The Week - UK (2021-02-13)

46 CITY

THE WEEK 13 February 2021

Talking points

Lastweek,theBankofEnglandkept

interestratesat0.1%–afiguretanta-

lisinglyclosetozero–andgavebanks

andbuildingsocietiessixmonthsto

prepareforthepossibilityofanegative

rate,saidSimonFrenchintheLondon

EveningStandard.Negativeratesare

alreadyarealityinJapanandmostof

Europe,buttherearetworeasonswhy

we’ll“staypositive”fornow.First,the

regulatorsthinkthesectorneedsatleast

sixmonthstogetready.Butmore

importantly,theBankis“cautiously

optimistictheUKeconomywillrebound

strongly”thisyear,negatingtheneed

forextrastimulus.Indeed,itforecasts

Britainwillreturntoitspre-Covidsizeby

thestartof 2022 ,in“thefastestecono-

micrecoverysinceWWII”.Financialmarketsweren’twholly

convinced.Theissuereallycomesdowntoinflation,whichnow

standsatjust0.8%.UnlessitmovesbacktotheBank’s2%

target,“thedebateovernegativeinterestratesisnotgoingaway”.

Inflationisalreadyon the marchelsewhere,saidTheEconomist.

The underlyingrateintheeurozone“recently reachedits highest

pointin five years”,and inAmerica,expectationshave risentoo.

Meanwhile,oilisabove $60 abarrel for thefirst timesincethe

pandemic and“bottlenecksarepushing upthe cost ofshipping

goods”.Itis“tooearly”tosay whetherthese trendswill continue.

Myguess,saidJeremyWarnerinThe

SundayTelegraph,isthatitcouldbe

“theprospectofinterestraterises,not

negativerates,that we’llsoonbeworry-

ingaboutmost”.AsBoEgovernor

AndrewBaileyobserved,thepandemic

hasledto“astartlingincreaseinthe

savingsrate”:UKhouseholdsdeposited

£125bnmorebytheendofNovember

thanwouldnormallyhavebeenthecase.

“Evenifaslittleas5%ofthisisregurg-

itated”,theBankreckonsitwillput“a

furtherrocketundertheeconom y”.

Don’tbankonthat,saidSimonFrench.

Consumersmayprovecautious.“The

healthofhouseholdfinanceshasbeen

hugelyunderwrittenbythefurloughing

ofmorethanninemillionworkers”,whichendsinApril.True,

saidPatrickHoskinginTheTimes.Butmosthouseholdsare

“morecashedupthantheyhavebeenforyears”.Themost

surprisingnumberfromtheBankisthatitexpectshouseholdsto

splurge just5%of this“Covid windfall”. Doesthatreallysound

likethe greatBritishconsumer?Solongasthevaccines workand

restrictionsare eased,“aconsumptionbinge” lookslikely.

“That’s agreat opportunityforconsumer-facingbusinesses.”For

policymakers,thespree mightnotbe sohelpful. Ifthestimulus

tapsarestillgoingfull pelttoothissummer,aconsumerbingeon

topmightmean “toomuchinflationforcomfort”.

Issue o fthe week:negative thinking

Cautiouslyoptimistic:governorAndrewBailey

The Reddit revolt: what the punters say

●Gameover?

The WallStreetBets page

on the Reddit website was

“stuffed with stories of

overnight fortunes won

by punters gambling their

Covid stimulus cheques

while hedge funds were

pushed to the brink”, said

Danny Fortson in The

Sunday Times. But

“pump” turned to “dump”

at lightning speed. In

almost “a mirror image

of its rise”, shares in

GameStop–the video

games retailer at the centre of the day

trading frenzy–collapsed 80% last week

to hit $63.77 by last Friday’s close. Given

that shares traded at between $5-$10 at

times last year, there were still some big

winners. Keith Gill,abasement trader

known by his Reddit handle

“DeepF***ingValue”, was sitting on a

$7.7m gain. But many others were left

despondent. “I feel like we’re the last

ones playing the violin on the Titanic,”

observed one trader, as “the natural order

reasserted itself with brutal efficiency”.

●Momentumshorts

Bearish hedge funds “who held their nerve

against the short-lived investing mania”

were, in the end, “rewarded”, said James

Titcomb in The Daily Telegraph. Bets

against GameStop returned $12bn by the

end of the week–a

particular bonanza for

“momentum” traders who

took out short positions

near the share-price peak.

But by then, many short-

sellers had given up,

“closing positions and

swallowing huge losses”.

The “biggest scalp” was

that of Gabriel Plotkin of

hedge fund Melvin

Capital, who was forced

into a$2.7bn bailout, said

The Sunday Times.

●Piggly wiggly

Perhaps the Reddit rebels should have

heeded the cautionary tale of Clarence

Saunders, said Richard Lambert in the

FT. When Wall Street speculators began

selling shares in his company, Piggly

Wiggly Stores, in 1922, he fought back –

borrowing big to corner the market,

which meant he was the only person able

to sell traders the shares they needed to

settle their transactions. At first all went

well: the stock soared and Saunders made

millions on paper. But things came crash-

ing down when the authorities suspended

shares. Ultimately, Saunders was left

bankrupt. “They have the body of Piggly

Wiggly, but they cannot have the soul,” he

cried. Today’s speculators–drawninto

what looks likeaclassic stock-market

bubble–“should remember his fate”.

How not to do it

Thinking of dabbling in shares? Then

try and avoid some of my mistakes,

says Sathnam Sanghera in The Times:

Overtrading Asymptom of fear, greed,

excitement–and no investment strat-

egy. Given that each trade costs money

in fees, tax and bid-offer spreads,

“overtrading can be as self-defeating as

undertrading: never having the guts to

put your money into anything”.

Selling too soon Ihave owned shares

in the Scottish Mortgage Investment

Trust “on and off” for the past five

years, during which it has risen 470%. I

sold out at 800p, but the fund–which

has big US tech investments–has gone

on to trade at £13.21.Apainful lesson:

just because something goes up lots, it

doesn’t mean it can’t go up more.

Buying onawhimIbought intoasmall

software house, Globo, on the back of a

tip. Soon after, it admitted to cooking

the books andIlost all my money. A

useful lesson that no analyst has total

knowledge and businesses can go bust.

Don’t put all your eggs in one basket.

Trying to time the market Amug’s

game,particularly given the power of

dividends. As Albert Einstein famously

said: “Compound interest is the eighth

wonder of the world.”

Unreasonable expectations Let’s face

it, with many assets doubling and

tripling in price, people can get greedy.

TheBankofEnglandhassignalledthepossibilityofnegativeinterestrates–butwilltheybenecessaryifconsumersdotheirbit?

KeithGill:madea$7.7mgain