HyperNormalTimes

Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

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August 30, 2020

Central Banks, Monetary & Educational Inflation

HIDEAWAY TO POLITICAL SHIELD -

Central Bankers started clandestine gatherings in their Jackson Hole hideaway in the late 1970s. These events grew in significance over the the years that followed and in the 1990s, as the role of Central Bankers grew in importance to the globalising economy, the event started to draw mainstream attention. The event has allowed Central Bankers to acquire a cult like status and the evolving monetary policy frameworks that they espouse have become the central tenets of the mainstream macro economic creed adopted by financial markets. Western politicians have encouraged this “independent” development, much in the same way as they bowed to the “experts” and became guided by “the science” during the pandemic, it provides the foil of expertise and a handy human shield of protection for them. As with so many things Trump has been most open and brazen in his approach to the Fed, but other politicians are guilty in claiming the credit for the successes, but scapegoating Central Banks for anything negative. As Ben Wright said in the Telegraph: “Fans of Central Bank independence argue that it is necessary measure to shield our important institutions from politicians like Trump. It’s at least worth asking the question whether Central Bank independence is one of the reasons why we get lumbered with politicians like Trump.”

Central Banks, Monetary & Educational Inflation

As with so many things Jackson Hole in 2020 is different to previous years. It is a virtual gathering which has provided much wider access to the proceedings and one can’t help but wonder a more deliberate attempt to politicise its policy outcomes. As usual the gathered Central Bankers seem to have independently arrived at remarkably consensual views about the way monetary policy needs to change and significantly their means of controlling inflation needs adaptation. The main message is that price stability, the mantra of Central Bankers since the late 1970s, is being thrown on the pandemic bonfire. The wording is subtle, but the message is clear.

RETAIL OR ASSET INFLATION -

Central Bankers are no different to any other public service tasked with meeting public policy goals set by objective yardstick. Just as we see the gaming of waiting times by healthcare providers and exam results by educators, Central Bankers have controlled the price level by moving the goalposts and creating an array of unintended consequences over the last decade. The most obvious of these has been the containment of inflation to asset prices rather than retail prices. A neat trick, and in line with their mandate, but also sending huge value straight into the pocket of Jeff Bezos and Mark Zuckerberg at the expense of the typical Trump voter.

GRADE INFLATION -

Another thing tossed onto the pandemic bonfire seems to be UK school exam results. With it becomes threatened the whole edifice of further and higher educational achievement. A staple of post-war Western liberal certitude has been the role of a university education, and the opportunity it offers its customers to go on and become more successful and wealthier than their parents. The outcome of this exam fiasco seems to suggest that, as with much of modern educational theory, everyone’s a winner and no one loses out. While this is at least might serve as good preparation for an inflationary mindset, it does nothing to uphold the value of educational achievement for those facing the daunting decision about their future career choices.

HARVARD OR KHAN ACADEMY -

As with some many things happening in this World, the areas of most coveted establishment protection (the NHS, Universities, the BBC) seem to be particularly unprepared for the increasing impact of technological changes happening in our society. Higher education is structurally unable to adapt to a world where its product (the world’s knowledge) is, thanks to Google and MOOCs, pretty freely available to nearly everyone with internet access. All the universities are left with is the luxury good stamp of authentication worn for all to see by a particular brand of alumni status. As Scott Galloway tweeted recently, “Harvard has just become the world’s most expensive streaming service”, as it announced to its 20 000 customers that there would only be online tuition until next year, for which the average cost is estimated to be in the region of $70 000 per annum.

JUST IN CASE -

I see an interesting parallel emerging in our understanding of, and confidence in, the twin pillars of our post-war institutions, fiat money and higher education. Both are showing signs of being unable to adapt to the rapidly changing world we now inhabit. Without knowing what the outcomes are of both higher inflationary targeting by Central Banks or the inability of universities to compete with free and limitless online knowledge, it remains prudent, in my opinion, to self insure against potential adverse consequences of both institutions becoming seriously undermined.

Tik Tok, Naked Data & Are Friends Elective

TIK TOK FRENZY -

The Tik Tok saga is taking up a lot airtime with an emerging scrum of interested buyers, now including Microsoft, Walmart, Oracle and financial companies Sequoia and General Atlantic. I think it is fascinating that Walmart has put itself forward. This is a clear sign of the value of consumer data and the emerging role that short video format is having on consumer choice and purchasing patterns. Native advertising from influencers and demonstrators in diverse areas of consumer activity from acrylic paint pouring, to carp fishing and cooking demonstrations have mushroomed during the lockdown, and while growth rates may have slowed post lockdown, they remain well above pre-pandemic levels. Short form video is here to stay and is an increasing part of the Amazon, Alphabet, Facebook and Pinterest focus. Walmart is doing a good job fighting a rearguard action against the new Barbarians at their gate, but they lack a key ingredient, consumer data. I would not be at all surprised to see that if Walmart fails in its bid to secure Tik Tok, it might well be inspired to go for Pinterest instead. Pinterest has a comparatively under monetised asset of followers (or pinners), with a very female skewed demographic with a highly purchase orientated motive to visit. Watch this space.

NAKED DATA -

In the search for data focused speciality retail opportunities I remain a believer in the Naked Wines proposition. Naked is a crowd-sourced funder of artisan wine makers. It has slowly emerged in the UK and Australia, but now also much more meaningfully in North America, by solving problems faced by both producers and regular consumers of mid-priced wine. The lockdown has significantly enhanced its online only strategy which is now further enhanced by its strong balance sheet flush with cash from last year’s sale of Majestic Wine. Here is Naked Wine CEO explaining the Naked model and their simple focus on ploughing this emerging sub-sector furrow. https://www.youtube.com/watch?v=N_3w3TU0ugk

LOAN A FRIEND -

Another data driven consumer facing business, but unlike Naked Wines one that has failed in its life as a listed entity these past few years, is UK listed Amigo Holdings. There is insufficient space and time here to update you fully on the saga of tragedies that have overwhelmed this innovative and hugely profitable consumer lending company since its IPO in 2017. However, suffice to say that these events have conspired to leave a listed company with a c.£65m market value supporting a net loan book of over £500m of value, which in the last three months, despite everything, was actually profitable. Furthermore its disaffected founder, who has been driving the valuation downwards daily for the last few months by selling 1% of the equity a day, from over 60% to now under 10%, is pledging to repurchase up to 29% of the company if he is re-elected to the board. This is an unprecedented saga in my experience of watching the UK stock market these past four decades. As usual there is a long list of reasons not to invest in Amigo, particularly if you are of the persuasion that there is a certain segment of society that should not be allowed access to credit. Furthermore, as the company has pointed out in its last full year results there is significant “going concern” risk around its current customer complaint and regulatory position with the Financial Services Ombudsman. However, given the binary outcome scenario for this company and the added extra twists and turns of boardroom and shareholder intrigue, I have become fixated. If you want some extra volatility in your life, keep an eye on the Amigo Holding share price these next few weeks. This is definitely not one for the “widows and orphans” risk category investor.

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