in thrall. These has ended. From cash too, given rising inflation. countries can never be weaned off aid, but the IMF But they should also be strolling towards equities. cannot be seen to write off the bad debts. The IMF list Companies with the right characteristics can and do of outstanding loans and repayments shows $107bn survive defaults and worse. Just as it was once thought on loan. Looking through this list, only a compulsive impossible that bond yields could be negative, so it gambler would bet more than a quarter will ever be has been forgotten that on extreme occasions some repaid. On top of this glaring problem of unrepayable companies have been seen as a better credit risk than debts, there is the damage the IMF often causes with its their national governments. So don’t be fooled by those “cures” – although rarely enforced – and its willingness many hands out at sea waving at you to join them. to deal with any despot or dictator. It’s a sorry decline. They are not in a happy place. In total, 147 governments have defaulted on debts since 1960. Only eight countries have not defaulted I wish I knew what Bretton Woods was, but I’m too embarrassed to ask The Bretton Woods agreement was born setting up the International Bank for it focused on attempting to reduce poverty out of the need to have a more open and Reconstruction and Development (IBRD), in developing countries. better regulated financial world after the which later became the World Bank. end of World War II, avoiding the economic The IBRD became operational in June rivalries and protectionism that resulted The IMF was intended to be a forum for 1946 and the IMF in March 1947. The from, and worsened, the Great international economic cooperation that exchange-rate system became operational Depression. In July 1944, 730 delegates would promote sound economic policies in 1958 when exchange controls were from 44 countries gathered in Bretton among its members – effectively the eliminated for current-account transactions Woods, New Hampshire, to discuss how keeper of the rules. It would also provide and member currencies became best to go about achieving their aims. financial support to members with balance convertible. While the IMF and World Bank of payments problems, so that regular still exist today, the exchange-rate The key outcomes of the conference international trade could function. agreement ended in the early 1970s when included: establishing a system of fixed US president Richard Nixon ended the gold exchange rates, under which all currencies The IBRD originally provided funding to standard in America so that dollars could were pegged to the dollar and the dollar help countries that had been devastated no longer be converted to gold. The system was convertible into gold; setting up the by the war. Later, its aims shifted to of fixed exchange rates fell apart and most International Monetary Fund (IMF); and supporting economic development – major currencies began to float freely. including funding infrastructure – and then 24 June 2022 moneyweek.com

Pensions 25 The return of annuities Retire later to boost income Rising annuity rates offer an improving alternative to income drawdown Q Savers looking to generate David Prosser than at the start of example, income drawdown extra pension income should Business columnist the year. For an income offers greater flexibility about consider delaying their linked to RPI inflation how you can pass on unused retirement. New data from Annuities have been largely (the retail price savings. Still, it is also possible insurer Aegon shows a delay ignored since the pension index) it drops to to buy annuities with attractive of just a single year could around £3,400 (to death benefits, enabling family offer a boost of over 16%. The figure is based on the freedom reforms of 2015. start), or £4,600 members to inherit either a example of a 60-year-old However, a near 30% rise with a 2.5% rise regular income or a lump sum. man with a £200,000 pension in some annuity rates so far each year. fund, who could today buy this year is turning heads. There’s also the small matter an annual annuity income of For many savers approaching that inflation and interest rates around £4,900 with these retirement, an annuity now might continue to rise from savings. Waiting a year to looks a more attractive way to here. However, the choice retire and continuing to does not have to be one or the contribute could mean the convert pension fund cash into other. You could buy a series pension fund grows to regular income than an income of annuities over time, rather £211,000, assuming drawdown arrangement. than deploying your entire investment growth of 4.25%, Annuities, which are sold by pension fund in one go. This after charges. Factor in the offers increased flexibility, higher annuity rate available life insurers, offer a guaranteed to a slightly older saver, and income for the rest of your this could provide an annual life. The plans vary, but the income of around £5,700 – a underlying principle remains 16.3% increase. the same. You hand over your pension fund and the insurer The potential to secure higher pension income promises to keep paying your grows larger the longer you pension for as long as you live. ©Getty Images are prepared to defer With income drawdown claiming your money. Annuities are on the up as interest rates rise Waiting three years could plans, you must manage mean an increase of 41%, your savings with great care, Aegon calculates, while balancing the need to generate waiting five years could net growth against the risk of an extra 73%. Of course, depleting your funds and everyone’s circumstances working out how much you can withdraw without risking To put that into perspective, particularly in the early years, will be different, but the depleting the pot. Since the 2015 pension experts often suggest and could also see you benefit broad principle holds in reforms, these have become that if you want to be sure from any future rate rises. most situations. Those who the default option for savers your pension fund will last, are able to delay retirement reaching retirement, who have you shouldn’t take an income Annuity rates were already may be able to unlock a largely eschewed annuities. of more than 3%-4% a year higher for older savers, since much larger increase in (rising with inflation) from your insurers don’t expect to have pension income than they One of the main reasons savings using income drawdown to pay out for so long. But this might expect. for the growing popularity of (see MoneyWeek issue 1107). end of the market has also seen drawdown is that annuity rates That would suggest a starting rates rise in line with higher State pensions can also be have been stuck at all-time lows annual income of no more gilt yields. A 75-year-old man boosted in this way. The for much of the past five years. than £4,000 if your savings are with £100,000 can buy an government offers additional Rates are pegged to gilt yields, worth £100,000. annuity income of around pension income to those which rise and fall in line with £7,900 a year, 18% more than who do not begin claiming interest rates. Since interest rates This doesn’t mean annuities at the beginning of the year, or their benefit at 66, the age at have been close to zero for so are right for everyone. For £5,700 linked to RPI. which the state pension usually becomes payable. long, annuity rates have been dismal. Rising life expectancies News in brief... a nudge to get advicehavealsobeenafactor:insurers expecting to pay annuities for longer naturally reduce the ONew rules from the The service has been O New government entitlement reduced. amount they pay each year. Financial Conduct available since April plans aimed at Those with between Authority, effective 2015, but only one in increasing home £6,000 and £16,000 lose from 1 June, will 33 of those eligible ownership could mean £4.35 per month in Rising rates turn the tide require both individual have taken up an the end of rules that benefits for every £250 pension providers appointment, says penalise people who in savings over £6,000, Now the environment has and employer- James Jones-Tinsley have put cash into and those with over changed. With five base rate sponsored schemes to in FT Adviser. The aim individual savings £16,000 aren’t entitled rises in the past six months, gilt “nudge“ savers to get of getting more people accounts (Isas) and to UC. yields have climbed steadily. a free appointment to do so is “laudable”, subsequently need to And as increases in average UK with the Pension Wise but the new claim benefits. However, the life expectancies have stalled, service when they regulations fall short. government now plans Ministers want to to exempt savings that the rise in annuity rates has been access their funds for It would be better for make it easier for are held in Help to Buy even sharper. A 65-year-old the first time. The savers to speak to people claiming Isas and Lifetime Isas man with a £100,000 pension government-backed Pension Wise earlier – universal credit (UC) from this calculation. fund can now buy an annuity scheme does not offer eg, at age 50 – rather to get a mortgage. Both savings vehicles income of around £5,940 a personalised financial than when taking However, anyone are aimed at people year, the highest amount since advice, but can help benefits, as this would with savings of who are trying to August 2014, and 28% higher savers work through give them more time more than £6,000 will build a deposit for a their options. to plan. have their benefit property purchase. moneyweek.com 24 June 2022 MoneyWeek

26 Companies S4 Capital still has much to prove Audit delays set the ad agency’s shares tumbling. It needs to show it can turn growth into profits Bruce packard Martin Sorrell has set up a rival to take on his old firm ©Getty Images buy advertising and had a Investment columnist close relationship with both package caused a third of WPP’s digital age to take on WPP. Google and Netflix – for No board of a FTSE 100 shareholders to vote against To prevent him being ousted, he $150m. In total S4 has made 30 company wants to hire a the plan. He left in April 2018, owns a golden share that allows acquisitions in the four years. below-average chief executive. amid accusations of bullying him to block any resolution Hence boards pay above- and suggestions he had blurred proposed by other shareholders Tumbling shares average rewards to CEOs who the line between personal and on acquisitions, disposals and they believe are above average. company expenses (allegations executive appointments. The However, it’s been a difficult Yet, mathematically not all that he denied). B share rights are negative few months. The company CEOs can be above average. (ie, they give him a veto). The delayed releasing its audited One way to judge the real talent Some shareholders disliked prospectus mentions a risk that full-year results twice, as PwC, of a CEO is to see what they go the fact that Sorrell walked a disagreement over strategy its auditors, flagged concerns. on to achieve after they’ve left away from WPP as a “good could result in deadlock. The Sunday Times revealed their position at the top of a leaver” – meaning that he kept last month that the problems major company. his multi-million pound awards Early backers included hedge involved the fact that finance – yet was not required to sign funds Tosca and Lansdown staff at Media Monks failed Since he resigned over a non-compete agreement. Partners – widely perceived to accurately record sales on the Libor rigging scandal, Within a couple of months as “smart money” in the City. the accounting system. Among the record of Bob Diamond, Sorrell had found a new cash S4’s first move was to acquire other issues, if staff needed to former CEO of Barclays, has shell, Derriston, renamed it S4 MediaMonks, a Netherlands- make a correction to an invoice been mixed, to say the least. Capital (LSE: SFOR) and raised based advertising agency for generated by the software – In the mid-2010s, Diamond £50m of cash to set about €300m, and San Francisco- which frequently happened raised close to $1bn through building a new media and headquartered MightyHive – they would edit the invoice his cash shell Atlas Mara, to advertising company for the – which uses algorithms to PDF rather than put it through invest in the banking sector in the accounting system, which is Africa. The shares dropped like what they should have done. So a stone and eventually Atlas the accounts were not accurate, Mara was delisted at the end of staff struggled to reconcile last year. Diamond has more the system with the amounts recently been involved with clients had actually been billed. a special purpose acquisition Employees raised concerns company (Spac) that is trying to around audit risk. merge with crypto firm Circle. Perhaps Diamond was not as The accounts were finally talented as the remuneration released last month. It looks committee at Barclays believed? like S4 management has now taken this seriously, with Sorrell’s second act better systems and new hires. However, S4 Capital’s shares Martin Sorrell, the former are down by more than 70% CEO of advertising agency since their peak of 878p last WPP, was another boss with an September, wiping more than outsized remuneration scheme £3bn off its value. Investors who resigned under a cloud. will hope that Sorrell’s second In 2016, Sorrell’s £70m pay act is more successful than Diamond’s African bank. A more challenging ad market S4 Capital (LSE: SFOR) While much of the drop trend has been undone. disappointment. But for Share price in pence 2021 2022 in S4’s shares reflects But other factors are now, performance is in the delay in publishing also at play. Alphabet line with the group’s 900 the accounts – they will remove third-party three-year plan. 800 dropped by more than a cookies from its Chrome 700 third in March after the browser. Apple has Net debt was £48m at 600 second delay – the allowed users to opt out end March. Since S4 has 500 broader adtech industry of tracking. used its own shares for 400 has also sold off. Tremor acquisitions, the number 300 is down 30%. In the US, S4’s first-quarter of shares has grown 200 The Trade Desk is down results shows net from 365 million at end 100 51% and Digital Turbine revenue up 65% to 2019 to 556 million at end is down 75%. £171m (up 35% on a like- 2021. There will be a 2018 2019 2020 for-like basis). It expects further 33 million of Some of this is a net revenue to increase share issuance, plus earnings, dropping to 11 advertising market. reverse from the 25% this year, in line £51m of contingent on 2023 forecasts. That Growth has been very pandemic. People were with previous guidance. consideration (based on could be good value if it strong, but low single- spending more time on Results are set to be the current share price) weathers the downturn. digit profitability digital devices, and the weighted towards the and a further £125m of Still, there is a risk S4 measures suggest that digital-advertising second half, which cash consideration for has grown too fast and high growth needs to platforms benefited. means that if the previous acquisitions. fails to integrate its convert into more Now people are outside economy weakens acquisitions properly, as profitability at some again, some of that further there is a risk of The shares are on 14 well as a more difficult point in the future. times forecast 2022 24 June 2022 moneyweek.com

Personal view 27 Investing in line with If only you’d invested in… Buffett’s principles Capricorn Energy (LSE: CNE) A professional investor tells us where he’d put his money. This week: Keith Ashworth-Lord of Sanford Share price in pence DeLand picks three high-quality companies 225 At Sanford DeLand, we manage our A leader in automotive testing flagship CFP SDL UK Buffettology Fund AB Dynamics (Aim: ABDP) is a group 200 and its smaller cousin, the CFP SDL Free of companies specialising in vehicle Spirit Fund, in line with the business- simulation, testing and measurement to 175 perspective investing philosophy as enable the development of active safety and championed by Warren Buffett, among autonomous systems for the automotive 150 others. We look for only the best businesses industry. Its proprietary technology is used available to invest in and, believe me, there globally by all major vehicle manufacturers 125 aren’t that many out there. for advanced driver assist systems (ADAS); J A S OND J FMAMJ We want businesses that have an driverless-car technology evaluation; 2021 2022 economic moat, meaning competitors find suspension, chassis and steering system it hard to muscle in on their franchises. We development; and noise, vibration and UK oil and gas production company like steady growth, favourable operating hardness testing. Capricorn Energy (LSE: CNE) has margins, superior returns on equity, copious AB Dynamics’ products include driving announced an all-stock merger with free cash flow and robust balance sheets. robots, ADAS targets, drive-by-wire Tullow Oil, says Reuters. The merged We also look for managers who act with systems, kinematics and compliance company, which will have reserves of the owner’s eye as well as being competent test machines, driving simulators, path- 343 million barrels, will focus on Africa. stewards of the shareholders’ capital. following, and synchronisation software. Tullow will contribute the greater share Not surprisingly, a lot of our investee The company is regarded as high-tech, of reserves and production, through its companies, especially the smaller ones, have which might explain the 50% sell-off since offshore fields in Ghana, while owner-managers with significant skin in the last October. However, guidance has been Capricorn’s cash reserves will allow the game. We run concentrated portfolios, with raised during this time. group to invest more in expanding 31 ownership interests in Buffettology and production beyond the current 26 in Free Spirit. Our investment horizon is Time to tune into this discount combined 100,000 barrels a day. Both long term. Ideally, we want to hold forever Focusrite (Aim: TUNE) is a global music firms have seen their shares rise along to allow compounding to work its magic. and audio products group supplying with the oil price. Capricorn’s share price hardware and is up by 34% over the past 12 months. A GPS giant “We want to hold forever software products Quartix (Aim: QTX) to allow compounding to used by professional Be glad you didn’t buy… is a vehicle-tracking work its magic” and amateur system software musicians. Its main CMC Markets (LSE: CMCX) developer. It is well established in the UK, products are digital mixing desks for home with a presence in France and the US. and small studio recordings, synthesisers, Share price in pence The latter market is the big opportunity. high-quality loudspeakers, high-power Financially, it ticks all the boxes: all the amplifiers and controllers for commercial 500 growth is organic and management retains audio applications. a significant equity stake in the business. It benefited from musicians having to 450 Recently growth has been held back by the work from home throughout the pandemic. decision to shed lower margin insurance- However, more recently management said 400 related business and there is some hefty that it was only “cautiously optimistic about marketing spend going on. However, we the prospects for modest revenue growth 350 expect growth to reassert itself with a in the current year”. That, coupled with vengeance as this passes. The shares are supply-chain issues, has spooked investors. 300 38% off their peak last September and offer You can now buy in to a great business for an attractive entry point. 45% less than in September last year. 250 J A S O N D J F M A M J 2021 2022 Shares in online-trading provider CMC Markets (LSE: CMCX) dropped by more than 10% after it announced a sharp fall in profits, says the Financial Times. The company said that pre-tax profits for the financial year to March 2022 had more than halved from the year before, from £224m to £92m, due to lower user activity after an “unsustainably strong” increase in spread-betting and online stock trading during the pandemic. CMC has previously said it may split its business into a traditional stockbroking platform and a riskier leveraged trading service. Shares in the company are down 40% over the last year. ©The Telegraph 2022 moneyweek.com 24 June 2022 MoneyWeek

28 3URƓOH The man who changed crypto Maths prodigy Vitalik Buterin became fascinated by bitcoin as a teenager. Now 28, he is worshipped as a near deity by crypto-enthusiasts. Jane Lewis reports Vitalik Buterin’s remarkable Weekly – earning “five bitcoins looks make him an easy a pop” (then around $4), later target for online hecklers: he’s co-founding his own magazine been described as everything while studying computer from “Bond villain” to “alien science. By the time he dropped crackhead”. But at gatherings out of college, he had gained of the faithful, the inventor of quite a following. In late 2013, cryptocurrency ethereum is he wrote a paper proposing worshipped as a near deity. Ethereum – and subsequently At a big convention in Denver in rallied eight enthusiasts to help March, lines stretched round the him build it. block for days in anticipation of an audience, says Time. The Cryptopians As the crowds pushed inside, The story of this extraordinary “a wiry man with elfin features” “fellowship”, who “slummed was seen “sprinting out of the together” in a house in Zug, venue, past astonished selfie Switzerland to plot the course of takers and venture capitalists”. ©Shutterstock Ethereum, was later written up Some gave chase on foot and on by Laura Shin in her book, The scooters. Buterin outran them Cryptopians. There was tension all, “disappearing into the privacy from the outset between those of his hotel lobby, alone”. “Buterin is scathing about those who view who wanted to run the project as crypto as a wealth-making opportunity” a commercial venture and those, Welcoming the bear like Buterin, who were more That, of course, was before the crypto “now rivals Visa in terms of the money it “mission-driven”. Ultimately the group winter set in in earnest. In May, when moves” and its native currency, ether, is the split, says Cointelegraph. But they stayed the price of ether had fallen 55% from second-biggest behind bitcoin. together long enough to launch Ethereum at its peak, Buterin tweeted that he was no Buterin, who was born in Russia of a bitcoin conference in Miami in 2014, later longer a billionaire, notes Bloomberg. mixed Russo-Ukrainian heritage and grew holding an initial coin offering (ICO) of the It’s safe to say that his personal wealth up in Canada, is scathing about those ether token to raise cash. has taken another substantial hit during who view crypto primarily as a wealth- Buterin was singled out by tech June’s carnage. Still, no one can take away making opportunity. He reserves particular entrepreneur Peter Thiel for a grant. One his achievement. At 28, Buterin has a claim contempt for people who rode the boom can see why the latter took a shine to him to be “the most influential man in crypto”, and flaunted it as investment prowess. That – both are “visionaries” driven by ideas says Time. His genius move nine years means he can view the bust with a degree of sociopolitical experimentation. Buterin ago was to plot a way of leveraging the of equanimity. “The people who are deep sees Ethereum as a possible launchpad blockchain technology underlying bitcoin into crypto, and especially building things… for fairer voting systems and universal “for all sorts of uses beyond currency”. By welcome a bear market,” he has said. basic income. In another nod to Thiel, he’s throwing open the Ethereum blockchain The son of two computer scientists, drawn to “life extension” technologies, to all comers, he came to preside over “a Buterin was born just outside Moscow predicting there’s a decent chance that trillion-dollar ecosystem”, in which games in 1994 and grew up steeped in tech and someone born today will live to be 3,000. and overhyped crazes such as NFTs jostle maths. It was his father, Dmitry, who The question of why anyone would want with more practical applications built by introduced the then teenager to bitcoin in to doesn’t even occur to him –his eyes are banks and entrepreneurs. The platform 2011. He began writing articles for Bitcoin clearly still fixed on the long road ahead. The Sun King of investment banking Michel David-Weill, who died a force in a changing integrating the firm’s life to ignore you”. For the past ©Getty Images last week aged 89, financial world”. independently run offices in two decades, David-Weill helped headed investment Known as the New York, Paris and London. lead private-equity firm Eurazeo, bank Lazard for “Sun King” for his The result was a revitalised firm, which he helped found. nearly three “monarchical made leaner and more decades from 1977. ascendance and grip centralised while increasing David-Weill was also a He was often on power”, the heir profits. His efforts to keep the benefactor of the arts, whose described as to the Lazard firm private were ultimately gifts of money and art work ruthless, says banking dynasty frustrated, however, by Bruce helped transform the Louvre The Telegraph. “revelled in old Wasserstein, a Wall Street and the Metropolitan Museum “Colleagues who won fashioned autocracy” bigwig he brought in who then of Art, says ArtNews. With his his trust knew him proceeded to oust him in 2005, wife, Hélène, he appeared on differently,” however – as a man and required partners in the pushing him into retirement the ArtNews top 200 collectors who liked to talk about art and bank he ran to “plead on bended with a $1.6bn payout for his list each year between 1991 and philosophy, and enjoyed good knee” for the pay package they shareholding. His feelings about 2014. “I think it’s important to food, wine, cigars, and female thought they deserved, says this were “contradictory”, he have art in the world,” he once company, but who always put Laurence Arnold on Bloomberg. later told Portfolio magazine – said. “I am somebody who is the family firm he headed first. He made his mark early. Upon “satisfaction because the firm is not terribly impressed by He worked far harder than he taking the reins in 1977, he alive and doing pretty well, and people. The only thing which is needed to, said one colleague, demoted seven partners, raided regret because it is always hard really exceptional about to “ensure that Lazard remained Lehman Brothers for new talent, to see a place you devoted your humans is art. Apart from that, and took steps towards we are animals.” 24 June 2022 moneyweek.com

Travel 29 Five stays for food-lovers From Caribbean cuisine with a French twist to a tour of a chocolate factory. Jasper Spires reports French fare with Caribbean flair The scenic splendour of Saint Martin, in the Caribbean, is impossible to ignore: “a lush landscape of green rippling skyward out of turquoise sea and beige beaches lining idyllic lagoons”, says Brad Japhe for Travel and Leisure. This year, the French side of the island, which it shares with Dutch Sint Maarten, is showcasing its flair for haute cuisine. In fact, 2022 has been dubbed “The Year of Gastronomy” in Saint Martin. Quite possibly the culinary capital of the Caribbean, French Saint Martin boasts numerous delightful restaurants with ocean views and Le Pressoir, in particular, stands out. “The menu is studded with fresh caviar, rich creams, and shaved truffles. Much of it sits atop locally sourced seafood, presented with flair (sauces are poured tableside out of conch-shell decanters).” Foodie travellers should stay at La Samanna, where a deluxe ocean view room costs $968. See belmond.com ©Alamy La Samanna is a delight for foodies ©La Samanna; Belmond Tour a Swiss chocolate factory Mayan culture one bite at a time The family-owned Aeschbach, in the Swiss- On arriving at Etéreo, Auberge Resorts Collection, on the Mayan German city of Steinhausen, is a working Riviera in Mexico, “you are greeted – quite literally – by the spirit chocolate factory full of delight and of Mayan tradition”, says Jessie Heyman for Vogue Travel. “A man cocoa-based wonder. It’s also an idyllic dressed in white linen dramatically blew a conch shell as I exited family retreat, says Nina Caplan in The my airport transfer… He then offered me a freshly Times. Open to the public, there can be no squeezed juice and asked if I wanted to receive better place to sample the simple joys of an ancient blessing. I said yes to both.” A chocolate and confectionary production. sumptuous retreat serving traditional Mayan “By wandering around the playground cuisine amid modern luxury, Etéreo is a gem upstairs you get to peek on to the factory for foodies. While the spa is a showcase for ancient Mayan techniques for relaxation, floor below while munching on oodles of there can be no better way to get to grips freebies and admiring detailed sculptures created with the culture than through the resort’s in premium chocolate, including a coin large enough to dining options, which offer everything serve as a backdrop for a group photo.” Activities are offered for all from shrimp tostadas to kampachi crudo the family and groups are treated with the opportunity to decorate “for those who’d rather commune with the their own supersized chocolate bar – a dream for younger visitors. Mayan past through tacos than crystals”. Nearby, the Hotel Löwen am See sits comfortably beside the scenic From $960 a night, aubergeresorts.com Lake Zug. Rooms cost from £195, loewen-zug.ch A unique take on Greek cuisine Farm-to-table dining in Tuscany Lusardi, have created an almost-too- good-to-be-true country estate within The boutique Kensho Ornos hotel on the Greek Borgo Pignano is a heavenly slice of 750 acres of organic farmland island of Mykonos is “sun-drenched, secluded and Tuscany, bursting with fresh food and (olive groves, vineyards, fields and thoroughly luxurious”, and a great place to eat, says breathtaking views. “The billionaire woods), where butterflies swarm on Elle Turner in Glamour. “Nestled in the hills above owner and charming GM, Luciano sprawling lavender and the soundtrack the beautiful Ornos Bay, it is a calming retreat. is birdsong”, says Condé Nast With stone-clad floors and walls, tonal white and Traveller. beige interiors, and natural pale wood accents, it’s a harmonious mix of traditional Greek architecture The very best of farm-to-table and contemporary minimalism. It’s modern and dining, “all produce is from the land cool, yet friendly and relaxed.” The island also has itself: free-range pigs, hens and bees a “legendary social scene”, with cobbled streets and provide all you see on your plate, there five-star restaurants. On top of this, the hotel offers is an on-site bakery (using flour they its own take on local cuisine. The food is a “next- mill) and kitchen garden overflowing level fusion of traditional Greek cuisine such with herbs and vegetables”. The food as feta salads and shrimp saganaki, with itself is equally lovely. “Villa Pignano whips up epic tasting menus fusing contemporary all sorts of unexpected combinations trends and – there’s ravioli with blue cheese and modern white chocolate, and a surprisingly techniques”. successful lamb with lavender and Rooms almonds.” Rooms start from £381, from £244, borgopignano.com kenshomy konos.com 24 June 2022 ©Alamy ©Borgo Pigano

30 Property This week: houses with tennis courts – from a converted 16th-century farmhouse in Dartmouth with an A Worden House, Dartmouth, Devon. A Chilton, Neen Savage, Cleobury converted, 16th-century farmhouse with an Mortimer, Kidderminster, Worcestershire. AstroTurf tennis court and a swimming pool An upgraded 15th-century property with a in the garden. It has an open-plan kitchen with Georgian faÇade set in landscaped gardens bifold doors leading onto a terrace and an that include a grass tennis court. It has period indoor swimming pool and steam room. fireplaces and wood floors. 7 beds, 3 baths, 3 6 beds, 6 baths, 2-bed cottage, barns, receps, kitchen, 2-bed coach house, 8.17 acres. 6.35 acres. £4.5m Savills 01548-800462. £1.9m Strutt & Parker 01584-873711. Old Hundred House, moneyweek.com Tamarton, Badminton, Gloucestershire. A restored Georgian house with earlier origins in grounds that include a modern surfaced tennis court in the walled garden. It has beamed ceilings, period fireplaces and a kitchen with double doors leading onto an orangery. 5 beds, 5 baths, 3 receps, 2-bed guest wing, 1-bed coach house, 2-bed stable flat, stable block, 23 acres. £3.75m Hamptons 01225-220216. 24 June 2022

Property 31 AstroTurf tennis court, to a Georgian house in Badminton with a tennis court in the walled garden Heatherbrae, Middleton-in-Teeside, Barnard Castle, County Durham. A substantial country house set in an elevated position with landscaped gardens that include a tennis court to the north of property, a stone terrace and two hot tubs. It has large reception rooms with high ceilings and open fireplaces and a sitting room with French doors leading onto the gardens. 7 beds, 5 baths, recep, games room, dining kitchen, 3-bed annexe, outbuildings, 2.3 acres. £1.5m. Finest Properties 01434-622234. Ivinghoe Manor, Ivinghoe, Buckinghamshire. A Grade II-listed, 17th-century house set in gardens that include a grass tennis court. It has open fireplaces and exposed wall and ceiling timbers. 5 beds, 2 baths, 3 receps, breakfast kitchen, 1.25 acres. £1.5m Nash Partnership 01442-820420. Old Greendene Cottage, Green Dene, East Horsley, Leatherhead, Surrey. An extended, Grade II-listed house set in gardens leading onto woodland with a large terrace and a tennis court. It has open fireplaces, exposed brickwork and a triple-aspect breakfast kitchen with state-of-the-art appliances and sliding doors leading onto a terrace. 4 beds, 3 baths, 3 receps, garage with gym and 1-bed flat above, 1.9 acres. £2.695m Knight Frank 01932-591602. Barnham Court, Barnham, Mill House, Missenden, Bognor Regis, West Sussex. A Amersham. A 17th-century renovated, 17th-century, Grade I-listed former mill house with the River building with an impressive Great Misbourne running through Room, two recently renovated 17th- the middle of the property, century orangeries and a tennis court which has a glass platform from and swimming pool in the grounds. which to view the old watermill It has beamed ceilings, panelling, workings. The landscaped period fireplaces and an Anglo-Dutch gardens include an enclosed parterre garden. 5 beds, 5 baths, tennis court and Victorian- breakfast kitchen, 4 receps, cottage, style greenhouse. The house 6.2 acres. £4.5m Savills 01798-345996. retains its original oak beams moneyweek.com and has a solid oak staircase. 7 beds, 5 baths, 3 receps, garden room, orangery, 2-bed annexe, 2.6 acres. £3.5m+ Fine & Country 01494-623266. 24 June 2022

32 Cars A plug-in hybrid to rule the road The new Jeep Grand Cherokee 4Xe comes into its own in all-electric mode, says Jasper Spires “The Jeep Grand Cherokee is an all-electric mode… the SUV acted more like “The SUV acted more uncomplicated car in an increasingly an accomplished athlete, lithe and sure-footed, like an accomplished complicated world – a haven for those humming to the tune of confidence”. athlete… humming to looking to escape the norm in robust, unfussy the tune of confidence” surroundings. But like time and tide, the The interior is best enjoyed with the full onward march of tech and regulation waits for menagerie of custom additions. These can be no-car,” says Adam Binnie in Car magazine. pricey, but “there are a few must-have options, “We arrive at the inevitable” – a Grand starting with the Summit Reserve Group”, says Cherokee with an electrified four-cylinder John Voelcker on Motor1.com. This upgrade drivetrain that outperforms the V8 engine. package includes a touchscreen display for the front passenger, a 19-speaker McIntosh audio The Jeep Grand Cherokee 4Xe plug-in system, active noise control for a quieter drive, hybrid is the off-road of the future, equipped and Palermo leather seats. But regardless of the with enough power to climb the most extreme spec you choose, the 4Xe version is “probably terrain, while rising to the modern standard the pick of the Grand Cherokee range for most of suiting a “pair of wellies just as well as a people”, says Top Gear. Its combination of tuxedo”. It’s a high-tech vehicle, and more trademark flexibility and ability on- and off- powerful than many of Jeep’s models from the road, together with its useful frugality, makes past, “all while under pressure to emit less CO2 it “a compelling choice”. Price: £62,000 from than the fizz from a bottle of Bollinger”. late 2022, jeep.co.uk A solid cruiser Drawing inspiration from the powertrain of Jeep’s Wran ler, the Cherokee 4Xe pushes out a grand 375 of horsepower, churning from 0-60mph in six seconds and an estimated top speed of around 151mph, says Paul Eisenstein for Gear Junkie. It’s a solid cruiser, and “the system is smooth and quick on the highway”, while delivering an electric- only range of 25 miles per charge. You’ll want to keep it in electric mode. As nostalgic as the roaring engine is, electric is “where it shines”, says Kristin Shaw for The Drive. Rock crawling was a breeze in hybrid mode, but “it was considerably smoother and less jarring in Wine of the week: Bandol’s engaging little brother 2020 Cadet de la Bégude, Matthew Jukes its little brother, Cadet, the other tasted. The bravura performance Provence, France Wine columnist day, and it was ripe, forward, is rich, liquorice-tinged, £20.00, vinoteca.co.uk; I have never written up a £19.50, Moreton Wine Bandol on this page, which is engaging and downright pomegranate-smooched and Merchants, 01608-651800   surprising given how much I love this historical style of delicious. The classic Bandol breathtakingly dry to boot. wine. The 2019 Bégude, Bandol Rouge (£42, hallmarks of sanguineous I have followed Bégude closely mustandlees.co.uk) is a delicious incarnation of minerality, wild fauna and for over 20 years, and yet I have this lusty, brooding and malevolent style of red decadent black fruit are all here, never tasted a trio of wines with wine and yet, in common with many wines from this but they are delivered this much magnetic appeal. Be region, it needs a couple of years to soften before you gracefully and without any sure to deploy Cadet for main pull the cork. So, imagine my surprise when I tasted interference from unwanted course BBQ duties after a couple tannin. To all intents and of rosés have been sunk. I can purposes, it is a summery assure you that you will be style of Bandol – a vinous presiding over the poshest oxymoron if ever there al fresco set-up in the land if you was one. This portfolio follow my advice. doesn’t stop here, because 2020 Bégude, Bandol Rosé Matthew Jukes is a winner of the (£29, mustandlees.co.uk) International Wine & Spirit is as refined and regal as Competition’s Communicator of any Bandol rosé I have the Year (MatthewJukes.com). 24 June 2022 moneyweek.com

Crossword 33 Bridge by Andrew Robson Tim Moorey’s Quick Crossword No.1109 Things get interesting A bottle of Taylor’s Late Bottled Vintage will be given to the sender of the first correct solution opened on 4July Holding AJ65 in hand facing K432 in dummy, the percentage play is 2022. By post: send to MoneyWeek’s Quick Crossword to cross to the King then lead back to the Knave. No.1109, 121-141 Westbourne Terrace, Paddington, London W2 6JR. By email: scan or photograph completed solution and coupon and email to: crossword@ Holding AJ82 facing K432, things can get interesting. You lead to moneyweek.com with MoneyWeek Crossword No.1109 in the subject field. the King and observe the nine fall on your left. You lead back to your Ace-Knave-eight (right-hand opponent playing low) and reflect that 123456 your left-hand opponent probably does not hold the ten (if he held ten-nine, he might have played the ten – the Principle of Restricted 78 Choice). No longer is it correct to finesse the jack. Either the deep finesse of the eight (playing for the nine to be singleton), or 9 rising with the ace (playing for Queen-nine doubleton) are now superior plays. Dealer West East-West vulnerable 10 11 12 z10764 ????? 13 y K632 ???? x QJ74 ???? 14 15 16 17 w4 ???? zQJ532 N ???? K9 18 y Q10 x– WE y 954 w KQ10962 ???? S ???? A93 19 20 The bidding South w J8753 2x 5x z A8 ???? pass y AJ87 x K108652 wA 21 22 West North East All clues are mildly cryptic DOWN 1w pass 2w 1 Best-loved large area of shanty 2z 3x 5w ACROSS pass pass double 7 Some playing American town (6) pass pass 2 Handled soft material (4) football perhaps (4) 3 Russian once in dire straits (7) West led the King of Clubs and declarer won and led a trump. 8 Forecaster keeping at a 4 Inferior cricketer dropping tons is East won and returned the King of Spades. Winning the Ace, declarer drew trumps, then, needing to pick up Hearts without loss, distance is a sailor (8) a teacher (5) crossed to the King of Hearts, and observed West’s ten. 9 Baby’s first spot and another 5 Right action ordered for screening Using the Principle of Restricted Choice, declarer placed the nine on his bum? It’s the potty entry on Apple Mac (8) with East, so that when he led a low card back (East following low), designer! (5, 8) 6 Spanish titles not entirely well- he rejected the finesse of the Knave (the right play only when West 10 Man penning article is feeling has the anti-PRC ten-nine doubleton). West’s ten can hardly be uneasiness (7) chosen or sensible (6) singleton (it would give West 12 black cards), so declarer played West 12 Manage to keep second lot of 11 Means state on top a long time (8) to have Queen-ten doubleton and rose with the Ace. Correct! West’s trees (5) 13 Comparatively inexperienced Queen fell and the game was made. 14 Arrive on time in first jet airliner (5) father’s taken over Surrey town (7) For Andrew’s four daily BridgeCasts, go to andrewrobsonbridgecast.com 16 Harry Potter’s complaint (7) 15 Boycott the first one in a series (6) 19 What Stanley did for a 17 Excessively ingratiating philosopher (13) 21 Disposal business you wouldn’t small host (6) want to be high up in! (8) 18 Letter from Greece one left 22 American’s second round? (4) in bottle (5) 20 Church on a quiet cove (4) Sudoku 1109 Name Address 12 To complete MoneyWeek’s email  Sudoku, fill in the squares 3 67 id so that every row 7 mn and each of the Solutions to 1107 64 squares contain all Across 1 Satanic anagram 5 Let-up let up 8 One plus twelve 9 Titan hidden 8 3 the digits from one to nine. 11 Diocese ceos anagram inside die 12 Sad reversal 13 Taser hidden The answer to last week’s 14 Lit initial letters 15 Observe Observer less r 17 Sahib hidden 19 Two plus eleven is an anagram of one plus twelve! 21 Rocky two definitions 3 1 2 7 puzzle is below. 22 Redress re-dress. 89 3 452761839 Down 1 Short 2 Treated 3 Nil 4 Cash dispenser 5 Law courts 6 Tilde 82 2 713859246 7 Present 10 Naturally 12 Scooter 14 Le Havre 16 Stoic 18 Bonus 20 Led. 5 78 689432751 361287594 The winner of MoneyWeek Quick Crossword No.1107 is: 49 Alan Goodbrand of Chalfont St Giles MoneyWeek is available to visually 924513678 Tim Moorey is author of How To Crack Cryptic Crosswords, published impaired readers from RNIB National 578946312 by HarperCollins, and runs crossword workshops (timmoorey.com) Talking Newspapers and Magazines 895674123 in audio or etext. 237198465 Taylor’s is one of the oldest of the founding port houses, family run and entirely For details, call 0303-123 9999, 146325987 dedicated to the production of the highest quality ports. Late Bottled Vintage or visit RNIB.org.uk. is matured in wood for four to six years. The ageing process produces a high-quality, immediately drinkable wine with a long, elegant finish; ruby red moneyweek.com in colour, with a hint of morello cherries on the nose, and cassis, plums and blackberry to taste. Try it with goat’s cheese or a chocolate fondant. 24 June 2022

34 Last word This messiah is a false prophet Editor-in-chief: Merryn Somerset Webb We never believed the hype. Those who did are nursing huge losses Executive editor: John Stepek Editor: Andrew Van Sickle Bill Bonner Acting editor: Cris Sholto Heaton Columnist Markets editor: Alexander Rankine Comment editor: Stuart Watkins Even in a world chock-a-block Politics editor: Emily Hohler with messiahs, MicroStrategy’s Wealth editor: Chris Carter CEO Michael Saylor deserves Shares editor: Matthew Partridge special mention. Most Pied Pipers Funds editor: Nicole García Mérida only take the children once. He’s Digital editor: Ben Judge done it twice. Digital shares editor: Our first encounter with Saylor Rupert Hargreaves came more than 20 years ago when Web writer: Saloni Sardana we were relatively new to the trade Contributors: Bill Bonner, of making fun of people in print. Ruth Jackson-Kirby, Max King, We needed an easy target. And Jane Lewis, Matthew Lynn, there he was. MicroStrategy had David Prosser, Jasper Spires, developed software that helped ©Getty Images David Stevenson, Simon Wilson businesses figure out who was buying their products. “We’re Michael Saylor has suffered his second multi-billion-dollar loss Art director: Kevin Cook-Fielding Picture editor: Natasha Langan purging ignorance from the earnings for the previous two coin of over $30,000. Now, with Chief sub-editor: Joanna Gibbs planet,” Saylor said, grandly. He years. Instead of a profit of $12.6m bitcoin at $19,000, its holdings are was on a “crusade for intelligence”. in 1999, it would now shoulder a worth about $2.9bn – less than Account director: Abdul Ahad He wanted to make information loss of $34m to $40m. Revenue, half of the roughly $6bn they were Group advertising director: “free… running like water.” too, was downsized. That day, worth just two months ago. Caroline Fenner (020-3890 3841) Shares were offered to the public Saylor made history. Never before Saylor is looking at staggering Chief customer officer: on 11 June 1998 at $12. Nearly had anyone lost so much money losses. And so is anybody who Abi Spooner two years later, in such a short bought MicroStrategy stock. The Publisher: Denise Elliott the stock hit “Never before had anyone time. In six firm did a 10:1 stock consolidation Chief financial officer $333. Saylor lost so much money in hours, his net in 2002, so that $333 peak is really Penny Ladkin-Brand made another worth dropped $3,330 in today’s terms. It briefly Non-executive chairman $1.3bn that day such a short time” by $6.1bn. got up to almost $1,000 again last Richard Huntingford Chief executive after $4.5bn in the preceding week year. Now it’s back to $160. Zillah Byng-Thorne – bringing his personal net worth A second chance to fail Saylor insists that this is a to $13.6bn. MicroStrategy, which All that was nearly 20 years ago. buying opportunity for bitcoin Subscriptions had sales of only $200m, and a Since then, Saylor has made a He’s HODLing (holding on reported profit for 1999 of $12.6m, comeback. That is, he has found for dear life) and believes that Email: subscriptions@ was worth more than DuPont. a second chance to make a fool of “cyberspace” is a refuge where true moneyweek.co.uk While we were mocking, the rest himself and lose billions more. In “freedom and sovereignty” can be Web: MoneyWeek.com/ of the financial press was praising. August 2020, MicroStrategy began found. We suspect that for millions contact-us Hardly a single report failed to find buying bitcoin. Initially it used it’s more like a hollow lure, a multi- Tel: 0330-333-9688 something flattering to say. Then, its cash, then borrowed money to coloured, fake bug dragged across Post: MoneyWeek on 20 March 2000, under pressure buy more, until it became the third a lake. It leads not to freedom, nor subscriptions, Rockwood from the regulator, MicroStrategy largest holder of bitcoin in the sovereignty, but to flopping around House, Perrymount Road, admitted it had overstated its world. It had an average cost per in a fisherman’s basket. Haywards Heath, West Sussex, RH16 3DH The bottom line Subscription costs: £139.99 a year (credit card/cheque/ €8m The amount raised the parliamentary from September 2013, in $4.8m How much direct debit), £159.99 in spending watchdog. terms of pay and Europe and ROW £179.99. so far by Israeli art historian promotions. Google Ripley’s Believe It or David Landau to restore $13bn How much did not admit to any Not museum chain MoneyWeek magazine is an three 16th-century wrongdoing. paid at auction for an unregulated product. synagogues in Venice’s Americans are predicted iconic figure-hugging Information in the magazine old Jewish ghetto. to spend on mezcal and £203,160 The Jean Louis gown in is for general information The site once housed up to tequila – Mexican spirits only and is not intended to 5,000 Jewish people, made from agave plants – value of the 2016, that had be relied upon by individual offering relative safety in 2023, supplanting the contract been worn by readers in making (or not from persecution across popularity of vodka sales handed by Marilyn making) specific investment Europe throughout the ($12.5bn) and US whiskey the Bank of Monroe in decisions. Appropriate middle ages. ($12.3bn), according to England to 1962 to sing independent advice should research by market London- Happy be obtained before making £4bn The cost of analysts IWSR. based consultancy Birthday to any such decision. The Storytellers Future Publishing Limited personal protection $118m How much to “define the John F. Kennedy. and its staff do not accept equipment (PPE) bought essence of the It is said to have liability for any loss suffered by the government Google has agreed to pay organisation” suffered by readers as a result of any during the Covid-19 to settle a lawsuit claiming (essentially a significant damage investment decision. pandemic that was found the tech giant had rebranding exercise), after the chain to be “unusable”. discriminated against says The Sunday lent it to reality star Editorial queries: Our staff “Significant volumes” are 15,500 female employees, Telegraph. Kim Kardashian are unable to respond to to be burned, according to who worked in California (pictured) for the personal investment Met Gala in May. queries as MoneyWeek is not authorised to provide individual investment advice. MoneyWeek, 121-141 Westbourne Terrace, London, W2 6JR [email protected] MoneyWeek is published by Future Publishing Limited. 121-141 Westbourne Terrace, London, W2 6JR © Future Publishing Limited 2022. All rights reserved. MoneyWeek and Money Morning are registered trademarks. Neither the whole of this publication nor any part of it may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the written permission of the publishers. © MoneyWeek 2022 IISSN: 1472-2062 ©Getty Images 24 June 2022 moneyweek.com



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