2 Mar 2014, 4:15pm
economy personal finance
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  • Doom and Death Spiral Deliberations

    I used that title a while back, in that curious Summer of Rage in 2011 when the stock market was taking a hammering and the yoof were rioting on the streets of London for the right to the correct sort of trainers and bigger flat panel TVs. Feels odd to exhume the title for a time when stock market valuations are running high and animal spirits seem to be on a bender of irrational exuberance. We’re three years on from then. People are being boring in pubs about house prices, though we don’t so far have much retail buzz about the stock market. Presumably because Joe Public is taking such a pasting in the cost of living crisis, and even the relatively well-heeled Lucy Mangans of this world grizzle about downward mobility.

    The engine of consumer spending is spluttering and dying

    I enjoyed Lucy’s piece for it’s internal contradictions. F’rinstance

    Our lives may be becoming more precarious than our parents’ or grandparents’ but we have tasted the good life and we want to keep it for ourselves and our children. And we still have the time and energy left for a fight. We may even discover in ourselves a greater empathy for the poor and the beginning of an understanding that impoverishment is not always the choice or result of personal bad decisions we vaguely – and our politicians fervidly – believe it is.

    Lucy Mangan – downward mobility

    Lucy Mangan of the Torygraph. "Going down" as the operator used to say in the Harrods lifts when I lived near there (in a crummy student dive)

    Lucy Mangan of the Torygraph. “Going down” as the operator used to say in the Harrods lifts when I lived near there in a crummy student dive.

    I’d agree with Lucy’s assessment that the ‘middle classes (as defined by the torygraph)’ lives are becoming more precarious. But a lot of that is due to taking on stupid and mahoosive levels of debt – the travails of Shona Sibary with the ridiculous flipping of houses to extract home equity in times of plenty has something to do with it, along with the general living larger than life on somebody else’s dime. There is a shift of power going on from labour to capital, and some of that debt is going in keeping up the pretension of being richer than they really are. That sort of impoverishment is the result of bad personal decisions and her parents and grandparents wouldn’t have tolerated it – or even found it possible in a time of credit controls.If you want to be middle class, you need to have middle class values, and living within your means used to go with the territory of being middle class.

    I don’t have as much income as I did when working. I could borrow money on credit cards to do the stuff I spent money on while I was working. But guess what – I try and live within my means, and that means doing things cheaper or doing without. The whole credit card thing would be a seriously bad personal decision. It doesn’t mean don’t use credit cards – but it does mean pay the blighters off in full each month. Just like the middle classes used to do in the late 1970s!

    I was tickled by

    We need to use our remaining capital – both social and financial – to demand change from governments, to avoid tax-evading and semi-monopolistic companies and shop at smaller, more local shops who still use humans rather than automata, and to set up local educational and financial institutions that better suit our needs. Set up a new game, with new rules. But in the meantime, while we work out what they are and where best to place our pieces, I shall be shopping at my local Lidl rather than at Waitrose,

    That’s the trouble with the middle class these days, they have no values. Lucy moved within two sentences from realising that the social contract includes using smaller shops that employ her neighbours to shopping at Lidl, which saves her money but doesn’t even share the profits with some faceless shareholders never mind some of the employees 🙂 You really ought to at least finish the paragraph before you undiscover “one for all, and all for one”.

    The middle class are hosed. It take unique and rare skills to pull out of a vicious circle, and to do it, the middle classes will have to jettison a lot of things that are dear to them. I just don’t think they have the integrity and moral fibre to take the hit – after all Lucy’s moved from corner shops to Aldi without realising the irony. With consistenty and integrity like that you don’t deserve to win. The problem in the future will not be keeping up with the Joneses, Lucy. It is going to be keeping out of debt slavery. Know your enemy….

    Values matter

    I’m personally of the view that having values matters a lot more in personal finance than absolute income. I’d say this is behind a lot of the struggle the middle classes are having – they have embraced consumerism and lost their way a bit. Middle class people were much poorer overall in the London I grew up in than they are now, but they seemed to have a stronger set of values, in particular debt other than mortgage debt was frowned on. Credit cards had an uphill struggle when first launched in Britain and had to emphasise the flexibility of rolling a  month’s worth of payments into one payment in those days of handwritten cheques. Hence  “Access your flexible friend helping out Money” rather than the way they advertise now, which is full of offers to buy now  pay nothing for a year etc. The rot soon set in with “Access takes the waiting out of wanting” – fast forward thirty years of this and we have Lucy Mangan grousing about downwards mobility. Once upon a time the middle classes knew that you only borrow money  to purchase assets or increased productive equipment and not for consumer spending, but it’s been a long, long time since that attitude prevailed.

    The Ermine is fearful

    I was looking at my TD account, which currently looks great, and spent a little bit of time trying to imagine the sea of red and the bottom line about half of where it stands today, and really picture what that looks like. You need to do that every so often to remember that a lot of the value in a portfolio is illusory. Over the long term it does tend to reflect the value that the asset is creating, but over the short term it reflects fickle human opinion. As the GDP chart shows, there’s no earthly good reason why valuations should be so high now. Granted, there was no good reason they were as low as they were in 2009 so only about half the difference is probably real, which is lucky – I thought I was doing okay before 2013 and didn’t buy anything new of note that year.

    Of note is that the yield from the HYP will probably rise 1 – dividend payments tend to fall less than the market value. Now being mindful that the bearish argument always sounds smarter I came across an interesting chart of GDP growth over time – hat tip to Flip Chart Fairy Tales

    GDP growth

    GDP growth

    So you then take a look the recent US and UK stock market performance

    Vanguard US and UK, rebased to GBP

    Vanguard US and UK, rebased to GBP. Obviously the timescale is only the very end of the GDP one.

    And you go obviously, ho-hum, the rise of the stock market is obviously a leading indicator of…the pole-axeing of GDP? Clearly the good people driving the price up 2 are smoking something powerful. The usual explanation is the shocking devaluation of the currency and everybody running to equities because all the QE, money-printing, what have you is debasing the value of money to inflate away the debt so people are trying to buy anything halfway real to dodge that.

    It’s hard to know what to do with this sort of doom and death spiral deliberations. The correct response to the last one was to go out and buy with both hands. The correct response to this one is to try and get used to what that 50% suckout looks like. And then go and buy – but what? I am looking a diversifying away from the dev world and that seems a reasonable way to get a long term edge from this current point. The dev world has served me well so far, but the imbalance stinks. Fortunately now isn’t a bad time to buy some geographical diversity, with the pound being less of a basket-case and creeping up. But stock markets are more correlated than ever nowadays, a bear market in the dev world is a bear market in AsiaPac. Something (globalisation?) seems to be phase-locking markets world-wide, giving a we’re all in it together aspect. There’s obviously the barbarous relic, gold, it may make sense to aim for a longer-term holding of about 5%, but its shocking medium-term volatility makes it a tough call. It’s not a bad time to buy, nowadays. RIT is the man to go to for a level-headed assessment of the details and how to do it. Unlike RIT I’ll wing it tax-unwrapped, since gold doesn’t pay an income 🙂 Its role is a swing producer of ISA funding should the doom and death spiral come to pass.

    1403_shark-fin

     Nathan’s right. There be fins in the water IMO.

     

    Notes:

    1. the yield will rise because the stock prices tank – I’m not saying the dividends will rise
    2. yes, I know, that’s you and me, though in my defence I don’t expect it to be up here, certainly don’t want to buy at this price and couldn’t find anything worth buying last ISA year
     
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