It’s not often you hear the early warning sirens go off in finance. They just did, when Mervyn King said this
The crisis in the euro area is one of solvency and not liquidity. And the interconnectedness of major banks means that banking systems, and hence economies, around the world are all
affected. Only the governments directly involved can find a way out of the crisis. But here in the UK, we must try to bolster the resilience of our financial system, better to withstand the
storms that may come in our direction.
What he said was there is little Britain can do to avert this shitstorm. It’s not just banks that need to take actions – for families around Britain the message is equally clear. Get out of debt, acquire no more, and for God’s sake live within your means. If that means beans on toast for the next couple of years then do it. And cancel Christmas if it means going into debt. No spending tastes as good as as debt-free feels when the wolves are howling at the door.
The world doesn’t owe you a living. It isn’t fair that other people get away with things you can’t, but that’s not a reason to give up the fight. A hostile world looks after people that look after themselves. Entitlements can be taken away and debt means someone owns you because they have a claim on your future work…
There may be opportunities for people prepared to fly into the economic storm, but these opportunities will come with stupendous risk. Many will lose their fortunes in it. I may well be one of them, perhaps left only with non-financial investments after the rubble stops falling.
I plan to invest into this shitstorm, because since I have only started investing post-credit-crunch, I do not have much to lose, and the potential gains if I survive the storm and reach the sunlit uplands are high. At no time in the last decade have valuations generally been this good, and they will probably get better when the Euro finally blows. In that time it will be people who hold an internal reference point that can hold their heads, because the storm will mask any external references.The falcon will no longer hear the falconer amidst the noise, and there is no riskless asset class any more that you can measure things against.
One of the obvious questions we could ask ourselves are how did we get here? The clumsy but talented Robert Peston will presumably ask this in his upcoming TV programme How the West Went Bust. He favours one possible explanation.
The overspending hypothesis
We overspent – basically the west got its credit card out and spent like drunken sailors, inflating an illusory increase in living standards without creating the extra wealth to underpin such an increase in living standards.
That is one possible explanation, however, there are other, more troubling possibilities.
The Limits to Growth/Peak Oil hypothesis
One of those was flagged up in a previous crisis nearly four decades ago, in particular in the 1972 report Limits to Growth by the Club of Rome which was one in the eye for the endless boosters who claim that the solution to all economic problems are ‘human ingenuity’. Yes, Warren Buffet, I’m talking about you too 🙂
Basically it postulated that human society needs a certain amount of resources from the world, and that the rich world was using these at a rate higher than could be sustained or renewed. For instance until 1950 human agriculture was generally renewable, whereas now one of our basic requirements, food, is produced by a process that makes a lot more output per worker. However, it does that at the cost of severe degradation of the soil, which used to be in balance with the crops, it uses water unsustainably. Two egregious examples of that are mining groundwater faster than it is renewed in the United States Ogalalla Aquifer and in India in the Punjab where the water table is falling at about a metre a year.
If the components of the limits to growth scenario are significant or increasing, then the prognosis for industrial economics are very bad indeed. Some elements of modern economics are predicated on continual growth. We could probably change these, after all human societies up to the Industrial Revolution managed economically in what was a fairly steady-state and sustainable balance with their environments. However, the experience of many people was certainly not the same as that which most Western democracies feel they are entitled to. Some of the credit card problem could in fact be the attempt by politicians to maintain the entitlements in the face of Limits to Growth problems.
I am going to take a chance on the issues being more a credit card problem, and take note of Jacob no longer ERE that empires fall over longer time-spans than in the movies. However, I have hedged some of my bets there with non-financial investments, because it’s not as clear-cut for me as it is for others.
It’s going to be a rough ride. People are already running for the exit, and I will be pushing past them into the maelstrom. I will lose a lot of money buying into the storm, but I hope to gain even more as it passes in the long years to come. There are no guarantees, however – I could be tossing cash into the fire. However, if the endgame is nigh for industrial economies, then even cash will lose its value. Germans know this already, which is why they aren’t rushing for a second bite of the cherry…
Another question we should really ask ourselves is how come we have become such a greedy bunch of SOBs as to always want the amount of Stuff we can buy to increase? Take a butcher’s hook at this article, telling us breathlessly
Families face ‘lost decade’ as spending power suffers biggest fall since 1950s
That sounds pretty rough, no? Okay, better than that flesh-eating zombies are coming out of Britan’s cemeteries at night and eating our children, but still pretty bad news. Until we read later on
Real average household incomes will be no higher in 2015-16 than in 2002-03, meaning middle-income families will have worked for more than a decade without any increase in living standards.
What exactly do they have against 2002? I mean if they said families living standards were no higher than 1962, when Britain heated its homes with coal fires and rationing had only just ended, then maybe. But 2002? I don’t remember 2002 was that terrible. People, particularly of a religious persuasion, sometimes used to take time out to give thanks for what they had. We should perhaps learn from that and stop being so damned greedy. 2002 was just fine. You may not have had a Kindle or an iPhone then, but if you measure the quality of your life against a yardstick of consumer goods them maybe you need to take a look in the mirror one morning and ask yourself if you’re on the right track.
Simple Living In Somerset 
Hi Ermine, just wanted to let you know I’ve recently discovered your blog and am really enjoying what you have to say. My formative years were during the ’80’s and unfortunately I was one of those that spent beyond my means and racked up a heap of debt. Whilst living in the USA I discovered Dave Ramsey and had a light bulb moment (I don’t agree with everything he has to say). Basically we’ve dug ourselves out of a lot of debt and started to save. I do think people need to take personal responsibility for their situations and stop waiting for someone to get them out of the mess. I think there’s more of this storm to come…. So everyone better sit up and listen!
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I think you’re right to invest but I’d stick to utilities, groceries, brewers, tobacco and coffee futures. Looks like it’s going to be a 5-10 more years of recession. All this austerity is going to impact the western economies big time. The price of oil has nowhere to go, over time, but up. Down here in Oilandia they’re already talking about a minor boom thanks to oil futures ( although they’re probably overly bullish ). Worldwide recessions usually make a pretty big dent in demand, but if supply should suddenly become endangered ( shock and awe in Tehran )the sky’s the limit. Hence, you can’t go wrong on groceries, utilities, tobacco and coffee.Those are recession consumer staples.I know, I lived through the seventies and eighties.Who knows people might end up using a ration book in the bleakest scenario ( the W word ).Have a pleasant Xmas !
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>and they will probably get better when the Euro finally blows.
Indeed. If they got a lot better, I’d be pretty miffed if I’d bought too quickly. That’s why I intend to take it slowly over the next 12-18 months. The current volatility is a bit scary.
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nobody ever mentions cash as an investment – the return is not the interest earned, but the opportunity revenue accruing in deferring the purchase of equities….
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@Moodles, I tip my hat to anybody who has dug themseves out of debt. That takes grit and determination, because there’s nowt directly to show for it. I had the experience paying down the negative equity on a house in the 1990s and it’s no fun at all, though good when it’s over!
@g I’d go along with that, indeed to some extent I am. I’m good on utilities and getting there on grocers, so it’s the likes of Diageo and maybe BAT. Maybe I will see what Neil Woodford has in the defensive EDIN IT to give me a lead there as I have no experience or understanding of tobacco or drinks as an investment. I already hold four out of his top 10.
@SG the ISA limitation is acting as a similar brake on my purchases. I’ve used up most of this year’s allocation and saving cash to next year’s
@Trevor
> the return is not the interest earned
Just as well 🙂 Of my cash holdings, only my NS&I ILSCs are keeping up the fight against inflation, my Cash ISAs are losing the battle and the Nat West cash savings account I’m saving up for next year’s ISA will lose even more.
I hold more cash than non-pension equities, largely because I will need to call on it in the next five years. Its unpleasant tendency to quietly sink into the ground and disappear is disconcerting!
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Hi Ermine, good article as always. I’d be interested in your views on the latest post on ERE, for a change a new one. Jacob gives up early retirement for a job, and sees nothing odd in it. Fair play to the guy, but I have to say, as the real hard liner of the need to break out and be free, I was disappointed that he was not a bit more contrite. I have never been much of a fan, preferring your own missives, and Monevator and Mr Money Moustache (who, strangely, Jacob has “handed the reins to”).
Life changes, and I guess Jacob was just too young to be properly retired, so, again, fair play to him.
Tony
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@TNT I’m not sure I interpret Jacob as giving up early retirement 😉
The difference between him and most of us is that he can choose whether to work or not. I am not yet in that position, though probably less than a year off. The reason he got there before me is partly that he’s smasrter than me but also that I want a higher material standard of living, I want to live in a house rather than a RV etc.
However, once I reach the point where I am finacially independent, although I’ll most likely leave The Firm at a convenient point, and I currently don’t have plans to work at a job for a living, I could do. Although for most of us retirement is the point that we become financially independent, becoming finacially independent does not have to mean retiring!
Choosing to do something is different from having to do it, so clearly Jacob was getting bored and fancied a spell as a quant. Being financially independent means there’s no downside, if he’s crap at it and gets fired so what. If he’s brilliant at it perhaps he gets to live in a house like the rest of us 😉 He’s still free either way.
It’s getting rid of the desperation that drives my search for finacial independence. When I had the spineless wonder of a manager trash me to meet his objectives in Apri 2009 I thought to myself that I never wanted to be in that position in future. It will have taken me three years to roll up my guns but no boss will threaten my livelihood in future. So at the moment ERE still has a freedom I don’t, even if he gets to clock in for a while. It’s only a matter of time, now, for me though 😉
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@TNT – what most people seem to misunderstand about Jacob is that he has always said he’d consider returning to the work force if an offering came up that met his terms:
1) no managing other people
2) no sales
3) free hands
4) sufficient intellectual challenge
5) high remuneration (to compensate for his time)
This job is the first one that met all 5 criteria. The “worthwhile” jobs that others have suggested he spend his time on have not met the criteria or were never put in front of him as an offer.
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Guys, as i said above, fair play to him, and as you say, Jacob was always about freedom to choose, not really early retirement, indeed several times he mentions his regret at not calling the blog something like Early Financial Independence, which I’d agree is more in line with his later philosophy, and clearly even more so now. I do feel, however, that he gave up a while back, just recycling old postings and getting ever more sound bite driven. Good luck to him, and as you say Ermine, maybe he’ll buy a house next.
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Hi Ermine – sorry to post another question in this article, I can’t figure out how else to send in a comment or question.
I’d be interested in your thoughts on the following, from an article in Changewave, a US investment newsletter that I follow, making the point that (some) index investing is not as good as it’s made out:
“a Bloomberg article this week discusses how the past decade for stock performance was much better than most commentators would lead investors to believe. You see it’s all in the calculations and how the data is presented.
For instance, even with the S&P 500 Index down 19% since the bursting of the technology bubble in 2000, it’s actually no lost decade for stocks. Once the cap-weightings for the index are leveled off, we get a whole different picture according to the Bloomberg report.
“The benchmark gauge for American common equity climbed 66% from March 24, 2000, through Dec. 2, after stripping out adjustments for market value, which gives equal credit to Exxon Mobil (XOM), whose shares are worth $382 billion, and Monster Worldwide (MWW), at $945 million.”
The result is that investors who purchased index funds based on the S&P 500 and other cap-weighted indices over the past decade have seen their capital gather moss. In contrast, those who are self-directed and invested in individual stocks had far better opportunities to reap strong returns.”
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@TNT that’s fine to use the comments that way 🙂
I agree with them – indeed I got there before them in saying index investing doesn’t work for me. I suspect the increasing popularity of index investing will damage it anyway, as any popular system does simply by diluting the once good principle among more investors.
I could probably nuance that in that I feel this applies to developed world passive indexing. I use index funds for things like emerging markets and global, because I don’t know the details. but would like to gain diversity and get an exposure to better demographics.
Having said that, index tracking is probably safest for new investors. To become halfway competent at stock selection you need to understand a lot of things like diversification, reading reports, taking a view on market sectors, not buying momentum and all sorts of other gotchas. And to hold on the the fruits of your labour you need to understand yourself and stop some of your own natural damn-foolery and emotional panic actions as well as tempering irrational exuberances. Learning that takes most people the loss of a lot of money – play-acting portfolios are no good because there’s no skin in the game. Plus you get no return for the hard work of studying companies with a play portfolio. I know I lost a lot of money learning in the dot-com boom and bust. That experience helps me no end in the choppy waters now. There are several tyro mistakes I just don’t do any more, though I’m sure I’ve invented some new ways to screw up 😉
But I’m doing okay – I’m about 2% down at times but I’m getting that 4-5% income.
That sort of training comes expensive, and index investing avoids all that, perhaps with the exception of understanding diversification. But no, after 7 years of going nowhere with the FTAS index all I use index tracking for now is as a benchmarking £100 a month part of my ISA to see how I am getting on.
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Tsk Tsk. Removing the famed “Newspeak” out of politocs’ twaddle is just not fair! Steaning their thunder too with such heretical pronouncements!
Society’s trends have shown that we live in a bizarre version of Huxley’s “Brave New World” with some Orwellian overtones.
Those sci-fi books were more scarier than books on AI and such for me. It is now “reality”, going by the way the media circus plays out in the links you share.
If there was a time to be both paranoid and sharp looking (for opportunities) this is it.
Have you read Amusing ourselves to death by Neil Postman? There’s one more for your Kindle collection.
Catch up with you later!
S/
> We should perhaps learn from that and stop being so damned greedy. 2002 was just fine.
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As an investor, what is the value of a solution to the Euro crisis? That is, how much will the market go up?
And the opposite question… how much will the markets react if there is a collapse of a single country and/or the entire Euro?
It’s interesting to see the daily 1.5-2.5% swings as have alternating news of “a deal has been made” and “the deal has collapsed”. Will the market reaction to a resolution be a letdown by comparison?
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@George,
Based on a UN study that I read a while back, exchange sentiment i.e. driving prices up or down actually turns out to influence real World prices in the end — this was in the Commmodities arena. Is that what you were looking for?
If so, it is best to do individual valuation/buying of the sort that stoatmaster ermine recommends. It is precisely for this kind of sagely advice that site is my regular jaunts on the internets. 🙂
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White Elephant for Sale in London, Again
So, how long will Governments continue to depend on a combination of brick & mortar and retail therapy to keep the fires burning?!? 😯
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@George
It’s hard to say. The value is more in not having a meltdown, because that involves a lot of uncertainty. It may also involve a lot of opportunity for some, but overal a downside.
I personally believe that the euro has to blow, because I see no way to address the inherent national differences in lifestye and productivity. So I would prefer it blows sooner rather than later, because the desperate measures to fix the problems breaking out are destroying wealth. The Germans have a saying “Lieber ein Ende mit Schrecken als ein Schrecken ohne Ende” – “Better a horrible end than horror without end”. I am with them there, that saying is from a people who know the power of grit and determination to fix something that is broken.
@Surio, in this one it is hard to make any meaningful valuations. Some things are inherently unknowable, and the response to a Euro breakup is far too complex for an Ermine mind 😉 Sometimes you have to just do the best you can with what you have to hand at the time!
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@Surio They’ll eventually have to knock it down. We aren’t rich enough to afford such airs and graces any more. It will never be a des res, however. Battersea is not that far from Brixton, and no self-respecting yuppie would want to live there. It’s south of the river, and people living in South London are definitely from the wrong side of the tracks, I was one so I know, and moved north of the river as soon as I could 😉
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