The Scotland problem

Something’s afoot later this year, and I can’t really get my head round the finance implications. Two things are afoot, indeed, and they are loosely related from an Ermine’s viewpoint.

One is the increased ISA allowance to 15k, and so far I’ve chosen to ignore Under the Money Tree’s sage advice and get my capital in there ASAP. Unlike UTMT I have no income and need to be more cautious at this particular stage, but more to the point I am well over the FSCS limit in my existing ISA, because unlike my Cash ISA, which is busy going nowhere, and indeed backwards in real terms, S&S ISAs tend to grow a bit over the years, which whopping heart-rending retrenchments every few years. I was fortunate enough to start just after one of those.

And there’s an event on the horizon that might make FSCS protection more important. It’s the threat (from my point of view) of Scottish independence.

Tomnaverie stone circle in Aberdeenshire

Tomnaverie stone circle in Aberdeenshire

Fantastic place, Scotland – wide open spaces, loads and loads of marvellous megalithic sites, people with a great engineering tradition and wide open spaces. Okay, so it gets brass monkeys in winter and don’t even think about going near water in July ‘cos the midges will eat you alive.

It’s all about to get a lot better, ‘cos that nice Mr Salmond has invited the Fairness Fairy to sprinkle a bit of magic pixie dust, and he’s written it all down in Scotland’s future – Your Guide to an Independent Scotland. Here are some of the things he will bring to the good citizens of that fair country

  • Scotland will continue to use the pound,
  • guarantee that the minimum wage rises – at the very least – in line with inflation
  • a commitment to increase the personal tax allowance, benefits and tax credits in line with inflation
  • single-tier State pension at the rate of £160 per week in 2016

More spending and less tax, what on earth is his secret? I’m not quite sure what sort of crack he’s smoking, but he clearly has a good dealer. Now I am all for the Scottish people having the right to self-determination, and there are some obvious cultural differences with England that stretch beyond football. The country is much more left-wing than the UK as a whole. There’s nothing wrong with that and indeed we might all live a little happier if we cared a little bit less about money and more about people. I can see that it sticks in the craw to have a largely Tory government when Scotland returns no Tory MPs. If people in Scotland are that pissed off with being part of the UK then they will vote accordingly.

Now independence comes with rights but also responsibilities, and I’m buggered if I understand the sort of independence that uses another country’s currency, never mind your ex’s currency. Managing the money supply to broadly track the amount of goods and services in your economy , your appetite for national debt and foreign goods is all something you can do when you run your own currency. It’s possible that the Calvinist roots of Scotland will mean it powers ahead of the rest of the UK despite the tendency of the Fairness Fairy to run out of other people’s money, in which case with the Pound Scotland will be Germany to the rUK equivalent of  Club Med. But without the power of Germany. In that case the spendthrift English will borrow against the hardworking Scots and spend all their money until they a) access the EU and b) join the Euro in which case the Germans will save them. Until the Germany runs out of young people in about 20 years time.

Alternatively the Fairness Fairy might start to run out of other people’s money and the Bank of England will seek to cut the supply off. That will cause plenty pain for rUK because it probably means higher interest rates, but given the relative numbers it will cause ten times more pain for Scotland. So have some self-respect, guys, and create a currency (Salmond?) ASAP and start managing your own financial affairs. What part of independence do you not understand, exactly? It’s not like we are still under Bretton Woods and Scotland can do like Australia did in ’65 and switch to the AU$ and £1=2AU$ until the 1970s. Yes, the pound is convertible and available on the open market. But like all those Hungarians and Cypriots who took mortgages denominated in the Swissie and found out how that can turn into a world of hurt the fact that you can do something doesn’t mean you should. The whole point of being independent means that you want to run things differently from the UK. Lockstepping the currency for any longer than you have to is a strange way of going about that.

Scottish independence and the Ermine

My problem with Scottish independence isn’t about independence as such, but the damage and turmoil that could do the the economy of the rest of the UK. What the bloody hell are we going to call the rUK then – the disunited kingdom? The Shattered State? At the moment the pound is relatively high (compared to the last few years) and that makes a case for buying foreign assets, given my ISA has a heavy home bias. It’s what I have been doing of late, to lean against that – a bit of emerging markets, a bit of Africa. I’m almost tempted by some Russia, but only a small amount. It’s hard to work out what the meaning of ‘ownership’ is there…

However, I don’t want to open an ISA until I can open a NISA because I need to use a different company that TD. Obviously I will make sure it’s not one domiciled in Scotland, in the end if I want to open an offshore account 1 then I’d want to choose somewhere in a country that is far away from the UK and not going through birth pangs as well.

The Ermine is not a funds sort of person, which is nice because an awful lot of funds are run by Aberdeen Asset management, and I will look at the policy of some of my investment trusts too. And I don’t really fancy having a lot of money tied up in a company in a new-born state trying to work out a monetary policy. Capital controls can go along with that. I don’t like Alex Salmond, I think he will say anything to get his own way, and I bloody well don’t want to have any money exposed to him or his world view. After the dust settles, Scotland may well be a good place to  invest – the Scottish people will be able to straighten themselves out and get to work building a country that expresses their world-view. At least with Russia you know that buying a small stake in Mr Putin and that the rule of law is tenuous; this is what the risk premium is all about. With Scotland because of the policy vacuum it’s all about unqualified risk for anybody in the rUK because we get to eat the downside with no exposure to the upside of all that Free Stuff from the Fairness Fairy.

On the plus side, it is at points of turmoil that opportunities show themselves. So having an ISA open by August with the higher available is an exciting opportunity – sort of like the summer of 2011 but hopefully without the rioting. Scottish independence, should it happen, should be a happy event for Scotland.

Of course it may all be a damp squib or other events like the clanking of Russian armour rolling into Kiev may cause more widespread issues. But I’m surprised the prospective breakup of the UK is met with such equanimity in the(r) UK PF scene.

 

 

 

Notes:

  1. I know there aren’t any offshore ISAs :)
11 May 2014, 11:32am
by Grumpy Old Paul


If Scotland becomes independent, then there are a number of other issues affecting rUk:

a) A permanent Tory parliamentary majority
b) In the north-east of England, the prevailing Weltanschuung is much closer to that of Scotland and the possibility of either a move to greater autonomy, full independence or some move to closer ties with Scotland is likely if the English north-south divide continues to widen
c) Emigration to Scotland to benefit from a more generous welfare state
d) If an independent Scotland’s economy goes to the dogs, mass emigration to rUK

On an unrelated note, I’m pissed off with referendums which only offer two choices, neither of which I want. An example was the vote on electoral reform. WTF is wrong with multiple choice referendums like those which the Swiss operate?

@Grumpy Old Paul

I totally agree with referanda always being totally biased towards a particular restricted choice of results.

The same of course goes for surveys, which are generally always worded in such a way as to generate a particularly benign response whatever the outcome.

The local council where our second home is located recently commissioned a postal survey, the question of which was along the lines of ‘…do you think the council is doing enough to provide cycle lanes in the borough… ?”

The options were simply ‘yes’ and ‘no’.

No mention of at least a third option, which is maybe they are doing far too much to inconvenience the paying motorists whilst pandering to the whims of an unqualified minority who are neither licensed nor insured, and who pay no road tax.

I realise that the stock response to this comment is that the cyclists may also be car drivers and so already pay road tax. However, this argument doesn’t wash at all – when I was young and daft (a while ago now admittedly, at least the young part) I kept two cars and two motorbikes on the road at the same time. Even though I could only ever drive / ride one at a time, I was still obliged to pay annual road tax for all four.

The council’s survey was worded along the lines of the old classic ‘do you still beat your wife’, to which there is no satisfactory ‘yes’ or ‘no’ answer….

@grumpy old paul (again !)

I live in the north-east of England and it’s simply not true that we’re any closer to Scotland than to Westminster (except geographically of course !) Maybe it’s different if you live in Berwick…

@ermine

I think the tanks rolling into Kiev is a very, very remote possibility (I’m prepared to be corrected if I’m subsequently proved wrong).

Russia’s the only party seeking true consensual international intervention in this conflict, as opposed to particular NATO members which maintain their usual propaganda and bluster and keep upping the ante because it’s they that have pumped $10 billion into inciting and supporting the insurgents who kicked this all off.

I’ve worked in Russia for long periods over the last fifteen years, my wife is Russian, and they don’t want any conflict at all, simply reassurance that the Russian interests in Ukraine (that are understandably many, given their history), and the Russian people of course, are suitably protected.

Why is this problem any more significant than the many pointless and bloody conflicts into which the US/UK has stuck their unwanted noses in recent years (Iraq, Libya, Syria et al) ?

And as for Afghanistan, FFS, Russia with its many former Islamic republics and hence detailed knowledge of their peoples and culture, if they couldn’t bring peace to the region then what chance do the infidel ‘western’ powers have ?

Myself, I’m balls-deep in Russian securities at the minute, and have been since the outset of these recent troubles. Whatever happens, the Russian people will go about their daily business and still need to eat, travel, bank, buy fuel & houses etc whatever’s going on in one of their former colonies.

And I think that Putin’s simply a much smarter politician than the west has seen for a hundred years…

11 May 2014, 10:38pm
by BeatTheSeasons


@DM – Why the bizarre attack on money being spent on cycling infrastructure? But seeing as you’ve raised the issue…

Local roads are funded from a combination of council tax and general taxation. Do you really think the sum total of ‘road tax’ as you call it would go very far towards building or even maintaining the roads system?

Cycle networks, in comparison, cost peanuts. And the overall benefit to society is huge. Even in purely financial terms it would save a fortune for the NHS if people were more active in their daily transport choices. Air quality, too, is a major health issue.

Yet for 50 years we’ve been designing car-dependency into everything. Spend a few days in a country like Holland or Denmark to see what alternatives are possible.

Improving safety is also clearly a no-brainer, but then I supposed you’re against speed cameras as well because of all that, err, inconvenience of sticking to the speed limit?

As for insurance, someone on a bike is hardly likely to cause such an enormous loss that even third party cover is necessary, although personally I have this on my home insurance anyway. Unlike all the uninsured drivers out there….

Now hold on a minute while I take cover before the barrage of abuse about jumping red lights and listening to headphones while riding the wrong way down one-way streets.

Wearing lycra.

@GOP I believe Scotland wouldn’t initially be part of the EU, so I guess visa restrictions would be like for people coming from Switzerland. Both ways, which would address some of the mass migration. It will be interesting whether Scottish citizenship is by jus soli or jus sanguinis

@DM I figure the Ukraine conflict will frighten the market horses more because it’s closer. The wider Russian market is hard to get a handle on. Compared with other markets the CAPE is low and to die for, but the very different operation and the way capital seems to flow out of the country makes me wonder if the low valuation isn’t as remarkable as it otherwise would be.

Re road tax I think that should be regarded as a way for them to tax you because you have a vehicle and most people need one. ie a bit of a poll tax that’s hard to avoid. I don’t think it’s had anything do do with making roads since Churchill’s time ;)

As for Afghanistan it’s even worse – the British Empire had grief there too so you’d have though the FO could have looked in their archives to find out how it turned out last time!

Are you suggesting that the FSCS account limit £85K applies to S&S isa’s? I hope it doesn’t.

@Scott it applies in a different way up to £50,000. It does not protect against bad investment decisions, which is probably your concern and I’d absolutely agree with you that something stinks if it did.

Because an ISA has to be a nominee account, where the shares are held by a broker with the customer as beneficiary, S&S ISA customers are exposed to the risk of criminality and fraud by the ISA provider or their agents. It’s the same with your bank – they hold your money but in practice they lend it out to people ASAP. What exactly does ‘ownership’ mean there?

After all, TD Direct provide a website saying they hold X shares on my behalf, collective value Y. I have no means of independently verifying this, but TD is regulated by the FSA/FCA, and it is they who guarantee the account against fraud. The poster-child for that sort of fraud is the US company MF Global

The FSCS protection is therefore addressing the issue of trust, which is needed for the fluid functioning of markets, and is different from risk. The FSCS protection is there to improve trust and avoid the equivalent bank runs. Without trust people will hoard money and resources, although banks have come in for a lot of stick they perform a useful function in keeping resources in service. If my ISA and pension savings were in lumps of gold under my bed the frozen store of the products of my working life wouldn’t be in the economy working. Historical economies worked that way, but were noted for shockingly low growth rates and a much greater value of capital relative to labour.

@ermine. I agree that to many people investing in Russia may seem a bit dodgy, but Russian exchange-quoted companies are obliged by law to pay a minimum value of dividend to shareholders as a proportion of annual profits, which doesn’t apply to the UK/US/EU markets where it’s entirely down to the discretion of the directors.

This minimum dividend requirement likely arises from almost all major Russian companies being at least partly owned by the State, and of course they want the income.

 

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