Monthly Archives: February 2014

I’m outrageously late for making seasonal new year predictions, and sorry for a title that sounds like Business Insider, but I want to keep a record to see if I have some predictive power. So, I would like to introduce my 5 best London-listed stocks to short, not for 2014 but for (end) 2016 — three years is a good time frame for short theses to develop, one year may not be enough for failure and they could easily keep being supported by momentum.

Ninenteenth century train crash with steam locomotive going through the wall of an end station.

The track was a bit too short. (source: Wikimedia)

I’m not short any of these stocks (or any individual stock at all) as in real life shorting is a major pain and I would only do it when a limited risk instrument (e.g. options) is available at an affordable price, which is not the case for this set.

That said I’m also not long these stocks, which is really half the value of the Obliquity strategy: there’s probably more insight in what I don’t buy than what I do (I’m short relative to an all inclusive market index). These are just some of the more egregious examples — there’s also stuff I don’t like for more mundane reasons.

For accounting the success or failure of these choices, I plan — if I remember by 2016! — to check the total return of an equal weighted short position in all 5, including dividends and capital actions. Should a stock be delisted, the exit value should be the closing price on the market day following the day the delisting was announced. Suspended stocks should (probably) be considered to have exited at zero.The drawdown allowance is hard to decide in advance, minimum would be 2x I’d say (so allow £2000 running loss for £1000 notional short position for the full portfolio).


Lots of accounting trickery with the headline product a me-too product nobody uses. Matthew Earl has written more than I could dream to about it.

Quindell Portfolio

The business model seem mostly about enabling insurance fraud, layered behind piles of creative accounting, all run by characters that do not inspire great confidence. If the business doesn’t fail, the likeliness of their leaving anything on the table for outside shareholders seems low.


Don’t you love the name? Spinning open source software they do not own or author, and selling add-ons of limited value seems both gross and ingenious. There’s probably enough mugs who don’t understand open source to have them run for a while and have the principals exit at a judicious time…

Naibu Global International

A Chinese shoe manufacturer, which despite the name doesn’t export outside China (why not? not starting well, are we?) and is a field of red flags hinting at possible accounting or corporate structure misrepresentation. It’s already heavily discounted relative to published accounts, so failure is largely already priced in, but I think the end game is delisting or the price languishing further down.

Judges Scientific

This is actually a much more legitimate business than any of the others here, but I’m not a fan of private equity masquerading as an operating business. Brilliant financial engineering, but I fear that the acquired businesses, left to their own devices, with founders pacified with a cash windfall, or retiring, may not prosper. Also the window it exploited where it was possible to buy private companies in this sector at a massive discount to a public market valuation could close as both sellers and competing buyers wise up to it. Combine that with it being a fashion stock on the back of past successes, and it seems more likely to go down than up in my view.

We’re really in the self-evident department here, but many arguments still float around which seem to forget the basics, so a little refresher may help.

Let’s start with the definition: what is inflation?

Inflation is too much money chasing too few goods.

From there it follows simply that to get inflation these two conditions must be fulfilled at the same time:

  1. Too much money
  2. Too few goods

People tend to watch reason #1 too closely, and often even get that wrong. For instance Quantitative Easing (QE) is an operation which is mainly about swapping different kind of money with each other to twist the yield curve at the margin which has a much smaller impact than really “printing money” and throwing it away through the central bank’s window would have. Most countries’ central banks are either not actually allowed, or do not actually practice, direct money printing. So it is in reality quite hard for a central banker, should they wish to, really to “print money”.

Now let’s just  assume that excess money is successfully injected in an economy. We still need condition #2, too few goods. If people find themselves with bundles of cash, and spend them — they must “chase goods”, if they save, no inflation — we’ve got suppliers of stuff and services facing facing an influx of customers. What do you do if you’re in business and see customers coming your way? You push your production/servicing capacities to the max, get more staff, etc. Under competition, you can’t really put your prices up by much in the medium or long term, otherwise someone will turn up and undercut you, opening a new café next to yours when they see yours is full.

So, in peacetime in a functioning economy, the supply side is very responsive: you can always get more staff or more equipment, for this to become strained you need to run out of staff so that staff become scarce and can name their price when negotiating wages. That is full employment, which brings us to the simple truism:

Inflation = Full employment

Exceptions to this require either inflation so frantic that it’s faster than people can advertise for jobs, or political disruptions that prevent normal operations of the jobs and equipment market. As far as I know all the historical episodes of major inflation occurred in time of full employment or major political disruption (war, civil or otherwise, etc).

Further it’s worth noting that full employment requires not only employing the people looking for a job, but people who are not currently looking but would if they saw opportunities, which in current circumstances are probably quite numerous in most mature economies (less people who are chronically unemployable due to personal or systemic circumstances, probably a percent or two of the workforce).

It also requires, in technological societies, running out of jobs that can be relatively easily automated but have not yet because staff was cheap and plentiful.

Conclusion: if you want to predict inflation, don’t ask an economist but a geopolitics expert re their views on major upcoming wars. If there is a green light here, and there are still plenty of people wishing to work, inflation risk is very low. Moreover, there’s a natural hedge for people of working age: if there’s inflation, it will be easy to get a job.