Tailpieces

Inflation: It’s still rising in America. In February the CPI rate reached 7.9 per cent, the highest figure for 40 years.

The Federal Reserve has started raising interest rates. Futures suggest there will be three more increases this year, and some policymakers expect as many as seven rises. Eoin Treacy, the well-known technical analyst, has a strongly contrary view. The Fed will have “an extraordinarily difficult time raising rates,” he says. If it increases rates seven times, that would make a recession inevitable. That’s fantasy. But even three increases would mean the chances of a recession would be better than even. The one increase already announced could be all that happens; it “sounds about right to me.”

The Atlanta Fed says the American economy’s growth rate has already fallen to 1.3 per cent. Financial conditions are tightening, liquidity measures are signalling caution, high-yield bond ETFs are accelerating lower.

China: The government’s ban on the $100 billion private education industry has had a devastating impact on businesses offering tutoring services. Tai Education reported a $1 billion loss for the first months following the clampdown, compared to a profit of $53 million for the previous comparable period. Competitor New Oriental has disclosed losses of $876 million after being forced to close its school-age tutoring. The government acted to stamp out expensive childhood extracurriculars blamed for exacerbating social inequality.

China is notorious for its corruption, but following the advice given to foreign businessmen operating in the country to stay “clean” doesn’t always work. The bureaucracy actually prefers entrepreneurs to be “dirty” as they are more easily controlled. FT editors Edward White and Victor Mallet say that China’s secretive justice system is “famous for arbitrary detention, torture, forced confessions and a near-100 per cent conviction rate.”

Coal: Investors have been told by almost all advisers to stay away from the dirty stuff. It has no future, they said. But once again, conventional advice has been wrong. Investors who have stayed away from coal have missed some big profits.

Far from declining, coal use globally surged to record levels of the winter. In the US coal-fired power generation has been higher under Joe Biden, its enemy, than it was under Donald Trump, its friend. Europe experienced an 18 per cent rise in coal use last year.

The Ukraine war has sent coal consumers in Europe and Asia scouring the markets for supply and pushing up prices, which hit $400 a ton this month compared to about $82 a year ago.

The anti-carbon mania is throttling production. “Nobody is building new coal mines; no one is getting funding for new mines; but there continues to be a healthy appetite for coal” says Glencore’s chief executive Gary Nagle.

Germany: Its electricity is the costliest in Europe – 70 per cent pricier than France’s — thanks to extreme climate change policies, but its new federal government has been forced into retreat by supply shortages and soaring prices. Robert Habeck, the Green leader who is vice-chancellor, says the government is considering scrapping the long-planned phasing out of nuclear energy, leaving on line three power stations due to be closed at the end of this year and switching back on three that were closed in January. That will be enough to replace 11 billion cubic metres of natural gas a year, or one-eighth of current energy needs. Germany is also increasing its consumption of coal, the dirtiest fossil fuel, after years of cutting back.

Incidentally I see that half of the cost of the Nord Stream 2 gas pipeline under the Baltic that Germany has refused to allow to operate will be lost by five European energy firms.

Defensive investing: The golden rule of investing – diversify – applies more than ever when the world is turbulent, says Tom Stevenson in The Telegraph. Harry Markowitz, the father of modern portfolio theory, called it “the only free lunch in finance.”

The three most important ways to diversify a portfolio are across individual shares, asset classes and geographies.

Evidence suggests that most individuals’ portfolios are far too focused. A study of accounts at a large American brokerage a few years back showed that the average holding was just four stocks, with younger and less sophisticated investors holding the most concentrated portfolios. Since 1926 it’s been the stellar performance of just a small number of shares that have accounted for all the gains achieved. The more concentrated your portfolio is, the less likely you are to have an exposure to that handful of top performers.

Risks in global finance: Two dangers stand out, says The Economist. One is leverage hidden in shadow banks and investment funds. Total borrowings and deposit-like liabilities of hedge funds, property trusts and money market funds have risen to 43 per cent of GDP. Firms can rack up huge debts without anyone noticing. Archegos, an obscure family investment office, defaulted last year, imposing $10 billion of losses on its lenders.

The second danger is that the system still relies on transactions being channelled through a few nodes that could be overwhelmed by volatility. Exchange traded funds, for example, with $10 trillion in assets, rely on a few small market-making firms to ensure that the prices of funds accurately track the underlying assets they own. Trillions of dollars of derivatives contracts are routed through just five clearing houses.

Electric cars: Americans have been less enthusiastic about switching to electric vehicles than drivers in other big markets because of smaller government subsidies, long driving distances and a lack of options beyond Tesla luxury models. Drivers are still fretting about whether electric vehicles work efficiently in cold weather – although this doesn’t appear to be a problem in Norway, the country where the switch to electric has gone furthest.

Last year sales of electric models in the US more than doubled, but still added up to less than 5 per cent of new passenger vehicles, compared to about 14 per cent in both China and Europe.

Renewables: What countries that expand solar- and wind-generating capacity fairly quickly discover is that the marginal benefit of installing more of it rapidly decreases as more capacity is installed, Prof. Anton van der Merwe writes in the FT. This is because they are intermittent and there is no affordable and scalable way of storing this power. It is not clear when affordable storage will become available. Until this problem is solved, we will continue to rely on fossil fuels to back up renewables.

A better answer, he suggests, would be to use nuclear power as back-up. (But we know that is expensive, controversial, and the facilities take a long time to construct).

Safe havens: Wealthy Russians fleeing from international sanctions are heading for places in the half of the world that refuses to apply them… and are benefiting from the international conflict.

One of the most successful is the United Arab Emirates. There are already an estimated 40,000 Russians living in the country, whose government has taken a neutral position on the Ukraine issue. Many wealthy Russians have established businesses there. Others have bought residence. Investment of $200,000 gives the right to live there for three years; larger amounts can secure longer-term “golden” visas.

Australia: It’s doing well out of the commodities boom. Natural gas, oil and wheat account for 18 per cent of exports; coal for another 14 per cent.

The other positive feature about the economy is the potential for a domestic consumption boom as 25 million Australians emerge from lockdown with household deposits at A$249 billion – 25 per cent high than prior to Covid.

A general election is due in May. The opposition Labor Party is five to ten percentage points ahead in the polls.

The pandemic: Vaccines don’t stop people from become infected and they don’t stop the spread of the virus by those who are infected, argues the Daily Reckoning’s Jim Rickards. The data shows that the fully vaccinated are more likely to catch the Omicron variant than the unvaccinated.

Extensive evidence is emerging that the mRNA vaccines produce myocarditis (heart failure) in men under 40, and particularly those in the 16- to 25-year range.

Anti-greenery campaigner: Britain’s best-known populist politician, Nigel Farage, has launched a movement to torpedo the country’s net zero emissions policy by campaigning for a referendum on the issue. Farage is credited with achieving Brexit, a policy almost no one expected would be achieved when he started campaigning for it as it was overwhelmingly opposed by the nation’s ruling elite.

Relocating to Latin America: American commentator Doug Casey says he would put Panama at the top of his list as a place to live. It’s very international, very urban (in Panama city), and very sophisticated. His second choice would be Belize. It’s English-speaking; more a part of the Caribbean, ethnically and culturally, than of Latin America. Casey was long a fan of Costa Rica but says it’s now overrun with Americans and very expensive.

Crazy policies: After years of using fierce sanctions to prevent Iran and Venezuela from selling their oil, the Americans have reversed their policies. They now want them to sell lots of the stuff. And after years of preaching about the evils of fossil fuels, they want allies such as Saudi Arabia to pump more. Quickly.

Vaccine deaths: According to the European Medicines Agency, 3.7 million suspected adverse drug reactions to the Pfizer-BioNTech, Moderna, AstraZeneca and Janssen anti-Covid vaccines, which resulted in 40,788 deaths, were reported to the end of last month. I leave you to guess why this readily-available public information isn’t reported by mainstream media.

Tobacco: It is easily the most profitable of China’s state-owned enterprises, and therefore escapes the robust anti-smoking policies imposed elsewhere in the world on the industry. The China National Tobacco Corporation monopoly makes and sells four out of every ten cigarettes smoked in the world.

Electrification for climate change: Implementing this will require enormous quantities of materials such as copper, nickel, manganese, lithium, and more common metals such as steel and aluminium. How’s it going to be paid for? No one seems to have a credible answer.

Windmills: The newest batch of offshore wind turbines are the largest rotating machines ever built. They keep getting bigger because there is a 45 per cent increase in generating capacity for a 19 per cent rise in diameter.