Tailpieces Blog Post 268

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Switzerland Delivers Two Political Shocks

Switzerland Delivers Two Political Shocks

Daniel Hannan, the well-known British politician, says Switzerland “has pretty much everything going for it: low taxes, high wages, minimal unemployment, dispersed government… direct democracy.” According to UN measures of healthcare, education, life expectancy and the like, it is the world’s third best country in which to live.

Hannan was commenting on Switzerland’s important decision to abandon negotiations with the European Union – which surrounds it – to agree to a single “framework agreement” replacing 120 treaties currently governing aspects of Swiss/EU relations.

It became clear that the Eurocrats “were not interested only in a tidying-up exercise,” Hannan says. They wanted to pull Switzerland  “more firmly into their regulatory orbit, imposing stricter rules on state aid, social security and free movement” of people.

For the Swiss, that was a step too far. They see closer union as “incompatible with the principles that govern their confederation, namely dispersal of power to the cantons [states] and regular use of referendums.” Switzerland is “an exceptionally open and multilingual society, a quarter of whose population is foreign.”

Their GDP per head is roughly twice the European Union’s. Hannan says system of governance has served to make the Swiss “the richest and freest people in Europe.”

A second political shock was voters’ rejection in a referendum of key measures to combat climate change. They vetoed government’s plans for a car fuel levy and a tax on air tickets.

China’s Dangerous Research

China’s Dangerous Research

Donald Trump is turning out to have been right when he blamed China for being responsible for the Covid-19 virus, but the truth could even be nastier. Since 2017 American officials have been warning about “risky” research, including animal experiments, at the Wuhan Institute of Virology on behalf of the Chinese military.

“China is the wild west for medical research,” says Eoin Treacy of FullerTreacyMoney. “The moral, ethical and safety considerations that slow down research in much of the developed world are ignored in China. If one wants to do research that would be frowned upon at home, you will find a welcome in China. All manner of experiments with new biomedical technology are taking place, often behind closed doors.”

Popular stories focus on human testing for biologically enhanced capabilities. China is the world centre for organ transplants, often based on forced harvesting of the organs. Forced mass sterilization of Uighurs has been reported.

Given the way the Chinese authorities manipulate scientific information and hide details of sensitive research, “it would be foolish to avoid the conclusion that China has an advanced program for biowarfare.”

It’s a Good Year for the Loonie

It’s a Good Year for the Loonie

Canada’s dollar may fare better than other commodity currencies such as the Australian and New Zealand dollars for the rest of this year, Bloomberg reports. Already near multi-year highs,  the Loonie still has potential to add to its gains, given the surge in commodity prices and an economy forecast to grow at the fastest pace in several decades.

The central bank has announced a scaling-back of government debt purchases and an accelerated timetable for interest-rate increases. “2021 may well turn out to be annus mirabilis for the currency, not only against its commodities’ peer group but also the wider G-10 complex.”

Canada is an important midsized economy that I and other commentators and investors often overlook. It has a long history of fostering upstart companies that come to dominate in bull markets. Nortel Networks, Blackberry, Canopy Growth, Brookfield Asset Management and Shopify all come to mind. But it’s the off-maligned extractive sector that forms the basis of the country’s wealth and stability. It has some of the world’s biggest resources of oil, coal, iron ore, potash, nickel and uranium.

Moonshots Can Be Good Selections

Moonshots Can Be Good Selections

Some experts now argue that it makes sense to invest aggressively in a narrow clutch of companies that are potential superstars, almost irrespective of their prices.

Their logic is based on research by Hendrik Bessembinder, a finance professor at Arizona State University. It shows that of roughly 26,000 companies listed in the US between 1926 and 2016, only 4 per cent accounted for all the net wealth creation over the period of almost $35 trillion.

Internationally, (that is outside the US), the skewed nature of stock market returns has been even more extreme. Over the period 1990 to 2018 less than 1 per cent of listed companies accounted for the entire $16 trillion of net worth creation.

The data imply that finding just one nascent superstar can more than compensate for losses made elsewhere.

“Historically, so-called growth stocks have underperformed in the long run because of our human inclination for optimism, which lead to overpaying for lottery-ticket-like stocks,” says the FT’s Robin Wigglesworth. But perhaps that may make more sense today.

“The winner-takes-all dynamic of the modern digital economy arguably means lottery-ticket stocks pay off far more than they have in the past.” The concentration of wealth creation “is rising and is now at an all-time high.”



What to invest in now: Instead of worrying about whether to prefer value or growth stocks, investors should focus on companies with strong fundamentals poised to benefit from the cyclical economic recovery and long-term strong secular growth trends, such as those we are seeing in emerging markets, small caps and consumer discretionary sectors, says global equities strategist Saira Malik.

After a long period of outperformance by American shares we can expect Europe and emerging markets, which are significantly undervalued, to do relatively well, says Colin Moore, global CIO at Columbia Threadneedle.

Biden’s tax hikes: They’re likely to depress capital investment, therefore economic growth and job creation.

The FT’s Robert Armstrong says his experience working for an investment fund was that what they looked for were companies that were increasing free cash flow – profit after investment and taxes – which can be handed back to shareholders.

“Companies know this is what investors want, and promise to deliver it. If taxes go up, something has to be cut to keep giving investors what they want. Long-term investment is a natural place to look.”

Weapons: British army chiefs have been warned that their new Ajax armoured fighting vehicles pose safety risks to soldiers if driven at more than half their designed fastest speed, cannot fire their cannons on the move, and cannot reverse over an obstacle more than 20 cm high. Tobias Ellwood, chairman of parliament’s Defence Select Committee, says that at 43 tonnes the weapon is heavier than any tank in the Second World War and can’t be airlifted by any Royal Air Force transport plane without first taking chunks off it.

Boris Johnson: “We thought we’d found our political leader… and rejoiced when he won an 80-seat majority, Toby Young writes in The Spectator. “But now [we] nurse a keen sense of betrayal after he committed himself to the ‘net zero’ agenda and told us we’d have to trade in our luxury sedans – one of our few pleasures in life – for electric shoeboxes.”

Young suggests members should take command of the Conservative party and replace Boris “with Liz Truss (our generation’s Margaret Thatcher.”

Climate change: When meteorologists can’t tell you what the weather will look like next month, why are climatologists very sure what it will look like in the next century, Wojtel Szala asks in his amazing fact-packed newsletter Econoinfo. And if carbon dioxide warms the planet, isn’t that exactly what human civilization actually needs to stop a mini Ice Age in the Grand Solar Minimum period estimated to come roughly between 2020 and 2050? he asks.

Shortages: Although American companies are delivering excellent profits they struggle to cope with shortages of materials and components, the best-known being car factories unable to get supplies of microchips.

Bottlenecks stem from issues such as paucity of raw materials, port congestion and labour shortages. Demand for manufactures has surprised with its strength by the bounceback from pandemic shutdowns boosted by massive fiscal and monetary stimulus and a rapid vaccination roll-out.

Out-of-work: The declining headline unemployment rate in the US ignores the more than 10 million able-bodied Americans between the ages of 25 and 64 who, although they don’t have job, are not counted as unemployed because they haven’t looked for a job recently. Comments James Rickards: “If you’re a waitress, why would you look for a job if half the restaurants in town are closed or out of business?”

Used cars: A major cause of inflation in America now is a sharp rise in prices of second-hand cars and trucks, which in April were 21 per cent higher than last year. Consumers are flush with government handout money and prefer their own vehicles to public transport. Rental companies are scrambling to rebuild their fleets as the economy recovers. There is a lack of new cars because of lockdowns and microchip shortages.

Fertilizers: The steady growth in demand for agricultural chemicals is encouraging mining companies to invest in crop nutrients. BHP is set to make a final decision on Jansen, a big potash project in Canada. Anglo American has bought into a venture to mine a huge deposite of polyhalite (also potash) beneath the UK’s Yorkshire moors.

The self-inflicted economic disaster: “Western governments have spent a year busy gaslighting their own electorates,” says British investment commentator Tim Price. (If you’re unfamiliar with the newly popular word, gaslighting is a form of abuse that causes someone to doubt their sanity or perceptions).

Fixed interest: The Credit Strategist’s Michael Lewitt is scathing about the high-yield bonds that have drawn investors desperate for income. They offer investors nothing better than “prison food and starvation rations.”

New highs: Stock markets of countries that are major suppliers of natural resources surged to new highs at the start of the month – Australia, Canada, South Africa, Brazil.

Polysilicon: More than three-quarters of this material, a key component of solar panels, comes from China.

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