Across the Atlantic, bank stocks are crumbling like a Jenga tower, posting losses of up to a half in a single day, with big banks seemingly just as vulnerable as small ones. At this rate, the entire American public will end up banking with JP Morgan, which thanks to its rescue missions so far, already has 15 per cent of all deposits in the US. Meanwhile, it’s business as usual over in the UK. Bank deposits have fallen a bit, but nothing to see here, let’s move on.

Can this insouciance really last? Are conditions so different here? Well, up to a point. The US banking system is much more fragmented that that of the UK, but it would seem that the banks overdosed on the Kool-Aid of thinking that long-dated US Treasury bonds were low-risk. They are, of course, in that a US default is highly unlikely (assuming that the traditional stand-off in Congress over the debt ceiling is resolved) but if you buy a long-dated bond on a yield of 1 per cent, its current value was always going to fall a long way once interest rates climbed off the floor. It is all very well telling the auditor that you are holding the bond to redemption 20 years hence, but that’s no help when your depositors can demand their money back at the click of a mouse.

Professor Amit Seru, a banking expert at Stanford University, told the Daily Telegraph: “Thousands of banks are underwater. Let’s not pretend that this is just about Silicon Valley Bank and First Republic. A lot of the US banking system is potentially insolvent.” The US Fed monitors securities for sale, and those that are (now euphemistically) called “held to maturity”. The combined unrealised losses are over $600 billion. Add in pension funds and insurance companies, and the unrealised losses could top $5 trillion.

This is the bill presented after the binge with of our old fair-weather friend, Quantitative Easing, the practice of central banks buying long-dated government stocks (and driving the yields right down to those ridiculous levels) with money that they effectively printed. As we know now, there is a terrible price to pay for dancing down this primrose path. Central banks everywhere must decide whether embedded inflation is worse than stalled economies. So far, having failed for so long to see what was coming, they are trying to tackle inflation. The Bank of England is highly likely to follow the US Federal reserve and raise Bank Rate again next week.

Such moves only have an impact after a lag, typically many months. There are growing signs that one more rise will be enough to start the UK on the long and painful road back to 2 per cent inflation. Indeed, an increasing minority is arguing that the monetary tightening has already been too fierce, and that interest rates will need to be cut to prevent a severe recession, with plunging share and property prices, rising unemployment and general misery.

The traditional beneficiaries of such conditions are holders of bonds. Ironically, a recovery in bond prices, with the concomitant fall in yields, would ease the “mark-to-market” problem for holders who are currently under water.

The unrealised losses are less for UK banks, and the shares look like havens of stability by comparison with US banks. All of them, even Barclays, have substantial reserves, and are making hay from the growing gap between the interest paid on deposits and that charged on their loans. They look increasingly like building societies, with mortgage lending accounting for most of their advances, and our paranoia at any significant fall in house prices would surely see the government stepping in to help.The Bank of England keeps saying that all is well, which is not a good sign, but the best guess today is that the banking panic virus will not cross the Atlantic.

The lost plot at Shell

They are a pretty cloth-eared lot in the Shell boardroom. This week the oil giant declared giant oil profits, prompting the predictable knee-jerk reaction from the usual suspects about “obscene” profits, the need to confiscate even more of the gains, etc etc.

You might think the shareholders were lighting up their cigars, or at least revving up their SUVs, but consider the recent history. Going back to the company’s great panic of March 2020, when the world was about to end, the board ditched a dividend policy stretching back more than half a century. The 47c a share quarterly payout was scrapped, and cut to just 16c.

The world did not end after all, and six months later the payout was raised to 16.65c. We all know what happened next, so another new dividend policy was needed. This week’s quarterly is 28.75c, and this policy is to raise it at 4 per cent a year. Four per cent! That means the payment will take another nine years until 2032 to get back to the 2019 level.

Shell is spending much more money now on share buybacks than on dividends, although there is little to show for it with the shares at the same price as they were in 1997. The board would doubtless disagree, but the damage to sentiment and confidence from the dividend cut, and the seeming indifference to restoring it is a major reason why Shell shares have been such a miserable investment.

Listen to A Long Time In Finance, a free weekly podcast with Jonathan Ford, by going to Spotify or Apple apps.

I apologise to readers of my blog, but the WordPress site alongtimeinfinance will not work for me.

to all readers. WordPress is not letting me write in my current site, alongtimeinfinnce.wordpress.com. I have told them, and they say there is no problem. There is. Perhaps this message will encourage them to solve it.

Neil Collins

and salut’e. This will be the last email from this site. In future, if I can conquer the technology, my column will be published under alongtimeinfinance.wordpress.com

As you can see, even trying to work out adding an acute e is beyond me (and Google too, I found)

Jonathan Ford and I are continuing and expanding our Podcast, A Long Time In Finance

I can’t switch you over, unfortunately. You’ll have to do it yourself.

Thanks for reading, and may 2023 prove to be a better year for all of us.

Neil

The problem for the beleaguered Monetary Policy Committee is that its members are invited to believe in three impossible things before breakfast. Not quite as bad as the Red Queen’s six, but here’s the clue. The objectives of the Bank of England shall be: “to maintain price stability, and subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.” The letter to the governor, Andrew Bailey, is dated October 2021 and signed by the Chancellor, Rishi Sunak.

Since then, the 2 per cent inflation target has been swept away by seismic events which the MPC totally failed to see coming. Yesterday it funked yet another chance to claw back a little of its battered credibility, raising Bank Rate to 3 1/2 per cent when a 3/4 per cent rise would have shown it was determined to get back on top of the first part of its remit.

Unfortunately, it was again stymied by the the letter’s woolly demand to think about prospects for growth and employment. It should be admitted that the prospects for both are pretty bleak, but tacking them on to the simple target for inflation just adds confusion to the MPC’s decision-making, inevitably pushing it towards the lowest Bank Rate it can plausibly impose.

The minutes more or less admit that the rate will have to go higher (the market expects at least 4 1/2 per cent) so it is doubly hard to see the point of small steps. “If it were done when ’tis done, then ’twere well / It were done quickly.” That might serve as the MPC’s motto for 2023.

World wonders at Whitby

“System working well, please send more money” said the man as he tried to break the bank at the casino in Monte Carlo. The version from Stephen Pearce, finance director at Anglo American, looks much the same, only with more zeros attached. The system, in this case, is the Woodsmith fertiliser mine, an extraordinary project under the North Sea near Teesside. Not very near, unfortunately, and inside a National Park, which means it requires a 23 mile underground transporter system from the mine to the port.

When Anglo rescued the project nearly three years ago, the £405m price looked generous to all but the locals who had been seduced into the project and lost money. At the time, Anglo reckoned it would take $3.3bn to complete. This month Mr Pearce, describing it as Anglo’s second-biggest capital undertaking, explained how he was improving the project’s configuration to get full value over the coming decades. “This will extend the development schedule and the capital budget, compared to what was anticipated prior to our ownership, and so potentially impact our carrying value of Woodsmith for accounting purposes at the year end.”

Such an elegant turn of phrase, Mr Pearce, for having to make a socking great provision against the cost. He expects to spend another £800m next year, as the project really gets going. On completion, the conveyor taking the output under the North Yorks moors to the port will be one of the wonders of the world, far longer than anything similar attempted in the past. Fortunately, Anglo is big enough to absorb the financial and engineering pain. One day, in the far future, the mine might even prove financially worth while. One day.

Nuclear conFusion

We do love our “nuclear breakthrough” stories, to help us dream of the day when we can create almost infinite power for the cost of turning a few hydrogen atoms into energy, as in Einstein’s famous equation. This week’s excitement was of a “milestone”, creating more energy from a controlled nuclear reaction than it cost to stimulate it. A few small details need to be sorted before the great day dawns.

For a start, the “gain” ignored the energy cost of turning a vast surge of electricity into lasers to fire at the huddled group of atoms suspended in the middle of billions of dollars of hardware. The reports also mostly ignored that those atoms weren’t any old hydrogen atoms such as you find in tap water, but a mixture of deuterium, or heavy hydrogen, with its extra neutron. If deuterium is rare, then the other component, tritium (with two extra neutrons) is so rare that the best guess is that there is only 50lb of it on the planet. You can pick some up for about $1m an ounce.

One day, maybe, commercial nuclear fusion will be a reality, but it won’t be in my lifetime or yours. In the meantime, we will have to keep plugging away with nuclear fission and hydrocarbons, while clinging on to the delusion that we can all keep warm on windmills and sunbeams.

A Long Time In Finance is a free weekly podcast from Jonathan Ford and me. Listen on Spotify, Acast or Apple apps.

Once upon a time Lloyds Bank shares cost over £6, ranking it as one of the most valuable banks in the world. That was before the banking crisis which poleaxed the entire sector and forced a government bailout. Lloyds is no longer a government pensioner, but the shares have never recovered, and at just 46p are little more than half the book asset value of the business. A bargain, you might think, for a domestic bank which also owns Halifax, giving it a UK market share which it would never have been allowed in normal times.

Well, maybe. The calculation depends on the value of the assets, which are mostly loans, mortgages and other clever financial toys where banks put their depositors’ money. The difference between that value and the liabilities to depositors and other lenders is the shareholders’ portion, and their comfort blanket. The crisis proved that a thin blanket was no protection in a banking winter, so as part of the price of rescue, banks were forced to ring-fence depositors’ accounts while accumulating profits to build up something warmer.

They have done so, up to the point where they are again paying dividends. Now they want to ease the rules on ring-fencing, eyeing the more exciting parts of banking, where the rewards are much higher. So, too, are the risks, but every banker thinks he can spot them, even though history shows that he can’t. The request for easing has been dressed up as an “engine for growth” since that’s what every politician says he wants nowadays. There is little evidence that more freedom would really lead to more investment, rather than to more complicated derivatives promising better returns for the banker and the illusion of lower risk to the buyer.

Still, with a thick enough blanket, our banker might be allowed to gamble with some of the customers’ money, but contrary to what you might have read about how well-capitalised banks are today, the blanket is not that thick. Figures from the Bank of England show that the “simple leverage” ratio in June was just 5.9 per cent. This is a huge improvement on the 2.7 per cent immediately ahead of the banking crisis, where a 2.8 per cent fall in the value of the assets was enough to wipe out a bank (and did).

However, with a recession looming, with its associated bad debts and write-offs, the cushion is not exactly plump. Clearly, to judge by the shares’ discount to stated net asset value, the market is skeptical of the published book value. In the summer John Vickers, whose committee recommended ring fencing in the first place, suggested a stress test based on those market values. If one were to be performed today, it would show that it is much too early to let the British banks out to play.

We’re all doomed! doomed!

Sometimes it’s just as well that economic forecasting is so difficult. It’s also encouraging that the consensus is so often wrong, since the general agreement is for an outlook somewhere between ghastly and disastrous. We are paying the price for decades of living on tick, believing that we should be paid more each year for doing the same job, preferring consumption today to investment for tomorrow. Here, for an extreme view, is Nouriel Roubini, a respected economist writing in Project Syndicate. “The unavoidable crash” is the unequivocal title of his missive.”The mother of all economic crises looms, and there will be little that policymakers can do about it.”

The butterfly years are gone, and it’s payback time. Outstanding debt across the world has risen from 200 per cent of GDP in 1999 to 350 per cent in 2021. The figures for the advanced economies are even higher, at 420 per cent. What do these numbers mean? In truth, nobody really knows. Quite a lot is owed by governments, which will never be repaid but is not a problem if economies grow faster than the debt (or if inflation shrinks it for them). Some, perhaps a majority, of the rest will default, wiping out bank equity (see above) and perhaps banks themselves.

Should we be worried? That’s almost a definition of economics. Next week the Bank of England is sure (as anything is in the dismal science) to raise Bank Rate again, to 3.5 per cent if the committee is nervous, to 3.75 per cent if it wants to keep atoning for its past sins of omission. Either way, it looks like peak inflation is passing, helped along by the weak oil price, and we may even enjoy the novelty of a stable administration in No10.

So should we despair? Only if, like Mr Roubini, your motto is: Do not be so sad and glum, there’s bound to be far worse to come.

Jonathan Ford and I publish a Podcast, A Long Time In Finance, every Friday. On Spotify, Acast and Apple apps.

If you have tears, prepare to shed them now. This week research by The Guardian revealed that 70 per cent of the UK’s water industry is in foreign ownership. Nothing wrong with that, you might say, they have to abide by the same rules as the rest of the industry, with penalties for breaking them. Who knows, the foreign owners might take a longer, more constructive and compliant view than a bunch of profit-maximising British shareholders.

If only. A combination of poorly-drafted legislation all the way back at privatisation, financial prestigidation and the chaotic regulatory regime has drained the initial equity capital from the industry. Sewage is routinely tipped into rivers and beaches from treatment plants unable to cope with the expanding population. The finances of some of the companies are as opaque as the outfall from their discharge pipes.

The good news, such as it is, is that the companies have at last realised that they have a problem. Rather than duck, they responded to the Guardian with lists of the good things they are doing. Here is Thames Water, the biggest and ugliest of the lot, claiming that it has not paid a dividend to its (mostly foreign) shareholders for five years, and pointing to its plans to invest £2bn more than its revenue. The same sum is promised by the second-largest offender, Southern, recipient of the largest fine on the industry to date.

Only three of the 10 water companies that were privatised 30 years ago remain quoted on the Stock Exchange. Co-incidently, or not, Severn Trent, United Utilities (North West Water) and Pennon (South West Water) are also the least worst offenders. They have transparent capital structures and the directors must face the shareholders in public at annual meetings. A simple step forward presents itself. Water company licences should oblige every one of the 10 to have a London listing, and to ensure that at least 25 per cent of the shares are in public hands. Since the companies are forever pointing out how much equity capital they are having to raise to rescue their balance sheets, they ought to welcome the change.

Change there is going to have to be. The current dog’s-breakfast of regulation could have been designed to ensure inaction, as responsibility is shuttled between the Environment Agency, the regulator Ofwat and Defra, the department in overall charge. But the pressure for better behaviour is mounting. There is a constant trickle of shocking reports of Britain’s foul rivers and beaches, while several groups are gathering evidence and firepower for legal actions.

Privatising a clutch of statutory monopolies was always going to be a bridge too far. It depended on the determination of the executives and, subsequently, their private equity shareholders, to do the right thing. Faced with the prospect of becoming seriously rich by minimising spending and replacing equity with debt, the temptation has proved irresistible. Fortunately, it is not too late, because the rain it raineth every day and if nature is given half a chance, it can work miracles. The choice for the water company executives is clear: behave better, or face a growing legal challenge from an increasingly well-funded group of very cross people.

Neil Collins and Jonathan Ford publish a Podcast, A Long Time In Finance, every Friday. On Spotify, Acast or Apple apps.

The Greek Tragedy that is LDI played out this week in front of the Lords’ industry and regulators committee, co-starring the pair of knights at the top of Legal & General, chairman John Kingman and CEO Nigel Wilson. Alas, the victims of the tragedy were not invited to be present, although their time may come. LDI, you ask? Oh, come on, do keep up with the acronyms. Liability-Driven Investment is the alchemy that allows pension funds to juice up their returns from “risk-free” investments by buying a derivative. In the most extreme cases, LDIs allowed exposure of £7 to UK government stocks for every pound of derivative.

Pension funds can’t (generally) borrow, but if they want to they can buy these financial thingies which produce a similar effect. They increase the fund’s exposure to the bonds which are routinely purchased with lives to match the dates the pensions must be paid. Please don’t call LDI a bet, that’s far too vulgar. L&G (I am a long-standing shareholder) would not much like you to call them bookies. As the knights explained, they facilitate the LDI purchases, but do not carry much risk. Indeed, the company estimated its losses from last month’s market meltdown at £10m. Some outside estimates put the total of forced sales of government stock in the panic at £500 billion.

Ah yes, the panic. When Barmy Liz and her innumerate Chancellor announced their tax cuts, dealers in the gilts market took one look and ran for the hills. Prices slumped (and those of index-linked stocks collapsed) leading to the providers of the clever derivatives demanding more collateral to counter the lower value of their security.

Only the emergency offer of £65bn of support from the Bank of England stopped the rot, in what was Andrew Bailey’s finest hour (to date). The day was saved, although some companies are likely to find themselves being asked to contribute more into their employees’ pension funds to cover the cost of the little misadventure. Some boards might decide to move the management contract to a manager less keen to take this sort of risk.

So far, so (reasonably) well understood. But the central mystery is why the pension funds loaded up with long-dated gilts in the first place. These bonds might have matched the dates for the pension payments, but until the start of this year, the returns they were offering were pitiful, typically around 1 per cent, far less than is needed to keep pace with the growing liability of a defined benefit scheme. The LDIs would juice that up, of course, but buying a 30-year stock on a yield of 1 per cent could be a definition of madness for any student of UK history.

In theory the yield could go down further (ie the price of the stock would rise) but it would have required some heroic assumptions about a sea-change in Britain’s incontinent economic policy for that to come about. Of course pension funds are supposed to be long-term investors, but the cost to a fund of not buying at 1 per cent, and keeping the money in near-cash, was modest even with Bank Rate at 0.1 per cent. The financial repression that gave us those conditions, with the Bank of England supporting prices through its Quantitative Easing programme, could not last, and any funds which stayed liquid can now buy 20-year gilts to match their liabilities on a yield of 3.3 per cent. Not exactly a bargain, but a lot better than 1 per cent.

The lesson from this tale is the usual one: in investing, anything that promises a better return than the market price also raises the risk for the investor. They are two sides of the same coin. The shocking thing is that all those experienced professionals had failed to learn it.

Office for Economic Cant and Decline

Once again, it is time for the pompously-named Organisation for Economic Co-operation and Development to savage the UK. From its agreeable, tax-free offices in Paris, the OECD tells us that it works for better policies to build better lives, and its forecasts are taken as something close to holy writ in the British media. This time, we’re bottom of the class, with miserable prospects for growth, with risks to the economy “tilted towards the downside”. The energy support scheme raised the prospect of inflation staying higher for longer, it added.

It’s all pretty grim, but is it right? When the OECD was invented, half a century ago, economic forecasting was a novelty. Now every self-respecting bank has its own department, often analysing and forecasting in great detail. Independents like Capital Economics are at least as good (or bad) at projecting the future as the OECD. It is redundant, and well past time this taxpayer-funded organisation was sent off into the sunset.

For a less gloomy take on prospects, listen to this week’s podcast of A Long Time In Finance, with me and Jonathan Ford

Politics, it might be said, is the art of pretending to do the right thing while maximising your chances of re-election. Jeremy Hunt yesterday proved himself quite the artist; a little tax rise here, a gentle squeeze on allowances there, a pained regret at allowing inflation to do the dirty work for him while telling us how important it is to fight it. This smorgasbord of measures all helped to disguise the central weakness of budgetting today, that there is no appetite for any real attempt to slow down the advance of the state.

The triple lock for pensions is retained, the education, health and social care budgets are increased, energy prices will still be capped after next April, the 2 per cent Defence target remains, the financial disaster that is HS2 will go on destroying wealth. Oh, and the Sizewell B nuclear power station really, really will be built this time.

Somehow, despite all these spending promises, he has convinced the high priests at the Office for Budget Responsibility to endorse his forecasts of cuts almost as large as the tax rises, doubtless in deference to demands from the Tory hardliners to “balance the Budget”. In reality, this is something that only ever happens by accident, and is routinely promised by chancellors for a time well beyond their likely sojourn in the job. To claim that now would stretch credibility to breaking point. The best Mr Hunt could do was to project a national debt falling as a proportion of GDP by 2027. Even that assumes that public spending really can be brought under control.

Yet we should not be too hard on him. Years of calamitous policy decisions, made worse under Boris Johnson, are exacting their grim toll. From post-Brexit intransigence to help-to-buy, from the ruinously expensive pledge of net zero to the manifest absurdity of the triple lock, the errors were clear at the time. The fiasco of Test and Trace was possibly the worst of the lot.

Unfortunately, the years of almost-free money in seemingly unlimited quantities seem to have persuaded the populace that the government can fix everything. Day after day the good causes are paraded on morning radio, all of them asking for more money, while working from home seems to have undermined the way we view work itself.

Cutting public spending, or even trying to decide that it’s for and where the limits might be, would be hard enough in settled times. With the public sector unions preparing to fight to prevent yet more cuts to their members’ wages, it is probably impossible. Mr Hunt said he was racing into the economic storm. On this showing, and on this Pollyanna arithmetic, he is running before it.

Read-through at Vodafone

It’s jolly tough running Vodafone, the incredible shrinking mobile phone operator. Never mind the competition in the UK (three others, including 3) look at the debt mountain. This was self-imposed 23 long years ago, in what was then Europe’s biggest-ever takeover, of Mannessmann of Germany. Bizarrely, it seemed like a good idea at the time, and Voda shares rose the dot-com wave to 440p, becoming the UK’s most valuable quoted company.

It’s been downhill ever since, and this week’s figures were greeted by a raspberry down the line, as the share price fell below £1 for the first time. Nick Read, promoted from finance director to CEO, described the results as “resilient” and claimed that his dealmaking would “improve returns at pace.” Let’s hope so. History is not on his side. A year ago, new into the job, he told us Voda was “structured for value creation.”

He has created value, but unfortunately not for the shareholders. Perhaps reflecting his promotion, his pay added £700,000 to the previous reward, taking it to £4.2m. Mr Read is not alone with the multi-million pound comfort blanket shielding him from the reality of hard times. Chief executives – and by extension, their lieutenants – are routinely awarded life-changing sums which seem to bear no relation to how good a job they do. The old adage that if a good management takes on a bad company, the company will win, is undoubtably true, but they all seem to get vast rewards, whatever the outcome.

A study from the London School of Economics describes this as a market failure, entitled: If you’re so ethical, whey are you so highly paid? It concludes “When it comes to senior executive rewards, for too long companies have behaved as if they are in the equivalent of an arms race. It is a mad, bad system, and it needs to change if inflation in executive pay is to be brought under control.”

This is hardly a new complaint. Executive pay parted company with the rest of us years ago, and has been rowing briskly away from the wage-slave rabble ever since. In theory, the pages of bonuses, option awards, relative performance and other incentives that festoon annual reports are designed to align the interests of shareholders with those of the executives, but no non-exec would survive long on the board is she tried to enforce that.

There is little dispute that the remuneration model is broken, but much less agreement on how to fix it. Meanwhile, the likes of Mr Read can go on spouting corporate rubbish and, doubtless, look forward to another seven-figure payday this year.

A three-pipe problem

A year ago, when shares in British American Tobacco cost a little more than £25 each, I wrote here that the dividends the company was paying were wasted on the shareholders. Despite the company’s excellent record of paying out ever larger amounts, the share price never seemed to respond, and the yield at the time was over 8 per cent. Rather than keep paying, the BAT boys should buy in the shares for cancellation.

If they did so and the price remained at £25, the money would buy almost all the shares in issue in less than a decade, I would be the last shareholder left, and thus the owner of this magnificent money-making business. Alas, not long after, some other investors decided that they would brave being treated as social pariahs and started buying tobacco shares. The BAT price is now over £32. The yield is still 6.8 per cent, as the payout has been raised.

This week’s Spectator magazine boasts a full-page ad entitled “Working towards a smoke fee 2030”. After wibbling on about the need for bold and decisive leadership, the author unveils a checklist “to reduce national smoking rates to below 5 per cent.” He concludes that “there is no time to waste” if we are to meet this arbitrary target in eight years’ time.

So who is behind this propaganda? No, not some anti-smoking fanatic but David Waterfield, who describes himself as area director of BAT north-western Europe area. He works for BAT! He is spending my money to discourage sales of his primary product! David, we know smoking is unhealthy, and it kills you if you try hard enough, but a smoke-free 2030 smacks of a fascist state. There are plenty who would love to impose it, so if you feel that strongly, perhaps you should go and join them.

James Carville, an adviser to President Bill Clinton, once famously said that if he were to be reincarnated, he would like to come back as the US treasury’s long bond, because that was where the real power lay. For the last 12 years, since the end of the banking crisis, a born-again Mr Carville would have been frustrated in the role. It seemed that governments could borrow as much as they liked, paying tiny, and in some cases even negative, rates of interest.

Not any more. In the UK, the equivalent of the long bond had the power to destroy the Truss government, and next week we will learn how much the bond markets are going to extract, in the form of higher taxes and public spending cuts, to pony up the billions the Sunak government needs to pay the bills. The omens are, at best, mixed. The prices of gilts, the UK government debt, have recovered from the post-Kwarteng panic, but they are miles away from the levels before his Budget.

To outsiders, this is a confusing market. Rather than quote the price of any given security, the measure is its inverse, the yield. This allows professionals to compare stocks with different coupons and different dates on which they are paid back. Since every stock has a redemption date, each day that goes past takes it a day nearer to repayment. Unless it is trading at exactly par (£100) that changes the yield to redemption, even if only by a tiny fraction of a percent.

Typically, the changes in yield (up means the price is falling, and vice versa) are a few hundredths of one per cent, or basis point. In the convulsions of the Great Pension Fund Panic, the changes were measured in actual percentage points. Things have calmed down since then, but prices/yields remain volatile, depending on Mr Market’s view each day of the Chancellor’s announcement next week. Swings which would have been considered shocking are now daily occurrences. Triple lock to go? Yields slide as this signifies financial discipline at the Treasury. Triple lock to stay? More borrowing, and a failure to deal with difficult decisions. Yields rise.

Since bonds are repayable in the pounds of the day at some distant point in the future, inflation is a key influence on market prices. Today, the UK’s equivalent of the long bond yields about 3.5 per cent. Set against current inflation in double digits, that may not look particularly attractive, but inflation is a backward-looking indicator, while the bond yields are forward-looking. Some analysts argue that the monetary squeeze is already quite fierce, and will get fiercer if Bank Rate is raised again next month, as the market expects. In any case, It seems increasingly likely that the peak of inflation is very near, and as the eye-watering price rises in gas and food start to drop out of the rolling 12-month calculation, it will come down, perhaps dramatically.

The coming squeeze will hit all those assets which have ballooned in value in the zero-interest rate era, from shares to property, both commercial and residential. As prices of these assets fall, it’s quite possible that in a few months’ time, a government-guaranteed return of 3.8 per cent for 20 years will look quite attractive.

What’s a supermarket chain worth?

Britain’s supermarkets are disappearing from the view of quoted markets. Tesco is still there, and Sainsburys (for now, at least) but Morrisons, Asda, Aldi and Lidl are all privately owned. An indication of just why these shadowy shareholders value the businesses at so much more than the stock market was provided this week across the Atlantic.

In 2005 Cerberus, usually described as a secretive private equity business, bought 661 unwanted stores as the rump of a buy-out of 1700 stores in Albertsons, a supermarkets group. Cerberus put up $975m in equity. In the subsequent decade it bought a further 2,200, putting up $1.35bn of fresh equity. In 2020 Cerberus took the whole lot back to market, listing at an enterprise value of $26bn, having taken $2.6bn of dividends on the way.

Now, if the anti-trust authorities let them, the Cerberus boys plan to sell the whole shooting match to Kroger for an enterprise value of $24.6bn. As the FT reports, the profit on two decades-worth of grocery trading is “set to be worth an incredible $14bn in cash”. The key to this near-magical mechanism to turn two-and-a-half billion dollars into twenty-six has been to exploit the underlying property values.

This will hardly be a revelation to the new owners of Morrisons or Asda, which have taken on huge debts to fund their purchases. It does make you wonder, though, whether the market really knows how to value Tesco, and whether even the UK’s biggest supermarket group is not too big for an ambitious private equity raider.

The Bank of England has finally caught up with the curve of rising interest rates. Amid headlines of the biggest monthly rise in 30 years, Bank Rate has been raised to the dizzy heights of 3 per cent. By any standard other than the weird, zero-interest world since the banking crisis, this would have been seen as the bottom of the interest rate cycle. As it is, the calls to protect borrowers from rising mortgage rates started almost immediately, while Andrew Bailey and his Monetary Policy Committee signalled that the market expectation of a peak of 5.25 per cent was too high.

The MPC acknowledged the possibility of that rate, but sketched an alternative where inflation peaked at a curiously-precise 10.9 per cent, before subsiding to 5.6 per cent by the end of next year, and miraculously fitting inside its 2 per cent target range thereafter, even with no further rises in Bank Rate.

Given the Bank’s record in forecasting, this looks more like wishful thinking than robust analysis. It completely failed to see the tsunami that overwhelmed its expectations – a year ago it forecast peak inflation at 5 per cent – so it was hardly surprising that the remarks did nothing to boost confidence among the investors on whom the UK is relying to fund our chronic deficit. The pound fell and government stocks suffered their worst day since Kwasi Kwarteng’s Budget that never was, all of a month ago.

Politicians may rant at the country being at the mercy of the markets, but chronic borrowers must take whatever terms they can get. The deficit problem for the UK is compounded by the need to start selling the vast pile of government debt the Bank bought during the balmy days of Quantitative Easing. Buying in stock from sellers in a rising market is easy when you have decided not to bother too much about the price. Selling stock back to buyers in an oversupplied market where prices are falling is altogether harder. As pension funds mature, there are fewer natural buyers for government stocks than there used to be, so whistling cheerfully about a coming dramatic fall in inflation may not be enough to bring them in.

Inflation is probably at or close to its peak now. The combination of falling gas prices and “demand destruction” as producers and consumers learn to do more with less is a powerful one, but history shows that getting it back down to 2 per cent, the level at which we don’t really notice it, is another matter.

So we stagger on to the next moment of drama, the proper Budget a fortnight hence. We have been prepped for truly grim news, so the reality may not be quite so bad. The sums depend uncomfortably on the estimated costs of raising the necessary debt, or the Office for Budget Responsibility’s estimate of them. The adverse reaction in the markets yesterday was hardly an encouraging sign.

Your Ocado order is delayed (again)

It would be fair to say that Clive Black is not a fan of Ocado. The Shore Capital analyst is one of the best in the business, and has always been baffled by the City’s love affair with this jam-tomorrow business. This week Ocado pulled another ripe avocado from its delivery van, with a deal to link up with a South Korean retailer called Lotte. This agreement to provide retail technology apparently added “significant long term value to the business”, and the shares jumped up. The next day they jumped halfway back down.

Perhaps the traders had read Mr Black’s verdict overnight. “Shore Capital Markets does not attempt to forecast Ocado Group earnings due to a chronic lack of visibility that has been evident since IPO 12 years ago”. It gets worse. “The business is chronically capital intensive, displays virtually no positive operational gearing, has made very negative capital returns…and despite all the technobabble, it just does not make any money.”

None of this is exactly new, and Mr Black is nothing if not consistent. But he’s not the only one who is baffled by the stock’s popularity. The price multiplied by 30 times from its post-flotation low until February last year, despite the company’s insatiable need for more cash. Having gone up like a November 5 rocket this week, it has since come down like the stick. Ocado does have some clever technology, but bigger and uglier competitors are learning how to do home delivery of groceries, with or without the company’s help. The shares may be worth more than a burnt-out firework, but the prospects for actual pre-tax profits, not to mention an actual dividend, seem as far away as they did a dozen years ago.

Warning: weather ahead

The Met Office has a powerful computer, and it seems to have helped improve short-term weather forecasting in the UK. We get fewer surprises than we used to. The picture for longer-term forecasting is less helpful. This week the office published its three-month outlook. After much nurdling around with the prospects of high pressure lurking near the UK and stopping all those windmills turning, it sees a 25 per cent chance of a colder winter, a 15 per cent chance of a warmer one, and a 60 per cent chance it will be average. Amazing what you can do with computers, isn’t it?