16 Jan 2017

Here are two pieces of great news for the citizens of relatively rich, relatively developed, relatively Western economies. Women can increasingly combine career and motherhood rather than having to choose between them: and improved healthcare (if not exercise and diet) mean that people on average are living to greater ages. Fifty years ago, the UK average birthrate per woman was 2.9 (over her fertile life, not per pregnancy, obviously). Now it is 1.8. No doubt this is down to a combination of reasons which you can work out for yourself. Given that medical science has not yet worked out how to allow men to give birth you might imagine, if the UK’s experience is typical, that in the long term the global population will decline, on the rough basis that each woman should on average have two babies to replace those falling off the perch at the far end of life’s journey. Were it not for the fertility of some African countries, where birthrates of >5 per woman are quite common, mankind might become an endangered species.  According to the World Bank, the average fertility of women in the world was 2.5 in 2016 and the necessary “replacement rate” is 2.1. So the human race looks as if it will walk on for a while. Yet the story for developed nations is quite different. BIRTH RATE IN DEVELOPED NATIONS – FLACCID France (2.0), the US (1.9) and the UK (1.8) are doing their best (all, note, countries with histories of racially diverse immigration). The EU, which only promotes immigration from within itself, is overall at just 1.6 and Germany (1.4), Italy (1.4) and Spain (1.3) are below average. China, just unwinding its one child policy, is at 1.6 and Japan, perhaps the world’s most notorious ageing nation, is at 1.4. But the populations of established nations like the US, Germany and the UK are certainly not declining yet. Instead we have decades ahead in which the population will continue to grow but will age significantly. This is important for all kinds of financial reasons, none of them good. The last time that the fertility rate in the UK was at the “replacement rate” of...

13 Dec 2016

Imagine that your morning post contains an envelope that has your name and address written by hand in block capitals. Inside is a note, written by the same unknown hand that says, “YOU ARE SMELLY”. What do you make of that? For a moment you will regret having two helpings of chilli con carne last night and you will think back to last Thursday when you had a shower. But then you will start wondering about who could have sent such a note. What kind of strange person would bother to take the trouble to deliver such childish (and doubtless unjustified) abuse. What kind of sinister creep does that? Is this the start of something that could escalate? Will it end with a chalk line on your floor marking the position of your dead body when it was discovered?   Much of what passes for “social media” on the internet is effectively a worldwide digital version of an anonymous “YOU ARE SMELLY” note. And once you have asked yourself what sort of person spends time commenting, usually negatively, on anything that takes their fancy, with their ignorance protected with the cloak of anonymity, you must then come to a more awkward question: who in their right mind takes any notice of this stuff? It is certainly the case that corporations and politicians manage their Twitter and Facebook (and doubtless many other apps that I’ve never heard of) identities carefully. They employ people to try to ensure that their public face is shiny and smiley. Television channels read out texts and tweets to give the impression that someone sitting at home sending messages to the TV is not sad at all but is really a member of an upbeat community. Everyone is frightened of provoking a Twitterstorm, defined on Wikipedia as “a sudden spike in activity surrounding a certain topic on the Twitter social media site”. Sadly, Twitterstorms are frequently responses to someone questioning orthodox or just populist opinion. We pretend to revere people who challenge consensus but in practice they are fair game for mob anger. (I appreciate that Donald Trump is the exception to the above: he is far from anonymous, he does not...

15 Sep 2016

This is a follow up to my last post about how QE is a wrecking ball that distorts financial markets and economic decision making. I have no opinion – despite a sceptical mindset – about whether QE is being applied correctly or about whether it will work. I doubt if even hindsight will allow people to agree about whether it succeeded. As an investor I need to weigh the probable outcomes of the distortion itself. Even this is not the same as making a definitive call on what will happen. That is gambling. As always, investing is about probability. THE WEALTH GAP – ONLY SHARES ARE CHEAP As long as QE carries on and the pool of safe assets shrinks further, savers in search of yield will keep chasing other assets. The stock market has been climbing the wall of fear this year. Before the referendum vote, George Soros and others forecast a decline of up to 20% in UK shares. Chancellor Osborne did not rule out suspending stock exchange trading in the face of the expected panic. With the atmosphere so full of “markets hate uncertainty”, that notorious cliché so readily embraced by third rate market commentators, many people will have assumed that the stock market would have performed its patriotic duty and dived after Brexit. But shares are cheap and quick to buy and sell, five days a week. I have just been offered a two year fixed rate bond by a building society that yields 0.95%. That’s a decision that ties up my money for two years. Were I to choose to buy Marks & Spencer shares instead I could get a dividend yield of more than 5% – and if I change my mind and decide that M&S is too racy, I can sell it in two minutes. Back in verdant Blackheath and vibrant Lewisham near to my house, yields on buy-to-let properties are between 3.6% and 4.5% (source portico.com). That seems like a lot of cost, time and risk compared to being a passive and better-rewarded owner of M&S. There is no hint that QE will be curtailed or reversed. On the contrary, the central banks of the UK...

25 Jan 2016

Don’t Ask, Don’t Tell (DADT) was a (now repealed) US official policy that insisted that gays serving in the military must take part in a cover-up. On the grounds that they kept their sexual preferences a secret they were excused from being openly bullied, discriminated against and dismissed. Something that everyone knew to be untrue (the idea that the US military was staffed entirely by patriotic heterosexuals) was sanctioned in a big game of “let’s pretend”. If everyone acted as if it were true it would be just as if it were actually true. But DADT turned out to be too convenient a device to be confined to such a narrow issue. It was perfect for the treatment of subprime mortgages! It was clear to many insiders that people who had no realistic chance of repaying were being granted loans to buy properties that had to rise in value to bail out the borrower, that these debts were being insured on terms that didn’t come close to reflecting their risk and that the loans were being repackaged and sold on, backed by credit agency ratings that were uninformed and irresponsible at best. Yet even when the crisis was unfolding at speed, banks and other financial institutions were saying publicly that everything with which they had been stuffed was AAA quality. Check out The Big Short for a great explanation of the story. The trouble with DADT is that it is like a Ponzi scheme. Once you have started to pretend, you have to keep going. The morons working at the soon-to-be rescued banks did not mean to buy toxic junk. But once the mistake was made the easier option was to keep playing along. Like a trader who hides loss-making positions in the bottom drawer (or a secret computer file), the final thing you can try to buy is time. You literally decide to wait for a miracle.    Something like this is going on with Quantitative Easing (QE = DADT). As I have pointed out elsewhere, the truth that QE was a device for inflating asset prices in order to save the banks from marking them to market was spun into an officially...

24 Dec 2015

This seems to be a time in which people have a touching faith in the idea that progress can be achieved through international negotiations. Certainly, the mutual back-slapping following the Conference Of Parties (COP21) in Paris implied that a new era of cooperation has arrived. COP21 had 25,000 official delegates and an estimated further 25,000 fellow travellers (doubtless all busily offsetting their air miles). The direct aim of this conference was to agree to a temperature target for the earth in the year 2100. With nearly 200 nations represented, it is understandable that everyone was pleased and relieved that everyone agreed that something had probably been achieved. The obvious problem is that in 85 years (2100) almost none of the 50,000 attendees will be alive. COP21 is a group-hug endorsement of the contemporary notion that everything that is hard to face now can be flipped into the future. The tendency to defer tough decisions is arguably human nature (though there must be some humans out there somewhere who prefer to face up to difficulties – where are they?) Certainly, putting off the evil hour has dominated central bank policy for nearly ten years to the point that markets were effectively begging Janet Yellen  to pull the trigger on the first rate rise of what might turn into the new current cycle. Avoiding short-term unpleasantness has resulted in a massive build-up in off-balance sheet liabilities for future UK taxpayers through an expensive policy known as PFI. It has allowed students to be obliged to fund their own education on penal terms, using teaser rates to distract attention from the financial burden that will dog them in years ahead. The probable widespread default that will hit the Student Loans Company will be underwritten by all taxpayers in the future. While much political capital is made out of trying to deny benefits to immigrants, nobody seems inclined to address the monumental unfunded liability that arises from the need to pay pensions to and healthcare costs for our dramatically aging population. We’re probably going to need a large number of working age, tax paying immigrants to help us out at some point. The inevitable car crash that will...

6 May 2015

IT’S NOT ABOUT HOMES, IT’S ABOUT HOUSE PRICES Politicians, journalists and sundry do-gooders seem, against the odds, to have discovered one fact on which they all agree. It seems that Britain has a housing shortage and, to paraphrase the late Vivian Nicholson, we must build, build, build. Whenever an opinion, no matter how compellingly simple, is presented as a fact with which no one could disagree it is wise and even compulsory to question it. I bought a dead tree copy of the Times last week (28 April 2015) and there was an opinion piece about housing that contained this sentence: “It’s reckoned that we need about 250,000 new homes a year”. It didn’t add who reckons that or why. But once you start googling “250000 new homes” you quickly light upon a report written in 2003 by Kate Barker, a one-time stalwart of the Bank of England Monetary Policy Committee. It is reckoned, as they say, that this report demanded 250,000 new homes a year and eleven years on that has not been achieved once. It would appear that the nation has accumulated a bit of a backlog: to be more precise, a backlog of 845,000, that being the difference between the actual number of completions and 2.750,000 (11x 250,000). So what did the esteemed Kate (now Dame) Barker actually say in her report? Did she really demand that 250,000 new homes should be built every year? (Spoiler: no). The first line of the report is this: “The UK has experienced a long-term upward trend in real house prices.” And there’s a clue. I think it is fair to say that the primary motivation of this report is to make housing more affordable by increasing the supply in order to restrain prices. Here is the section that deals directly with the question of how many new houses are desirable: “Looked at purely from the perspective of the UK economy, more housing would be beneficial. Different approaches to measuring the shortfall, produce a range of estimates: • projections of population growth and changing patterns of household formation (a proxy for future demand), compared to current build rates implies there is a current shortfall of...

12 Feb 2015

Quantitative easing is a process by which a central bank buys relatively safe assets (mostly government bonds) and thereby puts cash into the hands of the newly-ex owners of those assets. In the early years of the financial crisis, this was effectively a life-support system for financial institutions which, post-Lehman Brothers, looked like they might fall domino-style. As the central bank bids up asset prices it creates a rising tide that floats many boats. One side effect of this is that the wealthy become wealthier. QE is quite tricky to justify from this point of view. If it is necessary to prevent the collapse of the banking system it is a jagged pill that needs to be swallowed. As I have written before, this is broadly how the Bank of England justified QE in 2009. “Purchases of assets by the Bank of England could help to improve liquidity in credit markets that are currently not functioning normally.” But gradually, while the music remained the same the lyrics changed. Expressing an idea that was essentially imported from the US, the justification from the Bank in 2011 was quite different. “The purpose of the purchases was and is to inject money directly into the economy in order to boost nominal demand.” You see what they did there? Once again, it was party time in financial markets. Bonds and equities were rising nicely. Bonds were rising because the Bank was buying them and other people were buying them because the Bank was buying them and equities were rising because they looked cheap compared to bonds. And property in the areas where financial people live began to go up again, despite the fact that prices appeared to require mortgages that quite high incomes could not plausibly service and that damaged banks could not reasonably be expected to offer. My friends and I have done splendidly from this once we had “got it”. And although I don’t know any influential people, some of my friends do. Call me a conspiracy theorist if you want but these influential people soon popped up all over the place saying how brave and wise central bankers were to extend QE. THE HIGH MORAL...

2 Dec 2014

The Churchill wartime government was kicked out by the electorate less than three months after the German surrender in May 1945. Labour won a huge majority and set about a radical socialist programme of nationalisation of key industries and the creation of the NHS and the welfare state. That story is quite well known. What will surprise many people now is that Churchill’s government managed to pass one dramatically progressive piece of parliamentary law in 1944: Rab Butler’s Education Act. There would be free education for all with selection at the age of 11. Children who passed the 11 Plus were eligible for places in grammar schools – it was intended that the top 25% should reach that standard. Places for the other children were to be offered at either secondary modern schools or technical schools which specialised in scientific and mechanical skills. Sadly technical schools were expensive and hard to staff and there were few set up. This gradually created the impression that the majority of children “failed” at the age of 11 and were sent to schools for underachievers. The 1944 act also allowed for the creation of comprehensive schools that could incorporate all standards. Perhaps grammar schools were burdened with having been promoted by a Conservative politician, but socialist politicians grew to dislike their perceived elitism and the Wilson governments of the 60s and 70s embarked on a determined programme of abolition. This culminated in an education act in 1976 which stated that state education “is to be provided only in schools where the arrangements for the admission of pupils are not based (wholly or partly) on selection by reference to ability or aptitude.” The class warrior secretary of state for education leading this was Shirley Williams (St Paul’s School for girls and Somerville College, Oxford). It is a matter of wonder that the most privileged members of the establishment tend to be dismissive of grammar schools and the upwards social mobility that they seem to offer. Our Old Etonian Prime Minister called arguments about grammar schools “splashing around in the shallow end of the educational debate” and “clinging on to outdated mantras that bear no relation to the reality of...

24 Sep 2014

There is a widespread view in what passes for middle-England that people have a right to leave their wealth to their descendants. It seems odd that, in a country where demonising privilege has persisted as a mainstream political sport, we mostly seem to be more than comfortable with the idea that success or fortune should pass from one generation to another. But it turns out that even ideological turkeys do not vote for Christmas. “According to May 2014 research by Skipton Financial Services Limited, 48pc of under 40s expect to receive a large inheritance from their parents. Of these people, one in five are banking on an inheritance to get onto the housing ladder, and 17pc are relying on it because they have no pension set up. Other stated reasons for hoping for an inheritance include starting a family.” Daily Telegraph, 1 Sept 2014 Accordingly, politicians are frightened of this subject. David Cameron has called the desire to pass on your (hard-earned, responsibly saved) money to your children as “the most natural human instinct of all”. It’s parenthood from beyond the grave. It was reported that in 2007 the opposition Conservatives scared off Gordon Brown from calling a snap general election by pledging to raise the inheritance tax threshold from £325,000 to £1 million. Although Labour pointed out that this was a policy designed to benefit a relatively few relatively wealthy families, it backed off in the face of evidence that the Conservative pledge was popular. (To this day it remains no more than a pledge – it did not survive the coalition government). At present, the law says that an individual may leave £325,000 tax free above which level the rest of the estate is taxed at 40%. At first glance this is generous. Then one looks at UK property prices, particularly those in London and the South East. The average property price in London is now £499,000, in the rest of the South East it is £326,000 (source: ONS, June 2014). If the “family home” is worth the London average of £500,000, it will be liable to £70,000 of inheritance tax when the last exempt person (e.g. spouse or civil partner) has...

26 Mar 2013

I will review the success of my own advice every quarter because it looks like a good discipline and it feels like the chance to brag or whine, both of which could be satisfying. First, the share tips. My first ever post in November suggested that Enterprise Inns was probably worth more than 67p and suggested 120p as a possibility. Today’s price of 109p (+63%) is a nice slice of beginner’s luck. Then I suggested that Marks & Spencer could not justify a share price of 400p unless it was a takeover play. The takeover talk faded and the shares fell. Then the takeover talk restarted and it popped up to 400p again. My opinion is that it is too messy to be a plausible target but never say “never”.  In January I recommended ICAP at 327p. It had a decent jump on news of slightly better trading but then fell back when it was linked with the Libor “scandal”. So it is basically unchanged and still appears to yield 7%, albeit now with a “known unknown” risk. Then I tipped Home Retail Group, which jumped while I was writing about it. I’m chuffed to say that it has jumped again. It was 122p when I started writing about it, 140p when I published and is above 155p now. So far, so good: I expect it to go further.  Then in February I recommended Go-Ahead at 1367p. That has also lived up to its name and has risen by 8% including its half-year dividend. Obviously these triumphs are not unconnected to the fact that the FTSE rose by c.8% in the quarter. Now, the other posts. The student sub-prime loans are designed to blow up in 20 years, which is when my “model” student will start to reduce his outstanding debt. The guilty should be out of sight by then. Interestingly, RPI (now 3.2%), which is the driver for the increase in interest on the loans that students took for the first time this year (RPI +3%), will no longer be designated as a national statistic” according to the United Kingdom Statistics Authority. When I say “interestingly”, what I really mean is that I...

28 Nov 2012

As usual, we follow where the Americans lead. From a blog named ‘naked capitalism’. I recommend this post over at Naked Capitalism (quoted below): Student loan delinquencies are getting into nosebleed territory. The Wall Street Journal, citing New York Fed data, tells us that student debt outstanding increased 4.6% in the last quarter. Repeat: in the last quarter. Annualized, that’s a 19.7% rate of increase* during a period when other consumer borrowings were on the decline. And this growth is taking place while borrower distress is becoming acute. 11% of the loans were 90+ days delinquent, up from 8.9% at the close of last quarter. The underlying credit picture is certain to be worse, since many borrowers aren’t even required to service loans (as in they are still in school or have gotten a postponement, which is available to the unemployed for a short period). And it was the only type of consumer debt to show rising delinquency rates. This is the new subprime: escalating borrowing taking place as loan quality is lousy and getting worse. And in keeping with parallel to subprime, one of the big reasons is, to use a cliche from that product, anyone who can fog a mirror can get a loan. Read...

22 Nov 2012

This is a financial website and not the place for political ranting but loans to fund English university education represent investments in children’s futures. Unfortunately, alarmingly and disgracefully, the terms are such that any child who is sold one is likely to be financially handicapped for life. Sub-prime loans have high interest rates to compensate for an expected high rate of default; but those high rates kick in as the loan matures; initially borrowers are offered so-called “teaser” rates to lure them into signing up. The loans offered by Student Finance England appear to me to match this description but they have any extra twist that is not normally available to sub-prime lenders – they are being marketed to children. If you think I am succumbing to the emotion of anger at this point, check out the website – http://www.studentfinanceengland.co.uk/ – there you can play an online game called “Teacher’s pets” in which you have to save your teacher by defeating the “Pignorants” by answering questions such as: Which of the following companies can you get student finance from? A – Bank of England B – Money Saving Expert C – Argos D – Student Finance England As an aspiring Pignorant, I will offer a few facts that will make us ask ourselves what it is that 17 and 18 year olds have done to deserve this. For students at English universities who start after September 2012, the scheme that applies is Income Contingent Repayment Plan 2. The loans attract interest of RPI +3% from day one – so with RPI currently at 3.2%, that’s 6.2%. A student who needs to borrow £17,000 a year for a three course will borrow £51,000 but owe just over £54,200 when he or she leaves university. Repayment starts only when the graduate begins to earn over £21,000. Except, when we say repayment, what we really mean is the first steps to meet interest payments on a debt that continues to grow. The continuing interest rate depends on how much the graduate is earning. The more that he or she earns, the higher the interest rate. Payments are entirely dependent on income. Student Finance England simply takes 9%...