25 Feb 2015, 6:11pm
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  • others are greedy and the Ermine is fearful

    You want to be greedy when others are fearful. You want to be fearful when others are greedy.

    Warren Buffett

    Much brouhaha about the FTSE 100 at last closing above the level of its 15-year old dotcom high in December 1999. The rational investor will tap a copy of his efficient market hypothesis, sigh and wonder what all the fuss is about. Trouble is the market isn’t efficient, it’s all about the madness of crowds in the short term. And it means they’re greedy 1. I haven’t worked out what the hell we are doing up here for a couple of years now, and I’m still puzzled. As for the Americans, they’re drunk on it.

    And I can’t help a shiver go down the spine, because unlike whippersnappers like this, I was there in the early days of the Web, with an ESI account (eventually bought out by Charles Schwab and then bought out by Barclays). A group of us late thirty-somethings  dreaming at work – I still remember the welcome note the young Ermine sent out when I set up the internal company share discussion board

    “The aim: to make us rich. Very very rich”

    Asshole. Sorry young Ermine – you were at least circumspect enough to not risk money you couldn’t afford to lose. There was a heady and peculiar feel about it all. One fellow did do very well in 1999. Which was a bastard when it came to paying the capital gains tax on that lot the next year and his total portfolio was worth less than the CGT bill! Time to remortgage – it’s not meant to be like this… I was a timid Ermine, mucking around with no more than about £10,000 in total so I was spared that sort of slaughtering. £10k cash is worth about £15k nowadays. It was also worth more to me then because it was a larger proportion of my salary than ten years later.

    Looking back at the paper records of that time, the Ermine wasn’t as hammered as much by the dotcom bust as I thought, because I withdrew a lot from my trading account in ’99. I’m not sure why. It felt rough because I knew Mr  CGT cock-up personally – I was awestruck by the total abount of money he was trading but didn’t have the balls. It was a stupendous amount of money  – only fifteen years later have I seen that amount of valuation in an account summary of my own 2. So I knew a few people who got hurt big, whereas I just had the black tip of my tail pulled in comparison.  I’d really like to be able to claim I saw the denouement coming but I probably wanted to go on holiday with DxGF and also to start funding my ISA, which does show the classic dotcom story (I don’t have all the portfolio valuation statements but I put £7100 into this over a couple of ISA years before losing interest)

    The Ermine dotcom ISA - £7000 into about half that over three years

    The Ermine dotcom ISA portfolio valuations – cash in of about £7000 into about half that over three years

    I got good value out of the experience, because I learned what not to do. Do. not. Churn. For God’s sake, just don’t

    bunch of contract notes from two years of my dotcom days

    bunch of contract notes from two years of my dotcom days

    One of the great things about investing in those days is that it was so much more tactile – you got contract notes in the post each time you bought and sold. I filed mine, and spread the suckers from two years out. One of the obvious failure modes of my early investing days is right out there in plain sight – each one of those tickets cost at least £10 I think on the turn. Yes, volatility was shocking in the dotcom tech days and you could cover the cost of churning in the runup to the bust. But to be honest it didn’t really matter what you held then, so why trade all this shit when it notched down and buy something else that was racing up. These days if you want to trade over days and weeks go spreadbetting young man. Better still tune out of the wall of noise and chill. I keep these contract notes as a memento mori. Do. Not. Churn. If you’re not a daytrader then if you aren’t prepared to hold it for six months then don’t damn well buy it, and if you are a daytrader then you are Frankie and The EscapeArtist wants a word in your shell-like.

    On the other hand, like a good little regular index investor, I started investing in a virgin Tracker ISA ( I believe it tracked the FTSE All-share but could have been FTSE100. Had a good-for-the-times TER of 1%)

    Virgin tracker ISA

    Virgin tracker ISA

    I was buying until 2000 (the dotcom ISA took over from then ;) The pattern is not shockingly different – everybody got hurt in 2000 and may of us quit investing by 2001. From the looks of these charts I guess learning that cost me about £5000. When you look at the cost of numbnuts trying to charge you for sure fire courses on how to be a top trader the cost of attending investing school at the University of Life isn’t so bad. The lessons for me were –

    If you’re gonna stop investing regularly in the stock market, go on strike at times like 1999 or maybe now, don’t go on strike in the bear markets. That’s easy to say but still hard to do. It gets easier to do after you’ve seen it work. It’s one of those gut things.

    Do not churn. If most of your holding periods are less than a year you are a churner 3 A lot of your return is in the waiting.

    Don’t chase momentum. If it all looks high, look for something low. And still check the bastard out – sometimes it’s good to sit tight. Unlike chuck Price you don’t have to get up and dance, and at the paltry levels of interest these days holding cash in a S&S ISA (or even in a Cash ISA, not that that’s really worth the candle either) is a reasonable thing to do. Low inflation/deflation is the cash-holder’s friend. It’s not gonna last

    Note from my index investing career that index investing will still not save you if you are Dumb Money and chase momentum. Index investing is a method, not a solution.

    So what is it about now? Look all around you and the highway is littered to the horizon with cans kicked down the road by politicians eager to make it all go away for another five years. There is stupendous wreckage in the eurozone. The Chinese, Japanese and everyone else seems locked in a deadly embrace to trying to outprint money and make it some other sucker’s fault. Trade has slowed to the extend that we have overcapacity in world mining, commodities of all sorts and the oil price had tanked for  lack of demand due to a lack of economic activity. Warmongering sociopaths from Putin to the vexatious nutcases all over the Middle East are working out their childhood traumas on unfortunate legions of their fellow human beings. Grexit has been postponed, not resolved.

    Apart from that everything is dandy. I know that you shouldn’t be a doomster but that doesn’t mean you have to empty the Kool-Aid in one go. The valuations of the developed world seem mad given the state of the place. Let’s hear it from Citi’s Chuck Prince in 2007

    When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.

    All those damned kicked cans littering the highway, too, piling up and getting under people’s feet and making things more complicated. The ermine is fearful. Not fearful as in 2001, having lost a shitload of money and wanting to sit out the next dance. Fearful as in 2015, trying to work out what the hell to do with the coming years of ISA allowance because all those other blighters seem greedy.

    The market can stay irrational for longer than I can hold out selling my own stuff back to me. I only have another three years of CGT holdings to liquidate, and then I am going to have to start putting real money into my ISA as opposed to selling my unwrapped holdings back to myself, I hope this one’s gonna blow before 2018…

    There’s also a sneaky little corollary to that. If an when it does blow, don’t just load up my ISA. Load up an unwrapped trading account too, to sell back to myself in the Kool-Aid euphoria years like now. What did that fellow Greenspan call it? Irrational exuberance. His countrymen are doing that right now IMO.

    Notes:

    1. well, it also means our govenrments have printed a shitload of money that needs to stick to something I guess, and in the UK housing and equities is as good as any.
    2. I am lucky this is largely in an ISA
    3. There’s nothing inherently wrong with churning though your costs start to rise. But I have learned that I am absolutely crap in that mode. so I don’t do it – I favour being catatonic when investing.
    19 Feb 2015, 4:15pm
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  • A fun farrago of middle-class folly

    The heady aspirations of the middle class wannabees over at the Torygraph often tickle my fancy. Last week with was the numpties who wanted to become BTL landlords and have some impecunious other suckers pay for their three babies, this time let’s hear it from Rik Thomas who earns £55k and wonders if he can pay for private schooling for his one year-old son and get to retire at 50?

    Deconstructing this folly quite interesting. Although ambitious  it wouldn’t have been totally unreasonable for his father’s generation. Lots and lots of things are so much better now than they were a generation ago, but unfortunately for Rik it is increasing inequality that is turning this into a farrago. Some of the goods and services that people associate with the middle class are goods priced on perceived value, and while Rik’s salary is twice the average national household income and probably does put him in the middle class, he has been foolish with the purchase of one and his ambition of the another will cost him more of his lifetime salary than it did of his father.

    Can Rik pay for private schooling and retire at 50? No. Maybe the Ermine is being a sourpuss here because I didn’t get to retire by 50, but really. Just. No. Not quite the wrong city but definitely the wrong ballpark in the wrong part of town. This fellow is saving £100 a month against school fees of about £8,000 p.a. He wants to pay for private primary school, indeed, so the problem is urgent, I believe children go to primary school at 5 in this country. I didn’t realise that private primary schools exist, but there we go, how the other half lives, eh. Anyway. Oxford degree or not the problem is clear and it’s in the arithmetic – his savings rate is way too low. Okay, maybe his good lady wife (warms the cockles of the cynical Ermine’s heart that there are two people involved in this grand ambition) will return to work when the sprog is parked in the primary school for most of the working day and may be able to make up the deficit, but whatever. Must. Do. Better.  – and sharpish.

    By the time he is 35, he hopes to be earning £100,000. With the oil industry’s current woes, he is unsure if he will get a bonus this year.

    The old triumph of hope over experience, eh, somehow the ‘unsure you’ll get a bonus this year’ doesn’t necessarily bode well for mahoosive future pay raises but I have to agree with him and that Mark Carney fellow that the current oil price doldrums will probably look different in seven years’ time, so let’s take this at face value. I do note, however, that project management is eminently offshoreable – The Firm has been outing project managers for years. He’s 27, so time is on his side, his son should be off his hands and making his own way in the world by the time dad is 50, though observation shows that this whole moving out and making your own way in the world seems to be an early 30s thing rather than the early twenties thing that it was in days of yore.

    Let’s zoom out and take a look at the bigger picture.

    Fee paying schools are a Veblen Good

    In days of yore, bank managers and doctors , accountants and engineers sent their children to public school, because there was not such a disparity of incomes. Nowadays most of us have more Stuff, better heating and better cars than our forebears had in the 1950s and 60s, but there are some goods that are priced on perceived value rather than the marginal cost of production. I would classify public schools as Veblen goods, along with designer handbags, luxury cars, jewellery etc. You buy these for the message they give to other people. In the limiting case an oligarch doesn’t need a yacht, other than to make himself feel better than other people who don’t have one.

    Only 7% of Britons go to public schools 1. The promulgators of independent schools dress it all up with ethos and values and cobblers like that. However, the fact that 93% of Britons get dragged up in State schools and the country is still in the top twenty of GDP per capita  shows that this is not a need. It is in the top three of Maslow’s hierarchy

    1402_Maslow's_Hierarchy_of_Needs.svg

    and you do it to be part of the group of Well Off People. There are practical advantages, of course – public schools teach their pupils how to be leaders of men much better than State schools, so as a result the well-off but dim will have a good place in society. But a large part of the spending on public schools is to show that you can. It performs the same role as the iridescent feathers of the peacock’s tail, an inefficiency you carry to show that you have the wealth to spare.

    I have personal experience of this. I went to a State grammar school, which chose to become independent in my last year because otherwise it would have been destroyed by the wreckers of the Labour Government in ’76. Let’s hear it from Anthony Crosland.

    “If it’s the last thing I do, I’m going to destroy every fucking grammar school in England. And Wales and Northern Ireland”

    I must go and piss on his grave sometime. He caused my parents a lot of stress, because they couldn’t afford to pay and hadn’t expected to. As it was the ILEA grandfathered existing pupils and paid the fees in the last year (my sixth form).

    Grammar school worked for me. I was the son of a blue collar worker and a SAHM, and I benefited from upwards mobility. At a guess working in industrial research and design was a middle class career. I was eventually able to see the argument that several teachers repeatedly put to me, that by skimming the able the grammar schools impaired the ability of the secondary moderns and early comprehensives to achieve balance, because they were teaching the less able. Aspirations are lowered and people learn to labour. So the grammar schools had to go. Their existence was inequitable to some extent.

    Because my parents weren’t rich enough to do independent schooling, in a comprehensive system my end of the boat would have gone down, but overall the common weal would probably have improved. It’s easier to say that now that I have benefited from this and don’t have skin in the game. It took me until my late forties to finally surrender and accept the intellectual premise because I found its logic probably passes the balance of probabilities.

    My personal experience of mixed-ability schooling is limited to primary school, and I very distinctly remember being in class where those who could read had to sit beside those who couldn’t and help them read. It was tedious, excruciating and hard work, and it wasted my own time at school. I had normally finished the school books for reading in about a quarter of the time allocated, largely because I didn’t have to vocalise as I read. In that year I realised the Ermine was never going to be a teacher, because I was unable to understand or to empathise how people could not pick up the rudimentary meaning and grammar of English. And as for this reading out loud lark, WTF was up with that? Seriously, don’t ever do that to people. Speech is about five to ten times slower than visual reading, if you teach people to read out loud and then only understand by listening to themselves you condemn them to a lifetime of sub-normal reading speed, because it’s hard to unlearn.

    I was taught to read by my mother before I went to primary  school – English was not her first language. So while I accept that mixed ability schooling is probably overall for the best, as somebody who would (and had) lost out in it I’m never going to be an enthusiastic fan, it definitely falls into “the needs of the many outweigh the needs of the few” territory, and that sucks if you’re one of the few. But I can understand that State schooling has to aim for the greatest good given the limited resources 2.

    Parents never like to think their children are stupid or even below average, though it must be happening 50% of the time. Independent schooling addresses this in two ways. One is it throws more resources at the problem. A stupid child with excellent teaching can probably be brought up to the level of a mildly above average child with average teaching. That’s the easy part. The second way is that independent schools are far, far better at teaching their pupils to be leaders of men. Presumably they don’t go round telling people everybody is of the same worth and ability, which seems to be a given in State schools despite depressing evidence to the contrary in terms of ability. The Ermine only learned to address crowds of a couple of hundred people in the second half of my  working life, and I learned elements of command presence by having to take decisions in public leading people because I had specific skills for the job. I was never taught this, and had to research  how to carry people with me by watching others do it, by reading some military descriptions and with Google.

    My ability to do this is still a pale reflection of the typical public school alumnus. They were taught command presence. 3. I was taught subjects at school, but not how to lead people. I don’t find it that surprising that those who went to public school are much more likely to be in positions of leadership across the country, as evidenced in this Government report. And summarised by John Major in 2013

    “In every single sphere of British influence, the upper echelons of power in 2013 are held overwhelmingly by the privately educated or the affluent middle class,”

    I can see why parents like public schools. It softens that 50:50 chance of having to face up to having a stupid child, and you can still get them ahead of the 93% rabble, because leadership is a well-rewarded occupation. You don’t need to be bright to have command presence. The other area where public schools probably do well is where a child has an unusually unbalanced set of strengths and weaknesses. State schooling has to be one size fits all, once Crosland destroyed the grammar schools that specialised in academically biased pupils. We don’t want to pay the taxes that would ensure no child is left behind – it has to be good enough, not excellent, since we can’t afford excellence.

    I am not saying people who went to independent schools are dimwits – probably on average the intake is a little above average, purely on the slight heritability of ability combined with cultural factors. But independent schools can probably make more of the academically challenged than State schools, which must be comforting for parents who want the very best for their child regardless of their natural ability compared with the 93% lumpenproletariat ;)

    The trouble with Veblen goods is they have to be dear to be exclusive

    And this is where Rik is SOL. He went to public school, so he thinks of this as the norm, but 7% isn’t a norm. The whole point of public schooling is to get ahead of the 93%. If we take a butcher’s hook at the Independent Schools Council’s report we can see that the cumulative rise in pupils in independent schools since 1996 is 8% (roughly when Rik was at his public school from 1993 to 2006). Since 7% of children now go to public school, my grammar skool edukayshun lets me estimate about 6.5% of pupils went to public school in his day, since the ISC report indicates the cumulative change in total pupil numbers is very small. However, with increasing inequality all those richer people are driving up the price of public schooling, and as a Veblen good they don’t just make more public schooling to meet demand. They’ll make a bit more to soak up the demand profitably, but the 0.1% is getting richer faster than the Riks of this world.

    Britain has only so much space for dimwitted leaders  – we couldn’t have a 50% independent school population without some of the advantages going away. If we assume that half the intake of an independent school is below average, we can probably find space in the leadership structure of Britain for that 3.5%, whereas finding leadership positions for 25% of school leavers is going to be tough. And as conspicuous consumption, it has to be exclusive even if there weren’t technical reasons why it had to be. Imagine a world where all of us wore Manolo Blahniks, drove Rolls Royce SUVs and had Lear jets. The cognoscenti would have to go and find something else to make themselves feel special.

    Public school is like that. It is a status symbol, it does have quality and does buy you favours and particularly for dimwitted rich kids 4 it keeps them in the style they were accustomed t because leadership is not widely taught.

    I owe it to Prospect magazine for the official definition of these rich dimwits. They are the ‘second bananas’ identified in The Fall of the Sloane Rangers and they owe me a new keyboard. Apparently in the past according to the Torygraph

    Public schoolboys married girls in pearls and settled down to an upper middle class life in the bosom of the Establishment. Diana, Princess of Wales was their poster girl.

     

    Girls in pearls? WTF is this they speak of? Why was I as a student living in a Knightsbridge basement wannabe photojournalist shooting gritty Tri-X black and white pictures of the soup kitchens under Charing Cross railway arches and being accosted by jumpy coppers where I could have been using Kodachrome on girls in pearls…

    Anyway, Prospect supports the thesis of Rik’s dad having it easier than Rik, although the Sloane Rangers were the London cream of the second bananas. To wit, the ineffectual toffs used to be the 5%. They are being nuked by New Money

    Most of the old Sloane groups were originally somewhere in the top 5 per cent—it’s difficult to quantify a stance—and some of them at the ragged lower edge of the 1 per cent, where the household income threshold is more than £3,000 a week now.

    “The Sloane population of the City was winnowed out—now they were competing with other types and other breeds from other places”

    The combination of 80s Tory government and home-grown New Money—much of it smart, tough and well-educated—looked at first to most old Sloanes (instinctive Tories) like just what the doctor ordered. But they set about destroying the fixed points of the Sloane world—particularly the Old City at Big Bang (1986) and after. And then New Money started cherry-picking the trophies that Sloanes valued. The attractive London houses in SW3, 1, 7, 10, 6 and 5 (in that order), the prettiest rectories and miniature statelies in the best counties, the best university places. Big Bang reshaped the City and set the foundations for 21st-century financial London. There was a storm of acquisitions before and after 1986 in which a roll-call of familiar Old City names like Rowe and Pitman disappeared. Then their buyers were gulped down by still bigger fish. The familiar merchant wankers of a thousand Sloane jokes—the delicious histories, the panelled rooms and word-is-my-bondism—were replaced by global investment banks with soaring atrial offices in Broadgate and, later, Canary Wharf. The new players were American, French, German, Swiss and Japanese banks. The top bananas were toughs and technocrats from absolutely everywhere—people who didn’t know or care about subtle semantic class indicators or the significance of milk-in-first and who didn’t care if their suits looked a bit Charlie. People who didn’t know the Sloanes’ dads. The new bosses wanted “top talent,” wherever it came from.

    I fear the obsidian Ermine heart fails to bleed…

    But while Rik’s dad could afford to do this public school stuff, Rik can’t. He needs to choose now – public school, or early retirement. He can do one or the other, not both. And if he wants public school, he needs to suck in his gut and start saving, because he has 15 years of laying out £10k p.a. plus starting in four years time. Yes, his wife and lodgers may make up some of the shortfall, but public school gets dearer at secondary school.

    The best laid plans get sucker-punched by lifestyle inflation

    Now Rik will be doing better than I did, and he lives in Aberdeen rather than the Great Wen. But he’s already collected airs and graces at 27. Living three people in a five-bedroom house, FFS. At 27 I was renting a house with four other guys to save money because rent is throwing money away. I had yet to discover how much money you can throw away buying a house at the wrong time! At least Rik is figuring to rent out a room for £6k p.a. Call me an antisocial git but living in a house owned by the bank  with strangers is not my idea of living the middle class dream even if it does have five bedrooms and Italian hand-made tiles in the kitchen, but each to their own. Exactly how well it works for a lodger with a one-year-old in the household beats me. I’m assuming that Rik’s desire for early retirement will make him circumspect about adding extra mouths to his household – the late Cynthia Oti’s secret for a secure financial future was to

    “never take financial responsibility for something that eats.”

    which may be taking it a little bit far, though I recently heard reports of one lady friend whose children are sort of off her hands declaring

    “I’m not surprised people get themselves into money trouble, they accumulate accessories like dogs, children and stuff without thinking about how much it all costs”

    so maybe Cynthia was onto something :) The five-bedroom house of course says Rik is Mr Big and worth something, but he only needs three bedrooms and all the rest will continually bleed him, needing heating, decorating, repairing etc. Let’s hope that North Sea Oil will confound the Hubbert peak and still be bringing in shitloads of money at least until he can downsize.

    Either way, the problem with retiring early is that of course Rik can lob his salary over about 43k into his SIPP and that’s all very sensible, but that kinda clips his net income to £32k (corresponding to gross of about 43k, anything over goes to his SIPP). Of that he wants to spray £8,000 on school fees in the near future leaving him with £24k. Computing everything in today’s terms and anticipating that equity gains will at least compensate for inflation, if he wants to retire at 50 then he needs to have enough in an ISA to run him from 50 to 58, at £25,000 p.a which my trusty calculator makes £200k. He can run this capital into the ground because he will have a decent SIPP income for afterwards, and he has 23 years to do this starting tomorrow. He also owes £200 k on his house. Let’s say he saves into an ISA £10k p.a. and his mortgage costs him £4,000 pa @ 2%. Let’s ignore the tedious concept that you are supposed to pay down the capital on a mortgage, this family now needs to run two adults and a child in the style public school people like to live on  – on £10,000 a year 5. TFS has an example of what that looks like and it probably suffices to say that this is easier in theory than in practice. Now the Ermine household could do that, but I am almost twice Rik’s age, have no mortgage or public school spending. Your mid twenties to forties are the worst time for calls on your income, and this goes in spades if you have children.

    Early retirement is doing different – and to do different you have to be different and live different

    One of the observations I made at The Firm was that those who cleared off in their early fifties and retired were the child-free. As long as they had managed to avoid the D word parents were on their way about five years later if they worked at it. Everybody was retired at 60, because that was the normal retirement age.

    The original fellow who gave me all the sage advice to save into AVCs is still working for The Firm, despite being well over 50 and his younger self declaiming “you’re stupid if you dont’ save into AVCs and retire by 45″. Why is that then? Well, his wife and kids took issue with the grand plan – basically they wanted to have this nice middle class lifestyle and that doesn’t go along with dropping your salary even to the 40% tax threshold. Whoops. Nice plan, Stan. They preferred daddy in the office behind a screen where he belonged 6 so they could could have it all because they were worth it. Early retirement fail. If you want to retire early, you have to live differently to your peer group. In particular you have to spend less!

    Earning more doesn’t help most people, because as a rule to earn more you have to push yourself more until you reach CEO level. At board level to earn more you simply have a word with your mates on the non-exec remuneration board to loot the real owners of the firm more and award yourself a pay rise, but for grunts you normally have to do more or eat more stress by doing unpleasant shit. So you get to earn more, but then you are in the circle of more spendy people and you may be more pissed off with work so you need to spend more to make yourself feel better. So while earning more seems the obvious way to go it only works for some people. Less than 1% I would guess ;) If earning more were the answer, footballers would never go bankrupt.

    The fellow who taught the younger Ermine all about tax-advantaged pension savings was right you’re stupid if you dont’ save into [pension savings like SIPPS] AVCs – but not right for himself. His words gave me hope that there was a way out of there and the plan was put into action with extreme prejudice. It’s not a barrel of laughs, I can tell you, driving one’s salary down to a whisker of the minimum wage threshold and saving into pension AVCs using salary sacrifice. And then trying to save into an ISA. Because if you save so hard you can’t do shit because you have no bloody money left. When that shit is fast and furious desperate holidays because you’re so worth it cube slave, two weeks of respite in return for 48 of humdrum existence then one can do without it when the win is the rest of your life on vacation. Gets more challenging as you drive out of wanton consumerism and then start moving down Maslow’s hierarchy. It’s the in-between bit that suckers First World cubicle slaves. They want the trappings of their peers that cost money, but then they are trapped by the trappings.

    Rik is gonna run into the same sort of problem that my colleague at the Firm ran into. His family are going to want holidays in Tuscany and somewhere exotic. They are going to want kitchens with handmade Italian tiles, a butler sink and matching luggage. They will probably want something German on the driveway. How did the ermine get round that?

    I went on fewer holidays. I have less house than my colleagues 7. I drove my cars into the ground – two of my last four cars I took to the scrapyard personally. I spent less than I earned. But make no mistake – my colleagues had more holidays, Italian handmade tiles and all sorts of other goods and chattels to show for it. On the other hand, this week one day I got to go out and look at this in the Suffolk sunshine

    bloody hell, what's that noise - ah - incoming Brents at 2 o'clock

    bloody hell, what’s that noise – ah – incoming Brents at 2 o’clock

    Yesterday I went up to a recording studio in Norfolk to be a judge in a sound competition. While my former colleagues were looking a Microsoft Excel on their screens, or filling in their objectives. You pays your money and you takes your choice. I don’t have fancy tiles in the kitchen and haven’t been on a plane since 2007, whereas some of them go on five city-breaks a year.

    I don’t think Rik has jumped to this. To live different you have to do different. Not only that, there’s a second problem in town.

    Increasing inequality means you must be richer than your parents were to give you children the same class experience your parents gave you

    It’s those Veblen goods again. The trouble is there is one asset class that’s in the needs category that is typically the one single biggest part of most Britons’ net worth, provided that we overlook the inconvenient truth that they usually have it on borrowed money. Until 1979 Britain had a workable housing market where renting was a perfectly reasonable option, but since ownership has been promoted over renting. Even if the ownership is not for occupation. I found it brave of the Guardian to tackle this emotive issue and remind us that owning your home wasn’t widespread for an awful long time and isn’t the natural order of things. Indeed, home ownership is increasingly ill suited to modern working patterns where you may need to move to follow work. Most of the people at my grammar school were in rented accommodation, but in contrast to Generation Rent they had better security of tenure – many of these families were in council houses.

    More of Rik’s lifetime earnings will be consumed by housing than his parents’ earnings were. Should he go the public school education route, more of his lifetime earnings will be consumed by that too, relative to his parents. He is very unlikely to be able to retire early if he wants to indulge in such conspicuous consumption, although to him it will look like the normal spending of his peers. That is because most people spend as much as they earn, if they are lucky. To retire earlier than the norm, Rik must spend less than the norm. With his five-bedroom house and his public school aspirations, he is not on the right path. Something has to give. Pick any two of the three, Rik. Peer-group middle class lifestyle, school fees, early retirement. You’re just not rich enough to do all of them.

    Notes:

    1. for any confused logical Americans, public schools a.k.a. independent schools in England are the sort your pay money for, as opposed to State schools that are funded from general taxation
    2. I would now counter that we should focus State schooling on teaching the basics of the three Rs and then target the brightest because our economy will have few jobs for those of average or even slightly above average ability. The quid pro quo for that is that taxation needs to be enough on the winners so that a universal income can be paid, and also that adult education in the Victorian sense of bettering oneself and general education should be free and promoted via MOOCs and free libraries. The whole point of State education has changed through my working life but this does not seem to be acknowledged. It taught the thee Rs so you would have life skills and subjects so you would be a cog in the industrial machine. The latter is becoming redundant for many future non-employees, and in a world with Google general learning is much easier to be had for free.
    3. I have never been a paying independent school pupil. I offer this Guardian article into the stylistic differences between aims, and personal observation shows me that people who have been to public school are more at ease in leadership positions and generally giving direction
    4. clever rich kids would do okay in State schools as long as their parents taught them values
    5. £32k less £10k ISA less £8k public schoolery less £4000 IO mortgage
    6. I don’t know enough about his domestic circumstances to know how much his wife added to the household economy though from his talk I figured he happened to be the larger part of it
    7. but it is mortgage-free, which is rare amongst my colleagues
    12 Feb 2015, 2:15am
    debt economy:
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  • Zorba the Gr€€k is still skint after five years

    As the euro continues to fall amid disappointment that the EU has not come up with a solid rescue plan for Greece, Zorba makes an appearance

    Patrick Blower, Feb 2010

    It was five years ago to the day that I saw this livedraw on what was then the Guardian’s Comment is Free 1. Only one of the leaders in the cartoon is still standing after the five years, – five years is a really long time in politics.

    In those heady days, a nervous Ermine was still at work, but had roughed out a flight plan for the exit. All this turbulence in the market seemed hazard and opportunity, and I was convinced the Euro was going to blow, the internal contradictions of a finance union without a transfer union, the lack of common cause.

    None of these things have changed, but I underestimated the doggedness with which people cling to old forms, and of course perhaps the preparations the rest of the eurozone felt they needed to do to bolster the creaking edifice against Grexit. Even now it’s hard to say – will I look back at this in five years time and wonder how nothing has changed? Exactly how long can the markets stay irrational while the entirety of the Eurozone grinds its way into insolvency.

    Just like then, it feels that the forces are gathering for a showdown. It is in points of change that opportunity arises and destruction threatens. The five year anniversary seems to be a good one to invoke the spirit of Zorba the the Gr€€k once again. The world has still not recovered from the 2008 financial crisis, there is still too much capital chasing not enough productive assets. Greece is a symptom as well as a cause – the Eurozone serves two masters. As Lincoln observed the problem in a different field

    A house divided against itself cannot stand. I believe this government cannot endure, permanently, half slave and half free. I do not expect the Union to be dissolved — I do not expect the house to fall — but I do expect it will cease to be divided. It will become all one thing or all the other.

    Abraham Lincoln, 1858

    So too with the Eurozone, it lumbers endlessly from crisis to crisis, and it is time for it to become one thing or another. It has crushed too many dreams already, and it needs to shape up or to start to cut away the dead wood, and become small enough to for a political and transfer union to hold. Or the United States of Europe needs to be constructed.

    To call in another American view on the fiasco, I was glad to hear Greenspan finally call it out in public

    “I believe [Greece] will eventually leave. I don’t think it helps them or the rest of the eurozone – it is just a matter of time before everyone recognises that parting is the best strategy.
    […]

    The problem is that there there is no way that I can conceive of the euro of continuing, unless and until all of the members of eurozone become politically integrated – actually even just fiscally integrated won’t do it.”

    Until that comes to pass or the whole misbegotten enterprise disintegrates from its internal inconsistencies the rotting corpse that was wounded by the original financial crisis will endlessly stink up the place and ruin Europeans’ lives – particularly young folk by the looks of it.

    As a young man I was unlucky enough to graduate into Thatcher’s first recession in 1982, but although deep it recovered relatively quickly compared to the 2008 recession that seems to be combining with other strategic shifts in the workplace. In Britain although these problems may be affecting the quality of jobs, in the Eurozone and southern Europe there seems to be grinding youth unemployment as well as a general protracted recession – five years of that is a serious hit on one’s working life. No wonder there is a Greek youth brain drain.

    Can’t pay, won’t pay

    The Greeks are never going to repay the debt in Euros. Writing the debt off which is what Syriza seem to want isn’t going to help them in the long run either. They are yoked by the Euro to people that like to live in a different way. Let’s see what happened in the past. I hit up these guys for some historical USD to GDR, GBP and DEM from 1990 to 2001. I then normalised everything to a value of 1 on Jan 1990. Basically you needed 2½ times as many Drachma to buy a US dollar in 2000 than you’d needed 10 years before. Germans, who didn’t exactly have a great 1990s needed roughly the same and even in Blighty we only needed about 20% more GBP to buy that dollar. You can quibble as to what sort of store of value a US dollar represents but the difference cancels that out. There’s something different about the way Greece likes to do things and its currency reflected that.

    As time went by you needed more and more drachma to buy that US dollar

    When Zorba the Gr€€k was drawn, roughly the same distance as is covered by this chart had elapsed after the drachma was crash-locked to the Deutschemark’s proxy the Euro. Now it’s 1.5 times the space covered by this chart. There’s no point in resetting this to zero now, it’s a structural difference. In a true currency union like the United States, rich parts continuously transfer money to poor parts, else a New York City dollar would appreciate against a Detroit, MI dollar – in the chart above you’d need a lot more Detroit dollars to buy a beer in NYC at the end than at the start.

    The Greeks may be the canary in the coal-mine

    Those Gr€€k €uro debts ain’t gonna get paid. There’s a history lesson in this for the rest of us too. In the good times it’s easy to believe in financial promises, but in the end a lot of finance is just that, promises. A lot 2 of my ISA is also promises, so are all those British mortgages taken out of overinflated house prices at low interest rates by people who will never earn enough in a lifetime to discharge those debts unless something changes. At the moment the lens is focused on Greece, but it can move, and maybe zoom out. Odd things are happening in the economy – we have created a lot of money to buy off the day of reckoning in 20o8 and after seven years it’s still not finding things of value to stand proxy for, companies are hoarding cash because they can’t invest it to make things people can/will buy more of. It’s not necessarily all bad. Maybe it is the final denouement of consumerism -the Post Carbon Institute’s Richard Heinberg in a curiously upbeat mode

    The practical result of declining overall societal EROEI 3will be the need to devote proportionally more capital and labor to energy production processes. This is likely to translate, for example, to the requirement for more farm labor, and to fewer opportunities in professions not centered on directly productive activities: we’ll need more people making or growing things, and fewer people marketing, advertising, financing, regulating, and litigating them. For folks who think we have way too much marketing, advertising, financialization, regulation, and litigation in our current society, this may not seem like such a bad thing; prospects are likewise favorable for those who desire more control over their time, labor, and sources of sustenance (food and energy).

    […]

    The energy glut of the 20th century enabled us to embody energy in a mind-numbing array of buildings, infrastructure, machines, gadgets, and packaging. Middle-class families got used to buying and discarding enormous quantities of manufactured goods representing generous portions of previously expended energy. If we have less energy available to us in our renewable future, this will impact more than the operation of our machines and the lighting and heating of our buildings. It will also translate to a shrinking flow of manufactured goods that embody past energy expenditure, and a reduced ability to construct high energy-input structures. We might find we need to purchase fewer items of clothing and furniture, and fewer electronic devices, and inhabit smaller spaces. We might also use old goods longer, and re-use and re-purpose whatever can be repaired. We might need to get used to buying more basic foods again, rather than highly processed and excessively packaged food products. Exactly how far these trends might proceed is impossible to say: we are almost surely headed toward a simpler society, but no one knows ultimately how simple. Nevertheless, it’s fair to assume that this overall shift would constitute the end of consumerism (i.e., our current economic model that depends on ever-increasing consumption of consumer goods and services). Here again, there are more than a few people who believe that advanced industrial nations consume excessively, and that some simplification of rich- and middle-class lifestyles would be a good thing.

    I grew up in a simpler London, and when I look around me at the shocking waste and inefficiency of consumerism compared to only 40 years ago I do wish we could distil the many great and genuine innovations and improvements from all the destructive busywork and tat that takes away.

    Why? For crying out load, why?

    Consumerism. Why did this misallocation of resources happen?

    Perhaps Greece rubbing up against the evil heart of darkness in the common cause assumptions of the Euro is reminding us that in the battle of illusion against reality the latter tends to win out over time. We tell ourselves many stories round the virtual campfires weaving meaning into the flickering shadows on the wall. Although these myths are symbolic, not all of them are true. It is going to be an increasingly difficult task to find a way of turning cash into usefully productive long-term assets against a background of secular stagnation, and making easy assumptions is probably not the way to do it. Much of the appreciation is asset prices like shares and houses doesn’t reflect an increase in underlying value or future income stream in the case of shares. It merely reflects the increased amount of QE money chasing those assets. Anybody could be a great investor over the last few years with that sort of tailwind, though the day of reckoning seems to be getting closer with the help of our Greek friends shining a light on what unrealistic claims upon the future look like.

    The Greeks want to live with a currency that depreciates faster than the Germans. It is called the drachma. Possibly if Northern Europe wants its money back from the repudiated € loans, sue Goldman Sachs who aided the Greeks get into the Euro under false pretences, and good luck with that. It’s always good when seeking repayment to pressure people who actually have some money, and the Vampire Squid would seem to be where a lot of the money ended up ;)

    Goldman Sachs arranged swaps that effectively allowed Greece to borrow 1 billion Euros without adding to its official public debt. While it arranged the swaps, Goldman also sought to buy insurance on Greek debt and engage in other trades to protect itself against the risk of a default on those swaps. Eventually, Goldman sold the swaps to the national bank of Greece.

    The drachma is dead. Long live the drachma.

    Notes:

    1. Sadly along with it’s other faults the Internet is not forever – because meaning is held on the transitory relations of bits of spinning discs and network switchery that somebody has to pay for the rust that is linkrot  never sleeps. Analogue media coded information in what they were and didn’t need a constant supply of power and rent, though they had their own decay mechanisms. I was surprised to find this was hard to get hold of again after only five years. For me at least the Guardian’s link doesn’t play, but the artists own livedraw site still has it. I used a youtube link
    2. okay – all of it – a solar flare/EMP would vaporise the lot, but even without that some promises are more hand-waving than others
    3. energy return on energy invested – how much energy you have to invest in getting energy
    4 Feb 2015, 11:12pm
    personal finance
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  • Why UK retirees may prefer dividend income – putting the personal into finance

    There was a spirited discussion over at Monevator as to why on earth retirees focus on dividend income – in a rational world investors wouldn’t give a damn about where their return comes from – an appreciation in the share price or dividend income or some mix of the two. Total return is where it’s at. The Greybeard was advocating a shift towards companies with a tendency towards stable dividend payments like income investment trusts and met with some resistance to the idea from people who I would hazard were largely in the accumulation phase. I’m one of the greybeards favouring income too.

    Bogleheadism is a comforting creed. Take the return the putatively efficient market gives you for your particular asset mix of choice. Adopt your previously determined safe withdrawal rate (SWR) – typically 4 to 5% though mistersquirrel and RIT advocate lower levels, then sell off accumulation index fund units to realise your SWR.

    How many years do you have to average out the market noise to detect true value?

    Benjamin Graham said that in the short term the market is a voting machine, in the long term it is a weighing machine. It’s a pity the old boy didn’t give us an integration time to average out the noise signal from the voting machine bit, but we can get a feel for it by two bits of indirect evidence. One is the boom-bust cycle, and the other is the integration time of the Shiller CAPE index.

    The BBC counted 25 bear markets in the 20th century, with typical drawdowns of up to 40%.

    The Shiller CAPE index takes an integration time of about 10 years. That’s a bastard. It means if you start your retirement, say in 2007, you could have to wait a long time – over five years – to start to observe whether the engine of industrial capitalism was misfiring and trending towards secular stagnation, in which case you want to rack back your 5% SWR assumption and follow RIT down the 2.5% rat-hole. Trouble is, you’ve been overdrawing your retirement capital at twice the safe withdrawal rate for the last five years.

    So you decide to be a bit more jumpy and respond more quickly to the headline value of your networth. That’s now going to be feast or famine – one year you’re on caviar and flying First Class, the next year you’re on Pot Noodle and taking the Megabus to Blackpool.

    The working saver can take a nonchalant approach to market crashes. They are either getting a lot more shares for their money, or if industrial capitalism is doomed anyway then they are hosed like everyone else. If it turns out the 5% real return on investment was a quirk of the postwar period then they can defer retirement and save more money, unwelcome as it may be.

    If you lose or give up a job in your late 40s or 50s you often find it hard to match your previous salary, so once you pull the big red ejector handle you better be sure your plan is workable. Both in terms of academic correctness and in terms of being something that you can actually do without being stressed out into daft moves should the market throw a hissy fit on you.

    Dividend income is less volatile than the capital value of shares

    You can go get historical data for the FTSE 100 (UKX) index price and the UKX Total return from the FTSE here.  Unfortunately it only goes back to 2012; I munged the data to rebase both to a value of 100 on 1 Nov 2012. Then I took the quarterly change in the UKX from the previous period and calculated the dividend 1 (from the difference between UKX and the UKX-TR, bearing in mind the TR accumulates the dividend over time which needs to be compensated for).

    The chart shows a 4-point moving average of quarterly change in networth based on 100, ie each point is averaged over the previous year. You’re taking the piss if you live off dividend income and don’t have at least a year’s worth of buffer. The smoothed quarterly variation is +2.5% to -1% so the range sweeps a good portion of a typical +1.25% SWR 2, and it doesn’t even cover a particularly exciting period in the market. It’s a bumpy ride – about half the quarterly values are below the nominal steady SWR

    less variation in the divi than the capital value

    The dividend value varies less over the periods than the capital value. It’s also always a positive number (even in the pits of the recession some of the FTSE100 paid a dividend). It isn’t as much as the typical 1.25%/qtr SWR but the FTSE100 does generally increase capital value over decades, if you exclude the irrational exuberance of the dotcom boom.

    Passive investing is still a set of axioms – you are modelling the behaviour of a chaotic system subject to known random stimuli as well as human frailty and the madness of crowds. It may well be the best game in town for a host of good reasons, but you must live with that rough ride and the long and unspecified delay of filtering the voting from the weighing, to decide what your SWR is. What exactly is the value of your portfolio on which you base that SWR? It’s not like you can stop investing 10 years before retiring and do a Shiller CAPE on it.

    Imagine this kind of ride on a intercontinental flight

    You’re the pilot of an aircraft taking off from LAX. You observe your plane has massive fuel tanks, about 10x your fuel consumption, but they start off low. After a bumpy takeoff they seem to fill steadily from nowhere. For five thousand miles you overfly land, at a steady speed, sometimes you have outages in the fuel income but the increasingly full tanks help you ride these. Halfway through your journey, you reach the East Coast and the open sea, the tanks are almost full, and your flight engineer says let’s switch to the alternative powertrain.

    All of the sudden the power approximately halves, and gets rough, not only have you lost 50% of power but of what is left you’re facing a 2:1 variation in the inflow. The tanks never refill and the fuel gauge is going nuts – much of the time is shows a gradual and manageable decrease with sudden plunges to half of the previous level and back.

    It’s gonna make you jumpy and fearful. Particularly bearing in mind that people retiring now often had an experience of a steadier work income than is common in a less secure employment environment now. I have left five jobs (discounting crappy university infill stuff) but four of the leaving dos were in the first seven years of my working life. These people are going to be ill-suited to managing such a variable income compared to many people working now. They’re just not used to it.

    capital value/networth is a bad metric for people with high equity exposure – it’s feast or famine

    Ermine’s networth in marked to market terms. The date line is the zero axis

    This is an ermine’s networth, as it was in numerical form at the instance of the time on the x-axis. It shows cash and equity investments I can get hold of, and excludes things like my house value, main pension and AVC savings. If I can’t sell it in 30 days Quicken 3 may track it but it doesn’t show it. So at the end of the graph I have a 70% equity exposure. At the start I had very little, and obviously I was earning. I was a salaryman – there was no variability in my earnings, which you can see in the steady and monotonic climb at the left-hand side. All the variability was in my spending, and I had driven that down as much as possible.

    I left work in 2012 – the jump reflects two things, one is the redundancy money but for tax reasons I tossed a lot of that into my pension AVCs, not shown. There was a bunch of Sharesave shares vesting and therefore coming onto my books.  Quicken is able to update equity prices with a whole load of scripting fun and games, this chart therefore shows what the liquidation potential of my financial assets at any point in time. I stopped earning in 2012 – you can see this because the slope of the chart falls off. But also look at the increasing random variation on my networth, which is the result of the increasing equity exposure. In May 2012 I could have given a reasonably accurate answer to “what is your networth”. Whereas now it would be, well, search me, guv. There’s a 10% random noise figure on it as it is, and if the Greeks pick a fight with the Germans then that 70% equity networth could easily be marked to market at half its previous value, ie my networth would be hammered to 65% of the current value on the right-hand side 4. The month on month change is more than I was saving when earning, it is more than my monthly running costs, and this is the normal variation of a market that I have moaned about for two successive years that it is boring and tedious. I suspect we are due some excitement soon ;) My ISA is more diversified than the UKX in terms of sector, size and geography, but that doesn’t eliminate volatility, just reduces it.

    So if you’re spending x% of your annually evaluated networth, you could be eating a 50% variation in income year on year. If you want to see what that looks like check out the bellyaching about the GAD rules in 2011 as people in drawdown had to cut their spending for very similar reasons – and that was only 8% because the GAD window time spanned several years. Now retirees have usually got shot of the children and paid down most of their mortgage, so their fixed costs can be less of their income proportionally to their working selves. That’s a good position to be in, because they can then adjust their spending to suit. Still not going to be fun!

    The age-old choice – speed or comfort, Sir?

    In my view you need to hold about three years worth of running costs as a cash float to live off dividend income anyway. It seems many people think that’s too much – so they may be prepared to pay a bit more to have someone do that smoothing for them. Which is where the investment trusts come in – although valuations make it harder to do this now than when this article was written the time will come again. To wit –

    The pick of these trusts have paid regular dividends for decades, with the income rising annually for well over 20 years. The very best have grown their payouts for more than 40 years

    You are paying for the smoothing – in risk as well as slightly higher fees. The efficient market hypothesis says so. Nevertheless, if they have a track record of growing their payouts for decades then if you determine the amount of payout you get now is good enough, you may feel better about relying on it more than that SWR% of your net worth.

    You can do the smoothing yourself – just how much cash do you hold? There are other ways of smoothing – you can shift your portfolio towards bonds. How much? It really helps to know how long you will live for. You can take the Logan’s Run approach to putting an upper bound on that, for for some reason this isn’t a particularly popular option.

    Logan's Run

    Logan’s Run

    That’s the trouble with retirement planning. You have to make a judgement call on your own death, it’s not something a living system really likes to do. The Cyclopes of ancient Greek mythology traded one eye for knowledge of the future. They weren’t that chuffed to get in return the foreknowledge of the date of their own death ;)

    That’s why this retiree likes dividend income. Taking the efficient market hypothesis as an article of faith is a lot easier when you are young and retirement is far away. When I was looking for a way to top up my pension to allow for the fact that I was going to work for shorter than the original time I had expected, I started in the teeth of the recession. While this indicated to me I was starting at a good time 5, I didn’t want that rough ride on income that a fixed SWR would represent, even though the income was for wants, not needs. It’s very easy to imagine future bear markets when you are in one ;)

    When I read “there’s a way of profiting from holding shares that requires no selling at all, by receiving the (generally) twice-a-year dividend” I figured this was a good way to go to match my requirements and temperament. It’s got harder to do that, and I have given some nod to the EMH and diversification by using index funds for non-UK equity investments. I have seen my target yield fall as a result, though not my unitised portfolio value. At the moment because I reinvest dividends I am converting dividend income to ISA capital gain. I accept that I eat about 1% costs on the dividend in trading costs to invest it again.

    If I had 30 years of accumulation I would use continuous drip feeding. But I just don’t have that long. And I’m prepared to accept the consequences, because my risk profile is abnormal – this is not the main part of my retirement savings.

    Adjusting spending upwards is easy. Adjusting it down is hard

    I’ve had experience of trying to reduce spending incrementally. I read this book by Guardianista Polly Ghazi, probably in ’97. At the time I was looking to move from the first two-up-two down I stupidly bought in Ipswich for vastly more than it was worth in 1989 to the current place. The only small problem was icing the negative equity first, which meant kissing goodbye to roughly half the interest only (endowment backed) mortgage. There’s only one way to do that, every month you take a shitload of money you’ve earned by selling a load of your time to The Man and you throw it into a black hole of debt, money which you could be spending it on holidays, meals out, or even another house.

    Let me save you that £11 book price. You don’t downshift in any meaningful way by switching to value brands at Tesco. You don’t do it by switching to ecologically favourable washing up liquid – because it doesn’t work as well as the sort of thing that says ‘kills fish’ on it 6. If you need Ms Ghazi to tell you it’s cheaper to hang your washing outside rather than use the dryer you need a check up from the neck up. You don’t save money by going part-time. In short, you very definitely don’t go about it in the way described by these two Guardian journalists, I didn’t realise journalism had already been taken over by aristocratic interns that early. They had no bloody idea. Yes, if you’re spewing money away on John Lewis housewares and shop at Waitrose then maybe you can save enough money to matter. But if you’ve already put some brain cells to work in cutting down you need revolution, not evolution in your spending habits. Keeping hens in the back garden of your Islington pad ain’t gonna cut it.

    “Do or do not. There is no try”.

    It sounds outrageous, but if one is trying to jump across a chasm, it makes no sense to focus on first jumping half way across and then on jumping the rest of the way. Aim to jump all the way or don’t jump at all.

    Yoda and ERE

    Adjusting spending downwards is like running into a brick wall. Then getting up and bashing your head against it until it doesn’t hurt any more. Best done all in one go and you have at least six months of hell where you go “Why can’t I do [insert piece of stupid consumerism that you used to do but was vaguely enjoyable, though not as much as the hours of sucking up to the Man to be able to pay for it]?” The trouble is if you don’t go cold turkey the losses you feel in one piece of consumerism denied will simply go into jacking up some other piece of consumerism. If you try and nail that you now had two areas where you feel mildly pissed off but you still haven’t saved a useful amount of money. The meek shall not inherit the earth in this fight. Consumerism delivers the message every day “buy this. It will make you feel better ‘because you’re worth it'”. Lots of really clever people are paid lots of money to pound that message into your skull, and there are many of them and only one of you. This is not a question of balance, it is a case of terminate with extreme prejudice or go home and enjoy the consumer lifestyle and suck up to The Man. Incrementalism works a treat on upshifting but really blows on downshifting. Humans are loss averse – the downshift hurts way more than the upshift delighted. You’re just built that way.

    Dear ex-girlfriend and I never managed to save money the Ghazi way. We stopped going out for meals. Stopped going abroad for holidays. We decided what mattered to us and what didn’t. and I poured endless money down an endless circling drain to go fix the most monumental personal finance error I have ever made. There is absolutely no fun it that at all.

    Buy to Let = early retirement?

    You see the scars from that cock-up in all the grousing about residential property on here. It is in the value of my house 7 being less than a third of the networth chart of a subset of my total assets. It is in the fact I am not a BTL investor. The Ermine Does. Not. Do. Res. Property. Everybody else in the UK thinks residential property = money tree.

    London. 40k income. Wants to retire to pursue creative arty-farty stuff. Can I make enough money gulling tenants to pay for my three babies on top of that? Oy Vey...

    40k income. Wants to retire to pursue creative arty-farty stuff. Can I make enough money gulling hapless tenants of my Rachmanesque estate to pay for my three babies on top of that? In London? Oy Vey…

    I look at this pair of blessed tossers asking “Will income from a £750k buy-to-let empire pay for our three babies?” The ermine stares into the crystal ball and as it shatters with the intense flow of the clients’ emotion of Greed and he walks away with a cynical baring of the teeth and a note to charge these dudes for the trashed glassware. “There is nothing I can do for you in the face of such folly”. The Guardian tells you the cost of raising a child × 3 is over half a million pounds, and you both want to retire 8 by 40, live in London, raise those kids on an asset base of £750k while servicing a mortgage of £430k? He was lucky enough to make £300k on his house so he believes in BTL, like 99.99999999% of British people – I am the sole exception to that in this benighted country it seems. Let’s see – three kids FFS – you already have to be rich to be able to afford to have three kids in Britain these days. Props to them for ambition, wanting to retire before having children. Good luck with that. Hope it works, because the taxpayer is underwriting the downside of this triumph of hope over experience. BTL can be money tree. In the right hands. These are not the right hands IMO:

    “Property makes the most sense to me as an investment – I’ve spent a lot of time trying to understand stocks and shares, and it feels quite counterintuitive, although I bought shares in Royal Mail and Gap and I did all right.”

    Horizontal and vertical diversification, asset classes, risk management, all that tosh… Even though I hate on the asset class I have some property in REITs and HHP index crap.

    What you don’t want to do is upshift and downshift repeatedly

    So the second time in my life when I had to save a load of money was to quit work eight years early I knew what to do. Cold Turkey. It’s the only way IMO. When you are looking at downshifting for the rest of your life you’d like to at least qualify the option, and for that you need an answer to ‘how much income will I have in retirement’, and preferably not one that flaps about 50% down in a rough year or few.

    Take a look at the Ermine’s networth. Why am I still standing on the brake of spending, indeed have done for 5 years now – after all that networth is actually creeping up, and it represents less than half the much less volatile resources I do have? I am standing on the brakes because I know how hard it is to reduce spending, and I don’t want to have to do it again, or – shudder-  go work for The Man again. I’ve done with that for one lifetime. That’s why, when I look to win an income from an equity portfolio I favour dividend income like The Greybeard. It’s why when you go on TMF-UK you see people talking about high yield portfolios so much. It’s worth smoothing the income because if you’re going to have to downshift because you upshifted in the good times it’s probably going to feel better to not upshift in the first place, because the hurt of the down is more than the joy of the up. A smoothed income lets you minimise these changes. It’s between business class and economy, rather than business class and Megabus.

    The Boglehead way is probably great, but the ride absolutely sucks because of the unknowability of the true value of your portfolio. It’s for the young ‘uns with decades of investment ahead of them, and they will probably do very well out of it. Those of us with more aged bones prefer the gentler ride, and are often prepared to surrender performance for smoothness.

    Once you’ve had the experience of downshifting a couple of times, you really don’t want to do it on somebody else’s terms. It’s tough enough to do to achieve a positive goal like freedom from The Man 9. So I’ll favour conservatism, and inflate when I feel far enough away from the brick wall to have some space from it. Yeah, I could go to work, but I don’t have the taste for it, because I have gotten used to owning my own time. They still aren’t making any more of it.

    Notes:

    1. dividends are paid less frequently than quarterly so I will pick up sampling error, but this will come good in the 4Q/yearly boxcar average as quarterly shortfalls will be carried forward
    2. one quarter’s worth of a typical 5% annual safe withdrawal rate
    3. Quicken is the 10 year old program I use to track money. Unlike young pups like theFIrestarter or even mistersquirrel I don’t do cloud, I’ve taken the shaft too many times by providers closing business, and there’s the whole ‘if you’re not paying for the service then you are the product‘ problem.
    4. computed at 70%÷2+30%
    5. market timing is deprecated by the cognoscenti, for reasons I confess I don’t really get, valuation is one of the few signals that does seem to have a correlation with future returns. Even the Boglehead gurus at Vanguard say so.
    6. I jest. Slightly. There is no point in using things like Ecover toilet cleaner. If you are going to be less environmentally hostile use vinegar for glass and vitreous surfaces and baking powder (NaHCO3) as a degreaser/deodouriser. Neither of them work as well as Unilever’s finest but they are cheap. Bleach is not particularly bad as it breaks up as it gets diluted.  MMM can help you address the supply side of this problem
    7. most UK PF readers are from London. In the provinces houses are a tenth of the sort of prices you are used to
    8. sorry, both “focus on their creative careers without worrying about paying the bills”.
    9. I’m not sure if freedom from something is positive. But it feels good
    27 Jan 2015, 5:34pm
    living intentionally personal finance:
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  • George Osborne may help me to live intentionally and spend more

    By his pension changes, that is. Sadly the exact mechanics wont be of much use to young’uns but for for some modestly old gits (45 plus) who have accrued a defined-benefit (DB) pension where you can buy  additional voluntary contributions (AVCs). Since there are a number of readers who work(ed) for The Firm that employed me for many years I’m throwing it out there.

    The philosophy of how difficult it is to qualify living off savings may be of more general interest. It’s heavy on pensions, which seem to be the Cinderella of the PF world, because most PF bloggers are younger than me and Monevator’s Greybeard seems to be off on a cruise. However, hopefully you’ll all get old enough to be interested in pensions one day, and if you can learn from my mortgage screw-up then so be it ;)

    Some pension and early retirement orientation

    One of the big challenges facing early retirees is how to fund the pre 55 early part of their early retirement. The part before 55 has to be something other than pensions because you can’t get hold of pensions before getting to 55. The goto place for this is ISA income and cash savings, though not paying your mortgage off early is a great way to have more cash savings in the pre-55 period, because you can use the pension commencement lump sum to save to pay off your mortgage from pre-tax income.

    don't automatically pay off your mortgage early if you are retiring before 55

    don’t automatically pay off your mortgage early if you are retiring before 55

    I didn’t get the mortgage wheeze right. In threading your way through the myriad paths to early retirement you are always going to get something or other wrong, that was my big mistake. I don’t have housing costs other than council tax and the 1% or so house purchase price depreciation fund, but having the borrowed capital to run down now would be useful. I could then use my AVC fund to pay off the mortgage tax-free at 60. Pretty much any time I go anywhere near anything to do with housing I screw it up royally. Why break the habit, eh?

    Because I drove my spending down to be able to quit early I have been able to string out my savings for twice the amount of time I anticipated. But it’s probably fair to say I haven’t lived large like like mistersquirrel and theFIREstarter ;) I don’t have any complaints – freedom from The Man and being able to pursue my own interests is more than adequate compensation. For much of the first couple of years it was a process of recovery from the experience – and it’s respite that matters, not consumer goods and services. But I am also mindful that time is also ticking away, so if I could smooth my income I could do more in the near future rather than back-loading it. I’ve noticed the birds are starting to sing and maybe they call to me, get out there, travel more.

    I have no income – one of the primary navigational aids of personal finance spins and knows no North

    Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness.

    Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

    Wilkins Micawber

    I never understood how to manage finances without having a number I could allocate on the Annual Income side. Without a figure for income, I could never qualify the Micawber question. It has made me fearful and over-conservative in spending. This has worked out okay for me till now – it is how I got to this point and having the choice to take Osborne up on his alternative offer of getting my AVC out tax-free but earlier. If I had favoured spending I would have drawn my pension short by now.

    or, as da yoof sez, YOLO

    or, as da yoof sez, YOLO

    Some readers will wonder WTF? The income computation is easy. Take current age of Ermine, subtract from 60 which is how long it needs to last till a good alternative, then divide total amount of cash savings by years and you have the income level. Maybe knock off about a year’s savings to cover emergencies then run the calculation.

    Not so fast. If you have no income, you will find it the devil’s own job to borrow money which is a perfectly reasonable way of leveraging your emergency fund. A year’s worth of low-ish running costs as  savings is not enough to hedge some kinds of risks. Lucy Mangan charges us that If you don’t understand how people fall into poverty, you’re probably a sociopath  – probably correctly. I didn’t want that to happen to me, so I have used a much smaller percentage of my non-pension cash savings than that cash÷(60+1-current age) calculation would give. At least half of them are with those NS&I people so they aren’t being killed by inflation, unlike my cash ISA and cash balances. I really, really hate cash as an asset class, and never expect a return on it. At least inflation is surprisingly low given all the QE money that has been  pumped out – it seems to have gone in inflating the stock market and the housing market.

    The logical thing to to with a cash ISA these days is to switch the damn thing into S&S ISA but I can’t bring myself to do that, because of the fears of some of Lucy Mangan’s demons catching up with me, or needing to pay for an operation 1, or something like that. And as a result, the fearful me jams my spending. I err in the opposite way to mistersquirrel and theFIREstarter but error it still is.

    TEA calls this out well in The Pyramid and the Oxygen Mask – to wit

    If you are one of those people and you carry on working in your all consuming City or Corporate job, then you are wasting your life.

    This is more frequent than you might think. The most common motivation for this behaviour is fear  – fear of change, (irrational) fear of poverty, fear of loss of status, fear of their spouse’s reaction etc.  Its not enough just to make a life-changing amount of money, you still have to change your life.  Don’t just load the gun, pull the trigger.

    Apply own mask first…
    We owe it to ourselves and our families and friends to start by getting our own shit together.  Think about the airline safety briefing : always apply your own oxygen mask before helping others.  This initially sounds a bit counter-intuitive and even selfish to some people. 

    I have overcome most of that. I changed my life, and I qualified what Enough looked like to me. But I am still on his Level 2.

    These people understand the power of money and have mastered some of their emotional weaknesses re money. Paradoxically, they are seeking to get to a point (see level 1 below) where they think much less about money.

    I am not sure I can do that until Mr Micawber’s compass begins to respond and the questing needle shows which way is North. After a certain level personal finance is much more about the personal than it is about the finance. My fears of Lucy Mangan’s demons are part of the emotional weaknesses re money. Possibly I have some of the elements of her sociopath. I just didn’t want to depend on other people’s grace for dealing with the demons and so I spent less so I could buy my way out of certain kinds of misfortune. But I take TEA’s point. This is a question of balance and I haven’t got that right. A clawed hand remains frozen on the controls set to dead slow because the broken compass shows no signal I feel I can trust. There is still work to do on that intentional living thing.

    It has been five, getting on for six years since that fateful day in February 2009 when a jumped up punk of a manager squeezed an Ermine, intimated TINA and I realised I was all out of options and didn’t want to kiss The Man’s ass, and I locked down spending and took a three-year holiday from the middle class in the name of Freedom. I would do the same again. I have become even more ornery, awkward and unemployable since then. Work is not the point of Life 2. This much I know.

    I would soon have access to a DC pension

    Now if I had a DC pension I would soon be able to draw it. As a brutal simplification that everyone should qualify for their own circumstances, it makes sense to draw a DC pension as soon as possible, all other things being equal. By drawing it early, you stretch out the time over which the money is extracted, and you get a personal allowance for each of the years over which you take it. If you don’t need all the money that year , reinvest it in an ISA in the same sort of thing the pension was invested, and you shift the pension capital from being taxable to being sheltered from tax. If you still have more than 15k left over each year I suggest you need to spend more, unless you are looking to mollycoddle your kids in which case leave it in the pension since they can inherit that at their marginal tax rate it seems. The converse is that if you are so bloody stupid as to take your DC pension out in one lump then you deserve to pay a shitload of tax because such arrant stupidity should be taxed out of existence.

    But I don’t have a DC pension. So I can’t do that. Don’t get me wrong – I am deeply grateful that I started work at a time when there was a better balance between labour and capital and The Firm actually wanted people to work for them so they offered good benefits, the original DB pension being one of them. However, a DB pension is less flexible than a DC about the retirement date – draw it earlier than normal retirement age (60 in my case) and it is reduced by roughly 5% per year drawn short. If you are in decent health you really don’t want to do that. The actuarial reductions usually favour those who follow the norm rather than the early retirees. In itself that’s not a big deal, because I saved a quarter of my DB pension capital 3 in AVCs.

    the original plan – invest the 25% tax-free PCLS in the market in a couple of years time

    The original plan was to run off the SIPP I took out earlier this year when Osborne changed things, after another two years worth of contributions which I can get in by May 2015 (this year and next tax year), and then to draw my main pension a bit early and eat the actuarial reduction. I would then get the AVC tax free, which I would then shovel into ISAs over a few years, getting more ISA income to top up the actuarially reduced pension.

    Note the correct way to have done this job would have been to keep my mortgage at the level of the PCLS and live off the money I paid my mortgage off with until at 60 I take the PCLS tax-free and pay off the mortgage. The general cocked up the tactics there, even before the battle plan made contact with the enemy.

    the new plan – invest the AVC in deferring my main pension

    It appears I can shift the AVC into a SIPP without taking the main pension, as it is considered a DC independent saving. All of a sudden I lose the whole point of the AVC, which is to get 25% of my DB pension capital free of tax. I now only get 25% of 25% or a sixteenth of the capital tax free. However, I have discharged my mortgage and don’t have a particular need for a shedload of cash, other than as investment capital to make up for the actuarial reduction.

    From some time after this April, I can draw down the SIPP tax-free, as long as I stay below the income tax threshold. There is also some hazard of work income over the coming years 4. Indeed, it seems I can contribute to a SIPP up to £10k p.a. while drawing from it, so I can lose any earned income into the SIPP, which is a good way of spreading out earnings to minimise tax – I don’t aim to give up much time to the filthy W word, so 10k will probably do :)

    Each year I live off the AVC fuelled SIPP and the dividend income of my ISA, my deferred DB pension increases by roughly 5%. Effectively I get a return on my AVC funds in terms of that permanently increased DB pension, and at current stock market valuations that looks a higher return and lower risk than I could win from adding to my ISA. Of course that is a return on capital, the return of capital is consumed as income. Normally if you want a return on capital you need to retain the capital and not spend it, this is one of the few exceptions 5. When I get to 60 I will probably stop drawing down the divi from my ISA unless I think of something to spend it on. Running down the AVC + ISA income is roughly equal to the value of the DB pension at NRA, so I smooth my income. I will get two smaller bump-ups, one at 60 when the ISA dividend income becomes superfluous to requirements, and one in the distant time at 67 when and if I get the State pension.

    I get the same general effect as if I hadn’t made a cod’s of the mortgage/PCLS thing, subject to the limitation of being limited to the tax threshold + the income from my ISA each year. I’m easy with that, big spenders may not be.

    An annual income, and an answer to the Micawber question

    Obviously there’s the benefit of getting this AVC cash into use rather than depreciating for another six years. More importantly, however, I get an income for the first time in about three years. So I could return to that middle-class sort of spending if I wanted to. They say that it takes a month to break a habit, so six years should be plenty. I can’t unsee the wanton waste I discovered in some of the empty dreams of the middle class cubicle slave I was. I am no longer a cubicle slave, but some of the dreams still seem empty. I found freedom in the open spaces, in the sound of birdsong, in places like this

    1501_wolves_P1000135rather than places like this

    Westfield, London

    Westfield, London

    I am in no hurry to spend more, but I do need to release the dead hand of the fearful non-spender who felt adrift in a pathless land without the compass of Wilkins Micawber to guide the way. Unusually among consumers, possibly I am consuming at too low a rate. I can easily live well on the personal allowance plus £5000 tax-free from my ISA, maybe I will have to consult with good people like mistersquirrel and theFIREstarter as to how to inflate my outgoings on fine living. On the other hand I don’t have to spend all of it every year. My ISA will thank me for continued reinvestment. I now have a high-water-mark for annual spending, which I can exchange for the dead-hand’s ‘as little as possible’. The tide is a long, long, way out.

    the tide is out there somewhere

    the Wash – the tide is out there somewhere

    There’s no rush – one of the arts of pension planning seems to be keep as many options open, and then opportunistically close them off at the eleventh hour in whatever way is most advantageous at the time.

    Ed Miliband could destroy this plan

    …in May. In which case it’s back to plan A. There’s nothing I can do about that, it’s the usual mantra – coffee for the things I can do something about, red wine for what I can’t change. It’s the problem with pension savings all round – government meddling can screw up the best laid plans. In fairness to governments, it is only government meddling that has made this alternative a possibility. It wasn’t a possibility when I left work in 2012.

    of market crashes, and excitement, and foolishness

    All this will take a few years, should there be a market crash I can rethink, draw my DB pension a little earlier, eat some actuarial reduction and seize the opportunity to invest the SIPP. Assuming, that is, I have the cojones to do that – such a market crash could be the trumpet at dawn of the great unwinding. Or maybe I lack the taste for the ride. Finding myself unable to to determine a reasonable spending rate without having an annual income shows that perhaps I am not the Wolf of Wall Street. I should heed the words of Warren Buffett…

    To make the money they didn’t have and they didn’t need, they risked what they did have and did need–that’s foolish, that’s just plain foolish.

    …and at most half-split this if the denouement comes this year. At the moment an increase in DB pension looks lower risk than the known risk of the market 6. It’s taken me a long time to realise that I had this opportunity, because my original plan was built when Osborne’s changes hadn’t happened. However, the job of any chief executive is to adapt to changing circumstances

    no plan survives contact with the enemy

    von Moltke

    Pension planning is a bastard for complexity and counterintuitive wrinkles and changing rules. I’m generally of Monevator’s opinion when it comes to financial advisers, but I wonder if pension planning might not be an exception. Certainly for those working at The Firm, take up the offer of the Wealth at Work seminars, since you don’t pay for the advice and they have knowledge of your specific environment. Just don’t hire W@W to run your investment portfolio, which is what they’d like you to do afterwards ;)

    My pension will eventually be a combination of the DB pension with about 2/3 of the target time accrued, and my ISA to make up the difference, tax-free. But as an early retiree I could have 30 years ahead – possibly more. It would be unwise to ignore the tail risks that affect both types of pension, though differently. The world will change over that sort of timescale. Just to remind ourselves of the scale of those sorts of changes, we were listening to this on the radio 30 years ago

    Only one guy in Britain had a mobile phone, though the first had been demonstrated in 1973 in the US. Those 1970s analogue devices were not cellular like TACS was, so the number of channels was very low and prices were astronomical.

    Motorola's Martin Cooper, April 1973

    Motorola’s Martin Cooper, handset first used in April 1973

    Nobody much had the Internet. I was using a VAX with green-screen text terminal and 9600 baud serial connectors to do circuit simulation. 30 years is one hell of a long time for things to change. It’s plenty of time for tail risks to show up. But it’s also plenty of time for nimbler, younger minds to invent good stuff that people want to pay for. Assuming, of course, that the work of humans is not done here – in which case the spoils will accrue to patrimonial capital as Piketty told us it would.

    Notes:

    1. the NHS does fine with big stuff and with chronic stuff, but elective quality of life interventions it does poorly now the Tories have been at it.
    2. with the obvious rider ‘for me’. If Work is the point of Life for you then knock yourself out
    3. computed by taking the gross paid at NRA and multiplying by 20
    4. there is some research work I want to do. In the end even an ermine can’t outrun the W word forever…
    5. it isn’t a true exception, it is the interaction with life-expectancy figures that gives an appearance of a return on capital.
    6. I am casually interchanging risk and volatility of the short-term price levels which I really shouldn’t do
    15 Jan 2015, 10:56pm
    personal finance
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  • City or country – where you live matters in the budget for early retirement

    Most of the personal finance community I’ve come across in the UK seems to live or work in London. Monevator lives in London. mistersquirrel does too. I don’t – although I was born in London, grew up, went to university and started work there I moved out in my 20s because I couldn’t see any way to being able to buy a house. Stupid house prices relative to earnings are not a new thing in the UK; this was a shade over a quarter of a century ago.

    Where you live is a large part of your running costs. It’s there in terms of the capital tied up in your house or the rent you pay, but it is also in the price of the goods and services you buy. More subtly, it’s there in the goods and services presented to tempt you to buy. It’s one of those strange facts of capitalism – normally increased scale lowers prices of goods and services. 13% of the population of Britain lives in London. Obviously that is going to jack up house prices, but I’d have guessed the cost of supplies and food would be lower, because there’s so much of it shifted. But it doesn’t work that way. London is a damned expensive place to live. The one thing that is notably cheaper as well as better in London is public transport – it’s far better than anywhere else I’ve seen in the UK 1

    But there’s a great buzz to the place, it’s full of things to do, though most of these things involve spending money, as the natural world is not well represented in the city. Even the sparrows got pissed off and left the city in the late 1980s 2.

    gotta get out of this crazy place

    gotta get out of this crazy place

    If you want to move town and particularly country, that’s usually easier when you are young. As you get older you pick up connections, often have kids, and then you just get used to a place. You also gain a lot of ‘domain knowledge’. You know who to ask for how to do various things. You know where to get things from and where is usually cheapest/best. You know how to get places, and which are the rough parts of town. A lot of this you lose if you move, and have to acquire again. It’s possible that I was lucky in that I left London in my twenties, because leaving the city later on seems to be a big wrench.

    Not living in London appears to reduce a lot of my costs, but I didn’t realise by how much until I visited the fair city of Oxford for a conference recently. The place smelled of money, like London does. I live in Ipswich, and the town has money shops, betting shops. closed down shops (nowhere near as many as a couple of years ago) and all the other accoutrements of the ‘cost of living crisis’. In short, compared to Oxford, and many parts of London, it’s a dump. The citizens of Ipswich are clearly not as rich as those in London or Oxford. You can see that on this income heatmap. Oxford average wages are 26k, for Ipswich this is 18k, whereas London has high values all round, nothing is as low as 18k. Even in places like Lewisham and Deptford, which were rough as guts when I left London people are on an average of 25k.

    Services have to be priced to reflect that, from the cost of housing to the council tax. There’s one service that always seems to sum this up as a quick guide for me, and it is this one

    OLYMPUS DIGITAL CAMERAIn Oxford it’s a little bit dearer than I am used to,

    OLYMPUS DIGITAL CAMERA

    but it’s nowhere near the outlandish sorts of prices mistersquirrel is happy to pay in The Smoke. I’m not a cocktail guy, so it may be that I don’t know the prices but I just couldn’t pay £10 for one drink. I just couldn’t do that. I could afford it okay, but paying that much out would bother me so much I wouldn’t be able to enjoy the experience ;)

    Let’s all move somewhere cheaper once we’re financially independent

    Seems obvious, really. Not so damn fast. In addition to the domain knowledge bit, within any one country places with a higher cost of living are often more interesting places to live. Intelligent people go there and start creating wealth, which drives up the cost of living because they can afford to demand higher standards.

    Oxford

    Oxford

    It’s why Oxford is a much nicer town than Ipswich. So is Cambridge. Those places are known for attracting clever people and the blighters apply themselves, creating value and then go around drive up the cost of everything, though they do make it all fancy as well. Hence the beer is a bit more expensive that in Ipswich, though I’d argue that The Fat Cat in Ipswich is a better pub than the Oxford one I was in. But Oxford’s probably got better pubs than the Fat Cat. We settled for a place on the bus route that looked okay.

    More Oxford

    More Oxford

    Your requirements as a retiree also vary if you are in a relationship and if you have children. Philip Greenspun has a fascinating article on choosing a place to live as an early retiree with few attachments, written from a US perspective. You’re not necessarily limited to the country you worked in, of course, and some places can be a hell of a lot cheaper, particularly in Asia 3

    Most of Europe is simply too crowded and expensive to be attractive to the average North American.

    Most of Asia is too strange and far away to appeal to the average North American. Nonetheless, there are a lot of expatriates who’ve found their Buddhist bliss in Thailand, a country with an excellent infrastructure and stable government 4.

    Greenspun on early retirement destinations :)

    In the States people seem to move all over the place all the time, so retirees are happy to move where things are cheaper – this seems to be towards the south, presumably where it’s warmer and the are lower property taxes. Anybody who is retired is usually very sensitive to wealth taxation for several reasons. Their income is normally lower than a typical working person, their wealth is usually higher (because they are skimming their lower income from capital saved from many years of working). 5. In the UK retirees have historically moved towards the seaside. which strikes me as a bizarre thing for the elderly to do, because the cold and wet in the winter will bother their aching joints and make it dearer to heat their homes, but what do I know? Nowadays they seem to gravitate to Dorset, Devon and Cornwall. In the Telegraph’s best places to retire series all the places seem to be in the south of the country 6

    I didn’t apply any intelligence to this choice. I was ejected from London because I was too poor to live there, and I got to like Suffolk which has a fair number of things going for it – it has far lower rainfall than most of the UK, it has a fair amount of natural beauty, it is an easy if expensive train ride to London. On the downside it’s very badly connected by road to the rest of the UK. Every time I want to go to any part of the UK that lies south of Cambridge and west of London I have to drive halfway round the M25.

    At the moment Mrs Ermine has more ties with the area. The decision to move or not isn’t purely a matter of economics or geography however, it is also about your social web of life. Early retirees by definition retire earlier than the norm, so many of the people they know will still have the constraints of work, in free time and in geographic mobility.

    Let’s all move to a cheaper country

    It’s not a bad idea – RIT is on the case with that one.It probably works better if you have some connection with the country or culture, and like everything about retirement it works better if you have more money. Where it really doesn’t work is if you haven’t saved enough money and you are simply looking to reduce costs or try and make a lack of savings work. There are a bunch of subtle tail risks that can get you, associated with the divergence in fortunes of your destination and the place the money that gives you an income is in. And of course you are starting again socially, but you have to pick up the language and the cultural references, or live in some expat enclave.

    And even if it hadn’t lost its Buddhist bliss, while somewhere like Thailand sounds like a great place to visit or even spend months or a year or so, I’m not sure I’d like to grow old and die in a greatly different culture from the one I’d spent most of my life in. Maybe I am particularly unadventurous in that way.

    International Living has a guide to various countries and costs, and the HuffPo likes Portugal, Thailand and Malaysia. Changing country also involves currency risk – if you’re looking at spending 40 years in a different country from the UK you have to take a view on the relative wealth of the two countries and how they would diverge. You’re okay if the UK stays the same or gets richer relative to your destination, but you’re in deep shit if it’s the other way round unless the funds upon which your income is based track the fortunes of your destination. This is a case where a DC pension beats a DB pension hands down because you can target your investment base accordingly. You see some of this thinking in RIT’s portfolio although he is unwinding the Australian bias because that isn’t his preferred destination any more. And just as Jim Slater said elephants don’t gallop, the potential of the UK to get richer more rapidly than a low-cost Asian country is questionable. It’s a tough bet, and as a UK expat you’re on the wrong side of it…

    if you depend on the UK State Pension then be very careful retiring abroad

    I’d go as far as to say if you depend on the UK state pension you can’t afford to retire abroad. You definitely need to know it doesn’t necessarily increase with inflation particularly relevant for Canadian and Antipodean retirees. Canada, Australia and NZ attract UK retirees because they speak English, but it appears this policy comes as a surprise to some of these retirees. Although there’s a lot of bitching about this, this isn’t something that was sprung on people retrospectively. Indeed, I’m amazed people who rely on the UK State pension retire outside of the UK at all because of the currency risk. Fair enough for people rich enough to have their own pension provision, but the UK State pension is not particularly generous compared to other First World countries so depending on it and retiring to another country particularly where you may have to pay for healthcare looks like sticking your neck out to me.

    The power play is obvious. A UK government is influenced by UK voters. If you’re a UK resident pensioner, you are a UK voter. If you’re resident abroad, you aren’t. In a squeeze on pension resources, a UK government will focus resources on people who vote in the UK. If you don’t like that, either don’t retire abroad, or accept the tradeoffs, or make adequate private provision to become FI, and maybe hedge currency effects. The UK Government is quite explicit on the policy

    Essentially, the reason for not uprating retirement pension in these countries is cost and the desire to focus constrained resources on pensioners living in the UK.

    town and country – the city is a spendy place

    it’s easy to spend money in a big city. There are so many expensive places to choose from, the temptations are all around.

    mistersquirrel

    I can get out of Ipswich and do something interesting without spending any money at all – I can bike to somewhere I can poke a telescope at birds, or listen to some. I can reach open fields on foot, though the council is looking at filling some of these with houses. The natural world abounds in things that don’t cost much. Whereas a city abounds in things that are interesting, and often cost something. Not always – f’rinstance in Oxford I went and poked an inquisitive Ermine snout at these oddities for free at the Museum of the History of Science

    copy of John Dee's Enochian tablets

    copy of John Dee’s Enochian tablets. Science wasn’t as nailed down in the past…

    various historical lab glassware

    fabulous historical lab glassware

    cabinet

    cabinet of preparations

    but we paid to see the William Blake exhibition  – as mistersquirrel said, it’s easy to spend money in a city.

    It’s possible that one of the things that made financial independence easier for me was being out of the city. When I look at city boys like theFIREstarter’s £24k hit and mistersquirrel who won’t let on as to the absolute level of spending because the drinking and dining stands head and shoulders above the rest then I think to myself we’ve got some high-rollers here ;) And these are people who have their spending under control from a Micawber point of view, so God knows what this looks like for the rest of the country – no wonder that Britons slapped another £1.25 billion on their credit cards. In TFS and mistersquirrel’s favour, it was an Ermine rather than they who contributed to this statistic, though I used it to avoid crystallising a capital gain as opposed to spending money I didn’t have ;) For what it’s worth my take on spending is back here. I’d probably add another 6k on that of elective spend between us because that was drafted in lockdown to get out mode. However, even now, I don’t spend more on running costs and elective spend than goes into my ISA each year.

    Notes:

    1. Where I do get to try provincial bus services I usually concur with Mrs Thatcher on the subject
    2. they are meant to like being around lots of people, the clue is in the name, house sparrow, and the Latin name Passer domesticus. There were plenty in the garden when I was a child, but they have nearly all gone from London now. Sadly it appears they just lost heart and died out in London, rather than flying somewhere more agreeable. If you think about the use of the canary in mines, this might give Londoners pause for reflection…
    3. an exercise for the reader is, of course, to look in their crystal ball and decide whether that will still hold after 30,40, or in some cases 50 years. 50 years is a very long time and you are asking a hell of a lot of your crystal ball – 50 years ago London was a grimy city of many bomb-sites, few cars, outside bogs and often the water stopped running when there was snow on the ground. Nobody would have guessed it would have loads of people making loads of money all around the world while its residential property becomes the reserve currency of last resort for Russian oligarchs, Greek tax dodgers and the like.
    4. No longer it seems
    5. Britain has very few wealth taxes, the council tax is the only one I can think of. We have capital transfer taxes when wealth is transferred  – from one form to another in capital gains tax. There is a theoretical tax on intergenerational/dynastic wealth in terms of inheritance tax, unless you are a member of the aristocracy/Establishment in which case you hold your dynastic wealth as agricultural land on which there is no inheritance tax because your forebears struck deals with the postwar governments to hide this egregious aberration in the principles of equality of opportunity from the wage-slaves and serfs.
    6. this may be the result of sample bias, if they ranked the places by number, since most people in the UK live in the south of the country
    4 Jan 2015, 1:12pm
    economy personal finance
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  • Here’s to interesting times in 2015

    Ah, New Year, a time for revolutionary change? Sophie Heawood has some point that January is a bad time to start anything new in, we really should have gone for September. It’s brass monkeys out there and the cruel coldest month of February still awaits. The fire festivals of the shortest day have passed. Heck, after the excesses of Christmas we could at least have advanced the 28 day shortest month to January to give wage-slaves a mini-boost. Mind you, when we look at the results in places with “Doros”, a double salary at Christmas maybe that’s not such a good idea. The WaPo is uncharitable about these things, and Fortune magazine is particularly cutting about giving wage-slaves festive breaks

    The 14th salary works like this: Greek workers get their annual salary in roughly 14 instalments. On top of 12 monthly payments, employees receive double their paychecks in December, right in time for Christmas consumerism. They also receive half of their monthly spending in the spring to shell out on goods for Easter. Then they get another half-salary boost in July, before their traditional summer vacation.

    In the interests of balance, Slobber takes this kind of thing to task, but hey, never let the truth get in the way of good journalism I say ;)

    Glastonbury Tor in the mist

    Glastonbury Tor in the mist

    The Ermine spent a while mulling things over the Winter Solstice in Glastonbury, and read a lot. Reflections and ruminations are not the things for a New Year. It’s about carpe diem, the opportunities on offer, and what with the return of the Eurozone crisis, an election here in the UK and the Russian brouhaha there is the scent of hazard and opportunity in the air. We haven’t had a good rumble in the markets since 2011, and it’s getting harder and harder to turn a decent yield with high valuations.

    It’s a funny old world – the price of oil, for instance, is lower than the marginal cost of new production. UTMT has a nice piece on this. There’s a link to the old boy Tim Morgan, he of ex Tullett Prebon fame and the report “Britain – Armageddon – there’s no way out of here’. Tim’s in a new guise and brings us the pithy summary

    what we are witnessing is not the dawn of an age of cheap energy.

    Low oil costs look like good news but when it’s lower than the cost of new production then it isn’t. Unless we’ve all decided to use a lot less energy, and lest we forget just how hard that is, the humble refrigerator in your kitchen is consuming the rough equivalent of the daily output of two horses.

    after a long glide, it’s time to see if the engine of finance starts again for me…

    This could be the year that I return to having an income. I will have have coasted on savings and investment income for three years since leaving work – that’s 10% of my working life before I draw a DC pension, which is indeed made up of more of those cash savings. One of the bizarre things about financial independence is how everything is set up to qualify someone’s financial probity in terms of their income. With no income I am a financial deadbeat in the eyes of banks. At least I didn’t have trouble switching energy provider, but I struggled to borrow money and probably wouldn’t get a credit card, a mobile phone contract or a loan. Most of what I borrowed has come back to me now and the rest is coming it over time. but as usual you can’t do anything with cash these days…

    The Lorax. He's a fellow who can tell you a thing or two about buying thneeds on your credit card

    The Lorax. He’s a fellow who can tell you a thing or two about buying thneeds on your credit card

    It’s perfectly understandable to banks, apparently, for you to want to spend money before you’ve earned it, particularly for your consumer thneeds – but have assets in the wrong place or tied up in pensions or an ISA and lenders aren’t interested. So I am finally returning to the salaried – or rather the pensioned, maybe, and cease being a financial unperson, when I get my cash savings back from those nice fellows at Hargreaves Lansdown with the Chancellor’s 20% bung on top.

    I was/am a salaryman at heart

    The Ermine is a maverick, but I have to say I was entirely conventional and non-entrepreneurial in that I hate not having an income, even though I had enough savings to cover the intercession. Spreading out previous savings, indeed making one ad a half years savings stretch to three years just doesn’t feel like a stable situation. For starters, how the hell do you qualify the answer to the Micawber question – am I spending less than I earn? I could do this as a logical and arithmetical exercise given the time before I could sensibly draw my pension, but if you have no income then the gut feel is always

    ‘spend as little as possible, this sucker’s going down, play for time’

    It made me over-cautious in spending, particularly in the early days. Unlike the salaryman, there’s no easy way to qualify a good rate of spending with no income. You have to take everything with you once you leave work – and your savings need to address not only your running costs but also the risk of the unknown unknowns. Those risks are much higher at the start of the journey than at the end, so it is rational to minimise spending at the start of any period of living off fossil savings 1. Playing for time sounds okay and sort of fail-safe, but time is also a fossil resource – they ain’t making any more of it.

    Once I have an income the answer to Wilkins Micawber is easy – as long as my spending minus my dividend income is less than my pension income then old Wilkins will be happy 2. I had no mental model of living without a steady income because all my adult life I had had one. Unlike most UK personal finance folk, my retirement was an unceremonious scrabble for the exit rather than a carefully planned strategy.

    But it worked in the end – I can see my way to getting access to my savings. It was overly pessimistic to assume I would have zero income across the intercession between finishing work and drawing a pension, although I do appreciate the changes that made it possible to swap savings for an income boost, and hope they aren’t rolled back by the new Government in May. The changes in the workplace that turned what had been an interesting career for the most part into a gamified paint-by-numbers miasma of mockery, metrics and mendacious quarterly ‘evidence’ for the performance management system is also providing new routes to market and ways of microselling niche content that offer occasional opportunities for a more creative Ermine following my interests. I don’t chase work, but I don’t turn down sales if I’ve already done the work ;)

    In the Economist’s The Future of Work series there is an interesting throwaway line about the looming future of work

    The on-demand economy is unlikely to be a happy experience for people who value stability more than flexibility: middle-aged professionals with children to educate and mortgages to pay.

    though it will be great for those who haven’t picked up financial commitments like mortgages, children, dogs, tastes for fine living and debt. Provided they have talent, that is. Indeed the drumbeat of the changing world of work is getting louder, and it favours the opportunist and the unattached/uncommitted. It makes it easier for a retired Ermine to turn recordings into dollars where previously they would have been accumulated as reels of tape, but it seems an increasingly rough ride for many. Which is presumably why we Brits thrashed seven bells out of our credit cards in November. To the tune of £1.25bn. The Ermine has a confession to make – I was part of the problem that month. In my defence I bought productive assets and breathing space with the money, and I have half of it back as cash. No consumer goods were bought with it, but I fear that is not the case for a lot of that £1.25bn.

    So I’m looking for opportunities in 2015. Maybe this is the year that the Euro blows, and those oil prices may offer opportunities for buying oil firms and service companies at lower prices. I can’t see the world living without conventional oil for a good time yet. I’m not doing shale, but although Vlad’s always got a really sourpuss look on his face these days he’s in charge of a lot of real fossil fuels. Dude, you need to lighten up.

    Vlad on the horn, irreverently swiped from UTMT

    Vlad on the horn giving some poor blighter the Third Degree, irreverently swiped from UTMT

    2014 shares review

    Looking back, overall 2014 wasn’t that bad for me, the Ermine annual unit value 3 is up over 15% (the FTSE100 total return is up 0.72% in 2014 despite all the bitching that it lost in SP terms). This is despite clocking up two definite cock-ups in retrospect – following my old mate Warren Buffett into Tesco and jumping the gun on the deeply troubled Vladimir Putin’s operation. However, I am saved by the power of diversification – TSCO can go down the pan and I’d still easily be in positive territory for the year. I am mulling over whether I should short the rouble to the tune of that HRUB holding.

    Before I slap myself on the back too much, any Brit sat on their backside with a decent exposure in GBP to the S&P500 via an index fund would have had a better ride this year at 20%, they would have got the USD forex boost as well. Although I have deliberately avoided the US market (their TR was 29% in 2013 which I thought was outrageous and setting up for a fall) the Americans have served me better outside my ISA when I exchanged a load of The Firm’s shares for a load of Vanguard FTSE Dev World ex UK which is 50% US. They also did better than I did in my ISA this year ;) So you pretty much only needed to have a pulse and be in the market with a bit of US exposure to do okay, indeed the surprise in the case of the ISA is how I survived my anti-American bias. Don’t get me wrong, I’d love to have more exposure to the dynamism of American capitalism. I just don’t want to pay the currently exorbitant prices of getting it!

    Looking back, it was the years when I didn’t do so well that the seeds for better performance was laid. 2011 wasn’t a great performance on my unit price, a 2% fall. But some of what I bought then did the heavy lifting in 2013 and 2014. I’ve also started to see very high levels of volatility – they aren’t proportionally particularly outlandish but the absolute levels of the changes wrought get larger as time goes by, because the capital base is rising. The salaryman measures things against the yardstick of my erstwhile annual salary, and as capital appreciation and a little inflation pushes the capital base the volatility increases to a very significant part of that annual salary. Put it like this, the difference between the high-water mark this year and the low-water mark is a sum that would have seriously pissed me off to lose as a worker bee. That sort of rudeness is just what the stock market does, and it’s why it flames out most private investors (and yes, I could yet be one of them in future – nothing is guaranteed). I have to use the intellect override this  – I didn’t earn or have the high-water mark and the sun will rise again from the low point. Such is the conundrum of investing – you always have to fight some part of yourself in the endless battle between fear and greed. The only imperfect defence against the myriad of cognitive biases is to inform, to understand more, but also to know thyself.

    I’m gradually losing the HYP yield fight as my yield falls as a percentage of the total capital – the annual return is shifting in the direction of capgain rather than dividend income. Some of this is because I am deliberately diversifying away from the UK as the total stake gets larger, which drops my yield (the UK is a relatively high-dividend market), and some of the index funds are accumulation funds so they are total deadweight from a yield point of view.

    But then jolly good downturns are the time to build one’s HYP, whereas frothy markets pumped up with QE are the time to either diversify or sell your own unwrapped shares back to yourself in an ISA wrapper to bloodlet some capital gains allowance. Every dynamic system has its systole and diastole, and it’s better to roll with the cycle of opportunities than fight it.

    Notes:

    1. cash savings are non-renewable, unlike a share portfolio in drawdown over decades, but the stock market is unsuited to hold savings for a non-earning period of two or three years because of its high volatility
    2. There are cases imaginable where this wouldn’t hold, but they probably don’t apply to me
    3. unitisation is a way of tracking your ISA performance that works with the fact that most of us drip money into an ISA year on year,  which terribly complicates other ways of doing that. It is explained in this Motley Fool post. I had to repeat the exercise pretending to only unitise as if I had stayed in cash because I didn’t believe the result at first. The arithmetical result is quite counter-intuitive, compared to simply taking the ISA provider’s total market value divided by book cost after you have run for a few years
    9 Dec 2014, 12:59pm
    economy living intentionally
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  • The case for a Universal Income

    Those clever fellows at Oxford University have identified a problem with social mobility – it’s increasingly downwards. I have to run with the Guardian’s description of this because it looks like the paper is published by Wiley and is therefore going to be £££££ to get.

    The Grauniad will bring to the party their own biases, and yet their summary of the problem seems pretty clear and gels well with Humans Need Not Apply  – a storm of globalisation, automation and the shift of power from labour to capital is stripping out premium jobs – to wit

    The UK’s boom in managerial and professional level public services and industrial jobs during the 1950s, 1960s and 1970s saw an increase in the proportion of children born into professional and managerial families. The decline in these jobs meant that the number of individuals at risk of downward mobility were higher.

    Goldthorpe added: “Politicians are saying that a new generation of young people don’t have the same opportunities for social advancement as their parents, and these results seem to bear that out. The trend shows that, while social mobility has not stalled, more mobility is going in a downward direction than in the past.

    “ The emerging situation is one for which there is little historical precedent and that carries potentially far-reaching political and wider social implications.”

    I’m not totally sure there’s no historical precedent – the story of humanity is not a monotonic increase in wealth from generation to generation, but it is a problem. The issues boil down to that Britain’s GDP is being produced with fewer people. In itself that shouldn’t be a surprise – after all if you look at how many people it took to make anything a generation ago it’s obvious that you need far fewer people to make it now. There was a programme called The Secret Life of the National Grid that showed how the old CEGB used to erect pylons – basically about a hundred men and a lot of rope! According to the ONS, the real value of Britain’s manufacturing output is much higher now than in what we think of its heyday. When I entered the workforce over a quarter of the UK workforce was involved in making stuff, whereas now we make more stuff, but with  fewer than 1 in 10 of us compared to more than 1 in four. As the ONS succinctly says

    productivity in the manufacturing industry has risen by around 2.8% a year since 1948, compared with 1.5% in the service industry. While only 8% of UK jobs are now in manufacturing, compared with 25% in 1978, today’s workers are significantly better skilled and more experienced.

    We booted those humans out, and manufacturing does this quicker than services. Now whenever you say this might not be an unalloyed good loads of people come down on you like a ton of bricks and holler Lump Of Labour Fallacy until you can’t hear anything any more. The Economist gives a good summary too. The LoLF is predicated on the assumption that it is always possible to improve things for people in the world by putting more people to work, so Schumpeterian creative destruction is all to the good, as it can reallocate capital and work to where it can do most good.

    This assumes people are always as flexible as they were in their 20s. So they had better not get old, have children or otherwise tie themselves down to any one place or way of doing things. If you want to see the counterfactual, take a drive to some of the Welsh valleys – the Ermine started work and got to retire all in the space of time since these areas were nuked by Mrs T in the early 1980s and they still haven’t recovered by the looks of it.

    The other trouble is the modern economy produces great jobs and crap jobs, with nothing in between. And it’s producing fewer and fewer great jobs, though these seem to be higher and higher paid. At the moment we fight that – but the battle is being lost. At the moment we tell people work is the way out of poverty, which is bullshit.Let’s have a bit of fun with Google, shall we, on the theme of work is the way out of poverty. Let’s start with the dude who ought to know

    Bloomin' eck, I thought we've already done Halloween. Oh, wait. That was the other guy...

    Bloomin’ eck, I thought we’ve already done Halloween. Oh, wait. That was the other guy

    Iain Duncan Smith: ‘My mission is to lift people out of poverty and I will not give up’ there’s a hint of the Terminator in there, Iain. Always pays to investigate whether the thing you’re trying to do can actually be done, if only to find out which impediments to take on first…

    Sweatshops: A Way out of Poverty – Ludwig von Mises institute. Loosely paraphrased to  ‘get ‘em by the balls and their hearts and minds will follow’ 1

    For millions of people, work is no longer a way out of poverty – Archbishop of York/George Osborne

    Seven ways UK wages have changed over the past four decades – the proletariat has been losing this fight for the last 20 years

    Is Social Mobility Really Going into Reverse – only if you think about the money, according to the Telegraph

    We now have to subsidise crap jobs with tax credits for people to survive on them. I don’t think work is the way out of poverty unless you are unusually skilled. It’s time to strike a new bargain with the 1%. Along the general lines of

    Dear 1% – Britain provides opportunities for you to sell us stuff, move money around in complex ways and get rich on that, and hell, invest in London property. We the people of Britain are easy with that. In return, we require that you give us something in return, and that is a tax on economic activity in terms of corporation tax, CGT and income tax. And we also require that you obey the law of the land as far a polluting the environment etc. Let’s cut a deal. Make as much money as you want, within the rules. If you don’t like that, piss off to Monaco or wherever.

    The standard riposte to that is the wealth creators and owners of capital will up sticks and take their toys with them. Atlas Shrugged by Ayn Rand is the long-form version of that. In balance  there should also be a call to the rest of the 99%, along the general lines of a fantastic rant I overheard from someone describing why the 99% were moaning about the cost of living so much

    People go through life picking up unnecessary accessories like dogs and children without thinking how much it all costs. No wonder they get themselves into trouble.

    It’s hard to argue with her observation, and this is from one of the 99% ;) Mr Squirrel takes a slightly softer line.

    It appears that that august organ, the OECD takes issue with the claim that all the wealth creators will cram into Monaco or a seastead with their capital leaving the remaining starving hordes to eat each other. Unlike  Wiley who act as Gollum to knowledge the OECD publishes their stuff – short form here and full monty to be had from here. It’s worth a read – basically in contrast to Ayn Rand they take the view that we are our brother’s keeper in terms of the maximum aggregate human societal benefits:

    The most direct policy tool to reduce inequality is redistribution through taxes and benefits. The analysis shows that redistribution per se does not lower economic growth. Of course, this does not mean that all redistribution measures are equally good for growth. Redistribution policies that are poorly targeted and do not focus on the most effective tools can lead to a waste of resources and generate inefficiencies.

    Now before we all become communists it is possible for this to be true and yet nevertheless some people’s end of the boat may end up going down, even if most of the boat and inhabitants rise. Somewhere the John Galt in me does and did object for paying for other people’s lifestyle choices, for most of my working life I was paying towards my colleagues’ child benefit, though I am very happy that this has been stopped now. They are/were rich enough to pay for their own choices in life ;)

    The OECD’s stats are also backward-looking, over a period where the assumption that it is always possible to improve things by putting more people to work probably held. I have a lot of time for the thinking that we are in the middle of a third industrial revolution, and I will probably not live to see the full effects of this one. It takes far longer than a human lifetime for the rubble to stop bouncing in an industrial revolution, and the transformational effect of the improvement in communications, data handling and processing on economic activity is probably not complete. Unlike Roger Bootle, however, I wouldn’t necessarily bet on human ingenuity this time.

    We have a lot more humans to draw on, and capital can be more picky about which humans it uses. When I graduated, I was bright enough to be able to work in research and development. The twenty-something me was 2 nowhere near bright enough to work for Google. So we could have a lot more economic activity and vast increases in GDP with fewer humans aided by machine ingenuity, but the spoils of war would increasingly accrete to those that own the means of production, otherwise known as Capital.

    As a result the idea that we can improve economic efficiency by educating people better is not a given for the future in my view. It may be a good thing for their quality of life – after all having reached the end of my working life the economic value of my education is now entirely spent. There is still some intangible value in terms of being able to read, write and have a basic grasp of how things work, infer conclusions from experimental data and have a cultural reference to the world around me – the value of education is not purely as a way to amplify earning power. It’s possible that the OECD’s narrative is accurate for the past – the historical economy had the capacity to employ more human capital and ran below full bore because it was starved of skills and boots on the ground. The global economy has got access to a hell of a lot more people now than it did when I started work, and this seems to be at the same time as it needs fewer people per unit economic activity as a result of the various issues in Humans Need Not Apply.

    Which then brings us to the point of what the hell is the economy for? Is it to make as much stuff as possible and get as many people to buy this as possible, even if they can’t add enough economic value to pay for their consumption? Is it to maximise the sum total of human experience? These are political issues, but we don’t really seem to be tackling those issues as to what all this economic activity means and whether it is serving us well, we just know that we want ‘growth’ because it sprinkles some fairy-dust and seems to have made people feel better over time. Charging around telling people work is the way out of poverty seems to be pissing more and more people off, because it’s just not true. Eighty years after Keynes observed

    The decadent international but individualistic capitalism in the hands of which we found ourselves after the war is not a success. It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn’t deliver the goods. In short we dislike it, and we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed.

    he could still make the same observation.

    The Citizen’s Wage/ Universal Income – an alternative to the Occupy movement

    The Occupy movement is one response to the rise of the 1%, which is basically to try and tear them down. But it isn’t the only one. There’s another one. Let the 1% (and the 20% below) earn shedloads of money. After all, take a look at the Grauniad’s excellent analysis from Mona Chalabi  – people paying higher-rate tax and above make most of the running in tax revenue – about 2/3 of the tax take comes from them.

    Then set a flat rate of tax, at 40%. Abolish the personal allowance. But give everybody a universal income of about the National Minimum wage once they reach 18.  At the old higher rate tax threshold of ~ £40k you will have paid 32% of £30k which is about £10k in tax leaving you with £30k, under the new regime I guess you’re paying £24k in tax leaving you with £16k to which is added £13k resulting in ~ £30k in total

    Abolish all special interest pleading – nearly all of the Welfare state goes away, we presume that the NMW is enough to basically live on, be you pensioner or 19 year-old. No special case for having children – a couple on the NMW is a little under the average household income. Now, without the requirement to work, you can enjoy your children, see them grow up, walk them to school. You can now live anywhere in Britain we don’t all need to pack ourselves into the SE because that’s where all the jobs are – maybe even repopulate the North of the country – fabulous countryside.

    If you don’t have kids, well, you have a bit more money then, follow your interests. Have a better house or car, or go on holiday more. If you want more than the NMW, then by all means, if you are talented enough, go get a job. Your universal income won’t be taken away or taxed, but everything you earn would be taxed.

    The uber rich will now have to pay decently for their shit to be cleared, their houses to be cleaned and for fire service in London. But they can afford it, so the wages of shit-shovelling service industries will go up to whatever is needed that people will sell their time to do that sort of thing electively. But both parties will have a choice, and it’s up to the market to set the right price.

    This isn’t a fully formed idea – there’s no doubt endless problem with it. For starters until globalisation makes everybody in the world equally well off and we have ended war, entitlement needs to managed. Britain allocates citizenship/residency largely by jus soli as far as I can see, and some steps will need to be taken such as requiring you to be born in Britain by people here legally to get the entitlement. Before I get charged with being a card-carrying nut-job – immigration is no problem but the parents will have to be here legally and presumably work of be of independent means. And it seems fair enough that if you aren’t entitled to the citizen’s wage you at least get a personal allowance re your earnings of the same amount :) The devil would be greatly in the details.

    The problem we have at the moment is that we seem to be trying to micromanage our way out of macro sociological changes. The disenfranchising of a large part of the human population of a First World country isn’t necessarily a problem if it is caused by improvements in productivity caused by technology 3, but the way we allocate resources is going to drift out of track with the assumptions that underlie our societies.

    With the industrial revolution we managed to dramatically reduce our use for human physical labour, but increased our capacity to use intellectual human labour. With the Information and computing revolution we are reducing our need for intellectual human labour, because we can solve many of these problems using IT (and outsource a lot that doesn’t). It’s not absolutely clear to me where we are going to put these now idle hands to work, though I don’t have the Protestant Work Ethic that always assumes the Devil is going to be the employer of last resort. There are many things that would be nice that more human effort could do, but in general we don’t seem to be prepared to pay hard cash for them.

    That which we can’t do automatically demands much more cognitively of the humans 4, and it is beyond what many can do, we are way beyond the central bump in The Bell Curve and out there in the tail. I’m not really sure I’m bright enough to get ahead in this economy if I were starting now, the leading edge is way out there. We aren’t doing less, but the fruits of the productivity enhancements are accruing to people with capital and to people with power. CEOs and the 1% are skimming off a fair amount of the capital, but it is interesting that they have streaked ahead particularly through the use of equity allocations as well as higher pay.

     

    Notes:

    1. Charles Colson, possibly
    2. I am making the slightly ageist common assumption that this fades with time – accumulated experience has much less value now in technical fields than it did when I started work
    3. if the improvements are caused by globalisation then it is a problem, because living standards must fall to equalisation otherwise there will be balance of payments problems with the countries doing the work
    4. Not all future work is cognitive. There will still be work for some other types of skills – being a footballer, or a Kardashian doesn’t require smarts, and artistic creativity requires a different type of smarts
    30 Nov 2014, 6:38pm
    rant:
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  • Dear Mr TV Licensing. The Ermine has no TV licence…

    Because he doesn’t watch live TV. What part of that do you not understand?

    It’s not often that the Repo Man tries to call at Ermine towers, but one of your boys visited this Sunday, while the Ermine is laying out a printed circuit board, so no, I don’t appreciate the gratuitous interruption to something that needs concentration and keeping a load of spatial stuff in mind. But you’re also cheeky enough to want to come inside my house because you want me to prove that I am not lying to you. Well F*** off.

    I’m not having you search my house for it. An Englishman’s home is his castle etc. And I’m not pulling down my aerials either. I may want to use them one day, in which case I’ll pay out. All I have to do to be legally absolved of the need to buy a TV licence is not watch live TV as it is broadcast. And I don’t do that. It’s really no great deprivation, despite the apparent incredulity. One of the joys of becoming financially independent is you usually get to do that  by living a bit differently to the way other people do. This is one of them.

    There are ways of looking for signals leaking from TV gear in use. It’s a lot harder now those damn Europeans with their pesky EMC regulations mandate lower emissions from  consumer electronics. I wouldn’t imagine it’s economically viable for TV licensing to have people capable of driving the gear and making sense of the results. And it doesn’t look like this

    And it doesn't look like this you bunch of chumps

    And it doesn’t look like this you bunch of chumps

    There is a satellite dish and a TV aerial on the outside of my house. You are very welcome to park a Transit van on the public highway and point a dish at the Satellite quad LNB and look for the 11GHz local oscillator, and use a Yagi aerial to look for the Freeview local oscillator leaking from the TV aerial, it’s about 39MHz off the wanted channel if I remember right. Take yourself down to Livingston Hire and book out something suitable, the Rohde & Schwartz FSV13 would probably see you right. If you pay my consulting fee I’ll show you how to use it :)

    You won’t find any signal, because I don’t watch TV, there’s nothing connected to these aerials. I do still have the Humax Freesat box I talked about a while back but it is in a box in my loft – the resale value is sod all and I might one day change my mind. It’s not hurting anybody and I’m not using it.

    I’m not one of the rabid refuseniks who doesn’t think there should even be a TV licence, though the vexatious rudeness of TV licensing could turn me into one. There may be other better ways to fund the BBC but to be honest that’s not one of the problems in the world I give too much headspace to. The reason I don’t need a TV licence isn’t that I don’t watch TV, but I don’t have any way of picking out what’s worth watching ahead of time, other than people telling me. Obviously they have to watch TV first – thank you Under The Money Tree and Mr Squirrel for the last couple of recommends. I can’t abide TV series of the sort most people really rate like Breaking Bad or The Wire. I don’t do sport.  If I am interested in someone’s recommendation  I watch it on iPlayer or the ITV/C4 equivalents. There’s not much point in me shelling out £145 a year for the privilege of being able to do something I don’t do. If I needed to pay for iPlayer I’d live without. I do vaguely miss the TV news but it’s hardly as if the Web is without news, for instance if I want to see some people fighting over buying a television set then due to the magic of the new-fangled intertubes I can do just that. I think this is my favourite clip of Britons behaving badly, though I do note on some of the videos the gentlemen of the press outnumber the punters. The weather forecast is that much better on the Web, and if I want cat videos then there’s always Youtube.

    I do have a TV, though not the big one from this post – that went to the county dump a while back. Mrs Ermine uses it to watch DVDs. It is so old it doesn’t do Freeview or HDMI, though it has a nice analogue tuner showing many varieties of snow. I was even toying with getting a bigger TV monitor, preferably without fighting for it, because a 20 inch 4:3 machine at not even SD resolution isn’t that easy to see from a distance 1 and does lose the effect somewhat. But then I’d have to get a secondhand stereo for the sound because that’s half the story and it would end up in some ghastly version of the Diderot effect. And I’d like to go HD but couldn’t find anywhere to rent HD movies without being sucked into a subscription, and movies aren’t important enough in my life to subscribe to anything. DVDs seem to be £1 a go PAYG from the library, and you can’t argue with that.

    TV Licensing are a vexatiously rude bunch of tossers

    The reason TV Licensing get such a load of shit from people is that they are bully-boys. There’s a tradition in this country that you are innocent until proven guilty, but in TV Licensing start from the assumption that nobody in 21st century Britain can live without the glass teat feeding the lifeblood of consumerism directly into their face. Despite there being the competing multimedia firehose pointed at their face that you’re now looking at, and the smartphone for da yoof. So you are guilty and they address you as such. It starts off with the wheedling

    1411_TVL-141130-ren

    TV Licensing -> Ermine after 1 month  Shurely Shome mishtake, Sire has omitted to renew?

    NO, you numbskull, I don’t watch live TV because it consumes too much of my precious time to find what I want, so I wait for others to tell me, OK?

    1411_TVL-sept

     

    TV Licensing -> Ermine after 2 months  RENEW NOW YOU BACKSLIDING SPIV; WE KNOW WHERE YOU LIVE – YOU WILL BE ASSIMILATED. RESISTANCE IS FUTILE, MASSIVE FINES, INVESTIGATE, INVESTIGATE

    Ermine to TVL – no, I am not telling you anything, this is something I am no longer doing. I’m not paying money, wasting time on your phone system, giving you my phone number or email address to hassle, and the onus is not on me to prove my innocence. The onus is on you to prove I am doing something you can charge me for. As I walk down the street I can see lots of people’s TV screens. You are more than welcome to see if you can see mine from the public highway. Maybe I should get me one of these TV simulators  to make your pay-per-hit Capita dudes have a rush from the thrill of the chase, eh?

    TV Licensing -> Ermine after 2 months, random mailed intimidation and final demands.

    Random unjustified aggro by post

    Random unjustified TV Licensing aggro by post

    I haven’t had this sort of aggravation since Thatcher’s Poll Tax in the early 1990s!

    TV Licensing -> Ermine after 4 months  Up close and personal we want to inspect your house to make sure you aren’t watching TV.

    Eh? I haven’t ever had so much bloody grief for something I’m not doing and don’t need to do. It’s not 1984 guys, where you get into deep doo-doo for switching the damn telescreen off! Chill out and piss off.

    Postscript

    It appears that I will never be shot of this grief, this bloke has been harassed for the last 8 years…. Still, saving ~£150 a year is worth some aggro, the opportunity cost is a respectable  amount in red wine and coffee or 3 DVD rentals a week!

    Notes:

    1. I can see the damn thing perfectly well but it hardly fills the field of view :)
    28 Nov 2014, 12:53pm
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  • Today is the official spendy frenzy of Black Friday and it’s time to

    … ask yourself some searching questions in the vein of Oscar Wilde discoursing about the cynic

    A man who knows the price of everything and the value of nothing.

    because apparently you must go out and bag yourself a bargain this weekend. So what are these bargains they tell me of, then? I may as well start with what I know :)

    Bargains I tell ya

    Bargains I tell ya

    So what do we have here? Top left, a shaver, which apparently was ‘worth’ £300 and is now half that. Now the Mail is not targeted at Russian oligarchs, or the sort of bullshit you get in the seat-back in business class, or even the Torygraph’s look-but-don’t-touch Luxury section. So it wouldn’t be unreasonable to imagine the typical Daily Mail Reader on the median UK wage, apparently £517 per week last year. From all the wittering about stagnating wages, automation and damned furreners I don’t imagine it’s gone up that much in the last year. These are apparently gross earnings, so a quick spin on ListenToTaxman tells me

    Listen to Taxman gives it you straight

    Listen to Taxman gives it you straight

    that this fellow gets a gnat’s over £400 per week. So let’s say he runs a 40 hour week then he’s earning £10 per hour. Sadly his commute costs him more time and to add insult to injury the train companies seem to take a dim view of not paying. The FIrestarter did the maths, I’ll assume my punter eats a 25% hit rather than TFS’s 1/3 hit. So our Daily Mail Reader needs to spend an hour working/going to work for every £7.50 he earns.

    Righty-ho, so he wants a shaver, call it £150. That’s 20 hours of not seeing his wife and kids… The Ermine is clearly behind the times, I didn’t realise you can spend that much on a shaver. So be it. We have the Nespresso Lattissima coffee machine, yours for £125, that’s 15 hours at work. I’ve already had the rant about how a Nespresso anything is a way to electively pay more for a restricted range of coffee, and produce more needless waste compared to the gonzo filter cone. But here you have to add the extra time to decoke this darned thing, because the combination of milk and heat is a cleaning nightmare, so you have to factor in the extra cost of the cleaning help. Or be prepared to take half an hour over an espresso, half of which is to clean out the milk section. The advantage Starbucks has is they amortize the cleaning over lots of coffee drinkers, whereas drinking 50 cups of espresso a day is going some at home.

    So let’s move on to the pretty lady then. mail6Somebody really ought to tell her that winter’s coming, but what the hell. The trusty Ermine calculator tells me that is about 634 of your Great British Pounds for four items of clothing, so she’ll be working a month and a half 1a shade over two weeks  to pay for that little lot.

    Black Friday is For Fripperies, not Fundamentals

    Not so fast –  the time calculation gets worse. All these good people have to live somewhere and presumably eat something, so we really ought to run these calculations using disposable income. The Money Advice Service tells us that the average monthly disposable income is £224 2. Mind you, these are the same fellows who tell us that  it’s news to 1 in 100 of our fellow countrymen that you are supposed to pay a loan back, so maybe they fish in murky pools for their punters.

    All of a sudden our shaver purchaser is looking at working for three weeks to get his whiskers trimmed, and our summery lady is looking at the wrong side of three months to buy that outfit.

    Personally I’m on the other side of Oscar’s cynic.  There are a lot of very clever people out there. They go to work every day to make you screw up your finances by buying shit you don’t need. And Q4 of every year they go into overdrive.

    ‘just think of your children – buy these loom band kits’

    Reminds me of Charlotte Metcalf buying Silly Bandz for Christmas because she couldn’t bear to tell her daughter that she didn’t have any money left. WTF is it with selling overpriced rubber bands to children?

    Where’s Tyler Durden when you need him, eh?

    God damn it, an entire generation pumping gas, waiting tables – slaves with white collars. Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need.

    Happy Black Friday, all, and Cyber Monday, two inventions designed to put the consumers of the UK further away from financial independence. We can’t have the people giving The Man the middle finger, eh, so run along and form an orderly queue to buy shit you don’t need. No fighting on the shop floor, okay?

    Notes:

    1. Clive is absolutely right, it’s not as bad as that
    2. lies, damned lies and statistics, eh, note the shocking sleight of hand switching from median to average. When it comes to income, it seems the stinking rich lift the average with respect to the median so that £224 is probably an overestimate
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