Neil Collins’ Notebook – I’ll pay you to take my money
It finally happened this week. After accepting ever-shrinking returns on lending to the UK government, investors finally capitulated and agreed to pay the Bank of England for looking after their money. Buyers of one Treasury stock will see a return of minus 0.003 per cent on their £3.8bn when they get their money back in three years’ time.
It is hard to see the logic of accepting a negative return, unless you believe that inflation, too, will turn negative, so that a pound in three years’ time will buy you more than it does today. This is not impossible, but is outside the experience of every investor alive today, and it is unlikely that the buyers are expecting it.
They are buying out of fear, rather than greed. Ironically, UK government stocks are considered safe havens in hard times – ironically, since sterling is considered anything but safe – and the hundreds of billions the state is pumping into the private sector of the economy has to go somewhere.
(The process may not end here. The new Bank Governor, Andrew Bailey, has softened his stance against negative interest rates, a move which would further undermine bank profits and bring forward the day when they charge for looking after our money. Fortunately, the new plastic £20 notes are much more durable than the old paper ones, and would survive quite happily in a box buried in the garden.)
Our rookie chancellor is dishing out the dosh at a rate to make a drunken sailor blush, and last month alone spent £1,000 more per head of the population than he raised in tax, pushing up the National Debt to wartime levels. As this week has shown, the buyers seem happy with this, and if they stay away, there’s always more Quantitative Easing.
With QE, the Bank buys government stock in the market. But since the Bank is owned by the borrower, is the bought-in stock part of the National Debt? As chairman of the Treasury committee five years ago, Nigel Lawson argued that it wasn’t, and that the true outstanding debt was much smaller than the headline figure. In front of him Mark Carney had no convincing counter-argument and was reduced to saying they had to agree to differ.
This week has shown that the buyers of gilts do not worry about too much paper. They fear deflation more than inflation, and have grown complacent on a 40-year bull market in government bonds.
Few of today’s traders will remember the UK authorities in 1976 being forced to fund itself by selling a 20-year bond on a yield of 15.5 per cent. That marked the turning point in this very long cycle. The issue of government debt at a negative yield may signal another one.
Another form of betting
Burford Capital is a really modern company. It finances litigation in return for a share of the winnings, an activity so new that the accounting conventions are struggling to keep up. For instance, how to value the $773m claim against Argentina’s national oil company YPF, which represents 38 per cent of Burford’s “capital provision assets”?
Auditors EY spent nine pages of their 2019 report struggling with such questions. Still, the idea had looked attractive enough to investors for Burford to be valued at nearly £4bn a year ago. Then the price was sandbagged by those short-selling spoilsports at Muddy Waters, “A poor business masquerading as a great one” was one of the more charitable remarks in its analysis. The Burford share price halved in a day.
As always, the messenger catches the flak. Burford (naturally) launched a legal action to try and force the London Stock Exchange to disgorge details of share trades around the fateful day. Last week the court rejected the request, and this week Burford’s fans have been in fine voice. Here is fund manager Sharon Bentley-Hamlyn: “If a short seller denigrates a company, and engages in dubious market practices to profit thereby, causing actual financial damage both to the company and its shareholders, that this should be let go by the High Court?”
For what it’s worth, the Financial Conduct Authority has already investigated and found nothing untoward, so there may have been no “dubious market practices” to disclose. More broadly, Burford ought to have bright prospects. As its CEO Christopher Bogart told analysts last month: “While we hate the idea of trading on human misery, the reality is that the world post-Corvid is going to be a world with an awful lot of disputes.”
A cheerful soul, Mr Bogart. But here’s the thing. It is now nearly a year since the Muddy Waters attack, more than long enough for the market to dismiss its bleak analysis if it was wrong. Yet the price is lower today than immediately after the initial fall, and at 432p values Burford at less than £1bn. It may be that the Argentinians lose the case and actually pay up, however remote that chance seems today, but shooting the messenger is, to put it mildly, poor legal advice.