Discover more from David Stevenson's Adventurous Investor Newsletter
Further reading: China after Mao, Our aging skills base and curbing knife crime
Further reading for the weekend. A brilliant critique of our no growth economy, Berkshire Hathaway’s track record, 3i’s successful Action investment in perspective, and Erdogan’s friends in government
Book recommendation: China after Mao
I’ve just finished reading China after Mao by the acclaimed Dutch historian (based in HK), Frank Dikotter. I can’t recommend the book highly enough, especially for investors.
Dikotter – whose books on the cultural revolution are also required reading – does a demolition job on all those narratives which suggest that ‘this time it’s different’ with President Xi. The opposite seems to be true – everything that Xi shouts about has been circulating for decades, and was formulated by previous leaders. These include:
- Threatening to attack Taiwan. Both of his predecessors argued for this
- Threatening private businesses. Ditto
- Launching massive corruption rives to curb his enemies.
- Constantly attacking the evil US. Even Deng Xiaoping spent a considerable amount of time fulminating against the evil capitalist Yankees.
I particularly want to highlight two paragraphs of text from the introduction of the book which I think brilliantly sum up why private investors need to steer a country mile away from China: the first reminds us that China’s leaders have always been dedicated Marxists and that nothing has changed - they really do believe in all that socialist nonsense
The second paragraph sums up why we shouldn’t automatically assume there’s some evil plan for world domination. There may indeed be one – these are angry Marxists after all – but whether they’ll pull it off is another question:
Notes 1 – the UK is losing its skills base.
One area where we need to up our game here in the UK is in specialist training, even for industries that don’t seem especially relevant to our (low-growth) little island. Take mining. Despite the nimby’s and greens, we’ll still need mining expertise but according to Rian Whitton, this is in danger of dying out. Literally.
“According to a 2022 report by the UK mining education forum, of the 1,237 mining engineers registered with the British engineering council, 80% are over the age of 50, with 39% over the age of 66. The country has a shortfall of 51 mining graduates each year. How can getting 100 additional graduates— let alone 51 — be hard? More broadly there are reported to be 2,000 open positions in the UK mining industry. “ But this mining skills shortage is typical of a wider malaise – its also true for the nuclear industry. Whitton observes that the “ age of the average nuclear industry employee is over 50. A 2015 paper envisioned increasing the workforce to 98,000. As of 2021, the figure is less than 65,000, with a greater proportion involved in decommissioning and waste management as opposed to building or running new plants. Loss of expertise has contributed to Britain’s liability to build a reactor since 1995.” Source Rian Whitton
Notes 2 – Buffett’s track record
5+ years of Berkshire Hathaway vs. the S&P 500 Index. Link
Notes 3 – Action and 3i. A mega investment pays off
By now I think we all know that the private equity firm 3i has played a blinder with its Action supermarkets investment. It’s powered the share price and is now a dominant driver of returns for the fund.
Analysts at Liberum have been doing the sums on this hugely successful investment.
“3i acquired Action in 2011 for €130m. Based on the latest valuation at 31 March 2023, 3i’s MOIC is c.102x. Cumulative distributions over its ownership c.£1.7bn. We calculate that 3i has paid out £2.9bn in dividends since 2013 and share repurchases over the same period amount to £172m (Refinitiv). Action has been so cash generative and scalable (almost frictionlessly) that there has been little need for 3i to tap secondary markets (cumulative c.£10m raised since 2015). Including special dividends, the total distribution increased at an average of 25% between 2014 and 2022. On the basis that Action’s net debt to EBITDA is noted to be less than 2.0x, we estimate that on an EV/EBITDA basis, the LTM valuation multiple is c.19x.”
By now you’ll have read that Turkey’s president is probably about to be re-elected unless the CHP-led opposition can pull off a remarkable. But with Erdogan likely to still be in power in a few weeks’ time, it’s worth paying closer attention to his coalition partners, especially the conservative nationalist MHP.
Here’s foreign affairs specialist Claire Berlinski on Erdogan’s buddies:
“The MHP is typically described as “nationalist” or “radical right,” but “xenophobic, fanatically nationalist neo-fascists” is closer. The contemporary MHP also has respectable politicians, if you think politicians who could reasonably be described as Turkish analogues of Marine Le Pen or Georgia Meloni are respectable. I’ve spoken to some in their ranks who are thoughtful and well-spoken, even if I disagree with them. I had a lunch once with an MHP parliamentarian who was a fan of Ronald Reagan and Margaret Thatcher and imagined himself a politician in their mould. We liked each other. So they’re not all fascists.
The party’s founder, Alparslan Türkeş, openly sympathized with National Socialism. His nickname was “Başbuğ”—“The Führer”—inspired by the obvious; in 1945 he was court-martialed on charges of “fascist and racist activities.” He was the spokesman of the 1960 coup against Prime Minister Adnan Menderes—who was then executed by the junta—and part of a clique within the junta that opposed returning power to the Turkish civilians. (This led to his expulsion from the junta in an internal coup.)
In 1965, he became chairman of the party and movement that would subsequently call itself the MHP. As such, he was the de facto leader of its paramilitary wing, the Grey Wolves. Alas, the United States, noting his passionate antipathy to communism, trained him in guerrilla warfare in our covert anti-communist Gladio operation. He may have been a bastard, but he was our bastard.
The movement he founded was and is half political party and half paramilitary, and it is exceptionally violent and dark, responsible for urban guerrilla warfare, death squads, assassinations, bombings, armed robbery, kidnapping, torture, and mutilation, for starters. Turkish nationalists often hold weird mystical and pseudo-scientific beliefs about Turkish history and the genetic superiority of the Turkish race. Traditionally, they’ve sought an “ideal” Turkish nation—or a pan-Turkic empire—entirely Sunni and ethnically Turkish. (Turkey has at least 20 ethnic groups and a large Alevi minority, of which Kılıçdaroğlu is a representative. This probably played a role in his poor showing.) They’re hostile to Kurds, Alevis, Arabs, Armenians, Greeks, Christians, and Jews. They’re irresistibly drawn to The Protocols of the Elders of Zion.
The MHP is associated with the so-called Turkish-Islamic synthesis, which is about as appealing an ideology as it sounds, and it is hostile to the West; they endorse authoritarian socio-cultural policies, and they stand implacably opposed to any form of negotiation or compromise with the PKK, its aims, or its sympathizers. They are (credibly) said to be connected to the so-called Deep State—a secret organization at the nexus of the security services and the mafia. The Grey Wolves have a long string of murders to their name—of students, leftists, academics, judges, Kurds, Armenians, the list is endless. It was Grey Wolf Mehmet Ali Ağca who shot Pope John Paul II. Turkish intelligence tends to mobilize them abroad to do Ankara’s wet work, which is why they’re banned in France (for, among other things, desecrating Armenian cemeteries) and the European Parliament has called on its member states to designate it as a terrorist group. (The Turkish foreign ministry claimed this “slander” was fabricated by Armenians, Kurds, and Gülenists.) Its current leader, the elderly and befuddled Devlet Bahçeli—who, recall, is in an alliance with Erdoğan—claims the MHP has changed and is now moderate and middle-of-the-road, but no one believes this and no one should. “
The No Growth Economy
I recommend spending some time this weekend reading an excellent, admirably short piece on the Works in Progress website by economist Stian Westlake, who also happens to be CEO of the Royal Statistical Society.
In simple terms, he suggests that the UK has been playing out what a low/no growth future might look like - we are a practical living experiment for a progressive no-growth theory. Reflecting on his early days in think tanks where green-influenced thinkers argued for deprioritizing economic growth, Westlake argues that these thinkers have got their wish in the UK.
“Well, the “abandoning economic growth” bit has gone surprisingly well. If you’re in the UK, you’re probably familiar with the ONS’s statistics showing what has happened to productivity—the UK’s output per hour worked—since the late 2000s. They make grim reading for economists, with growth close to zero, and far below the pre-2008 trend
But from a degrowth point of view, this looks like a success story. If you turn the graph upside down, they actually show that the UK has been remarkably successful in weaning itself off its growth addiction. I’m surprised that supporters of degrowth don’t celebrate these charts more.
What they certainly don’t show is a country addicted to growth at all costs, a charge you sometimes hear levelled at Britain. But progressive supporters of degrowth would no doubt argue that the rest of their agenda has not been delivered. They argue that the UK’s economy still produces an unsustainable amount of carbon and consumes an unsustainable quantity of resources. The economy seems to be doing an even less satisfactory job at meeting people’s needs, with stagnant wage growth and housing dramatically less affordable. And the cultural climate of the UK has developed in ways that degrowth advocates generally dislike, from a rise in anti-immigration politics to the virulence of the so-called culture wars—and of course, Brexit, which the progressive growth-sceptics I know mostly opposed.”
“But I can’t help thinking that there’s a different explanation for what has happened. Perhaps, when my friends wished for degrowth and thought it would lead to environmentalism and to a focus on what really matters, they were correct—just not in exactly the way they expected. Perhaps their wish was granted, but the Monkey’s Paw twitched. Take the environment. The UK economy has been getting greener since 2008, but, it seems, not fast enough to meet its targets. So why is it hard to decarbonise our energy systems? The rules against wind turbines and solar farms weren’t lobbied for by top-hatted capitalists, but by campaigners who think of themselves as protectors of England’s green and pleasant land: not BP and Shell, but the CPRE and the RSPB and countless local groups, and politicians seeking to accommodate them.
The backbone of these groups is largely comfortably-off people who have no desperate need for economic growth, and who sincerely believe they are protecting nature and the environment. For many people, “the environment” is less about ppm of atmospheric carbon and more about the view when they walk their dog; this is after all, a venerable environmental tradition stretching back to William Morris and beyond. They are pursuing what they see as a just environmental cause, and they don’t mind if it reduces growth—it just so happens that this particular flavour of environmentalism increases rather than reduces carbon emissions.
The same logic plays out when it comes to housing. If you accept the argument that Britain’s high housing costs have anything to do with our inability to build enough new housing to meet demand, you have to reckon with the fact that opposition to new building comes from people who for the most part claim to stand for protecting communities, protecting the countryside, and opposing “corporate greed”. It’s precisely the sort of altruistic social action you would expect to see in a post-growth society—it’s just that it exacerbates a major social problem and, most likely, is a major driver of inequality. These trends seem to have been on display in the recent local election results, where we’ve seen remarkable wins by the Green Party not in trendy bohemian towns, but in rural areas (like Mid Suffolk where they took control of the local council) in no small part by opposing housing development. And then there are the culture wars, the endless fighting over “wokeness”, Brexit, and a whole host of social justice issues. I’m generally sceptical of the claim that these debates are confected by the media, or by some other malign elite actors: casual empiricism suggests that significant groups of people really do care about these issues, and sincerely disagree about things they think are important. If this is true, it seems to me that intense culture wars are exactly what you’d expect in a post-growth world, in which people focus less on the pursuit of material things and more on culture, community and what matters to them.
It’s just that people don’t agree with each other on what matters to them: for some people, what really matters might be nationhood and sovereignty, or traditional gender roles, or being surrounded by people of the same community and ethnicity, just as for other people what matters might include diversity, inclusion and social justice. By this logic, the culture wars aren’t a fake phenomenon made up by growth-oriented media moguls to distract people from the negative consequences of economic growth, they’re entirely earnest, and the predictable result of people having a lot more mental bandwidth to worry about “what really matters”.
As the last pagan Roman emperor lay dying, contemplating the demise of the old gods and the end of the ancient world, he is supposed to have uttered the words vicisti, Galilaee—“you have won, Galilean”. Perhaps we should acknowledge that the advocates of degrowth have won, at least for the time being, and the world we see around us is—perhaps inadvertently—a world of their making.”
The Hydrogen Hype
The economic historian Adam Tooze has a deep dive into the Hydrogen craze in his (subscription) newsletter. He comes to the same conclusion that I have come to – hydrogen tech is interesting but like me, he’s not really convinced by all the suggested uses.
There’s obviously a big lobby in favor of hydrogen-based energy processes but very few of them make much sense. Tooze rightly emphasizes the graphic below from Michael Liebreich, the renewables guru – courtesy of The Economist magazine. This shows the various niches where hydrogen might play a role alongside the long list of touted alternatives where it probably doesn’t work.
But Tooze also reminds us that there are some specialist segments of the economy where hydrogen already plays a huge role – and technology is needed to disrupt the status quo.
“The hydrogen economy is not a hypothetical. Our economies as they stand already rely on the production of huge volumes of hydrogen for two basic chemical processes: the processing of oil and the production of fertilizer.
For these purposes we produce over 90 million tons of hydrogen annually. It is an industry worth $160 billion or so. And because hydrogen is won from natural gas and sometimes coal it is an extremely dirty process. These uses for hydrogen do no have the glamour of green aviation or fuel-cell vehicles. But they are essential and they are very dirty. Globally, hydrogen production today accounts for emissions equivalent to those of an economy like that of Germany.
These uses rank even in Liebreich’s hydrogen hierarchy at the very top. To get to net zero, whatever new uses we find for hydrogen, this existing hydrogen consumption will have to be cleaned up.
That by itself is no small job. In a medium-sized European country like the UK, replacing the current consumption of hydrogen with green hydrogen would require a huge share of renewable energy currently generated and a heavy investment in electrolytic capacity.
To some extent this demand will be eased by the winding down of the oil industry which is the major consumer of industrial hydrogen. But the rest of the chemical industry remains, most crucially of all the fertilizer industry without which we could not feed the 8 billion human inhabitants of our planet.
Viewed from the side of the investor, it is good news that there is a steady source of demand for hydrogen in existing industry. There is no speculation about the need for ammonia or methanol in industry. But that does not mean that it will be easy to swap green hydrogen for the grey hydrogen currently consumed. Above all there are locational problems. Industrial hydrogen is produced on the spot in chemicals plants. It isn’t shipped in like coal or oil or natural gas. Creating a market for industrial green hydrogen is not simply a matter of technology. It requires the creation of a new commodity market and a new wave of highly specific investment.
“40 green ammonia projects reported to be in the development and pre-approval stages. The country is seemingly leapfrogging the blue ammonia approach being favoured by some other nations in Europe and the Middle East, and investing instead in large-scale green ammonia research and construction projects. One plant in the north of China, owned by Envision Energy, has a 20,000 t/yr green ammonia plant currently under construction, which will be followed by a ramp-up to 300,000 t/yr. Industry sources said that the plant, which will run on wind power and is located in Inner Mongolia, could be ready to start exporting green ammonia by late 2024. The Inner Mongolia region has increasingly become the focus for hydrogen and ammonia facilities run on renewable energy over recent months. On the back of this wave of investment China will likely emerge as a major exporter of green ammonia but also as an exporter of facilities for the production of green ammonia in the rest of the world. First up is a cooperation with Morocco which is widely touted as a future powerhouse in green hydrogen.
Outside China and Europe, it may, in fact, be the United States and, in particular, Texas that lead the green hydrogen push that actually matters. The bipartisan infrastructure bill of 2021 offered funding for hydrogen hubs which it described as “network[s] of clean hydrogen producers, potential clean hydrogen consumers, and connective infrastructure located in close proximity... that can be developed into a national clean hydrogen network to facilitate a clean hydrogen economy”. Texas in fact has an extensive network of hydrogen pipelines interconnecting these hubs. The IRA doubled down with huge subsidies. Of all places in the world it is probably Texas that now offers the most propitious conditions for a truly rapid build out of green hydrogen”.
How do we curb Knife Crime?
The commentator Ian Leslie last week featured a fascinating interview with Gavin Hales, a Senior Research Fellow at the London Metropolitan University and Visiting Fellow at the London School of Economics.
He’s a specialist researcher focused on knife crime in the UK and the stop-start police policies designed to curb it, especially stop and search. It’s a very revealing discussion based on Hales detailed empirical research which I think presents a suitably nuanced portrait of a deeply controversial area of policy
“ Ian Leslie: [ on why stop and search is used] in a sense the police are right to have that in mind - that’s an evidence-based supposition. But it’s also grossly unfair on the black teenager who has got nothing to do with crime. And experience suggests that police stopping and searching the wrong people is a key way that trust and confidence can be undermined.
Hales : I think it’s partly about how police interpret indicators of suspicion. There was a publicised case from lockdown of a black guy who was sitting in his expensive car, and he was approached by police and they said, “Can you get out the car we want to search you for drugs because this is a location that we know is used for drug dealing.” I discussed this with a police officer who had worked in that part of London and they said something like ‘people who have nice cars in that part of London are either drug dealers or it’s been carjacked.’
So their mental frame goes immediately to suspicion of criminality. I think that's because their experience of that part of London is viewed almost entirely through the policing lens: the calls they’ve attended and the intelligence they’ve read. They don't live there - and if they did they’d know of course that a lot of black people who are not involved in any criminality have very nice cars. Another police officer I know came up with a very useful term for this. He talked about ‘blue tinted spectacles’ - that is, that when police officers view places predominantly through their experience of policing them they get a very partial view of those places. In his case, he realised this when he moved to somewhere he had previously policed.
If you’re a police officer, you might spend a lot of your time targeting young people involved with violence. So you learn to associate the way they present themselves, things like clothing and car preferences - even a preference for tinted windows in their cars - with involvement in crime. But those things are actually expressions of wider cultural preferences, they’re not the province of criminals alone. So the risk is that you, as a police officer, start to see suspicion in places where it actually doesn't exist, because that person looks a lot like the people that you've been policing last week over that brawl you were called to when somebody got stabbed. Given that fewer than half of the Met’s police officers actually live in London, there’s a risk that a lack of cultural awareness turns into a degree of bias.
“ Ian Leslie: Do you think stop and search has helped?
Hales : Based on some analysis I’ve done, looking at the last decade or so, my gut feeling is that there was a relationship between the increased use of stop and search from 2018 and the subsequent reduction in violence involving weapons. But it's very difficult to establish that robustly. More generally, my feeling is that the relationship between stop and search and efficacy is probably not linear. It's probably more like an ‘S’ or even an inverted ‘U’ shape in that if there's no stop and search and then you introduce some there is likely to be quite a strong effect because you're increasing the visibility and activity of the police. But then it seems likely there'll come a point when as you continue to increase numbers, you're not really having any more of a deterrent effect because the people who are going to be deterred are being deterred already. And then if you keep going further still it becomes counterproductive, including because you will increasingly risk targeting the wrong people and in the sense that people start really hating the police, and they're less willing to trust the police in other ways, with information about crimes. Trust and confidence are so important to police effectiveness.
Ian Leslie: It sounds like the police are always probably always doing the wrong amount of stop and search!
Hales : Well yes, evidence on the right level is very elusive. I talk about it as a Goldilocks problem, sometimes it’s too hot, sometimes too cold, but there’s no agreement on what is just right. There are voices calling for further reductions now, even though we're nearly at the very low levels we saw in 2012 to 2014. For some people it's never low enough, for other people there needs to be more. It's an area where there's no consensus or good empirical evidence.