A new exhibition – Ming: The Golden Empire – has just opened at the National Museum of Scotland. I wandered around it this week with JP Morgan’s Stephanie Flanders, who had kindly come north to speak with me at a lunch held by the Prince’s Trust.
Given that both of us are more than averagely preoccupied with economics, you’d expect us to be looking for the lessons from the Ming era that we might translate to today. There were plenty.
There is a piece of paper money once worth one ounce of silver, a nice reminder that fiat money isn’t really something to hold if you are after long-term value. During the hyperinflation of the 1450s anyone with paper notes probably rather wished they had ounces of silver instead.
There are amazing luxury items (if you go, look for the carved jade belt pieces) from which you can note the wealth of the court relative to the masses and draw whatever conclusion suits you about wealth inequality and the interplay between state spending and taxation 600 years ago.
The Ming dynasty period was one of high spending, but low taxation, so by the 17th century it was running massive deficits, something that clearly contributed to its eventual collapse.
There are some original exam papers for mandarins – almost impossibly difficult, apparently, but also fairly meritocratic and something that might make you think our own bureaucrats look a little under qualified.
But the bit of the exhibition that reminded me most of today was the bit about art. By the late Ming period (the dynasty ran from 1368 to 1644), say the curators, “an increasingly commercialised art market grew in response to demand at all levels of society”.
Forgeries abounded; books were published to give advice to novices; and craftsmen suddenly found that they had become brands. By the end it became so bad that contemporary commentator Li Rihua said: “Crafty dealers and market hustlers will do almost anything to make a sale, spouting absurd claims to the point of talking absolute nonsense.”
You could translate this to the modern art market in China and indeed to our own art market, in which case you would be wise to buy today’s brand artists and put their work away (assuming it’s not perishable) for 400 years.
But it translates just as nicely to the property market. Demand at all levels of society, endless instruction books on how to make it big in buy-to-let; branded developers; and of course plenty of hustlers spouting absurd claims to the point of talking absolute nonsense about everything from investing in student property to the (debatable) shortage of housing in the UK.
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This brings us to some of our own mandarins, the members of the Financial Policy Committee (FPC). This is chaired by Bank of England governor Mark Carney, and has recently been given new powers that allow it to interfere in credit markets. This week it announced it is to introduce controls on mortgage lending in the UK.
Lenders will not be able to offer more than 15% of their mortgages at more than 4.5 times the borrower’s income; they will also have to be sure that borrowers will still be able to afford their payments if interest rates rise by three percentage points in the five years after they take out their mortgage.
Mr Carney noted that he didn’t expect this to have any effect at all – it allows high loan-to-value lending to rise from its current level, which is already above its 2008 peak. Nothing in there for the hustlers to worry about.
As the analysts at Fathom Consulting put it, you can now expect “house prices and household debt to continue to rise from levels that are already too high”. Something will eventually slow the property market in London and the southeast. But this particular bit of nonsense talk isn’t going to be it.
That said, all this is more important than it looks. We haven’t had credit controls or mortgage restrictions such as these in the UK for 30 years. Now we do. It is a whole new world of bureaucratic power. And given the tendency for the work of bureaucrats to expand to fill whatever space is available, I suspect they will soon be making more use of it.
Finally, a note on contrarianism. A few months ago, I suggested buying stocks in Russia – which was both the cheapest and the most obviously unpopular market I could see around the world. You didn’t like this much. Indeed, most of you thought buying Russia was downright stupid and many people said so in the comments section below the article.
Since then, the Micex is up about 25%. I mention this not to demonstrate my brilliance – regular readers will know that market timing isn’t my thing – but as a reminder about what contrarianism really is.
Ask any fund manager how he perceives himself and he will almost always tell you that he “isn’t interested in what other people are buying”; he “looks for value”, he looks past the chatter to the “long-term potential” of investments; he is in fact a contrarian investor.
Then ask him if he holds any Gazprom, or whether he has been in the market recently buying a little Tesco for its big data wealth, amazing branding and the potential in its banking business. I can be fairly sure the answer will be no.
When I suggested Russia, I said I liked (and hold) the JP Morgan Russian investment trust. Alan Brierley of Canaccord Genuity agrees. He notes that the market is still on price-to-book ratio of a mere 0.7 times and a forward price/earnings ratio of 5.3 times (the US is on 19 times).
The market as a whole trades at a 68% discount to the rest of the world in valuation terms and this trust trades at an 11% discount to the net asset value of its investments. That’s got to be a better long-term deal than a buy-to-let flat in London. Something for your Nisa money, perhaps?
• This article was first published in the Financial Times.