Small Cap Value Report (Weds 24 June 2020) - QE, LOOP, WINE, WYN, TRB

24th Jun '20 by Paul Scott

132 comments 9755 reads

Good morning, it's Paul here with the SCVR for Weds.

Estimated timings - I'll probably say 1pm, but will actually be finished by about 4pm. That's what usually happens.
Edit at 10:40 - there's already tons written, so my conscience is clear! I'll make a note here when I'm finished, not sure of timings.
Edit at 13:05 - today's report is finished. Broadly in line with the official finish time too!

Copying content onto advfn - please could subscribers refrain from copying content from here onto advfn (or other bulletin boards)? The SCVRs were free for about 6 years, but are now behind the paywall. It's not fair to other subscribers, who are paying to have access to these articles. Many thanks.

Quantitative Easing

I should emphasise that I'm not an expert in economics. I studied economics at O-Level, A-level, and as part of my Degree, so have a reasonable general understanding only.

The press have recently been publishing often alarmist articles about the explosion in UK Govt debt. This is unfortunate, because the large annual deficits incurred after the 2008-9 financial crisis had been gradually reduced, until almost eliminated. Then covid struck, and we're not just back to square one, we're now in a far worse position of over-spending than in the last crisis.

The unprecedented measures taken to keep the economy afloat during lockdown have been vastly costly - e.g. this article from the OBR (Office for Budget Responsibility) shows how Govt borrowing was £103.7bn in just two months. Tax revenues for April-May are down 43% vs LY, and central Govt spending is up 48%. Mind-boggling figures. Borrowing was only £16.7bn in the comparative 2 months LY (last year);

National debt has now risen to just over 100% of GDP, the first time it has got that high since the 1960s. Although that is based on a reduced GDP figure, adjusted to take into account the sharp economic slowdown due to lockdown. Hence the % should fall somewhat as the economy recovers.

The Govt has to borrow from bond markets (by issuing Gilts) in order to finance this deficit. Conventional economics suggests that borrowing on this scale would trigger very high interest rates (a premium return required by investors, in order to take on the risk of lending money to a profligate Govt). However,…

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JohnEustace

24th Jun '20

De nada.

SJRen

I think it's worthwhile watching some of the (youtube) presentations given by Warren Mosler, Stephanie Kelton and others on the MMT topic.

Paul Scott

Hi Martin,

Fair points. Although bear in mind that DLAR's solvency risk pretty much disappears with the big equity fundraising underway (underwritten, IIRC).

The pension deficit & recovery payments need us to take about a third off the valuation of the company, in my opinion, but shouldn't present any solvency problems - it's just a long-term drain on cashflows.

I'm not taking a big position in DLAR, it's currently small, with a view to possibly taking it to medium-sized but I like to mull things over for a while & discuss, so useful to have your input, thanks!

Regards, Paul.

Dave_17

Not properly combining Majestic and Naked Wines was a missed opportunity to me and don't understand why it didn't happen. Online Majestic wines sold to existing customer base and in store Naked Wine sales to a separate customer base = win/win. Stinks of management infighting rather than looking after the business. I'm not a fan of the Naked Wine proposition as it's effectively a subscription model, wine batches are too small and generally too difficult to be bothered with. I was even thinking of starting a small competitor that removed those barriers but Brexit got in the way and I put the idea on hold until future is clearer.

Tonysaparito

Investoree.I totally agree with you...I bought my first property to rent in 1987 and whilst I do have a portfolio I have had every tenant from hell , who Shelter fund in their legal action against me..Over the years I have lost count of the £1000,s of unpaid rent I have lost..Local Councils are run by idiots who have no appreciation of the value private landlords provide..Once I sat on a landlords steering committee for a local council but most landlords gave up..councils pay lip service to landlords..

If I could sell my portfolio I would and instead invest the net proceeds in the stock market .

The tax system introduced by that idiot George Osborne proves even chancellors simply only know one thing...kill the goose that lays the golden egg....I would love to show my tenants how small my profit is for the quality of accommodation I provide...If anyone here is thinking of buying a BTL...they need to first consult a shrink and get their head examined .

Vsihv

In short, important to use the word "real economy". As it stands all the printing stays in the financial system. BoE/ECB buys govt bonds for cash from Banks / Pension funds. That cash is used to purchase a 100 year bond from Austrian govt for 1%. Inflation in financial assets

Austrian govt may choose to put it back in the real economy with very generous benefits (which will result in real world inflation if the increase in benefits is not matched by an increase in production).

I think the idea at the outset was that QE would result in that cash being made available by banks to lend to a small business to build a new factory and make more stuff (productivity/growth improved), but if there is too much money chasing too few factories, factories will go up in price (inflation).

Today, they probably want banks to give it away by writing off customer credit cards/debts. Without any changes to the previous credit limit, customer will spend it on stuff and prices will go up.

However, the winner was option number 3: Bank lends it to someone who can put down 35% on a house (someone earning zero on that 35%), customers will chase houses, and houses will go up in price.

Capital requirements mean it is very expensive for banks to take lending risk - on the other hand, lending to people who don't really need the money promises a small return, but it is OK when you lever up that lending.

Also, this is not a criticism of Banks or regulators for that matter - not like I would have done any better.

MiserableJacktPotato

So, who do you buy goods from? If nothing is being made in the UK you'll have to buy from abroad. So far so good. So you try to turn your pounds into Euros, but who wants pounds? No one wants to buy pounds because there's nothing to buy with them. So you have nothing you can buy in your domestic market and you can't convert your money into anything with purchasing power.

Remember "money" is only worth something because people believe it is worth something. It is merely a medium of exchange, it is not a store of wealth.

Phillip Arghebant

Good afternoon. I saw your comments on Scapa referring to the goodwill impairment. If you go to the most recent presentation document on the Scapa website, you will see that on page 24 the company provides a detailed explanation of the impairment and how this figure was arrived at following consultation with the auditor.
kind regards

Phillip

Morris1602

It's a tad unsettling to see government debt just disappear on such a grand scale. QE is not the cost free solution it seems. We are effectively devaluing the currency, thereby impacting the cost of trade and hence raising the cost of living. If all countries adopted the same tactic then perhaps no one would notice !

john652

Hi

Some b2l In the whole portfolio is not a bad idea if we have a fair amount of inflation, which given all the free money is quite possible. So over the last 15 years it went from a capital gains play, to income to now maybe inflation protection, and its price is fairly stable, compared to stocks, and cant go to zero, im fairly ok with b2l as a % of a portfolio.

steve gray

Yes, I see it the same way with £wine

OsullivanB

Thank you, Vsihv, I was thinking about the money printed to cover the Covid intervention schems such as furlough. That surely goes into the real economy.

I guess it does, but at the moment, that is filling a hole, so total stock is not as much larger. Also I expect a lot is going to pay mortgage/rents, credit card bills, car finance loans - ie ending up back in the system. Banks typically didn't lend it back out without a government guarantee / withdrew higher risk mortgages.

i am cynical at the best of times but I am pretty sure a lot of this fiscal support was to prevent creditor losses.

Furloughed have lost income and I expect many are towards the lower or negative end of the wealth spectrum.

That said, the price of goods relative to resources usually goes down (deflation being the natural state). It just so happens that the price of money relative to other resources goes down faster.

Inflation, I think rather than being a monetary phenomenon is a made up phenomenon to support government largesse (inflate the debt away), which works while debt is rising less than GDP.

Hyperinflation though I expect requires political and monetary turbulence. Who's feeling lucky with our politicians?

Tommy H

It says up to an hour on the new site, I managed the other day but then when realized as second blooper and the ticker still saying 43 minutes left to edit it would not let me edit...

Raised on the green button at the bottom right!

iggs58

Thanks, Paul, for your offer of help to those who've got into difficulties - nor remotely my situation, thank God, but a very generous offer to those who might have.

Re Naked Wines, I think I’m in agreement. The corporate toing and froing has been wasteful for poor Majestic, a business I’ve appreciated as a customer. Like you, however, I tried Naked a few years ago, because I liked the aim of supporting small vineyards by buying their hopefully good-value outputs. Sadly, I found the wine over-priced and too often plain ordinary, so I stopped using them. Of course, like many wine traders, they’ve had a good C19 crisis. But I wouldn’t bank on it continuing.

CamRaid

25th Jun '20

Amazon are excluded for operating in the Wine space. This is because they own Whole Foods.

Laughton

Still works for me on the "old" site

We're not really devaluing the currency though, because everyone else is doing QE too! Also, devaluing the currency a little is actually very helpful, as it creates slightly higher inflation, which scrubs off even more of the debt, as nominal GDP rises, making the national debt a smaller % of GDP. It also means that gilt yields of nearly zero, are an amazing deal for the taxpayer - buyers of gilts are effectively subsidising all of us, with our grateful thanks.

I know this subject makes some people angry, because it shouldn't be possible, and it should end in ruin. But it's worked amazingly well for 12 years now.

My feeling is that, providing the UK keeps roughly in the same ballpark as the USA & EU, in terms of use of QE, then we should be OK. Clearly QE can be used very effectively in times of crisis, but new QE then needs to be stopped once the economy is back on its feet.

Now that Govts have realised they can print money fairly freely, and at almost zero cost, with no adverse consequences (to date), then I can't see the genie going back into the bottle.

Hi Housemartin2,

I agree that getting cheap manufactured goods from China has kept a lid on inflation in the West. If there's more on-shoring, and increased tariffs, then that could trigger higher inflation, as you say.

Set against that is the power of the internet. It's so easy for consumers to shop around for the best prices, for so many of the things we need. For example, last year I paid £750 to insure my XJS - I was so excited about buying it, and found that several classic car companies wouldn't insure it at all, so I bit the hand off an insurer that was recommended to me.

Anyway on renewal this year, I tried out those lovely fluffy meerkats (they look just like my two dogs!) and they got me a comprehensive policy for just £250, a huge saving!

My point being that the internet is squeezing inflation down all the time, as consumers shop around, and retail margins go down, for physical and online retailers.

The vast amount of QE doesn't seem to have fed through much to the normal economy. I suppose if the BoE is buying gilts from investors, they are just going to use that cash to buy some other investment. Hence it doesn't get through to higher consumer demand. Meanwhile the Govt's over-spending keeps the real economy jogging along at a reasonable pace (once it recovers from the lockdown anyway).

All fascinating stuff, and there's no economic textbook for any of this. In fact, I think studying economics has actually been a hindrance to me (and others here), because we're fighting against the current reality, saying it shouldn't be possible. But it is possible, for now anyway.

facepalm

29th Jun '20

its called easing for a reason.. ergo a small amount.

Small Cap Value Report (Weds 24 June 2020) - QE, LOOP, WINE, WYN, TRB

Quantitative Easing

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Paul Scott

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