The Bad Investment Guide’s gilt-edged entry: trust in governments, settle for little
This is the time of year for virtuous resolutions, so let us resolve on a visit to the Bad Investment Guide, which now has a giltedged new entry. In among all the flaky oil-drillers and flats brought off the drawing board for a quick turn, we can note the stately presence of Her Majesty’s Government’s 41/4 per cent Treasury stock, due for redemption in 2055. Proudly launched by the Chancellor, Gordon Brown, last summer, this stock now stands at a small premium, which means that if you were to buy it and sit on it for the next 49 years, you would be guaranteed to lose money. Along the way, though, you would receive a steady income. Putting the two together, your investment would yield you 3.9 per cent — before tax, that is, and before the corrosive effects of inflation. If you pay income tax at the higher rate and if inflation hits the Bank of England’s target, you are looking at a real return on your money that is not much more than positive: less, in fact, than 0.5 per cent. To be content with that for almost half a century you must have schooled yourself to expect little and to trust in governments. Sir Clarence Sadd, who ran the Midland Bank, put his trust in an earlier Chancellor, Hugh Dalton, who proudly launched a new stock paying 21/2 per cent. Today, rather more than half a century later, the Midland’s ‘Daltons’ are changing hands for less than three-fifths of their nominal value, and their real value has been shredded by inflation. Perhaps Browns will do better.
Sadd, sadder, sorry
You will be disheartened to learn that today’s Clarence Sadds are buying Browns for your old age. The pension funds’ liabilities stretch out for half a century and stocks like this are tailor-made to match them, so the trustees and managers can switch their minds off, nod smugly to their regulators and assert that safety must come first. They can be sure that so long as the demand is there, the Chancellor will supply it. With his bills mounting up and his revenues faltering, he will not miss a chance like this. He will paper the walls with new issues of stock and adjust his rules and ratios to suit them. The moral will be that safety, as always, is relative. Dalton bought his own stocks and was booked for an impoverished old age until Nicholas Davenport, my sainted predecessor, cleared them all out and found him some shares that went up. I would hesitate to do as much for today’s Chancellor, who can look forward to a state-backed pension worth £3 million, but he is always welcome to inspect my Bad Investment Guide.
Drugs on the market
It is fair to observe that Sadds all over the world are piling into bonds like Browns. The French and even the Greek government have fed their appetite, and in New York, Lehman Brothers’ chief US economist has a simple explanation: ‘I think the bond market is on drugs.’ To raise money as cheaply as possible, bond issuers now borrow for as long as possible. This reversal of the natural order is considered, by the market’s technicians, a bad omen. It suggests that investors in these bonds are anxious to lock in a meagre income in the belief that this will be better than nothing. If they are right, we are in for a dismal half-century and, somewhere along the line, the world’s governments will surely be tempted to get us and themselves out of trouble by printing more money — which is where Sir Clarence came in. When gilt-edged stock yields so little, that makes it look cheap to own gold, which yields nothing at all, but does not depend for its value on anyone’s promise, not even the Chancellor’s. That is one reason why gold will never qualify, in my book, as a bad investment.
Can’t please everyone
Martin Smith started off as a brewer (with Guinness) but made his name and his fortune in and around the world of investment banking, which is full of prima donnas but can scarcely compare with the English National Opera. Arriving as chairman and writing ENO a cheque for £1 million by way of setting an example, he found himself plunged into a revenge tragedy which has left bodies littered all over the stage, including his own, for he has fallen on his sword. Perhaps the cast should re-enact it while the orchestra plays excerpts from Rheingold or Götterdämmerung. The surtitles would explain that his regime got ENO’s splendid house reopened on time and on budget, and seemed to be able to fill it with opera-goers who did not want to have to take out a mortgage before buying tickets. Last year’s contemporary drama of frustrated lesbian passion was, I am told, an exception, but, as Mr Smith has found, you can’t please everyone. Backstage, the drama continues. Banking may be more restful.
Betting with the odds
Governors of the Bank of Italy used to be appointed for life, which is why their retirement jobs had to be good ones. They might go on to be President of the Republic, like Carlo Azeglio Ciampi, the present incumbent — as if Eddie George had moved on from the Bank of England to Buckingham Palace. No such luck for Antonio Fazio. His enemies have charged him with favouritism, bugged his telephone conversations, and winkled him out, and his successors will serve for fixed terms. Mario Draghi, who takes over, is a smoothly familiar face on the international financial circuit and, having just spent a few years with Goldman Sachs, is presumably all right for money. This coup, all the same, is a reminder that, in a tussle between governments and central bankers, the odds are on the government — so that the central bank’s independence is correspondingly limited. If Italy’s credit now depends more on its government and less on anybody else, that is another reason for its creditors to worry. They have plenty.
Old law, new ways
All those policy wonks in Downing Street should have given themselves an outing over the holidays. Five minutes’ walk would have taken them to the Trafalgar Studios, once the Whitehall Theatre, where they could have seen The Old Law, or A New Way to Please You. In this political satire (by Thomas Middleton and William Rowley, dating from 1618) the Tony Blair figure decrees that men over 80 and women over 60 are unproductive and should be put to death. This solves the pension problem and clears out the hospitals, which can then be privatised as brothels. Just the right headline-grabbing initiative to leak on a dull Monday. Wake up, wonks.
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