Mellon on the Markets

Inside the mind of the Master Investor: influential British investor Jim Mellon reveals his latest thoughts on the markets.

I’m in Berlin at the moment, before setting off on yet another trek across the world in order to promote longevity. I’m not sure all these air miles are great for my own longevity prospects, though!

Yesterday, I went to visit the vast and chilling Sachsenhausen concentration camp, preserved as a memorial to the people who lost their lives there during and after the Second World War.

On my return to the city, the way to my flat was blocked by legions of polizei, as a demonstration against something or other was brewing. The police let me into my flat, where I remained stuck for the evening, barricaded in as thousands of agitated and angry people shouted slogans that in tone, if not in substance, would not have sounded out of place in 1936, the year of Sachsenhausen’s foundation.

The fury and banging continued till the early hours, as it had the day before, when the protest for climate action took place. This morning, the police and demonstrators have gone, but the feeling that something is wrong has not.

All across Europe, and indeed, in parts of the US, in Hong Kong and Australia, metaphorical pitchforks are being bandied about, as angry, and mostly young people find a point to focus on – in the case of Europe, typically climate change (and in the UK, Brexit), and in Hong Kong, democracy or the apparent lack of it.

Perhaps what they are really protesting about is their frustrations in life: lack of opportunity, lack of money, lack of access to housing, the high price of education and the relative devaluation of degrees over the past two decades.

In case there is any doubt about this, the direct cause of this has been the wilful and persistent manipulation of the means of transmission of money by central banks just about everywhere, causing a widening gulf between the owners of assets and the vast bulk of the population, who own little if anything −and see no way out of their predicament.

This is why, in my opinion, fiscal policy is needed urgently, including here in the UK, to rectify some of this, before those metaphorical pitchforks turn into something much worse, and my nocturnal inconvenience becomes a more vicious long-term reality.

Governments should try to get their central bankers to normalise interest rates (or the central bankers should wake up and smell the coffee), to avoid ‘Japanification’ and the long-term destruction of capital and social equilibrium.

Instead, governments that can – and this includes the UK and German governments – should immediately borrow hundreds of billions of pounds, euros or whatever, at hugely favourable interest rates, for the longest possible duration – money to be deployed into specific projects where the expected (and not fudged) returns are in excess of the cost of borrowing.

This isn’t that hard in the case of Germany, where just about every government interest rate is negative; it’s not hard in the case of the UK either, where interest rates are derisory, compared to current and prospective inflation.

Yes, there will be a debt to repay, but as inflation rises (and it will), there will be a gradual erosion of its real value in terms of repayment obligations (think War Bonds).

Projects that could be usefully funded in this way, with government guarantees, include social-care housing; housing in general; new forms of agriculture and biosciences etc; and maybe even a Boris bridge between Northern Ireland and Scotland, which I happen to think is a good idea.

This will play well with electorates too, and will be largely redistributive if monetary policy is normalised, which it really needs to be.

Germany, where I started this letter, has huge capacity to do this, and such spending would be beneficial to the failing euro project, as it would serve to inflate domestic consumption, reducing the highly deflationary effect of Germany’s enormous trade surplus on its neighbours.

Meanwhile, back to the grubby world of stocks and shares. I sent Tom Winnifrith (very good podcasts by the way) an article on WeWork, which he has been looking at as symptomatic of the excesses of the ‘bro’ culture in the funding of ludicrously overvalued companies.

I suggest readers take at look at this business as a textbook case of how hot markets can unravel.

I would be very surprised if WeWork gets its IPO away at any price – and if not, then what? Could this company get into serious financial trouble? Yes. And such a flop would have massive ramifications for commercial real estate on many markets, as well as for lenders.

With the continuing car crashes that are Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT), surely the market for these ’story’ stocks, where the product is undifferentiated and the price is heroic, is over? I think so.

I would be wary of Airbnb as it seeks a listing, and indeed, more or less anything to do with the “sharing” or “gig” economy.The move by California to force Uber et al to recognise their drivers as employees might just spread elsewhere and would be a fatal blow to their business models.

In fact, as I have said before, the workers are going to get more and the companies less, and the tired old model of corporate buybacks, excessive executive compensation and jam tomorrow for the workers, is surely about to change.

This is why value stocks are much better than growth stocks, generally, at the moment −and those that have a decent and sustainable dividend yield even more desirable. Neil Woodford should have stuck to these and he would have come up smelling of roses. Instead, he tried to be a Silicon Valley man – and we know very well that that model is sick.

Meanwhile, I reiterate, buy gold and silver, buy dividend stocks and the pound sterling (notice how it’s going up?) – and lock your door tightly shut every night.

Happy Hunting!

Jim Mellon