Edward Chancellor:

why I voted for

Brexit P18

24 June 2016 Issue 799

The horse breeder who The ex-minister,

built the UKs hottest the nuns and the
baby brand P30
$9m P34

Britains best-selling financial magazine

Heading for
disaster?
How central
banks lost
control Page 24

HOW TO MAKE IT, HOW TO KEEP IT, HOW TO SPEND IT

771472 206092

2 5

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>

3.95

MONEYWEEK

24 June 2016 Issue 799 Britains best-selling financial magazine

From the editor-in-chief

As I write I dont know
what the result of the
UK referendum on
Europe is. You will
have to wait until
next week to hear
MoneyWeeks views
on the actual result
(though well be giving
our immediate take on the results in a
podcast on the website on Friday youll
be able to listen to that or download it at
MoneyWeek.com). However, one thing
I can say already is that, however we
voted, the actual result will be much the
same either way in the short-to-medium
term. If weve voted in, well be trying
to reform the EU from the inside (not
easy at all) and if we have voted out by a
small margin well be getting to work on
reforming at least our deal with it from
the outside (easier, but still not that easy).
Either way, well be demanding change
as will the electorates of many other EU
countries (see page 20). And regardless
from which side we are fudging around
with the EU, all our other problems
will still be with us. We will still have a
stunner of a public-debt problem (total
government debt is knocking around
1.2trn and still rising see page 5),
Editor-in-chief: Merryn Somerset Webb
Executive editor: John Stepek
Managing editor: Cris Sholto Heaton
Deputy managing editor: Alex Williams
Markets editor: Andrew Van Sickle
Senior writer: Matthew Partridge
Contributors: Chris Carter,
Mischa Frankl-Duval, Emily Hohler, Jane Lewis,
Sarah Moore, Natalie Stanton
Group art director: Kevin Cook-Fielding
Picture editor: Natasha Langan
Designer: Sam McMurchie
Production editor: Stuart Watkins
Chief sub-editor: Joanna Gibbs
Website editor: Ben Judge

Cover illustration: Adam Stower. Photos: Getty Images; iStockphotos

Advertising sales director: Simon Cuff

(020-7633 3720) Commercial director: Vinod
Gorasia (020-7633 3664) Publisher: Dan Denning
Managing director: Helen Hunsperger
Founder and editorial director:
Jolyon Connell Group publisher: Bill Bonner
Editorial queries: Our staff are unable to
respond to personal investment queries as
MoneyWeek is not authorised to provide individual
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com Phone: 020-7633 3651 Subscriptions &
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8th Floor, Friars Bridge Court, 41-45 Blackfriars
Road, London SE1 8NZ. MONEYWEEK and MONEY
MORNING are registered trade marks owned by
MoneyWeek Limited. MoneyWeek 2016
ISSN: 1472-2062 ABC, Jan Jun 2015: 47,986

fuelled by our unsustainable system of

tax credits. We will still have a horrible
current-account deficit (see our website
for Bernard Connollys take on this).
Our big companies will still be
overcommitted (in terms of dividend
promises to shareholders), underinvested
(capital expenditure has been falling
dramatically) and dependent on the
kind of corporate cronyism we all say
we disapprove of to keep their shows on
the road. Our equity market will still be
overpriced and horribly vulnerable given
companies weak profits. And of course

How we deal with the fallout of

the EU referendum could make
a huge difference to our
long-term future
we will still be at the mercy of the same
grand monetary experiment that has
been slowly confusing our economies for
the last 20-odd years.

their buyers care more about preserving

most of their money than they do about
a guarantee that they will lose a little
of it. Thats just too nuts to last for very
long. So on page 24, Dan Denning looks
at what might happen next. The answer,
in a nutshell, is nothing good. Were
at a stage where its hard to see how we
avoid a future monetary crisis. The lower
rates go, the more extreme central banks
efforts to avoid or escape deflation
will become. The more desperate their
policies, the greater the risk that well see
destructive levels of inflation.
The EU referendum has been important
and it will continue to be important:
how we deal with its fallout could make
a huge difference to our long-term
future. However, it is also a symptom
of a deeper economic malaise across the
West. And as Dan says in our cover story,
in the end that makes it something of a
sideshow to the main event: the endgame
of modern monetary madness.

In this weeks cover story we take a break

from talking about the EU to look at how
we got to where we are now to a point
where more than half of all government
bonds globally trade on a negative yield:

Good week for:

Microsoft: The software giant has routed more than 8bn in

UK sales through Ireland since 2011, saving 100m a year in
corporation tax, as part of an advance pricing agreement with
HM Revenue & Customs, according to The Sunday Times.
London Business School: The business school has been able to
end its five-year fundraising drive two years early, after raising
125m. Jim Ratcliffe, founder of chemicals giant Ineos, who
graduated from the school with an MBA in 1980, donated 25m.

Bad week for:

Avocado lovers: Rising demand for avocados in

New Zealand has pushed the price per fruit
to NZ$6 (3), sparking a crime wave since
January, 40 large-scale thefts have been
recorded. An extra 96,000 households bought
avocados in 2015, according to New Zealand
Avocados, a growers association.
First-time buyers: Home buyers are being priced out of the
governments Help to Buy individual savings account (Isa) in
many areas of England. The average price of a starter-home
exceeds the schemes maximum purchase price of 250,000
(450,000 in London), the BBC has found.

Merryn Somerset Webb

email: editor@moneyweek.com

Winner of the week

Mlardalen University, in
Sweden, has been ordered
by a Swedish court to
refund US student Connie
Askenback 170,182 kronor
(14,000) in tuition fees,
plus interest, after the twoyear finance course she
had been on was slammed
as almost worthless
by the countrys higher
educational authority,
UK. The court in
Vstmanland agreed
that the degree
that Askenback
had studied for
from 2011 to 2013 had
no practical value. It
really feels good. It is an
important vindication, said
Askenback after the verdict.

The point of philosophy is to start with something so simple as not to seem worth stating, and
to end with something so paradoxical that no one will believe it.
Philosopher Bertrand Russell (1872-1970)

MoneyWeek magazine is an unregulated product. Information in the magazine is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment
decisions. Appropriate independent advice should be obtained before making any such decision. MoneyWeek Ltd and its staff do not accept liability for any loss suffered by readers as a result of any investment decision.

moneyweek.com

24 June 2016

MONEYWEEK

news

Washington DC

Clintons war chest trumps Trumps: Figures released by

Americas Federal Election Commission show that Hillary
Clinton has an overwhelming financial advantage as she
begins her presidential campaign against the Republican
nominee Donald Trump. She had $42.5m of cash on hand at
the beginning of June, compared with Trumps $1.3m.
In May, Trump raised only $3.1m, while Clinton raked in
$26m. Last month also saw Trump lend his own campaign

another $2.5m; he has now put $46m of his own money

towards his presidential bid. Republicans, rattled by a turbulent
few weeks in which he fired his campaign manager and racially
abused a judge, will be feeling even more nervous now.

Palo Alto, California

Tesla bids for SolarCity: Elon Musk, the

founder and CEO of Tesla, the electric car
maker, has announced a $2.7bn all-stock bid
for SolarCity of which he is the chairman
and a 22% stakeholder. Teslas shares fell
by 10% on the news. You can see why, said
Lex in the FT. For all Musks insistence that
electric cars and solar panels are a great
match, Tesla shareholders smelled the deal
for what it was: a bail-out between two
Elon Musk companies. Tesla really doesnt
need a solar company, and if it did, it
could have bought a good one. SolarCity is
carrying more than $3bn of debt and it
could come close to breaching its
covenants, according to
Goldman Sachs. Analysts
at Oppenheimer &
Co expect a robust
shareholder fight over
his acquisition.

The way we live now

It apparently suits retailers to treat

men like man-babies whose maturity
stopped developing around the age of
14, says Carol Midgley in The Times.
How else to explain products such as
talking waste-paper bins and Harvey
Nichols new wheeze: a man crche,
or man park, for those who hate
shopping. It conjures up visions of
man-babies in giant nappies being
winded post-temper-tantrum.
In fact its a gimmicky basement with
a bar, a TV, Wi-Fi and a games area.
This is a pointless and patronising
waste of time, as stores have had
suitable places for anti-shoppers for
years. Theyre known as pubs. In any
case, why should couples go shopping
together if one cant stand it?

MONEYWEEK

24 June 2016

Brazils biggest bankruptcy: Oi, Brazils

biggest fixed-line telephone company, filed
for bankruptcy this week, seeking protection
from creditors on $19bn of debt. Its Brazils
biggest bankruptcy on record. The company
had failed to reach a deal on restructuring
its debt after a long series of mergers and
leadership changes. The groups performance
has gradually deteriorated over the past few
years: last year interest costs
were almost double operating
income. Potential white knights
were scared off by expensive
obligations that came with the
business, such as having to
install pay phones throughout
the area it covers. Other
Brazilian companies have also
come under pressure during the
recession of the past two years.
Bankruptcy filings rose by 55%
last year, and were 100% up
year-on-year in May.

Alamy

iStockphotos

Brasilia

London

Chemring craters: Shares in defence group Chemring plunged by 35% last Tuesday
after it reported a threefold increase in underlying first-half losses to 4m, and
warned that full-year results would be slightly below expectations. Revenues grew
by 11%, however, and the order book edged up to almost 600m. The fall looks like
an overreaction, said Martin Waller in The Times. Some health and safety issues
have restricted output in Australia, but they have now been sorted out. A delay on a
contract to make ammunition for a Middle Eastern client has pushed some expected
profits into the second half. Throw in the long-term prospects of the US defence
sector, and the outlook for Chemring is encouraging.
moneyweek.com

news
London

Public finances disappoint: Only

two months into the fiscal year, the
public borrowing figures suggest that
Chancellor George Osborne could
struggle to meet his 2016/2017 target.
Public-sector net borrowing came in
at 9.7bn in May, while Aprils figure
was revised up by 1bn. That means
borrowing in the first two months
is 0.8% higher than last year, while

the March forecast for 2016/2017 as

a whole foretold a fall of 23%. A key
problem was slow growth in central
government tax receipts, which are rising
by just 3% year-on-year, half the pace
the government has pencilled in for the
year as a whole. An economic recovery
later this year implies a more rapid
improvement in the public finances, so
the forecasts could yet be vindicated.

Karlsruhe, Germany

High Court agrees to OMTs:

Germanys constitutional court has ruled
in favour of the European Central Banks
(ECB) Outright Monetary Transactions
Programme (OMTs). This fire-fighting
tool, which envisaged unlimited
purchases of peripheral countries bonds
in order to lower their borrowing costs
and prevent bankruptcy, was never
used. But the unveiling of OMTs is
credited with bringing the eurozone
back from the brink in 2012. German
academics, politicians and businessmen
had complained that OMTs violated
German federal law because
they amounted to illegal
monetary financing
of southern European
governments. OMTs
have been superseded by
quantitative easing (QE), whereby
the ECB buys government and
corporate bonds across the whole euro
bloc. A negative judgement would have
called into question the Bundesbanks
role in OMTs, and thus their overall
efficacy, in case they are ever needed.

Beijing

Press Association

Walmart goes online in China:

The worlds biggest retailer is taking
a 5% stake worth $1.5bn in Chinas
e-commerce giant JD.com. The deal will
also see JD.com take over
Walmarts Chinese online
grocery store, Yihaodian.
Walmart is seeking a fresh
start in China after its
bricks-and-mortar outlets
have struggled amid a
slowing local economy and
a gradual shift to online
shopping, said Bloomberg.
coms Shannon Pettypiece.
In 2015, Chinese retail sales
grew 10% year-on-year; online sales
increased more than 30% and now
comprise 13% of the total, or $580bn.
JD.com will now have greater scale and
access to online groceries, allowing it to
compete better with e-commerce market
leader Alibaba.

Rome

PM suffers setback: Italys Five Star

Movement won most of the mayoral
elections that took place in Italy last
weekend, gaining control of Rome
and Turin. The success of the antiglobalisation, eurosceptic, populist party
has dealt a blow to the centre-left Prime
Minister Matteo Renzi, who has been
trying to push through economic reforms
to bolster growth and ultimately reduce
the countrys huge debt pile, worth 132%
of GDP. Renzi is planning a referendum
on constitutional reform in October.
He proposes to reduce the size of the
Senate to facilitate law-making and make
it harder to bring down governments.
He says he will resign if he loses, which
now looks possible. Five Star is also
pushing for a referendum on Italys
membership of the euro.
moneyweek.com

Ankara, Turkey

Turkey muzzles press: Turkish authorities have arrested three campaigners for press
freedom and charged them with spreading terrorist propaganda. The government has
already seized or shut down several newspapers and broadcasters in the past year, so
this weeks news has confirmed fears that the regime of President Tayyip Erdogan
(pictured) is becoming ever more authoritarian. Erdogan has also accused the
central bank of hampering growth by keeping
interest rates high, which may help explain why it
cut interest rates for the fourth consecutive time
this week. A backdrop of falling inflation and a
more stable Turkish lira provided macroeconomic
cover for the move, however. The economy grew
by 4.5% year-on-year in the first quarter of 2016,
but a current-account deficit of around 4.2% of GDP
remains a worry.
24 June 2016

MONEYWEEK

markets

Japan:
the only
way is up
by Andrew Van Sickle

The main problem has been the

strength of the yen, a result of a flight to
safety during the global growth scare.
It rose by almost 7% against the dollar
between January and March, the biggest
quarterly jump since 2009. This bodes ill
for the Japanese markets heavyweight
exporters. More broadly, three years of
Abenomics, the stimulus programme
named after Prime Minister Shinzo Abe,
has yet to shake Japan out of its long
deflationary slump. Despite quantitative
easing (QE) and negative interest rates,
growth has been lacklustre and inflation
is still just below zero, a far cry from the
Bank of Japans 2% target.
The gloom is overdone, however. For one
thing, the Bank of Japan is expected to
step up the pace of its QE programme
and to push interest rates even further

Alamy

This year has not been kind to Japanese

equities. The Nikkei 225 index has fallen
by around 15% so far, while the broader
Topix index has lost almost a fifth,
its worst start since 1995. Foreign
investors have been heading for the exits.
They have sold around $93bn of
Japanese stocks in the past year, as the
FTs Leo Lewis points out. And they
may not be back in a hurry. Last months
Bank of America Merrill Lynch survey
of global fund managers shows that they
are more bearish on Japan than at any
stage since late 2012.
Japan is doing everything in its power to cheer investors
below zero. Monetary easing tends
to weaken the currency, while the
extra liquidity finds its way into asset
markets. The Bank of Japan could also
contemplate even more radical policies.
Artificial stimulus aside, however, the
economy is hardly a write-off. The
labour market continues to tighten,
even if it hasnt yet produced the lasting
rise in wages everyone is hoping for.
Unemployment is a mere 3.2% and could
well fall further. Meanwhile, for all the
fuss over negative interest rates crimping
bank profits and lending, Japans banks
havent been this willing to extend
credit since the early 1990s, as Capital
Economics points out.

Perhaps most encouragingly there has

been a corporate governance revolution
in Japan. This entails companies being
more accountable to shareholders, and
crucially returning spare capital to
them if it cant be put to good use, rather
than hoarding it. As a result of this shift,
and thanks also to negative interest rates,
share buybacks by Japanese firms have
surged to record levels.
Meanwhile, the central bank and the
Government Pension Investment Fund
are also reliable buyers of the equity
market. Throw in attractive valuations,
says BMO Global Asset Managements
Gary Potter, and theres hardly any way
to go but up.

The ten most-hated shares on the FTSE

This is a list of the ten most despised
shares on the London market, judged by
the percentage of stock being shorted.
Short sellers hope to profit from falling
stock prices, so it can be useful to see
what they are betting against. The
list is also a good indicator of stocks
with the potential to bounce strongly
on unexpected good news short
squeezes occur when short sellers are
forced out of their positions, which can
send share prices surging. Supermarkets
remain under attack by discounters, with
Ocado also in the spotlight owing to key
client Wm Morrisons joint venture with
Amazon. Confidence in Just Eat appears
to have been shaken by the CEO selling
shares and the threat of competition
from UberEats.

MoneyWeek

24 June 2016

Company

What it does

% of stock
being shorted

% on 27 May

Ocado Group

Online supermarkets

23.13%

20.94%

Carillion

Construction/outsourcing

18.34%

19.12%

Wm Morrison

Supermarkets

15.05%

14.67%

Mitie Group

Facilities management

9.32%

9.06%

J Sainsbury

Supermarkets

9.31%

8.53%

Ladbrokes

Gambling

8.63%

7.14%

Tullow Oil

Oil and gas explorer

7.65%

7.41%

Just Eat

Online food delivery

7.02%

NEW ENTRY

Aggreko

Power supply

6.94%

7.46%

6.56%

6.22%

Hansteen Holdings Real estate investment trust

moneyweek.com

markets

Surprise exit for

Indias bank chief

Impressive potential
in Nigeria

Bowing to the inevitable: the naira lost its dollar peg

Nobody knows why, says

Economist.com. Perhaps
Prime Minister Narendra
Modi is placating the
chauvinist arm of his
party peeved by [Rajans]
tendency to denounce
intolerance. His attempt
to clean up bank balance
sheets may have irritated
Indias crony capitalists,
while his refusal to
lower interest rates
despite political pressure
tamed inflation.

Now the government has tacitly acknowledged

that a weaker currency would encourage
domestic production more than import bans
can, and will ultimately hurt consumers less.
Foreign investors should now return, not least
because the economys long-term potential
is impressive, says William Railton in
City AM. Two years ago it overtook
South Africa as the continents largest
economy, and while oil is its main export, it
has been trying to diversify. Services comprise
50% of output and the growing middle class
bodes well for consumption. Infrastructure
and corruption remain key weaknesses; the
World Bank estimates that $400bn in oil
revenues has been stolen since independence in
1960. Devaluation is no miracle cure, but it is
certainly a step in the right direction.

Investors should keep a

close eye on his successor.
The next governor
must resist political
interference, says Una
Galani on BreakingViews.
com especially now
that the RBI is setting
up a new monetary
policy committee, three
of whose six members
will be appointed by the
government. It will also
be crucial to complete
the banking reforms
Rajan started. The new
governor will struggle to
match Rajans authority.
Meanwhile, Indias
credibility will suffer.

M&A will bounce back after Brexit poll

The uncertainty over the UKs future relationship with Europe has severely dented British merger
and acquisition (M&A) activity. The volume of deals involving UK targets has declined by almost
70% this year compared with the same period in 2015, say James Fontanella-Khan and Arash
Massoudi in the Financial Times. The $57.6bn spent on deals so far this year account for just
4% of global M&A, a record-low British share. Global M&A is only 20% down on last year.
Nobody wants to do deals when they dont know whether their target will be in or out of the
worlds largest single market, according to one banker. Things could now improve either way,
however: if we stay, relieved foreign firms should return, while a fall in sterling after Brexit could
make our assets enticingly cheap.

Viewpoint

Chart of the week: China snacks on peanuts

Catching up is hard to do [progress]

has slowed considerably... Since 2008,
the proportion of [developing] countries
catching up with the US has fallen back
to 1990s levels. Between 2003 and 2008,
emerging markets on average were
growing at a rate that would have caught
them up to 2015 levels of US GDP per
head in 40 years; by 2013-2015, that
timescale had stretched to more than
60 years The reasons for the decline in
the great convergence are complex and
varied. But the general prescription to
conduct policymaking on a predictable
basis that will reassure consumers,
business leaders and investors holds
across the emerging-market world.

The Chinese are just hoovering

everything up, according
to one trader. Demand for
peanuts has flared up in the
Middle Kingdom as increasingly
health-conscious consumers
like to snack on them and chefs
turn to peanut oil for cooking.
China, once a key exporter, is
turning into a major importer,
says Emiko Terazono in the
Financial Times: imports are up
50% in a decade. Chinese prices
are now higher than in the rest
of the world, so it has been
buying up supplies from big
exporters. The surge in demand
has coincided with poor
harvests in India and Argentina,
the top exporter.

Editorial, Financial Times

moneyweek.com

Peanut prices ($ per tonne)

Argentina

2,200

China

2,000
1,800
1,600
1,400
1,200
1,000

2014

2015

2016

24 June 2016

Source: FT/Mintec

Beset by dwindling oil revenue, the government

feared a rise in inflation and hence interest
rates if it let the currency fall. That would
temper growth and hurt companies with
foreign-currency debt. But the side-effects of
keeping the currency artificially high proved
worse. Foreign-exchange reserves, spent
defending the peg, have fallen to a decade low.

Indian markets wobbled

early this week when
Raghuram Rajan, the
governor of the central
bank, the Reserve Bank of
India (RBI), unexpectedly
announced that he would
step down in September
when his three-year
term expires.

iStockphotos

Im surprised it lasted as long as it did,

John Ashbourne of Capital Economics told
The Wall Street Journal. The Nigerian
government bowed to the inevitable last week
and scrapped its currency peg of 197 naira to
the US dollar, which had been in place for over
a year. The naira, which had already reached
a rate of 370 to the greenback on the black
market, promptly slid by around 30%.

The government tried to preserve them by

banning imports, but this has created scarcity,
fuelling inflation already around 15%
and hampering industrial production and
development. It has also forced people and
firms into the black market. To make
matters worse, foreign investors hold back
in these situations, assuming that the peg
will have to be ditched at some stage, thus
depriving the country of valuable cash.

MoneyWeek

investment strategy
8

XX

investment strategy

Should you short shares?

by Matthew Partridge
Investing usually involves buying
something you believe will go up in
value. However, you can also take
advantage of a fall in the price of a share,
or any other asset, by shorting it.
This means selling a share that you
borrow but dont own, with the intention
of buying later on at a lower price and
returning it to the owner. If you get
it right, you make a profit from the
difference in the price at which you sell
and the price at which you buy.
Obviously, when you sell a share, you
have to hand it over to the new buyer
almost immediately. So when you short
a share, youll need to borrow it from
another shareholder until the point at
which you decide to close the short by
buying the share. Youll normally be
charged interest on this loan, based
on the value of the shares, at the price
charged when they loaned them to you.
How much you need to pay depends on
how difficult it is to borrow the shares.
This means that the longer you keep a
short going, the more it costs you so
shorts are typically relatively short-term
trades rather than long-term positions.
Shorting is risky. If you buy shares then
your gains are theoretically unlimited,
and your losses are fixed at the value of
your initial investment. With shorting
its the other way around since you could
lose far more than the initial value of
your position if it increases enough in
value. If you short a share at 1 and it
rises to 50, youve lost 49. However,
the most you could make is 1 (assuming
the value of the share goes to zero).
Consequently, short-sellers will normally
use a stop-loss that will automatically
close their position once a share reaches
a certain level. The downside of a stoploss is that you could be forced to exit

A short squeeze can be painful

the position (or be stopped out) by a
temporary surge in the price. In some
cases, a large number of short-sellers can
be forced to close their positions, causing
a further increase in the price as they are
forced to buy back the shares. This is
called a short squeeze, and can end up
being very expensive for the short-sellers
who dont get out in time.
The potential for a short squeeze means
that some investors look for shares that
are heavily shorted and buy them. They
argue that this increases the chances of a
short squeeze. Contrarian investors also
argue that high levels of shorting are a
sign of excessive pessimism. However,
some research has come to the opposite
conclusion. A 2007 study by Eric Kelley
and a 2008 study from Ferhat Akbas,
both from Texas A&M, found that
shares that are heavily shorted tend
subsequently to lag the market in the
near term, suggesting that its best to
avoid betting on them rebounding.

Guru watch
Jim Grant, the
editor of Grants
Interest Rate
Observer, is a
long-standing
critic of the US
Federal Reserve
and central
banks in general.
He thinks that
those expecting
the Fed to hike interest rates this
year will be disappointed, he told
CNBC earlier this year. The Federal
Reserve has missed its market and
the next move is more likely to be
a cut. Economic data suggest that
the manufacturing sector is either
in recession or flirting with it. For
example, the inventories of auto
companies are building, suggesting
that they have increasing trouble
selling the stock of cars that they have.
However, Grant thinks that even more
loosening would not be enough to
revitalise the economy. The persistent
radical monetary experiment of
ultra-low interest rates has led to the
Federal Reserve being put in charge
of market manipulation. This has
been great at boosting real assets,
but not the real economy. Although
things are clearly better than they
were in 2008, America has been going
through the slowest recovery in living
memory, with young people unable
to break into the world of work.
Overall, the horse of speculation is
ahead of the cart of enterprise.
Grant is bearish on asset prices,
likening the stock and bond markets
to a little kitten stuck at the top of a
tree, with Janet Yellen left looking
on like a helpless firefighter saying,
how did you get up there little fur
ball? The combination of sky-high
asset markets and softening activity
suggests the world could be entering
the down portion of the credit cycle.
The outlook is very unclear, butwe
will know more where we are in two
years time.

A put option gives the holder the right (but not the obligation) to
sell an asset, such as a share, for an agreed price on or before a
certain date. When you buy a put option, you pay a fee (known
as a premium) to the seller of the option (who is sometimes
referred to as the writer of the option). You can use put
options to bet on the price of an asset falling while limiting your
potential loss to the initial premium that you pay.

In addition to betting on a share or other asset falling in price,

options can also be used to protect (or hedge) against the
risk of that happening. For example, you might buy a put option
on the FTSE 100 because you want to hedge your investments
against the risk of a bear market. If shares fall sharply, your put
options should show a profit, helping to offset the fall in the
value of your other investments.

Lets imagine that Acme Widgets is trading at 100p per share

and a put option to sell at 90p costs 5p. You buy a block of 1,000
options at a cost of 50 (5p 1,000). If the shares fall to 70p, you
would make a profit of 150 ((90p 70p 5p) 1,000). However,
if the shares go up to 120p, say you let the option expire.
In that case, you lose your premium of 50, but nothing more.

The price of an option is determined by a number of factors,

including the volatility of the price of the underlying asset
(options on more volatile assets will be more expensive). So
option prices tend to rise during market turmoil. How long
an option has to run before it expires is also important, with
options that expire further in the future being more expensive.

MoneyWeek

24 June 2016

moneyweek.com

iStockphotos; Press Association

I wish I knew what a put option was but Im too embarrassed to ask

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shares
City Diary

Goldman Sachs is being

sued for $1.2bn by Libyas
sovereign wealth fund,
which has accused the bank
of warping the judgement
of its investment officials by
plying them with women.
A former banker at
Goldman Sachs allegedly
employed two prostitutes in
Dubai, including Michella,
25, from Russia, in a bid to
clinch lucrative trades with
the country under former
dictator Colonel Gaddafi,
according to claims
presented to the High Court
in London. Goldman Sachs
disputes the allegations and
the case is ongoing.
The Libyan fund, which
says that it made huge
losses on nine trades
executed between January
and April 2008 while
Goldman made $270m
in profits, is accusing the
bank of exploiting the
financial naivety of its
investment officials and
it is presenting as much
embarrassing evidence as it
can in support of that claim.

Any dealmaker could

rape Libyas sovereign
wealth fund, said one
internal memo sent by a
Goldman Sachs staffer.
You just delivered a pitch
on structured leveraged
loans to someone who lives
in the middle of the desert
with his camels.
Youssef Kabbaj, the former
executive at Goldman, was
meanwhile instructed by
his bosses at the bank to
teach, train and dine
Libyas junior officials,
according to one email.
Youssefs text messages
to Michella have also been
presented as evidence.
Hi darling, do you remeber
[sic] me? Youssef from
London. Just arrived in
Dubai. After a protracted
back and forth on price,
he said she had a deal.
Michella, who earned an
estimated 500,000 a year,
has since moved to Italy,
according to The Sun.

MoneyWeek

24 June 2016

Why Muslims love Vimto

Nichols, the Merseyside-based maker of purple fizzy drinks,
has an unexpected fan club in the Middle East
There arent that many ways for investors
sitting inside the M25 to make
money out of Ramadan, but
buying shares in Nichols
is definitely one of them.
The Merseyside-based firm
is best known for making
Vimto, a purple fizzy drink,
most popular among teenagers
and grannies in the north of
England. But Vimto also has
an ardent following across the
Middle East, where it is sold in
a double-strength concentrate,
making it an energy-boosting
drink to break the fast during
Islams holy month.
Nichols has played to its following,
using a string of provocative
advertisements on Saudi television to link
Vimto to Ramadan, just as mince pies are
associated with Christmas in the UK. In one
advertisement in 2007, the world is thrown
into panic at the prospect of Vimto running
out. A bottle is snatched from a man on his
deathbed, while a woman has a dream that
her stash of Vimto is missing and attacks her
husband with a cricket bat.
That Vimto should cater to a religious crowd
is not as bizarre as all that, says The Times.
The purple fruity beverage was originally
concocted by John Noel Nichols at his shop in
Timperley, Cheshire, to appeal to the alcohol
abstainers of the temperance movement.
It has been sold in Muslim countries for nearly
a century and had a head start in the Arab
world, which had a boycott on Coca-Cola
until 1991.

All this translates into a boost

for Nichols around June,
when Ramadan usually falls.
The groups sales in Africa
and the Middle East have
more than tripled in the last
ten years to over 20m.
However, it would be
misleading to assume that the
majority of Nichols business
hinges on the Muslim diet.
Revenue in the UK has been
flat for four years, but still
accounts for the majority of
its business, with sales of
85m last year.
The firm, in which the
Nichols family still has a
9% stake, is a financial fortress, says
Richard Beddard in Money Observer. It has
35m in cash and has not carried any debt
for the last decade. But its concentration of
sales in the UK leaves the company heavily
exposed to the so-called fat tax levied on
sugary drinks by Chancellor George Osborne
in March. The companys shares fell more
than 10% on the news, far more than its larger
rivals, such as Pepsi and Coca-Cola, which
earn a fraction of their sales in Britain.
Nichols has bounced back, but is still
marginally cheaper than competitors, on
22 times forward earnings, versus 23 times
for Coca-Cola. Nichols acquisitions of
other soft drinks brands, including Panda,
have however fallen flat. Nichols is a sugary
play on the Middle East, but its discount to
its larger rivals is not yet wide enough to
make it tempting.

Bids & deals: big potential in diamonds

A huge uncut diamond the
size of a cricket ball is set to
be auctioned by Sothebys
in London next week, with
bidding expected to push
through 50m. The massive
diamond, which weighs
1,109-carats, is the biggest
ever to go under the hammer.
It was unearthed in Botswana
last year by a Canadian
mining company, Lucara,
which is backed by Swedish
billionaire Lukas Lundin. A
27-year-old geology graduate,
Tiroyaone Mathaba, plucked
the rock out of Lucaras
processing plant, stopping

it from being crushed. The

only diamond ever mined
that was bigger, which was
found in South Africa in 1905,
was broken apart after being
presented to Edward VII, to be
set into the Crown Jewels.
Commodity prices have
struggled for five years, but
the diamond market has
remained strong. In May,
Christies sold a 15-carat
blue diamond for $58m, the
most expensive diamond
ever auctioned. Lucaras find
is likely to beat the record.
Sothebys has set a pre-sale

estimate of $70m (48m), but

the stone could fetch more
than $85m, according to
Panmure Gordon, making it
an expensive paperweight.
Lucaras shares have rocketed
since the discovery, adding
C$880m ($687m) to its market
cap, while London-based
Firestone Diamonds has also
risen strongly, as the market
wakes up to the potential for
big diamonds at its Letseng
mine in Lesotho, which will
enter production later this
year. Firestone has also been
tipped as a target for Lucara,
which is prowling for deals.

Alamy; iStockphotos

10

moneyweek.com

shares
MoneyWeeks comprehensive guide to the weeks share tips
Three to buy
Conviviality

Investors Chronicle
Shares in the company behind the off-licence chain Bargain Booze have big potential.
After buying up several rivals, including wine distributor Bibendum, Conviviality
could grow into a major alcohol wholesaler, supplying both the on- and off-trade
sectors. The forecast dividend yield looks attractive at 4.3%. 196p
Halma

The Times
Halma, the Buckinghamshire-based technology firm that specialises in
hazard detectors, from fire alarms to pregnancy scanners, has raised its
dividend by at least 5% for 37 years. It is deal-hungry, spending more
than 200m on acquisitions last year, swallowing a US digital firm.
Organic growth on top was 6% last year. The shares are far from cheap
on 25 times earnings, but deserve the premium. 933p
Pets at Home

Shares
Snap up shares in the pet accessory firm, says Shares. Pets at
Home is now also the biggest small-animal veterinary firm in the
UK, offering resilient growth in a fragmented market. It has
raised its dividend pay-out policy and also plans to return
excess cash as special dividends. 235p

Three to sell
Berkeley Group

The Daily Telegraph

Berkeley, the luxury
London flat builder, has
reported record results
and has pledged to return
2m a year to investors
in dividends over the next
five years. But cracks
are appearing. The
property cycle looks like it
has reached its peak
and average prices in
London are now falling.
The forward priceearnings ratio is just eight,
but that assumes a big
jump in earnings. 2,954p

Circassia Pharmaceuticals

The Sunday Times

The allergy-treatment
developer listed on the
stock exchange at a price
of 310p two years ago,
in one of the markets
biggest public floats.
But progress at the
company has been slow
and too much of its value
rides on results due from
trials of its cat-allergy
drug. Disappointment
could herald a major
sell-off in the shares, if not
the biotech sector more
broadly. 270p

Servelec

Investors Chronicle
Dwindling NHS budgets
have delayed orders
at software specialist
Servelec and its shares
have tanked. Orders
anticipated for its
technology division, which
are linked to regulatory
changes in the water
sector, have also failed to
materialise. The number
of acquisitions made by
management only adds to
concerns. Its now time
to bail out of the shares.
227p

And the rest

11

Directors dealings
Simon Silver, a co-founder of upmarket
office developer Derwent London, has
sold 30,000 shares in the company,
pocketing just under 1m. Silver, who
set up the business more than 30 years
ago, retains 213,617 shares, worth
around 7m (0.192% of the company).
Shares in Derwent, which has more
than six million square feet of high-end
office space in central London, have
bounced around this year along with
other companies in the commercial
property sector, as EU referendum
polls have swung from side to side.
Derwents property portfolio in
London is valued at 5bn, leaving
it heavily exposed to the capitals
commercial property market. Some
analysts expect London property to
suffer if the UK votes to leave the EU.

A German view
Infineon Technologies is Europes
biggest semiconductor maker, and
appears to have its fingers in all the
right pies. It already makes half its
sales set to hit 6.5bn this year
in the fast-growing Asian market,
where its Chinese business looks
especially promising. The advent of
electric vehicles is a major opportunity,
notes Wirtschaftswoche, as electric
and hybrid cars contain chips worth
around $700 a car. Beijing aims
to increase the number of electric
vehicles in China by 700,000 this year.
Infineons chips are also required for
the photovoltaic cells that capture
solar energy, and are central to the
emergence of the internet of things,
whereby everyday objects such as cars
and appliances are being automated
and connected.

Vital numbers

Buys

Price at
21 Jun

% change
since 14 Jun

FTSE 100

6,225

5.1%

The UKs biggest franchise letting agency is resilient and yields 6% (Mail) 122p

Nikkei

16,066

1.3%

The shares in this maker of drug delivery devices look cheap (Times) 941p

S&P 500

2,089

0.7%

FirstGroup

The rail and bus firm is on track despite losing two franchises (Inv. Chr.) 114p

Nasdaq

4,844

0.1%

GB Group

The security firms shares are worth holding despite the CEO leaving (Shares) 285p

CAC 40

4,380

6.1%

PureCircle

The market for natural sweeteners is growing strongly (Inv. Chr.) 343p

Dax

10,060

5.7%

Safestore

Occupancy is low at the self-storage firm, giving it room to grow (Times) 350p

$ per

1.13

0.6%

Sierra Rutile

Rutile prices are stabilising and the firms output is ramping up (Inv. Chr.) 22p

per

1.30

3.2%

SQS

Two US acquisitions have bolstered the software firms position (Shares) 442p

$ per

1.47

4.1%

UBM

The exhibitions specialist is paying a juicy special dividend (Times) 560p

Gold ($ per oz)

Wincanton

The logistics provider could be a takeover target (Telegraph) 187p

1,267

-1.4%

Brent crude oil

51

2.5%

Ashtead Group

Shares in the tool-hire firm are cheap and it plans share buybacks (Times) 986p

BCA Marketplace

Europes car auctioneer is generating surplus cash (Investors Chronicle) 177p

Belvoir Lettings
Consort Medical

moneyweek.com

24 June 2016

MONEYWEEK

city view
12

XX

city view

Stop this corporate bullying

Next time you want to thank the person

at the checkout who packed your bags,
or someone who steps out of your way
in the street, check with a lawyer first.
Why? Because US bank Citigroup thinks
it owns the word. Seriously. The bank is
suing phone company AT&T, arguing
that its use of the word thanks in its
AT&T thanks loyalty scheme infringes
Citis own trademarked Citi ThankYou
scheme. The outcome remains to be
seen. With any luck, the judge will give
the whole Citi board ten years in jail
for wasting his or her time. But it is an
illustration of just how aggressive big
companies have become in trying to
claim ownership of everyday words.
Pods have been around for a long time
especially in the vegetable world but
after the success of the iPod, Apple tried
to stop anyone else from using the word.
BP once tried to sue anyone who used the
colour green. Best of all, Hagen-Dazs
tried to act against anyone using a madeup Scandinavian brand, on the grounds
that its own was fake, and that it was
the first firm to come up with the idea of
pretending to be northern European in
order to sell stuff.
This is bonkers. And it is a sign that
intellectual property law is becoming a
barrier to business. The basic argument

Intellectual property law is now being

used as a way to entrench the
dominance of big corporations, and
to keep new ideas out of the market.
Only huge firms can afford the legal
departments and risk the court cases
needed to enforce such restrictions. You
might be tempted to describe it as a
monster growing out of control were it
not for the fact that the Monster Cable
firm in the US is especially vigilant
in enforcing its rights over the word
monster. And we will probably see
much more of this. Brand names, patents
and logos are becoming more and more
important to firms. In an increasingly
competitive global economy, new ideas
dont stay new for long and successful
products are rapidly imitated.
Companies will try to stop that
happening. But that doesnt mean
we should let them. Its a form of
bullying and like any bullying, it
needs to be resisted. Far better if phone
manufacturers are influenced by each
others innovations. The same goes for

Whos getting what

Despite suffering an embarrassing high-profile hack that exposed the personal

data of TalkTalks four million customers, the total pay of boss Dido Harding nearly
tripled last year to 2.8m. Baroness Harding said she would give her 220,000 bonus
to the charity Ambitious About Autism. TalkTalks pre-tax profits fell by 50% in 2015.

David Brown may head the rail franchise rated the least reliable in Britain

Govia Thameslink Railway in London but that hasnt stopped the Go-Ahead chief
executive from pocketing 2.16m last year, up from 1.96m in 2014. Dividends to
shareholders rose by 2m to 37m in the same period.

SABMiller boss Alan Clark saw his total pay fall last year due to the impact of

currency moves on his long-term incentive scheme, which fell in value from 4.4m
in 2015 to 2.4m. However, Clarks fixed pay rose to 1.7m from 1.5m, while his
bonus grew 56% to 1.7m. Clark is also in line for a 55m pay out from the sale of the
brewer to rival Anheuser-Busch InBev.

FirstGroups CEO, Tim OToole, saw his bonus fall to 162,000 from 578,000 last

year, as the transport groups operating profits fell. His total pay fell to 1.24m from
1.65m. The remuneration committee has since rejigged how his bonus is calculated.

MONEYWEEK

24 June 2016

Getty Images

Matthew Lynn

is clear enough. The language belongs to

everyone and, within reason, should be
available to every firm, big or small.
No one invented it, and it is impossible
to see any legitimate argument for
anyone laying claim to any particular
word. Of course, unique brands
should be protected. I cant set up a
grocery store called Tesco, or sell TVs
under the Samsung name, or set up a
coffee bar called Starbucks. But everyday
words shouldnt be controlled by anyone.
If an entrepreneur wants to use a word
for a new business, and is not pretending
to be part of an existing corporation,
then it is unreasonable to prevent them.

Hagen-Dazs: a pioneer in fakery

Intellectual property law has

gone bonkers and is now a
barrier to business
car makers, restaurants, or any other sort
of business. The more entrepreneurs we
have trying out new things, the better off
we will all be, even if the people they are
challenging dont like the competition.
Thickets of rules are often used to keep
small companies down. Many come
from the government. But bullying
big corporations, with aggressive legal
teams, can do exactly the same thing,
and deserve even less sympathy because
they should know better than anyone
that the freedom to compete is what
makes capitalism work.

Nice work if you can get it

At a time when the armed forces face
a pay freeze, the Ministry of Defence
(MOD) hired headhunters to scout
out applicants for the new role of
Director General, Nuclear, The Sun
on Sunday reports. The successful
applicant will earn up to 400,000 a
year for overseeing the paperwork
for renewing Britains Trident nuclear
deterrent, comprising a 300,000 basic
salary (more than double the prime
ministers), plus a potential 30% bonus.
Perks include a chauffeur-driven car,
first-class travel and top hotels for
official business. Six applicants have
been shortlisted. This role involves
running a specialised, multi-billionpound programme on a salary which
compares with the standard market
rate, an MOD spokesperson said.

moneyweek.com

TO KNOW LOCAL
COMPANIES,
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Fidelity China Special

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14.3%

18.2%

32.3%

-0.8%

Fidelity China Special

Situations PLC
Share Price

-18.2%

8.9%

13.7%

27.7%

-5.3%

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MSCI China

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To nd out more, go to delity.co.uk/china

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Source of performance: Fidelity and Morningstar as at 29 February 2016 on a bid-to-bid basis

with income reinvested net of UK basic rate tax. Copyright 2016 Morningstar Inc. All Rights
Reserved. The comparative index of the investment trust is MSCI China.

The latest annual reports and factsheets can be obtained from our website at www.delity.co.uk/its or by calling 0800 41 41 10. The full prospectus may also be obtained from Fidelity. Issued by Financial
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UKM0316/9616/CSO7809/0616

Job No: 51798-18

Publication: Moneyweek (UK)

Size: 297x210

Ins Date: 18.03.16

Proof no: 1

Tel: 020 7291 4700


14

briefing XX
briefing

Cleaning up our toxic air

The air we breathe is killing us and costing us a fortune too. But if you think
electric cars are the answer, think again, says Simon Wilson
Is there a problem?

coal-driven power stations (the global

proportion is 41%, according to the
World Coal Association), it is to some
extent true that, as the green venture
capitalist Vinod Khosla has noted,
electric cars are coal-powered. Also,
while electric cars emit less carbon
dioxide, the production of their batteries
creates vast quantities of the greenhouse
gas, meaning that over an electric cars
lifetime the advantage is marginal. Thats
before you get into particulate matter.

Air pollution in Europe costs more than

1.5trn a year roughly equivalent to a
tenth of the continents GDP, according
to a 2015 study by the World Health
Organisation. The study, covering EU
and non-EU states, is the first attempt
of its kind to calculate the monetary
costs of polluted air. These costs come in
the form of 600,000 premature deaths
a year, as well as non-fatal illnesses.
Overall, the study found that pollution
is a factor in the deaths or illnesses
of at least one in four Europeans;
that air pollution is the single biggest
environmental health risk; and that in
2012 outdoor pollution, such as that
from diesel car exhausts, accounted for
482,000 premature deaths Europe-wide.

Whats that?

It depends on the type of pollution,

but overall, road transport is the
biggest single source of air pollution
in cities. According to the World Atlas
of Atmospheric Pollution (from 2011),
road transport accounts for 88% of
the carbon monoxide in Londons
atmosphere, 62% of particulate matter,
and 53% of nitrogen dioxides (NOx).
London, like Milan and Stockholm,
has tried to tackle this via congestion
charging and a low-emissions zone,
and from 2020 an ultra-low-emissions
zone will be created, meaning all
pre-2007 motorcycles, pre-2006 petrol
cars and pre-2015 diesel cars will pay
an extra 12.50 on top of the existing
11.50 a day rate. In Paris, meanwhile,
new rules that come into effect next
Friday (1 July) will ban pre-1997 cars
and pre-1999 motorbikes from the
streets on weekdays, in effect removing
about 5% of polluting elements linked
to cancers, heart disease and respiratory
problems such as asthma.

Has diesel made it worse?

The UK has had a stop-start

attitude to diesel. When he was
chancellor in the early 2000s,
Gordon Brown overhauled
vehicle excise duty so that
diesel cars, which are about
20% more efficient and emit
less carbon dioxide (but up to
twice as much NOx), cost less
in tax than those with petrol
engines. Brown also cut duty
on low-sulphur diesel and
reduced company-car taxes.
This all boosted diesel sales,
encouraging 11 million cars on
the roads but also boosted

MoneyWeek

24 June 2016

Rex Features

How much of this is due to transport?

Making them run on coal wont help

emissions of NOx and particulates.
According to data cited by The Sunday
Times, at least 7,000 deaths a year can be
linked to diesel pollution. Many expect
the VW emissions scandals (and others)
to push drivers away from the fuel.

Are electric cars the answer?

At the point of use, in terms of NOx

and hydrocarbon emissions, all-electric
cars (such as the Nissan Leaf and the
forthcoming Tesla Model 3) and plug-in
hybrid vehicles (like the Toyota Prius)
are obviously less polluting. But, sceptics
say, you cant just consider the car
you have to consider how its electricity
is produced. Given that a significant
proportion of electricity is produced by

Particulate (or PM) pollution is made

up of tiny particles created by brake and
tyre wear, and the road surface itself,
and is produced by all cars. But because
eco-vehicles are heavier (typically 24%
heavier, due to the batteries and other
extra parts), their non-exhaust emissions
are far larger. Research published in the
journal Atmospheric Environment found
that eco-friendly cars produce far more
non-exhaust PM pollution than the
diesels and petrol engines they are slated
to replace. Thats significant because,
says the studys co-author Peter Achten,
non-exhaust particulate emissions
account for more pollution than exhaust
emissions do, in all modern cars they
surveyed. Moreover, these kinds of
emissions are more toxic than emissions
from modern engines so they are likely to
be key factors in the extra heart attacks,
strokes and asthma attacks seen when air
pollution levels surge.

What does the future hold?

The car industry has to make ecofriendly cars much lighter. The lithiumion battery is the dominant electric-car
technology, but its so chunky the car
base needs to be built around it. Its also
flammable, adding to the complexity of
integrating them into the design. A key
challenge for policymakers is
to focus not just on engines
but on pollution overall. Either
way, most analysts expect sales
of hybrids, in the first instance,
Alternatives to the existing lithium-ion model are jostling
to rocket once the typical
on the starting line, says Peter Campbell in the Financial
electric-only range exceeds 50
Times. Lithium-air batteries are considerably behind
miles and prices fall to those
lithium-ion batteries in development, but have a higher
of a similarly specified diesel
energy density and dont catch fire. Solid state batteries
or petrol model. In ten years
(the holy grail of battery technology) can be much
time its entirely possible that
smaller than liquid-based batteries, making them much
easier to integrate into existing car designs. Dyson is
breakthroughs in technology
reportedly working on its own electric car on this basis.
(see box) will mean that after
Toyota, meanwhile, a pioneer of hybrids, has already
a century of cars driven by
launched its first hydrogen-powered car (the Mirai). Rather
pollution-heavy combustion
than using a battery, hydrogen mixes with oxygen to create
engines well be driving
a fuel cell that runs the electric motor.
very different machines and
breathing more easily.

How to build a better battery

moneyweek.com

best of the financial columnists

Perverse
incentives at
Microsoft
Jonathan Ford
Financial Times

It makes
sense to live
with Mom
Laura Carstensen
Time

Our colossal
food-waste
mountain
Joanna Blythman
The Observer

The NHS
cant go on
like this
Alice Thomson
The Times

MoneyWeek

24 June 2016

Why has Satya Nadella, CEO of Microsoft, just splashed out more
than $26bn on LinkedIn, an unprofitable professional networking site?
asks Jonathan Ford. There may be some synergies, but its hard to see
how it can provide additional revenue, nor how it can fail to detract
from the need to nurture Microsofts still hugely profitable software
franchise. If he knows all this, there must be a powerful opposing
force at stake. And there is, in the form of lavish equity incentives.
Nadella may end up with a stake of between 1.3 million and four
million shares over the next five years, but he really hits the jackpot
(stock worth more than $200m) if Microsofts shareholder returns
exceed certain stockmarket-based targets between now and 2021.
Such incentives strongly motivate him to find some short-term
investment story, such as high-profile acquisitions, that will encourage
investors to put a high price on Microsofts shares. Investors need to
think harder about the messages that incentive packages send.
Millennials are the first generation who will reach the age of 90 in
large numbers, says Laura Carstensen. The Sightlines Project at the
Stanford Centre on Longevity found that millennials smoke less,
exercise more, have stronger friendships and more college degrees.
On the downside, they are also poorer, with higher debts, few
savings, and worse job and housing prospects. Nonetheless, though
disparaged, millenial lifestyle habits could be the right approach.
Many millennials still live with their parents and are less likely to be
married or have children than previous generations at their age. Living
with parents for longer helps with repaying debt and saving for houses
and retirement. Buying a house at 35 and paying off the mortgage at
65, with 30 years ahead of you, is a bright prospect. But it takes
planning, which isnt in our nature. By 2050, an estimated eight
million people will be in their 90s. But US policymakers have barely
thought about what that might mean. (See also page 39.)
Last year Tesco produced a 59,400-tonne food-waste mountain, says
Joanna Blythman. Thats 119 million meals, up 4% on last year.
Supermarkets themselves are the problem. They started colonising the
grocery market in the 1980s and are retail dinosaurs locked into a
system thats riddled with problems. Our bins only started to fill up
when, instead of shopping a little every day, we started doing a weekly
shop. Now we hazard a guess as to what we are likely to eat and chuck
food out, usually needlessly, once it passes its best before date or when
the next shop arrives, egged on by profit-hungry retailers. Battalions
of quangos, government agencies and charities see supermarkets as
allies in the war on food waste, but the supermarket system that is
predicated on super-sized stores and overconsumption, actively
begets it. The business model isnt fit to meet 21st-century food
challenges. We must instead learn from the burgeoning grassroots
initiatives that aim to relocalise and scale down our food chain.
The NHS became a battleground in the EU referendum, says
Alice Thomson. Brexiteers said immigrants are wasting NHS
resources; the Remain camp that the service relies on migrant workers.
But both sides missed the real point. The key issue is that the NHS
is trying to do too much with too little money. There are a million
more patients in A&E than in 2010; hospitals perform a million
more operations and GPs conduct 2.1 million more consultations.
Staff shortages, caused partly by female part-timers and early
retirements, led to a 3.6bn bill for agency and contract staff last year.
The public arent helping. Smokers cost the NHS 2.7bn last year,
the obese 9bn. And despite efficiency gains, we will be spending just
7% of GDP on the NHS by 2020. The US spends 18%. The fact is,
living longer costs money and, in or out of the EU, we will just have to
consider European-style social insurance or a dedicated NHS tax.

Money talk

Rex Features

16

best of the financial columnists XX

Not only is everything

ridiculous in Hollywood
but its cut-throat, too.
The only way you can
survive in this town is if
you find the funny side.
Singer Kelly Osbourne
(pictured), in The Times
[My success] was sucked
out of me by my own fault.
If Id worked harder and
been cleverer I was still a
child at 45.
Actor Rupert Everett, in
The Sunday Times
To be honest with you,
I dont know. Someone
suggested it.
Sir Philip Green on why he
opted to live in Monaco,
quoted in the FT
How do we know
economists have a sense
of humour? They put a
decimal point on their
forecasts.
Old joke, quoted on
Economist.com
To be on Broadway you
have to work hard and
study for years. Or you can
do what I did: already be
famous.
Comedian Steve Martin, in
The Sunday Times
I know Im not that
clever. Im not thick I
got an F in English, but
Im very successful, and I
enjoy my job. Ive always
tried really hard in all my
jobs. I worked down the
fish market, I worked as
a trader three different
times in three stockbroking firms, I worked
at a salmon factory, Ive
worked in a warehouse,
and now Im on TV and Im
really happy.
Reality TV star Joey Essex,
quoted in
The Sunday Times

moneyweek.com

MW Full Page Ad VARIANT 1 FinalV2.pdf

14/06/2016

16:52

opinion
18

XX

opinion

Why I voted for Brexit

By the time you read this, well know

whether Britain has voted to remain in
the European Union (EU) or not. Heres
why, with a certain trepidation, I voted
for Brexit. My unease derived not from a
fear that change would unleash economic
turmoil. Rather, I worried that this vote
conflicted with my own cosmopolitan
leanings. On reflection, I decided that by
rejecting the EU I showed greater fellow
feeling for the citizens of Europe and was
more faithful to the continents highest
ideals, than those who wish to remain.
Dealing with the economics first, leaving
the single market would certainly
create uncertainty. But developed
economies have withstood far greater
shocks. US growth, for instance, was
only temporarily set back by the Great
Depression. Its inconceivable that a
far less extreme event such as Brexit
could by itself permanently damage
Britains prospects. In reality, the greatest
economic risk comes from the threat of
retaliation by our erstwhile European
partners. Given that Britain runs a large
trade deficit with Europe, a trade war
would be irrational. It reflects poorly on
the EU that the threat should be credible.
But doesnt a vote for Brexit reveal a
petty nationalism, at odds with modern
progressive values? Or, as the daughter
of a friend put it: with my vote, I was
putting myself in bad company. I dont

Over the course of its evolution, the

EU has betrayed those ideals. In 1795,
Immanuel Kant, who coined the
term Enlightenment (in German,
Aufklrung), wrote Perpetual Peace: A
Philosophical Sketch. In this essay, Kant
showed profound respect for a states
separate identity: a state like the stem of
a tree has its own root to incorporate it
as a graft on another state, is to destroy
its existence as a moral person. The
consequence of bundling states together,
even when done peacefully through
dynastic alliances, would be that the
subjects of the state are used and abused
as things that may be managed at will.
Kant preferred republican government
one which gained the consent of citizens
as members of the state to despotism,
characterised by the irresponsible
executive administration of the state by
laws laid down and enacted by the same
power that administers them. Kant did
propose an international federation of
states to avoid war, but this would not
have to take the form of a State made
up of these nations. Such a super-state
would not allow the existence of a free
state, which by definition both made and
applied its own laws. Each state places
its majesty (for it is absurd to speak
of the majesty of the people) in being
subject to no external juridical restraint.

Robot watch
The next time anyone in the north London borough of Enfield
wants to find out why their rubbish has not been collected
or how to make a planning application, they will have a new
council employee to get annoyed with, says Valentine Low in The
Times. Her name is Amelia and shes a smiling young blonde,
blue-eyed council worker. But shes not all she seems.
Thats because Amelia is whats known as a cognitive
agent. She is an artificial-intelligence program
designed by New York tech firm IPsoft. Amelia is
supposed to be able to respond to questions as a
human would, as well as learn on the job. She is
capable of analysing natural language, she
understands context, applies logic, learns
and resolves problems, says IPsoft. She is
even able to sense emotions, adapting her
response to the tone of the caller.

MONEYWEEK

24 June 2016

pic credit

Edward Chancellor

believe so. At university, I read 18thcentury European history. The ideals

of the Enlightenment a preference
for reason over tradition, for economic
individualism over state control, for
toleration over bigotry, and a belief that
relationships between nations should
be governed by the rule of law remain
close to my heart. The same notions
guided the founding fathers of the
postwar European project.

Im with Kant and therefore against the EU

The European project has morphed
from Kants international federation into
something akin to the late Habsburg
empire, a fractious conglomeration of
nations riven by centripetal forces. The
EUs form of government, in Kantian
terms, can be described as despotic
since the publics consent has not
been gained. During the euro crisis,
unemployment in parts of Europe has
exceeded Great Depression levels.
If the EU cared for its citizens, or was
properly accountable, substantive
reforms would have been enacted. This
hasnt happened. As a result, discontent
across Europe is fostering political
extremism of the 1930s variety. My
vote for Brexit shows solidarity with
the European public and complies with
the principles of Kant, the greatest of
Enlightenment philosophers.

Auctions
Going A series of letters written
by Breakfast at Tiffanys star Audrey
Hepburn, which chart her early rise to
fame and marriage to actor Mel Ferrer,
are expected to fetch up to 4,000
when they go under the hammer
on 29 June as part of Bonhams
Entertainment Memorabilia in London.
Gone The pink dress made by
French designer Pierre Balmain and
stripped off by Sophia Loren to reveal
her racy black corset in a famous
scene with Peter Sellers from the 1960
comedy The Millionairess sold for 500
at Dukes auctioneers in Dorset. It was
part of a collection of garments given
to a member of the crew after filming.

moneyweek.com

funds

XX

funds

19

Should I buy discounted trusts?

Were keen on investment trusts at
MoneyWeek. One reason for this is that
they can often allow you to buy assets at
less than their true value. Thats because
shares in an investment trust are traded
on the stockmarket unlike other types
of fund, such as unit trusts and openended investment companies and their
price is driven by market demand. If
more people want to buy, the price rises;
if they dont, the price falls. So the trusts
shares can be undervalued or overvalued
compared to its net asset value (NAV)
the total value of its holdings.
Looking at the difference between the
trusts share price and its NAV and
understanding why it trades at a discount
or premium is important when deciding
whether to invest. Thats because even
when a trust is trading at a big discount
to NAV, youre not necessarily getting a
good deal, while a trust that trades at a
premium isnt always a terrible deal.
There are several reasons that a trust
may trade at a discount. It could be that
investors are concerned and have started
selling their shares in the trust, perhaps
because they believe a particular sector
will soon go out of fashion, or because

they have growing doubts about the

managers ability. Investors may also
be sceptical as to whether the NAV is
accurate some investment trusts have
holdings in unlisted companies, where
valuations arent always up to date.
If an investment trust is trading at a
premium to NAV, its sometimes evidence
that investors are overexcited about a
sector and that the trust is overpriced.
However, a more modest premium
can be a sign that investors see it as an
exceptionally well-run fund. Youre
paying more than the assets are currently
worth, but you think the managers
decisions will add enough value in future
that you are willing to pay up for access
to their skill.
So when choosing an investment trust,
you shouldnt look at the size of the
current discount or premium in isolation.
You should compare it to the trusts
average over 12 months and ideally over
a much longer period. If the current
discount is larger than average (or the
premium is smaller), it could be a good
time to buy in. However, do research the
trust carefully to check that there isnt a
compelling reason why the discount has
widened perhaps the manager has made
serious mistakes, for example. Also look

iStockphotos

by Sarah Moore

A premium might just indicate overexcitement

at the sector average for similar funds,
to see how the trust stacks up next to
its peers: trusts in different sectors often
trade at different discounts.
The sectors trade body, the Association
of Investment Companies (TheAIC.
co.uk), is a good source of information
on individual investment trusts.
And MoneyWeeks editor-in-chief,
Merryn Somerset Webb, has put together
a portfolio of six of our favourite
investment trusts, which can be found at
MoneyWeek.com/funds/the-moneyweekportfolio-of-investment-trusts.

Britain divided over Brexit vote.

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politics & economics

20

XX

politics & economics

In or Out, the world has changed

Whatever the outcome of the EU referendum,
the increasingly rancorous campaigning,
which was brought to a shocked halt with the
murder of Labour MP Jo Cox last week, will
have far-reaching repercussions. This was not
Prime Minister David Camerons intention. He
promised the referendum in 2013 to puncture
growing support for the anti-EU Ukip and
placate his own partys eurosceptics, says
the Daily Mail. He hoped it would settle the
European question, not unleash a bitter feud.

Yet his position will be tough even if

Remain wins. Tory Brexiteers are livid that
Cameron used the government to churn
out pro-Remain propaganda and may not
feel forgiving. Given the governments tiny
majority of 12, pro-Brexit Tories could wage
guerrilla warfare reminiscent of the chaos
after John Major signed the Maastricht Treaty.
MPs and ministers from both camps are
talking of installing Home Secretary Theresa
May as a caretaker leader only she has the
ability to unite the warring factions, say Tim
Shipman and James Lyons in The Times.

Can they stay chums?

Jeremy Corbyn says that Labour is very
ready for a post-referendum snap general
election. But he has his work cut out too.
His pro-Remain campaign was lacklustre
(he voted Out in 1975); a potentially
damaging schism over immigration is in
the offing; and Labour faces an almighty
row over Trident, says Charlie Cooper in
The Independent. More generally, the
political kaleidoscope has been shaken, says
Asa Bennett in The Daily Telegraph. This
debate has thrown together politicians from
wildly different political traditions... and seen
many of them shift their rhetoric on the big
issues. We have fallen down the rabbit hole,
into a new political world. How long will we
stay there?

What the papers backed

Leave

The Daily Telegraph: The EU now has the

trappings of the nation state that we were
always assured it would not become: a
single currency; a central bank; no frontiers...
Nor will it stop there.
The Sun: The Remain campaign predicts
mass unemployment, soaring interest rates
and inflation, plummeting house prices
Nonsense! Years ago the same politicians and
economists issued apocalyptic predictions
about our fate if we didnt join the euro.
Daily Mail: There is nothing petty-minded
about being proud of our traditions and
history... Indeed, it is a sclerotic EU, with its
terror of competing with the great economies
of the world... which is backward-looking and
locked into the past.

MoneyWeek

24 June 2016

Remain

Financial Times: Since Britain joined the EU

in 1973, real gross domestic product per head
has grown faster than in France, Germany and
Italy... membership of the single market has
been a magnet for foreign direct investment,
funding a bulging current-account deficit and
guaranteeing British jobs.
The Guardian: A better world means working
across borders, not sheltering behind them.
The Times: If Mr Cameron wins, he must
seize the moment... for a new assault
on waste, red tape and anti-democratic
interference He could go down in history as
both an effective campaigner and the leader
of a reform movement in Europe that would
prevent it sliding into a disharmonious federal
state that would ultimately rip it apart.

Press Association

by Matthew Partridge

pic credit

In 1975, Harold Wilson held a referendum

on EEC membership as a way of smoothing
over internal party divisions, says Geoffrey
Wheatcroft in The Guardian. It worked
the majority of Britons voted to stay. But
Cameron unleashed forces of which he had
not been properly aware from resentment
of elites, to crude racism to humble
patriotism. The future of the Conservative
party is now at stake, says Andrew Grice in
The Independent. Cameron has vowed to stay,
even if Leave wins, and 70 MPs, including
Boris Johnson and Michael Gove, have signed
a letter backing him. But privately, senior
Tories say his position would be untenable.

Betting on politics
By Friday morning, long
after MoneyWeek went
to press, the European
referendum will have been
decided. Well have a whole
host of markets to discuss,
from possible leadership
elections in both parties
to the date (and result) of
a new general election.
So its a good time to take
stock of the different ways
bookmakers and betting
exchanges calculate odds.
In the past bookies would
express odds as the net
amount you could expect to
win. So odds of 3/1 would
mean you get 3 extra for
every 1 you bet, for a total
of 4 back. To work out the
implied probability of an
event happening, divide the
right hand side by the two
sides added together. In this
case 3/1 gives an implied
probability of 1/(3+1) = 0.25,
or 25%. However, some
bookies and exchanges
have switched to digital
odds. These indicate the
total you will get back. So
a 3/1 bet would be quoted
as 4.00. Digital odds are
always quoted as a single
figure, usually to two
decimal places. To work
out implied probabilities,
simply divide 1 by the
figure so 4.00 = 0.25 or 25%.
Recently some firms have
been quoting binary bets.
The best way to think of
these is as a bet that is
worth 100 if the event
happens, and 0 if it doesnt.
As a result, the price should
reflect the implied chance
of an event happening in
percentage terms, so a
price of 25 would be a 25%
probability. To convert
back to digital odds, simply
divide by a hundred and
invert the result.

moneyweek.com

Book your seat for

the 2016 MoneyWeek
Conference today
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When Banking
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for the Monetary
Endgame
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Weve convened these leading
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personal finance XX

22

personal finance

Can cash really trump shares?

in 1998, if you saved 10,000 into the
UKs best-buy one-year deposit account,
you could have walked away a year later
with 10,800. Today, if you save 10,000
into the best-buy one-year savings bond,
youll pocket just 10,166 a year on.

by Natalie Stanton
Most advisers would agree that, over the
long term, shares are the best place for
your money. And in the short term youre
best to stick with cash. However, is this
long-held wisdom necessarily true?

Its a striking finding, although its

also easy to pick holes in his thesis. For
starters, Lewiss research finds that
investing in the FTSE tracker secures
much higher returns over the longer
term. Over periods of 18 years or more,
shares outperformed cash more often
than not. And, over the entire 21-year
period from 1995 to 2015, shares
returned a compound 6% while cash
managed 5%. The research also makes
the assumption that the saver involved
is dedicated enough to identify and
move his or her money into a best-buy
account every year, while the investor
is more apathetic, sticking with the
tracker through thick and thin the

Tracker funds are also a lot cheaper than

they were in the past. Most trackers
would have set you back at least 1%
a year if not more in 1995, but the
HSBC fund in question now charges
just 0.18%. Over the next 20 years, the
cost of an average tracker is likely to fall
substantially again, making it harder for
cash to come up trumps.

iStockphotos

In this weeks Financial Times, consumer

champion Paul Lewis sets out his
argument that cash can in fact beat
the stockmarket in periods of up to 18
years. His case goes like this. Lewis
found that, since 1995, active cash in
other words, money kept in a best-buy
account, then transferred a year later to
the most up-to-date best-buy account
would have yielded a higher return than
investing in an HSBC FTSE 100 tracker
fund. This active cash strategy also
beat the total returns from the tracker
in 57% of the five-year periods between
the start of January 1995 and the end
of December 2015. The effect was even
more pronounced over 14 years, with
cash beating shares 96% of the time.

Put it in shares, not under your bed

reverse of what youd typically expect.
If the investor had been just as active in
switching to the cheapest tracker, or the
best value part of the market each year,
then Lewiss results may well have been
very different.
Theres also the obligatory warning that
the past is no guide to the future. Just
because savings accounts have fared well
over the past 21 years doesnt mean they
will continue to do so in future. For the
majority of the period that Lewis has
covered, UK interest rates have been
positive in real terms (after inflation).
That simply isnt the case any more. Back

Finally, while the HSBC FTSE 100

tracker beat cash in 57% of five-year
periods, the results differ when applied
to the HSBC FTSE 250. Lewis found
that this tracker had a much better result
between 1 March 1998 and 1 April
2016, beating cash in 65% of periods.
All in all, Lewiss research is a reminder
that cash can be underrated as an asset
class, and that it definitely deserves its
place on your portfolio as an asset all of
its own. But it doesnt overturn the longheld view that for money you can lock
up for the medium to long term, the best
returns are likely to come from stocks.
Best easy-access savings accounts on the
market (according to Moneyfacts)
AER
Charter Savings Bank

1.66%

OakNorth Bank

1.65%

Habib Bank Zurich

1.55%

Axis Bank

1.4%

Sainsburys Bank

1.3%

The biggest tech takeover deals

Dell/EMC

$67bn

2015

Hewlett-Packard/Compaq Computer

$31.8bn

2001

Microsoft/LinkedIn

$26.2bn

2016

Facebook /WhatsApp

$22bn

2014

Oracle/PeopleSoft

$12.6bn

2005

Google/Motorola Mobility

$12.5bn

2014

HP/Autonomy

$10.2bn

2011

Microsoft/Skype

$8.5bn

2011

Apple/Beats (headphone maker)

$3bn

2014

Facebook/Instagram

$1bn

2012

MoneyWeek

24 June 2016

American software giant Microsoft

raised eyebrows when it agreed to buy
business social network LinkedIn for
$26.2bn in cash earlier this month.
Many investors are sceptical about the
deals value and point to Microsofts
patchy history of making acquisitions
work (see also page 16).
Yet even this enormous sum isnt quite
enough to make it the most expensive
takeover deal in the technology sector
to date. That honour falls to Dells tie-up
with data storage firm EMC last year.
On the left, we look at the top ten tech
deals as ranked by The Daily Telegraph.

moneyweek.com

pensions

23

Should deficits come before dividends?

based on best guesses about
future investment returns.
In most cases, its calculated
on the assumption that the
pension funds returns will be
around the level of the yield
on UK government bonds
(gilts). The lower the gilt yield
goes, the worse the deficit
becomes and thats whats
been happening in recent
years, as yields have headed to
record lows.

Many FTSE 100 companies

are paying out dividends that
exceed the shortfalls on their
company pension schemes,
leading some commentators
to question whether firms are
putting enough of a priority
on ensuring that employees
pensions are adequately
funded. In total, 54 FTSE 100
companies have handed out
48bn to investors in the past
two years, almost equal to
the deficit of their combined
pension schemes, which stood
at 52bn in 2014, according
to figures compiled by
stockbroker AJ Bell. Some 35 companies
have paid out more in dividends than the
total size of their pension deficits.
For example, oil major Royal Dutch
Shell paid 8bn to shareholders last
year despite having a 6.7bn funding
gap in 2014. Pharmaceuticals giant
AstraZeneca paid 2.4bn, compared
with a 1.9bn deficit the previous year,
while GlaxoSmithKline handed out
3.9bn despite a 1.7bn gap in 2014.
Rio Tinto, National Grid, Glencore,
British American Tobacco and Vodafone
were also among the biggest spenders.
Numbers such as these easily generate
controversy, given the extent to which
pension deficits have been in the news
lately. Last week, Sir Philip Green
faced the Work and Pensions Select
Committee (pictured) to discuss the
collapse of retailer BHS, which has left

Press Association

by Natalie Stanton

Deficits are not always the scandal they seem

a 571m deficit that will need to be
absorbed by the Pension Protection Fund
(the pensions lifeboat that partially
protects staff pensions if their company
pension scheme becomes insolvent).
Meanwhile, the government is consulting
on plans to restructure benefits paid
by the British Steel pension scheme (see
below) in order to tackle that schemes
485m deficit. But is there really a case
for firms with large deficits to suspend or
reduce dividends and funnel the excess
cash into their pension schemes?
There are two main problems with
simplistically comparing dividends
to deficits in this way. The first is
the question of what deficits actually
measure. As MoneyWeeks editor-inchief Merryn Somerset Webb noted last
time this subject came up in April,
A pension deficit is not a number that
is set in stone Its an actuarial concept

Many funds are now heavily

invested in gilts for many
years, they were encouraged
to be, as the safest and most
prudent option. However,
bonds show every sign of being in
a bubble (see page 24) basing an
investment strategy solely around gilts is
madness. Instead, the sensible approach
would be to invest elsewhere in assets
and earn a higher return which would
make their deficits look less onerous.
The second issue is that the obvious
place for pension funds to invest in
pursuit of higher returns is in equities.
These may not be cheap, but dividend
yields are significantly higher than
bond yields and offer pension funds
a higher income stream. However, if
firms cut dividends to plug deficits, that
will reduce the returns that pension
schemes can earn from equities. In short,
slashing much-needed dividends to plug
overstated deficits could make corporate
pensions problems worse as well as
hitting lots of other shareholders who
also depend on dividends.

Abracadabra, the deficit is shrunk but is the magic legal?

Last week, the FirstGroup Pension Scheme, which provides
retirement benefits for many employees of bus and train
operator FirstGroup, revealed it has switched its measure from
the Retail Price Index (RPI) to the slower-rising Consumer Price
Index (CPI). While this may sound like a very technical change,
the shift will enabled the scheme to wipe 10.8m from its
liabilities, making it a useful example of how seemingly minor
issues can affect the size of a pension funds deficit or surplus.
RPI and CPI are calculated differently, resulting in RPI producing
a rate of inflation roughly 1% higher than that produced by
CPI. Since defined-benefit (also known as final-salary) pension
schemes mostly increase what they pay in line with inflation
each year, the measure of inflation they use affects how much
they are likely to have to pay in future and hence how large their
estimated liabilities are.
Since 2010, CPI has been used to measure annual increases to
public-sector occupational pensions. However, many privatesector workplace pensions have stuck to the more traditional
RPI. The Department for Work and Pensions has estimated
that roughly three-quarters of schemes have rules that stipulate

moneyweek.com

that inflation-linked increases are based on RPI. In the case of

the FirstGroup Pension Scheme, this stipulation did not apply.
The trustees were permitted to select an appropriate measure
of inflation, which had previously been RPI but will now be
moved to CPI.
Most other pension schemes do not have this flexibility, which
is why proposals to restructure the British Steel scheme are
so controversial. The government is considering allowing
this scheme to switch its inflation index from RPI to CPI, even
though the scheme rules specifically lock it into RPI. Thus the
change would not usually be permitted under the Pensions Act
1995, which prohibits retrospective changes to benefits that
have already built up, unless members consent.
The British Steel scheme is being described as a special case.
The change would cut an estimated 2.5bn from the schemes
long-term liabilities, and thus make Tata Steel more attractive
to prospective buyers, potentially saving up to 40,000 jobs, and
preventing the scheme from falling into the Pension Protection
Fund. However, the reality is that if one scheme is allowed to
bend the rules, others will eventually be permitted to follow.

24 June 2016

MoneyWeek

cover story

24

What will you do when

banking dies?
Central banks have been aggressive in their attempts to boost growth. But all they will achieve
is the debasement of the currency. That presages disaster, says Dan Denning

5
Percentage points

4
3
2
1
0

MONEYWEEK

Unprecedented distortions

That interest rates could rise again contrary to the

expressed interests of central banks may seem a
remote possibility. After all, the US Federal Reserve
has already backed off on its plan to normalise
rates this year. The immediate culprit was the
weakest jobs report in six years in May. Markets
expected 160,000 jobs to be added instead they
got 38,000. As a result, traders now reckon there
wont be another US rate hike until February 2017,
and Fed boss Yellen has done little to discourage
that view. In response, ten-year US Treasury yields
touched a low of 1.57% in mid-June.

That in itself wasnt that alarming. But what

happened next was. The term premium on the
ten-year Treasury bond fell to a record low, turning
negative, as you can see from the chart below. What
does that mean? Estimating the term premium is not
a precise art, but
think of it as the
extra yield that
Treasury ten-year term premium
investors demand
for taking the
risk that goes
with lending
over a longer
rather than a
shorter period of
time inflation
might surprise
on the upside, for
example. As the
name implies,
youd generally
expect it to be
65-69 70-74 75-79 80-84 85-90 90-94 95-99 00-04 05-09 10-14
positive but
24 June 2016

as you can see, in June, the premium went below

zero. In other words, investors are not demanding
extra compensation for lending long term in fact,
theyre offering a discount. Thats partly driven by
demand for safe liquid assets, such as Treasuries,
and partly by an expectation that rates will remain
low and that deflation is a bigger risk than inflation,
which means investors actually see longer-term
bonds as less risky than short-term ones (better to
lock in a higher yield now than risk being rolled over
into a lower one in a few years time).
Yet this is extraordinary. It suggests that despite the
radical actions of central banks and an absence of
actual deflation in the US statistics investors have
written off the idea of inflation ever taking wing.
And its not just in America. For a brief period in
June, the entire Swiss yield curve that is, bonds of
all maturities, from short-term to the 30-year was
negative. In other words, investors were paying
the Swiss government to be allowed to lend it their
money for anything up to 30 years. This reflects
extreme risk-aversion a panicked flight to safety
among institutional investors, which also drove
yields on ten-year German bunds into negative
territory, and ten-year gilt yields to record lows.
You know weve reached an unusual point in
economic history when a desire for financial selfpreservation means accepting a small amount of
wealth destruction in order to avoid the perceived
risk of a larger one. With more than half of all
global government bonds around $10trn on
negative yields, the seeds have been planted for a
devastating bond market wipe out. When you have
governments issuing 20-, 30-, 50- and even 100-year
bonds at low rates, and investors snapping them up,
you have a dangerous situation.
Bond investors are now risking huge amounts of
capital on a bet that rates wont rise for a very
long way into the future. Yet given that rates are
currently at or near all-time lows, doesnt that seem
foolhardy? Its precisely when everyone thinks a
trend can only go in one direction that you have
to think differently. The big moves the ones that
ruin or reward investors happen when you least
expect them. This really is an important point.
Central-bank bond buying and the general climate
of fear about the endgame of this whole monetary
experiment has driven long-term yields down to
these levels. From here they can go marginally lower
but rates can only go so negative before investors
favour cash instead (well discuss this more below).
Or, they can stay low for a long period of deflation
and stagnation (in which case, bonds make perfect
sense). Or they can go up higher and faster than
moneyweek.com

Press Association

When
you have
governments
issuing 20-,
30-, 50-, and
even 100year bonds
at low rates,
and investors
snapping them
up, you have
a dangerous
situation

In the Great Train Robbery of 1963, the theft of

2.6m in cash from a Royal Mail train travelling
between Glasgow and London was accomplished by
tampering with the line signals in order to stop the
train. As robberies go, it was audacious. The haul
was worth around 50m in todays money. But as
criminal masterminds go, the gang of 15 robbers
who pulled off one of the most infamous heists in
British history cant compare to the current gang
running the worlds central banks. Those people
Janet Yellen, Mario Draghi, Mark Carney, and
Haruhiko Kuroda have pulled off an even greater
heist. By tampering with price signals short-term
and long-term interest rates those central bankers
have put trillions in global savings at risk. While the
world has focused on the risks of Brexit, a bigger
and more dangerous risk has emerged that the
endgame for central banks results in massive falls
in both stock and bond prices.

Press Association

Mario Draghi and Mark Carney: the masterminds behind the greatest heist in history
anyone currently imagines. Its this last scenario that
worries me the most. What could bring it about?

What comes next?

We know negative interest rates provide an incentive

for dangerous risk-taking. When central banks force
rates down by hoovering up trillions in government
and corporate bonds, they force other investors
from banks to pension funds to people like you and
me to take greater risks with their capital in the
hunt for yield. But what will the catalyst for the big
breakdown be? After all, Yellen clearly has no desire
to raise interest rates, and the European, Japanese
and British central banks are all still way behind the
Fed. So what could see interest rates rise, bond prices
crash, and inflation run rampant?

a three-pronged strategy (not to be confused with

Abenomics and its three arrows). Prong one: buy
Japanese government bonds (JGBs) to push down
rates and boost bank lending the BoJ now owns
a third of the entire JGB market, and it has bought
pretty much every JGB issued in the past three years,
according to the FT. Prong two: buy exchangetraded funds (equities, in other words) as part of its
asset-purchase programme. Prong three: take deposit
rates negative to encourage lending.

Its this third prong I want to pay attention to. Japan

isnt the first central bank to do it, but arguably it is
the most open to radical policies, particularly as it is
still struggling to get anywhere close to its inflation
target. Negative rates are currently only charged
on deposits held at the central bank by commercial
banks. But the direction of travel is pretty clear.
If anywhere will give us the answer, its Japan.
Its been at the forefront of unconventional economic Lets assume the world remains mired in stagnation,
with low growth, low inflation, and seemingly no
policies ever since its bubble popped in 1989.
way out. Central banks wont shrug their shoulders
First we saw government spending on projects
and move on. Theyll get ever more radical. There
nobody needed (fiscal stimulus). That helped drive
are three things to watch out for:
Japans government-debt-to-GDP
helicopter money (printing money
ratio above 200%. There were
and handing it out as directly as
also half-hearted early efforts
possible), negative deposit rates on
at quantitative easing (QE). But
your savings (not just commercial
Japan has taken the monetary
The low reached by
bank reserves), and stamped
madness to new levels since
ten-year US treasury
Haruhiko Kuroda took over at
Continued on next page
the Bank of Japan in 2013, with
yields in mid-June

1.57%

moneyweek.com

In Japan,
negative rates
are currently
only charged
on deposits
held at the
central bank
by commercial
banks. But the
direction
of travel is
pretty clear

24 June 2016

MoneyWeek

26

cover story
too. Stamped money is money
that requires a government
stamp on it to be considered
money, or cash that expires.
legal tender. The concept
Lets look at each in turn.
was developed by 19thcentury German anarchist
Helicopters and vouchers
Silvio Gesell. His ideas were
In Japans case, helicopter
even briefly implemented in
money could take off in two
1932 in the Austrian town of
ways in 2016. The first is via
Wrgl. The idea is that the
debt monetisation. Thats
money depreciates in value,
when a central bank prints
and so must be spent before
money to buy government
it is worthless. Heres how
bonds directly so its
it would work. You have
fiscal policy (government
to pay the government for
spending) financed by
the stamp imagine larger
money printing rather than
denomination notes having
borrowing or tax hikes.
a higher tax. Or imagine
Japan has done this before,
paying a lower tax the more
in 1932. As part of a plan to
money you bring in to get
bolster its economy after the
stamped. Or imagine that
1929 crash, Japans thenmoney without a stamp is
finance minister, Korekiyo
Can governments force her to spend it?
simply money that has expired,
Takahashi, ordered the BoJ
worthless despite its face value. As crazy as it
to print money to buy government bonds, which
sounds, this is probably how cash will be phased out
underpinned both infrastructure spending and the
when the monetary endgame arrives. An alternative
financing of the Japanese war machine in the 1930s.
digital currency will have to be introduced in
By 1935, the economy had picked up, inflation was
parallel with physical cash. You penalise the use of
rising fast, and Takahashi decided to cut spending.
cash, to herd people into the new digital currency,
But the military didnt like the sudden austerity,
whereupon negative interest rates can then be
and assassinated him in 1936. His successors
imposed with a keystroke. Cash that expires if
were understandably reluctant to cut off funding,
not used by a certain date well, thats about as
and inflation soared as a result. Despite the risks,
powerful an incentive as you can think of to spend.
today BoJ governor Kuroda could be tempted by
Takahashis apparent pre-assassination success. The
government would issue perpetual bonds that pay
Money is not wealth
no interest, and are continuously refinanced with the
If you wish to destroy a nation, you must first
BoJ as buyer of first and only resort.
corrupt its currency, wrote Adam Fergusson in his
1975 classic on the Weimar inflation, When Money
Alternatively, theres another helicopter-money
Dies. Thus must sound money be the first bastion
option that Japan has also already tried. In 1999
of a societys defence, he added. It was sage advice
and 2009 the government distributed shopping
during the last period in our economic history
coupons to consumers, hoping to boost spending.
when inflation destroyed the savings and retirement
It didnt work, but mainly because the coupons
dreams of an entire generation. And today, modern
applied only to certain goods, and most had an
central bankers, in their desire to boost growth, have
expiry date of six months they werent a cash
made the destruction of sound money their central
equivalent. Future helicopter money would instead
project. Were at a stage where its hard to see how
have to get a cash-like substance directly into the
we avoid a future monetary crisis. The lower rates
hands of consumers, then introduce an element of
go, the more extreme central banks efforts to avoid
time decay so they want to spend it.
or escape deflation will become. The more desperate
their policies, the greater the risk that well see
destructive levels of inflation.
Taxing your savings
That takes us to negative deposit rates. One way
Government bonds and even cash itself may provide
to get Mrs Watanabe (the proverbial Japanese
no refuge, although both provide liquidity of last
housewife) to spend is to tax her savings.
resort in a deflationary crisis. You could own
MoneyWeek regular Tim Price has already written
tangible assets outside the financial system (such as
extensively on the impact of negative rates on your
precious metals). But what else? Are you powerless
money in his book The War on Cash. But in short,
in the face of the coming crisis? I believe that this
negative rates would mean your savings get smaller,
question is so important that Ive made it the sole
rather than larger, the longer you leave them in the
focus of this years MoneyWeek conference: its
bank. The idea is that this encourages you to spend.
called When Banking Dies: How To Prepare For
The Monetary Endgame. It will be held on Monday
The trouble is, in Japan the mere threat of negative
3 October in London (see page 21 for more details).
rates has led to soaring sales of safes. In Europe,
where commercial banks have been subjected to
Meanwhile, whatever happens with this weeks EU
negative rates, some have taken to hoarding physical
referendum, remember: its a sideshow to the main
cash in vaults rather than keep it with the European
event. I cant tell you what comes next for sure.
Central Bank. That hardly inspires confidence.
But I hope Ive shown that we are approaching the
Thus the policy is doing exactly the opposite of
endgame of this grand monetary experiment, and
what it was designed to do. A measure to increase
that Ive highlighted some of the warning signs to
spending actually increases hoarding, thus
watch out for. It could come methodically or all at
accelerating the coming of the monetary endgame.
once. But come it will. Prepare yourself now.
But central banks have a plan to punish hoarders
Getty Images

Continued from previous page

Modern
central
bankers, in
their desire to
boost growth,
have made the
destruction of
sound money
their central
project

MoneyWeek

24 June 2016

moneyweek.com

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09/06/2016 14:14

investing in property
28

XX

investing in property

A stamp-duty trap for landlords

a long time before buying a new
property would seemingly not
receive this exemption, so it is
a complication that buy-to-let
landlords who dont own their
own house may need to keep in
mind in future.

The new stamp-duty rules that

came into effect earlier this year
included an anomaly that could
catch out buy-to-let landlords
who rent, rather than own,
their main residence, says
Paul Lewis in the Financial
Times. Since April, those who
buy an additional property
have to pay an extra 3% in
stamp duty. This is meant to
curb the advantages that buyto-let landlords may have over
other buyers, as well as deter
those who own second homes.
However, to cushion the blow
for existing landlords, those who owned
multiple properties were exempt from
the tax if they were buying a property
to replace their main residence, and also
sold the main residence. The rules were
written so even those who waited for up
to three years before selling their main
residence could get a duty refund.
But one FT reader seemed to have been
snared by a loophole in the rules.
David Page, an estate agent from Kent,
had sold his main property in 2008,
well outside the three-year window.
He then bought three buy-to-lets with the
proceeds, while he had moved to rented
accommodation. Recently he bought a
new main residence, only to be hit by
stamp duty because he had not recently
sold, or was selling, his main property.
Naturally, he argued that this was
unfair and he has a point, says
Lewis. It is hard to see the logical
difference between landlords replacing
a house that they own and landlords

iStockphotos

by Matthew Partridge

Rental yields are attractive in Manchester

like Page who are replacing a rented
main home with one they buy. This
is also bad news for those who turn
temporarily to renting after a job move
and end up with a rented main home and
another they at least partly own.
Fortunately for Page, his case seems
to fall under an exemption granted by
the government in March of this year,
noted Lewis. The Treasury has decided
that those who sold their main residence
before November 2015 will have until
late 2018 to buy a replacement, while still
being able to reclaim stamp duty.
The downside of this concession for
the government is that it will certainly
reduce the money that the new tax is
expected to raise, projected to equal
825m in 2019/2020. But it appears
fairer, as it avoids catching out landlords
who could have had no idea that the new
stamp-duty rules would be introduced.
However, those who subsequently sell up
and move into rented property and wait

Guess the price: 18 Canon Street, Taunton, Somerset

This Grade II-listed house,
set over four floors, is a
short walk from the centre
of Taunton. It has walled
gardens and courtyard.
The property has recently
been restored and divided
into two two-bedroom
flats, with four extra
bedrooms on the top
two floors.
The house retains many
of its original features,
including period fire
surrounds and sash
windows. Can you
guess the asking price?
(Answer on page 41.)

MoneyWeek

24 June 2016

l Chinese investors have been

high-profile buyers of property
in London for many years. Now,
they are increasingly looking
to invest in UK cities such
as Manchester, according to
stories in a number of sources,
including the South China
Morning Post and the BBC.

Thats not surprising, given that investors

get significantly more for their money
in the north of England, says Hansen
Lu of Capital Economics. Average
house prices in five key northern cities
(Manchester, Liverpool, Leeds, Sheffield
and Newcastle) are 143,100 less than a
third of the London average of 470,000.
Some of this gap can be explained by the
fact that workers in London earn more
than their counterparts in the North
(they can afford to pay higher prices).
However, the gap in prices is too great
for that to account for the full difference.
Hence rental yields are somewhat more
attractive: gross rental yields range from
around 4% in Manchester (slightly
higher than London) to more than 6% in
Leeds. But given house prices are unlikely
to rise rapidly and rents are likely to be
the main source of returns, the fact that
yields are low by historical standards
makes rising foreign investment look like
further evidence of a bubble that will pop
once interest rates begin to rise.

A 250K parking spot

A parking space has gone on
the market in Londons wealthy
Knightsbridge area for 250,000
25,000 more than the average house
price in England. The space also
comes with an annual 743.32 service
charge, and buyers of the 87-year
lease must live within a 400-metre
radius. But its close to Harrods, so
at least it will be handy for shopping
trips. However, any owners of a
Lamborghini Aventador, the 265,000
supercar marque favoured by the
super-rich, may want to steer clear,
says the Daily Mirror. At just 2.35
metres wide and 5.7 metres long, the
space would be a tight squeeze for the
two-metre wide car a problem made
worse by being located next to a pillar
and at an angle to the road.

moneyweek.com

XX

money makers

30

money makers

Unicorn takes on the banks

Taavet Hinrikus, 37, has

nothing to hide and the CEO
of TransferWise isnt shy of
stripping off to illustrate the
point. Since he and co-founder
Kristo Krman launched
their currency-transfer
business in 2011 they have
regularly paraded through
London in their pants in
protest at what he describes
as the poor service provided
by banks transferring money
abroad. TransferWise claims
to offer a much cheaper
service by matching users
sending money in one
direction with those sending
it the other way. Were being
honest and transparent, he
tells The Times. Thats a
pretty different way of doing
business compared to a bank.
With a million users in 60
countries, TransferWise
moves 500m a month. The
company has raised $100m
(69m) from investors,
including Sir Richard
Branson, and enjoys rarified
status as one of Britains
few unicorns, a privately
owned tech firm valued at
$1bn plus a valuation that
Hinrikus shrugs off. Were
all running a marathon and
this is like kilometre No. 2.
The company lost 11m last
year. Its pretty obvious that
the losses are the investment
we are making to grow, he
says. Theres an opportunity
to build companies faster than
ever before. If we grow by
ten times, which we will, we

will still be transferring just

1% of the money that crosses
borders. The 35-year-old still
has strong ties to his native
Estonia, where he joined
Skype as the companys first
employee. The biggest thing
it taught me is that anything
is possible. You can build
a piece of software in the
outskirts of an ex-Soviet city
which changes the way we
communicate forever.

From refugee to power broker

Malik Karim, 55, one of the

calmest power brokers in the
City, spent his first year in
the UK in refugee camps. He
grew up in Uganda, where his
father ran a caf, but Karims
family was forced to flee when
he was 12, after dictator Idi
Amin expelled all Asians from
the country. I missed a year
of school, he tells the Evening
Standard, which was great.
Karim spent a year in military
bases. Forty-four years later
and he is sitting in a walnutpanelled boardroom in the
City. He raced through
school and was sucked into
a mergers and acquisitions
boom in the 1980s, but was
fired from Credit Suisse in a
restructuring.
Former clients pledged to
back him if he launched his
own business, so Fenchurch
was born, advising financial
services firms on deals.
With 22 dealmakers, it is
celebrating a record year,
pushing clients through six
takeovers, including Axas

Joanna Jensen is selling her stables. The former horse

breeder, who left a career in investment banking, says her
childrens-toiletries business has taken over her life. Jensen
credits her daughters, Mimi, ten, and Bella, seven, for her new
venture, Childs Farm, which began in 2010 as a homemade
recipe to soothe their skin. It is now a fully fledged business
with sales of more than 2m. When I had my two girls
I felt that everything I bought for them that was organic
just looked medicinal, Jensen tells the FT. Bath time was
hell... I needed to do something. She foraged in hedgerows,
consulted natural remedy guides, and eventually made her
first formulas. Parents on a budget are not the brands target
market, but Childs Farm is now the fastest-growing baby
brand in the UK and industry grown-ups are looking over their
shoulders. I want to be going head-to-head with Johnson &
Johnson, Jensen says. We want the range to grow up with
the kids... A lot of kids at boarding school already use the
shampoo, while parents are desperate for an adult range.
I have huge ambitions for this brand.

recent sale of its SunLife

pension group. Fenchurch
is trusted, one client says,
because finance firms would
rather go to Karim than let a
rival bank rummage through
their business. Being fired
from Credit Suisse has become
a badge of honour, Karim

says. He met his wife in an

airport queue and their son
is about to go to Oxford, but
Karim doesnt care about the
material stuff in life. The
most important gift anybody
can give their children is love
and attention, and my parents
gave me that in bucketloads.

The MoneyWeek audit: Meat Loaf

Singer Meat Loaf, who
made headlines after
collapsing on stage
in Canada last week,
was born Marvin Lee
Aday in 1947 in Dallas,
Texas. His father, an
alcoholic, was a police
officer and his mother a
gospel singer. He began
performing in musicals
while at high school.
After his mother died
in 1967, he moved to
Los Angeles where he
worked as a bouncer,
and started a band,
Meat Loaf Soul, named
after her favourite meal.

MONEYWEEK

24 June 20166

What was his big break?

In 1973 Meat Loaf won a role in The

Rocky Horror Show and later in the film
version, The Rocky Horror Picture Show.
Show
Around the same time he began working
on the first Bat Out Of Hell album with
songwriter Jim Steinman, who he
had met while auditioning for
another musical. It was released
in 1977 and became a huge
hit, selling 43 million copies
worldwide and spending more
than 470 weeks in the UK
charts. Meat Loaf is one of the
bestselling artists of all time,
with 80 million records sold
worldwide. He has appeared
in more than 50 films and TV
shows, including Fight Club
and Waynes World.

How much has he made?

Meat Loaf has had a turbulent career,

going bankrupt in the mid-1980s as his
career deteriorated amid a protracted
legal dispute with Steinman and others.
He and Steinman later put aside their
differences and worked on Bat Out Of Hell
II: Back Into Hell, which resurrected Meat
Loafs career and restored his finances.
A long-running court case between
Cleveland International, the record label
for which Bat Out Of Hell was recorded,
and Sony, which distributed the album,
subsequently revealed that Sony had
failed to pay Meat Loaf, Steinman and
Cleveland many of the royalties that
they were due. Meat Loaf eventually
settled with Sony in the late 1990s on
undisclosed terms that were reported to
be up to $9m for him and Steinman.

Alamy

How did he start?

moneyweek.com

Business problem. Business solution. Charitable outcome.

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The share donation charity

32

personal view

Prospering in turmoil

If only youd invested in

A professional investor tells us where hed put his money.

This week: Mark Page, Artemis European Opportunities Fund
Economic activity
in parts of Europe
has stagnated for
the best part of a
decade. Despite this
a number of stocks
and industries have
grown irrespective
of the ups and
downs in GDP data. Even during a grim
decade of repeated crisis and last-minute
bail-outs, my colleague Laurent Millet
and I have been able to find European
companies that have prospered.
Payment processing is a good example
of an industry that is seeing
transformative, or secular, growth.
Electronic and card payments are
growing while payments by cash and
cheque are flat and in sharp decline
respectively. The reasons for this
structural shift to electronic payments
are obvious: shoppers find it faster, safer
and convenient. But while paying by
card or smartphone appears easy to the
customer, carrying out the transaction
depends on a complex ecosystem
involving multiple intermediaries.
Completing the sale requires an
acceptance system (the point-ofsales terminal in a physical store or a
gateway for purchases made online)
followed by multiple stages of processing
by a payment service provider to acquire,
authorise and clear the transaction.

German pharmaceutical giant Bayer

(Frankfurt: BAYN) will need to issue
more debt to fund its $62bn bid for
Monsanto. Yet the two underlying
businesses pharmaceuticals and
crop protection produce strong and
predictable cash flows, so Bayer should
be able to repay its debt quickly. And
borrowing costs are at historic lows:
the yield on Germanys ten-year bund
recently dipped into negative territory for
the first time. Moreover, the European
Central Bank (ECB) is now buying
corporate bonds as part of its extended
quantitative-easing programme. In a
roundabout way, the ECB will help to
fund the deal.
Despite this, news of the deal saw Bayers
shares fall. These short-term disruptions
can present long-term investors with
opportunities. Like Europe as a whole,
Bayer might not seem the most exciting
investment, but appearances can deceive.

The stocks Mark Page likes

WLN
GVNV
BAYN

12mth high
27.825
27.80
138.00

12mth low
17.90
21.455
83.45

Now
25.79
23.75
91.06

32Red (Aim: TTR)

180
160

Figures in pence

140
120
100
80
60
Jun 15

Sep 15

Dec 15

Mar 16

Jun 16

Be glad you didnt

Mayair Group (Aim: MAYA) is a
Malaysia-based company that
manufactures and installs industrial,
commercial and residential air
purifiers, operating mainly in China.
The company was established in
2001, and listed on 7 May 2015, raising
16.2m. Despite rising revenue and
profits up 49% and 47% in the six
months to 30 June last year the
shares have followed a relentlessly
downward path since listing, shedding
more than 60% of their value.

Mayair Group (Aim: MAYA)

Figures in pence

140
120
100
80
60
Jun 15

Sep 15

Dec 15

Mar 16

Jun 16

The Telegraph 2016

Half of all payments in Europe are

still processed by banks. However,
regulatory pressure from the European
Commission means pricing pressures
are increasing, making the processing
of payments uneconomical for most
lenders. French payment processor
Worldline (Paris: WLN) is ideally
positioned to consolidate this sector.

GrandVision (Amsterdam: GVNV),

a Dutch retailer of eyewear such as
spectacles, sunglasses and contact
lenses, is well positioned for growth.
GrandVisions size means that it can
buy lenses for prices that can be 30%
lower than those available to smaller
retailers, who it can undercut on price
while also enjoying higher margins.
Not surprisingly, many smaller firms are
selling out to GrandVision, enhancing
its organic growth and adding to its
competitive advantage.

32Red (Aim: TTR) is an online casino,

poker and bingo company registered in
Gibraltar. It listed on Aim in 2005, and
in the year immediately after listing
the share price slumped, wiping 70%
off the value of the company. However,
the last six years have seen the shares
climb more than 800% and double in
the past year. In July 2015, it acquired
the Roxy Palace online casino for
8.4m. A trading update in January
2016 showed net gaming receipts up
by 51% in the previous year.

MoneyWeek

24 June 2016

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24 June 2016

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the best blogs

33

Its time to build that ark

We must rethink
wealth taxes

In France, as in all countries, the main

tax on wealth is the property tax.
But this is more regressive than it seems.
In principle, it is proportional levied at
0.5% of the value of the property. But
the other wealth tax in France only really
falls on the top 1% of the population and
doesnt take account of debts. So a person
owning a property worth 200,000 but
with debts of 150,000 pays the same tax
as one who inherits a 200,000 property
but who also holds financial assets worth
300,000. This is explained by the fact
that the property tax was created more
than two centuries ago, as were the
similar systems in force in the US and
most countries, at a time when property
was predominantly held in the form of
land and real estate, and when financial
assets and debts barely existed.

Alamy

American pundit Doug Casey believes

we are heading for a super depression
that will follow the collapse of this
debt super cycle. Most people hear
these alarm calls, then just reach over
and hit the snooze button, says Tom
Chatham on the Zero Hedge blog. But
its time to wake up. This is a generation
that has only ever known post-WorldWar-II levels of prosperity easy credit
and instant gratification have created
a nation of whining, self-absorbed,
entitlement-minded people with no moral
or mental toughness. They will pay
dearly for this in the coming days.

Some candidates for the 2017 French

presidential election are going to propose
to abolish the wealth tax. That would
be a serious mistake, says economist
Thomas Piketty on his blog. The tax
could, however, do with reform.

Act now before its too late: you need

Be like Noah: get prepared for the flood
to be Noah on his ark, not the people
drowning as he floated off. Build up the resources youll need to provide food, shelter,
clothing and security when the system fails to do it for you. Store useable goods for the
short term, and things like gold, silver and production equipment for the long term.
What will you do when you cant find a job? Do you have a home you can hang on to
when the system breaks down? What about fuel? These are the questions you should
be asking yourselves now. You better have a good answer because your family will be
asking them when the greater depression sets in.

A way to promote long-termism

We could make the tax system fairer by

deducting debts and taking financial
assets into account. As the Panama
Papers affair and other scandals have
underlined, it is also important to
introduce more transparency. We have
other priorities than giving the rich a
tax break: taxes should fall more on
the rich than on wages, and the state
should invest in training and research.
In a period in which assets prosper while
salaries stagnate and society is in crisis,
this is not the time to be bestowing gifts
on the wealthy.

Heres a radical plan, says Jamie

Condliffe in the MIT Technology
Review: create a new stock exchange
that values long-term innovation over
short-term profits. It is the brainchild
of Eric Ries. He suggests creating an
exchange that would list companies that
give far less prominence to quarterly
reporting, that tie employee pay scales
to long-term success in the market, give
shareholders more say the longer they
hold their shares, and require firms to
disclose in detail how they are investing
its money. Of course, this will be easier

said than done. Ries says his idea ruined

his credibility when he first floated it in
2011. Since then, he has been building
a team to make it into a reality. Venture
capitalist Marc Andreessen and former
US chief technology officer Aneesh
Chopra are onboard and their team is in
early discussions with the US regulator.
But dont hold your breath. Getting
approval will be a lengthy process;
finding firms willing to sign up will be
too. People who like this idea will just
have to develop the patience that Ries
thinks is a virtue for investors.

How to invest like Sherlock Holmes

If you want to be a good investor,
you need to be a student of human
behaviour, says Morgan Housel on The
Motley Fool. So it might pay to learn
from the master: Sherlock Holmes.

interesting? To a collector of fairytales.

On theory: It is a capital mistake to

theorise before one has data. Insensibly
one begins to twist facts to suit theories,
instead of theories to suit facts.

On con men: My horror at his crimes

was lost in my admiration at his skill.
Rex Features

On advice: Nothing clears up a case so

much as stating it to another person.

On debates: If falsehood, like truth, had

only one face, we would be in better shape. For we would take
as certain the opposite of what the liar said. But the reverse of
truth has a hundred thousand shapes and a limitless field.
On forecasts: When Dr. Mortimer had finished reading he
pushed his spectacles up on his forehead and stared across
at Mr Sherlock Holmes. The latter yawned and tossed the end
of his cigarette into the fire. Well? said he. Do you not find it

moneyweek.com

On quickly drawing false conclusions:

There is nothing more deceptive than
an obvious fact.
On simple ideas being so obvious no one takes them seriously:
The world is full of obvious things which nobody by any
chance ever observes.
On doing nothing when nothing needs to be done: You have a
grand gift for silence, Watson. It makes you quite invaluable as
a companion.

24 June 2016

MoneyWeek


34

profile XX
profile

This week: Jos Lpez

The ex-minister, the nuns and the $9m

The mysterious man whom police

eventually found cosily ensconced with
the sisters in the convents kitchen
turned out to be Jos Lpez, a former
junior government minister, who had
served as public works secretary to
the ex-president Cristina Fernndez de
Kirchner. Officers later found a semiautomatic rifle in his car, but even more
extraordinary were the contents of the
sacks, says Newsweek. As well as several
expensive watches, they contained 160
bundles of cash currencies, including
pesos, dollars, euros, yen and Qatari
riyals. The total stash amounted to $9m.
Lpez at first claimed to be a church
official, then allegedly tried to bribe
officers with $1m to avoid arrest.
The saga continued with a bizarre
court hearing in which Lpezs lawyer,

Fernanda Herrera best known in

Argentina for her career as a glamorous
former model argued that her client
suffered hallucinations and was mentally
unfit to testify, although doctors had
ruled him fit. Lpez proceeded to hit
himself over the head and demand to
be supplied with cocaine.
Exactly how Lpez acquired the money,
which he apparently intended to bury
in the nunnery, is now the focus of the
investigation and it may not bode
well for Fernndez, or the leftist
kirchnerismo movement she heads,
says the Financial Times. As well as
serving in their governments, Lpez was
reportedly extremely close to both
Fernndez and her late husband and
predecessor, Nstor Kirchner. Ever since
the partys narrow electoral defeat at the
hands of centre-right President Mauricio
Macri last year, Fernndez and her circle
have been dogged by constant allegations
of money-laundering and corruption
related to public building contracts
threatening to scupper her hopes of
standing again in 2019.
Earlier this year, construction boss
Lzaro Bez (allegedly a front man for
the presidential couple) was arrested on
money-laundering charges, following
allegations that he had buried an
enormous stash of cash in remote

Getty Images

One morning last week, just before

dawn, an early rising resident of a quiet
Buenos Aires suburb was struck by an
unusual sight. A middle-aged man was
heaving several sacks and bags over
the wall of the neighbouring convent.
He then clambered in after them. Fearing
for the safety of the three elderly nuns
inside, the observer called the police.
Before long, says The Guardian, what
began as a neighbourhood curiosity
had morphed into a national political
drama which is gripping Argentina.

farmland in Patagonia. A huge dig

ensued, says The Guardian. Even Nstor
Kirchners imposing mausoleum was
searched. But nothing was found.
Fernndez has denied any links with
the Lpez case. But some in Argentina
think this latest soap opera could prove
the final nail in the partys coffin.
Jos Lpez couldnt bury the dollars,
but he buried kirchnerismo, concluded
La Nacin last week.

Great investors in history

This week: Alfred Winslow Jones
How did he start out?

Unlike most other great investors, with

the possible exception of Georges
Doriot, Jones didnt become involved in
investment management until he was
nearly 50. After graduating from Harvard
in 1923, Jones changed career several
times. He worked as a purser on a tramp
steamer, had a spell as a diplomat, and
then became a sociology lecturer, before
going on to write for various publications, including Fortune
magazine. Writing an article on technical analysis sparked
interest in Wall Street. In 1949, he founded A. W. Jones and
Company, one of the first Hedged Funds. He ran it for more
than 30 years, before handing over control in 1984.

What was his strategy?

Joness idea was to hedge long positions with short ones.

In theory, this meant his returns would not be affected by the
overall market direction, but rather his ability to pick winners
and losers. In reality, the fund was not always fully hedged.
Indeed, in the early 1970s it had a leveraged long position (in
other words, it was aggressively betting on a rising market,
and so it ran into trouble when the opposite happened).

MoneyWeek

24 June 2016

He outsourced a lot of his stockpicking to a team of analysts

who were selected by getting them first to run paper portfolios.

Did this work?

Joness fund made money in 31 of the 34 years that he ran

it, compared with nine years for the S&P 500 over the same
period. Despite charging relatively high fees, the fund still
returned more than 20% a year for an investor during its first
two decades of operation. The fund still exists as a fund of
funds, with $390m in assets under management. The hedgefund model has also spread rapidly, with an estimated $2.7trn
under management today, according to BarclayHedge.

What lessons are there for investors?

Studies suggest that the hedge-fund industry has become

oversaturated, driving down returns since 2009 the HFRI
Hedge Fund index has returned just 50%, against around 200%
for the S&P 500. As with any other area of active management,
managers like Jones are the exception rather than the rule.
However, there are a couple of tips from Jones that private
investors can use. Firstly, running a paper-trading account
is a good way of trying out a strategy to see whether it works
(and if you are comfortable with it), before risking real money.
Secondly, Joness problems with excessive leverage in the
early 1970s show the dangers of taking big bets with borrowed
money regardless of how confident and capable you are.

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spending it

35

A five-page section covering holidays, cars and housing

Escape into the wilderness

Tiger-spotting in Russia

At the extreme edge of Russia, close

to China and seven hours ahead of
Moscow, ghostly swamps are frozen
over, says Sophy Roberts in the
Financial Times. Here in Khabarovsk,
where the temperature can slip to well
below freezing, there are no tourists.
It has little history of attracting visitors.
But there are tracks in the snow that tell
you the rare Siberian tiger lives close
by. Only 500 are thought to be left in
the wild. Just as Roberts is starting to
wonder if all shes going to see is windtorn cloud and a billion birch and alder,
the guide spots a line of pug marks in the
fresh snow, indicating the presence of a
tiger close by. She caught a glimpse, just
before he vanished, the flash of black
and orange disappearing among the
skinny tree trunks.
From 2,325 per person see
NaturalWorldSafaris.com.
A trekking adventure in Khabarovsk in Russia could lead you to the rare Siberian tiger

Wild bison still roam in Biaowieza forest

Primeval woodland in Poland

Polands Biaowieza forest, straddling the

border with Belarus, is the last remnant
of a vast primeval woodland. Here,

the wild bison still roam, along with

wolves and lynxes, although logging
now threatens to disturb the peace.
Wild Poland, led by naturalist ukasz
Mazurek, seeks to reconnect visitors
with the untouched forest, says
Ros Coward in The Guardian. From the
traditional wooden Wejmutka Manor
hotel guesthouse, you venture out to
the forest edge early in the morning.
On Cowards trip, the bison emerged
out of this mist as if a primitive cave
painting had come to life. Much of the
area is swampy and feels mysterious,
with black storks skulking in dark
pools. Conservationists are keen to

develop sustainable tourism in the forest.

Certainly, there arent many places left
to glimpse Europes wild past.
From 785 per person for seven nights
see WildPoland.com.

Rustic paradise in Kyrgyzstan

If your idea of paradise is yurts and

hot springs lost in mountain valleys a
thousand miles from anywhere, then

How to survive in the great outdoors

Youve done everything right and still ended up lost in the wilderness. Welcome to
the club, says adventure writer Mark Jenkins in The Guardian. The thing to do is let
the panic pass and think clearly. Remember the acronym, Stop. S is for stop.
T is for think. What was the last landmark you recognised? How long ago was that?
O is for observe. Can you see any landmarks? P means plan. Is there enough
daylight to retrace your steps? Should
you build a fire? Can you make a phone
call? Food is the least of your worries, but
water and staying warm are critical. If you
do regain the trail, hightail it out and get
back to your car. The last thing you want
is to spark a search and rescue mission.
Otherwise, except in canyon country, your
best bet is to move downhill. Eventually
youll come to a road or a path. You dont
die from not knowing where you are.
You die from bad decisions.

moneyweek.com

Meadows miles from anywhere in Kyrgyzstan

Kyrgyzstan is for you, says Giles Whittell
in The Times. Walking up the most
perfect mountainscape on Earth, the
Altyn Arashan valley bends with its river,
revealing new meadows carpeted with
edelweiss when not grazed upon by sheep
and horses. The topography is Alpine,
the scale Himalayan. But more than
anything, it is Kyrgyzstan.
From 2,555 per person for a 13-day
tour see Regent-Holidays.co.uk.
24 June 2016

MoneyWeek

36

property

This week: properties for around 500,000 including a 17th-century thatched cottage in Crediton, Devon,
Castle, Cantal, Salers, France. A restored castle in a valley, surrounded by
parkland gardens. It has large fireplaces, access to the 15th-century rampart walk and
restored outbuildings in the grounds, including a heated swimming pool. 5 beds, 2
baths, 3 receps, library, 49.4 acres. 500,000 Groupe Mercure +33 (0)666 792 653.

Beach Retreat, Marina Esplanade, Ramsgate, Kent. A contemporary apartment in

a prime beach-front location with views over the Royal Harbour and Sandwich Bay.
It has floor-to-ceiling windows and a balcony. 2 beds, 2 baths, open-plan living room/
kitchen, garage parking space. 495,000 Strutt & Parker 01227-451123.

Glebe Cottage, Woolfardisworthy,

Crediton, Devon. A 17th-century, Grade
II-listed thatched cottage with country
views. It has a stone newel staircase,
beamed ceilings, oak-framed leaded
windows and an inglenook fireplace with
a wood-burning stove. 4 beds, 2 baths,
3 receps, gardens, paddock, orchard, 1.4
acres. 525,000 Savills 01392-455755.

MoneyWeek 24 June 2016

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property

37

Devon, a restored castle in Salers, France, and a beachside apartment in Ramsgate, Kent
Lintzford House
East, Lintzford,
Tyne & Wear. This
Grade II-listed, semidetached Georgian
house is part of a
conversion of a former
paper mill and is set on
the riverside at the edge
a village. It has wood
floors and a traditional
marble feature fireplace.
4 beds, 3 baths, 3
receps, garage, gardens.
495,000 Sanderson
Young 0191-213 0033.

Nithbank House,
Thornhill, Dumfriesshire. A
Grade C-listed house dating
from the 1800s on the banks
of the River Nith. It has a
large kitchen, landscaped
gardens and a stone barn
with planning permission for
conversion into a three-bed
cottage. 6 beds, 4 baths,
3 receps, tennis court, 4.4
acres. 525,000+ Knight
Frank 0131-222 9600.

British School House,

Moreton-in-Marsh,
Gloucestershire. An 1840s
former headmasters house
with exposed stonework,
beamed ceilings and a
drawing room with a
double-height vaulted ceiling.
2 beds, bath, 2 receps,
galleried library, garden.
500,000 Strutt & Parker
01608-650502.

Almeida Street, London N1.

A basement flat in a Victorian house
close to the main shopping area and
transport hub of Angel, Islington.
It has wood floors, an open-plan
living area and good storage. 1 bed,
bath, share of freehold. 494,950 Savills
020-7226 1313.

moneyweek.com

West Scholes,
Queensbury, West Yorkshire.
A 17th-century, Grade
II-listed former farmhouse
and brewery with country
views. It has stone inglenook
fireplaces and a large
kitchen with an Aga. 5 beds,
3 baths, 2 receps, library,
outbuildings including a
workshop, former stables,
dairy, gardens. 499,950
Hunters 01422-385137.

24 June 2016

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cars
38

XX

cars

McLarens theatrical
supercar
Most supercars are about as practical as a pair of speedos
in a snowstorm, says Alistair Weaver in The Sunday Times.
McLaren would like you to believe that its 570GT is different.
The car is based on the 570S but for added practicality you now
get a side-hinged rear window. This apparently transforms
the car from a self-indulgent toy into a versatile grand tourer.
Still, no one buys a supercar for practical reasons, and as a
supercar, no other car in its price range is quite as super. It
has theatrical looks, a cockpit swathed in leather and carbon
fibre, and the digital dashboard
will make you think youre driving
Kitt from the hit 1980s TV show
Knight Rider.
Rider Its certainly the best
car McLaren makes now and it
stands alongside the Ferrari 488GT
as the best of the bunch.

magazine. The
ride is smooth and
supple, and the engine and
wind noise are muted. But once you
press the throttle, it will accelerate as quickly and effortlessly as
a supersonic travelator. From rest, 62mph is eerily dispatched
in just 3.4 seconds, and the top speed is 204mph. Corners are
as much fun as the straights, thanks to phenomenal grip levels,
and the steering is a delight. This is one
astoundingly quick car that handles
beautifully. You will struggle to get
these levels of pace, excitement and
sense of occasion anywhere else.
Price: 154,000. Engine: 3,799cc
32v twin-turbo petrol V8.
Top speed: 204mph. 0-62mph: 3.4
secs. Power: 562bhp at 7,500rpm.
Torque: 443lb ft at 5,000-6,500rpm.

Its quite a civilised beast to drive,

says Phil McNamara in Car

Wine of the week: a dolcetto packed with fruit and energy

2013 Dolcetto di Diano dAlba, Sor Costa
Fiore, Cascina Adelaide, Piemonte, Italy
(14.99, VirginWines.co.uk).
While I am putting the finishing touches
to my massive, inaugural Piemonte
Report, which covers the two principal
powerhouse wines of the region,
Barolo and Barbaresco, I am conscious
that I will only be featuring a handful
of elite barberas and dolcettos in this
tome. While nebbiolo, the variety which
gives longevity and majesty to both
by Matthew Jukes
Barolo and Barbaresco, is the local hero
grape and barbera a variety worthy of note, dolcetto, which
drinks young, is always at the back of the queue. So let me
redress this balance this week with a triumphant example of
this underrated red grape.

MONEYWEEK

24 June 2016

The Cascina Adelaide estate understands that

the dolcetto grape is all about vibrant black-cherry fruit
and so it astutely leaves oak out of the equation. The
estate also realises that most dolcettos are thin and
dilute so, by contrast, it packs its Costa Fiore wine
with fruit and energy.
This wine is at its peak now and it performs the
same sort of duties that elite cru Beaujolais or
old vine Bierzo (menca from Spain) might do at
your dinner table serve it slightly chilled and it
will romance top charcuterie, terrines and pies,
barbecue favourites and even mildly spicy Asianinfluenced dishes.

Matthew Jukes is a winner of the International

Wine & Spirit Competitions Communicator of the

Year (MatthewJukes.com).

moneyweek.com

blowing it

39

blowing it

39

The new young fogeys

A couple of years ago
I wrote about Generation
Y, the young people born
between 1980 and 2000
sometimes known as
Generation Yawn. One
of them, Rachael Dove,
24, confessed in The Daily
Telegraph that she hardly
ever drank enough to get
a hangover and couldnt
remember the last time she
went clubbing or to bed
after midnight during the
week. Some of her friends
were going to knitting
classes. I quoted Professor
Fiona Measham of Durham
University: The generation
before Generation Y
were bar-hopping,
binge-drinking and taking
cocaine. Now there is
a new sense of sobriety
among young people.

what she thought. We

werent as boring as that,
she said, but perhaps the
millenials are.

Old Bond, new villains

You must forgive me,

James Bond tells Vesper
Lynd in the novel Casino
Royale, after informing
her that Taittinger is
the worlds greatest
champagne. I take a
ridiculous pleasure in
what I eat and drink. It
comes partly from being a
bachelor, but mostly from
a habit of taking a lot of
trouble over the details.
Getty Images

The world Bond is talking

about has gone, says the
left-wing journalist Paul
Mason in The Guardian,
Generation Yawn: health-conscious, level-headed and conformist
and not only the class
Cowley, a teenager in the 1980s, went to
distinctions, blurred forever by the
a sixth-form college in Harlow where,
To judge from Radio 4s Analysis
mass luxury brand empires. But Bond
during his first A-level English lesson, one lives on in films so its time he took on
programme, things havent got any
of the students asked if he could smoke.
better or worse, depending on your
new villains. Perhaps Spectre should now
Yes, said the teacher, a bearded poet
point of view. Jason Cowley, the editor
represent the global oligarchy, ripping
manqu. Five or six others promptly
of the New Statesman, examined the
off the world (overpaid CEOs, hedgelit up as well. Returning to Harlow,
millennial generation (who overlap with
funders, fracking bosses, etc). Bond could
Cowley found the students he met
Generation Y). He was struck by how
start by having a quiet word with the
preoccupied with exams and getting jobs.
socially responsible they are, these new
man who tried to hike the price of HIV
They objected to being called boring,
young fogeys. The figures back him up.
drugs from $13.50 to $750, and then
Cowley wrote in The Times, but they are
According to the Office for National
move on to the Saudi millionaires who
certainly level-headed and realistic, if a
Statistics, this could be the best-behaved
have bankrolled violent jihadism. And
little too conformist. And theyre always
generation since the rebellions and
the villains wouldnt be that different:
fiddling with their wretched smartphones the old Bond, after all, took on greedupheavals of the 1960s. More than a
and oversharing the small details of
quarter of young adults in Britain today
inspired madmen and cat-stroking
their lives.
are teetotal; teenage pregnancy has fallen
sadists. There are plenty still around.
markedly; millenials smoke much less
At a Generation Y party on Saturday
and take fewer drugs; the level of school
I asked one of my daughters (born 1990)
truancy is at a record low.

Tabloid money... Or, or, or. Sir Philip Greens actions have more ores than a Monaco brothel
n So-called body-shaming advertisements are to be banned
from Londons tube and bus network, reports the Daily Mail.
The new mayor, Sadiq Khan, has announced a block on
advertisements that demean women or encourage them to
conform to unrealistic shapes. The policy means controversial
marketing campaigns such as Protein Worlds Are you beach
body ready? poster (pictured), which
provoked a huge backlash last year
will no longer be allowed.

Rex Features

n When quizzed about his new 48.8m

plane, Sir Philip Green said: I dont
want to talk to you. Is that clear? I
presume he doesnt want to talk about
his new 100m yacht either, says
Kelvin MacKenzie in The Sun. Or
how his missus owns all his assets
in Monaco so he will never pay tax
on their disposal. Or how he stopped

moneyweek.com

everybody talking to the Pensions Regulator ahead of the

BHS sale to the thrice-bankrupted Chappell. Or, or, or. Greens
actions have more ores than a Monaco brothel.

n George Osbornes Tory leadership hopes appear to be in

ruins, whatever the outcome of the referendum, says Ephraim

Hardcastle in the Daily Mail. Did
the lean and hungry look he adopted
under the tutelage of his 98,000 chief
of staff Thea Rogers, 32 including a
Caesar haircut, a slimmer figure after
a 5:2 diet and a Mockney accent
end up souring his previous friendly
character, making him seem shrill and
hysterical? A rich man thanks to his
familys interior decorating business,
hell never be short of money. Exoccupants of the Treasury have little
difficulty finding lucrative board jobs.

24 June 2016

MoneyWeek

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XX

crossword
crossword

Tim Mooreys Quick Crossword No. 799

Bridge by Andrew Robson

A bottle of Taylors Late Bottled Vintage will be given

to the sender of the first correct solution opened
on 6 July 2016. Answers to MoneyWeeks Quick
Crossword No. 799, 8th Floor, Friars Bridge Court,
41-45 Blackfriars Road, London SE1 8NZ.

Forcing or competitive?

41

On this weeks deal, South intended his Three Heart bid as

competitive (ie, non-invitational to game). However, North was
not on the same wavelength and gave the matter not a seconds
thought before raising to game. How would you play the Three
Heart bid Id opt for competitive?
Dealer North

Neither side vulnerable

AQ32
AK2
1063
753

109764
J5
AKJ5
Q2

15 across was the first to reach the other unclued answers.

ACROSS
1/4
(5, 4)
9
Reddish brown; dark horse (3)
10
Profitable (9)
12
A very high price (especially in
US) (3, 6)
14
Kind of dance; spigot (3)
15
(5, 8)
17
Quick swim; party
preparation (3)
19
Say again (9)
21
Fried savoury dishes made with
20 (9)
23
Kind of iron; farm animal (3)
24/25 (5, 4)

DOWN
2 Capital of Washington state (7)
3 Formidable task (4, 5)
5 Unfertilised 20 (3)
6 Kick out (5)
7 Not a lot (1, 3)
8 Go back into business (6)
11 Regular writer on a newspaper,
say (9)
13 Competitors who finish second (7-2)
15 Very passionate; like a vindaloo
(3, 3)
16 Surgical instrument (7)
18 Where ships come in; ____ Morgan,
TV personality (5)
20 Breakfast staple essential to 21 (4)
22 Cousin of an ostrich (3)

Tim Moorey is author of How To Crack Cryptic Crosswords, published by

HarperCollins, and runs crossword workshops (TimMoorey.info).

Taylors, a family firm for over

300 years, is dedicated to the
production of the highest
quality ports. Late Bottled
Vintage 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
in colour, with a hint of
morello cherries on the
nose, and cassis, plums
and blackberry to taste.
Try it with goats cheese
or a chocolate fondant.

moneyweek.com

Solutions to 797
Across 1 Knowhow 5 Odium 8 Actor
9 Sceptic 10 Strange 11 Large
12 Fools paradise 15 Degas
17 Embargo 20 Rhubarb 22 Theta
23 Ledge 24 Nanking.
Down 1 Keats 2 Ontario 3 Heron
4 Wastepaper bin 5 (P)Ore 6 Inter
7 Machete 11 (P)Lea 12 Federal
13 (P)Sis 14 Israeli 16 Glued 18 Baton
19 Orang 21 (P)Ace.
No Parking (omission of letter P)
was given by KNOW, PAR and KING
emboldened above.
The winner of MoneyWeek
Quick Crossword No. 797 is:
Stewart MacGlashan of Perthshire.
Answer to Guess the price column
325,000 Humberts 01823-288484.

J
103
974
AKJ10964

E
S
K85
Q98764
Q82
8

The bidding
South

West

3
pass

pass
pass

North
1 NT
4

East
3
pass

West cashed the ace of diamonds at trick one, then, in response to

his partners discouraging signal of the four, switched correctly to the
queen of clubs. East overtook this with the king and the defence was
poised to take two further tricks (assuming a second diamond lead from
East). But at this point things went astray, East falling for the temptation
to try a second top club.
Declarer ruffed the club but still appeared to be a trick short (with
spades not splitting evenly). However, West was in trouble on the run
of the trumps. As declarer led his last trump, West was forced to discard
from king-knave of diamonds and four spades. Dummy, following
Wests discard, held two diamonds and four spades.
If West discarded the knave of diamonds, declarer would simply give
up a trick to the king and so establish a third round winner in the suit.
But when West discarded a spade, declarer was able to throw a
diamond from dummy and score four spade tricks. Ten tricks and game
made, leaving East to rue his failure to lead a second diamond.
For all Andrews books and flippers including his booklet Duplicate
Pairs Tactics see AndrewRobson.co.uk.

Sudoku 799
6

9
7
2
4 7
8
9
3
5 6
8
2
1 5
7
8
9
5
6
4
3
5
MoneyWeek is available to visually
impaired readers from RNIB National
Talking Newspapers and Magazines
in audio or etext. For details, call
0303-123 9999, or visit RNIB.org.uk.

To complete MoneyWeeks
Sudoku, fill in the squares
in the grid so that every row
and column and each of the
nine 3x3 squares contain all
the digits from one to nine.
The answer to last weeks
puzzle is below.

2
4
6
8
7
9
1
3
5

1
5
8
3
2
6
4
9
7

3
9
7
5
4
1
2
6
8

5
7
4
2
6
8
3
1
9

9
6
2
1
3
7
8
5
4

24 June 2016

8
1
3
9
5
4
7
2
6

6
8
1
4
9
2
5
7
3

7
2
5
6
8
3
9
4
1

4
3
9
7
1
5
6
8
2

MONEYWEEK

lastword
42

XX

last word

Were all Gods fools

And were bound for the grave. No use looking sour about it!

Weve been wondering about myths

lately. Myths are not necessarily
untrue. They just cant be known or
proven in the way, say, that Archimedes
could prove that the kings crown was
made of gold. The Old Testament reports
on God, for example, could be literally
true, symbolically or metaphorically
true, or complete fantasy. Unless an angel
speaks to you from a burning bush, you
cant know for sure.

Hey, what couldnt? When you dont

want to do something, its not hard to
find reasons not to do it. Dont want to
mow the lawn? The grass is too wet. Or
its too late in the day. Or the lawnmower
needs oil. Dont want to take a chance on
raising rates? The British could vote to
leave the European Union. The Orioles
could lose a home game. Or someone,
somewhere could catch a cold on his way
to work.

Likewise, we cant know for sure

which candidate for president would be
better. Poor Donald Trump is sinking
in the polls; the media says his reckless
comments are catching up with him.
But who knows? We cant see into the
future only God can. So, we make
our decisions based not on facts, but on
which myths (assumptions and prejudices
that cant be tested) we believe.

Rather than own up to the mess it has

made, the Fed hides behind a myth that
it can protect the economy with centrally
planned interest rates. And now, thanks
largely to its own mismanagement, the
world is deep in debt, with far too many
people all over the world who earn far
too little income to support it. Every loan
comes with a fuse. And the world now
has $200trn worth of debt and plenty
of matches. Brexit is just one of them.
Sooner or later, were going to see some
fire and brimstone.

In newspapers, elections, and most of

public life, myths are more important
than provable facts. They direct trillions
of dollars of spending and set off wars
in which millions are killed. Which
brings us to the US Federal Reserve. The
Fed says it wants 2% consumer price
inflation. But there is nothing scientific

Yellen pretends not to notice. What may

be significant is the markets reaction.
Until now, every time the Fed has dodged
fate, investors bought stocks. They
expected stocks to rise, in celebration

Rex Features

Bill Bonner

about that figure. Is 2% better than, say,

1%? Or no inflation at all? It is myth.
At last weeks Fed meeting, the prophet
Janet brought forth the expected blahblah to explain why they were still not
ready to raise interest rates. Sticking her
neck out, she said the Brexit vote this
week could have consequences for the
financial system.

How will the market react to a hyperactive Fed?

of more easy money. Not this time.
Yellen backed off her previous
commitment to raise rates gradually and
instead strongly hinted that interest rates
may stay depressed for a long time.
But instead of rising on the news, the
Dow registered its fifth straight day of
decline. Who can take up the slack?
Amor fati was Nietzsches expression.
It means love of fate. It is a white shoe
yearning for mud. It is a turkey looking
forward to Thanksgiving. Or an investor
stoically preparing for a bear market.
We use the term to describe the grace
and courage you need to meet a complex,
unknowable, and uncontrollable future.
We are all human all Gods fools
and all bound for the grave. No use going
there with a sour look on your face! And
no use pretending it isnt so.

The bottom line

340,000 The value of cannabis produced annually
in 12 caravans at Glynmill traveller site in Merthyr
Tydfil, a camp that had received grants totalling 3.1m
between 2011 and 2014 from the Welsh government.

28m The estimated cost to the economy

of closing the M1 for 28 hours after a
45-year-old man climbed onto the gantry
over the motorway.

157,000 The number of indebted

Russians added to a list between January

and May that bans them from travelling
abroad, an 80% increase on the same period
the year before. A 2007 law prohibits those
who fail to pay debts exceeding 10,000
roubles (110) from leaving the country.

$15m The value of the reputational damage

claimed by former stock broker Andrew Greene,

MONEYWEEK

24 June 2016

who is suing the producers behind the 2013 film The Wolf
of Wall Street
Street, claiming he is behind the character of Nicky
Rugrat Koskoff. Leonardo DiCaprio (pictured), who played
Jordan Belfort in the lead role, has been ordered to testify.

46m The reported cost of Sir Philip Greens new

Gulfstream G650ER private jet. Green recently faced

MPs over his role in the demise of high-street chain
BHS, which left a 571m hole in the pension fund.

$17bn The value of the treasure from a shipwreck

at the centre of a row between Colombia and

American salvage firm Sea Search Armada, both of
whom claim to have found it. The Spanish galleon
San Jos was sunk by the Royal Navy in 1708.

60m

How much Mdecins Sans Frontires got

in funding from the EU and Norway last year. The aid
organisation has refused to accept any more money in
protest at the EUs response to the refugee crisis.

moneyweek.com

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