28 Aug 2014, 8:43pm
personal finance
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  • Cash ISAs are king, it appears

    We have not just one but two bearish articles on the stock market now that the hacks have returned from their hols and decided everything looks less fun than on the beach.

    Maybe the teeming masses of our British ISA ‘investors’ are wise after all, as only one in ten of us 1 open a S&S ISA. The Torygraph asserts

    ‘Super Isa’ savers play safe by putting their money overwhelmingly into cash rather than investments in the first month of the new, enhanced tax-free plans

    Blimey, if that’s what they call safety, I’d hate to see what these guys think of a racy high-risk strategy. At least the writer got one thing right – you don’t invest in cash, because it always offends. The one good thing you know about cash is that it’s dying on you. I’ve will have lost about £10k to the depredations of interest-free cash 2 in my AVC fund by the time I get hold of it; fortunately I saved considerably more by not feeding it into the rapacious hands of the taxman so sometimes you have to eat the cost of doing business. In retrospect I should have left some of it in the market, but because I didn’t know when I’d need to draw it I left it in cash. And I’ve seen this safety at work, and t’aint pretty at the moment.

    The advantage of havign termites eat yoru cash is you can see the buggers and you know what the problem is. When the government does it who are you gonna call?

    Termites can also eat your cash, but the government can ruin its value without getting at it. They simply make a lot more of it.

    Not only that but I have a lot of cash outside pensions. That’s the trouble with having a low income – you need to hold a lot of cash 3. If you’re earning a decent wedge then if something goes wrong you slap it on the credit card, roll back your partying for a few months while you pay it off and that’s great. Whereas if you haven’t, you need to hold a lot of cash to cover emergencies. Or do without – Wonga is not an option because it never gets better if you have no income, something that an unfortunately large number of my fellow Britons haven’t jumped to yet.

    I have a cash ISA, from way back, in two halves – 2008/9 and 2009/10, when I thought I had very very few options and was going to be iced from The Firm in months, not three years. I’ve hung on to it because cash does give you some optionality, but I’ve never been tempted to add to it as an ISA, though I did take those nice guys at NS&I up when they were offering inflation-proofed cash. If they did that again to be honest I’d probably draw that cash ISA and whack it into NS&I. But they aren’t.

    Anyway, I’ve held this for five years, over which it’s fallen in value in real terms. Of course the nominal value hasn’t fallen, and indeed inched up, but it’s grim, and it ain’t going to get better. I retain this cash ISA purely for the tax-sheltered value – when I get control of my cash it’s going into my S&S ISA.

    Cash is king but has no earning potential

    Whereas my S&S ISA, which I have been feeding exclusively and to the max has increased by about 20% over the same time, relative to the total cost of purchase as of 2014 – not all of the money has been working for four years. Now there’s a very good argument to say this isn’t because shares are inherently better than cash over four years – over that period all you needed to make money in the stock market was to have a pulse, actually be in it, and not screw up. It’s been getting harder and harder to find much worth buying, and what with the relative strength lack of weakness of the pound, I have looked towards building out – in emerging markets, Asian smaller companies, Russia, and Africa. I could use some of the mayhem in the stock markets trumpeted by the Torygraph to get valuations down from the silly levels, particularly in the US.

    After leaving work and coming to the conclusion that my HYP will soon be able to make up the pension income I lose from leaving early 4 I started to look towards the longer term defence, and while emerging/frontier markets seem on sale this year it is a bit nutty to ignore the largest capitalist economy on earth. Although I couldn’t bring myself to buy the S&P itself at current valuations I managed to hold my nose long enough to diversify a shedload of The Firm’s Sharesave into Vanguard FTSE Developed World ex-U.K. Equity Index Fund which is more than half US. I was going to Bed and ISA that sucker but it’s had the temerity to appreciate by 12%, which puts the kybosh on that idea for this year as I’m capgain maxed. So the Coming Reckoning Of Doom will have a grain of silver lining amongst all the mayhem – it would let me Bed and ISA a whole load of stuff. It’s an ill wind, etc, and of course all the buying opportunities, yay 😉

    Maybe our cash ISA-niks are keeping their powder dry

    Beats the hell out of me what all the punters are doing with their cash ISAs. It’s not even like you can turn that much interest on cash for the tax difference to be worth the candle. Maybe they are mindful of the Torygraph’s second article and waiting for the Case-Shiller to drop back to historical averages. The trouble with that line is that it’s easy to say and hard to do. However, if the massed ranks of cash ISA savers are under the fond impression their money is safe, they need to think again. Knowing that you aren’t safe is better than believing you are, but discovering the power of inflation does destroy your money. You know that compound interest everybody goes on about? Inflation is it’s Mr Hyde – compound interest run by Bad Guys. Tax takes more than one form, and printing cash to devalue the debt takes most financial assets with it, as more and more money chases a finite supply of things of value. Most of the rise in stock market valuations isn’t real either, more money chasing the same or less Stuff. The advantage of the stock market is that the risk is printed on a sign above the door – “here be dragons, volatility and 50% swoons in a couple of days”. Whereas on a cash ISA it’s all marble hallways and apparent solidity, but in the night the termites unleashed by the Bank of England are in there, busily nibbing away and the value of your cash. The tax is the disappearing value, not the small part you pay to HMRC 😉

    There are some ways to greater safety than cash

    If our cash ISAniks really wanted more safety, they could do worse than ponder Harry Browne’s  Permanent Portfolio. (Permanent Portfolio at ERE) It’s one example of diversification across asset classes, wider than the usual trio of equities, bonds, and property/land. And cash has its place there. But you have to accept a lower return, because there are two passive non-income generating components in the mix, cash and gold. They are the sleeping King who will rise up when the Kingdom is in mortal peril – but obviously half your capital base is asleep in times of prosperity, and so far the prosperous times have been a larger proportion of the time than the recessions.

    The advantage of having a few year’s ISA behind me is that the decisions to be made each year form a smaller part of the whole picture. At the beginning, I was desperate for a sustainable income, and I was lucky to start from a bear market and one where income investing was particularly bombed and people could consider swapping income shares for income ITs on a discount. As time goes on preserving what I have becomes more important – and that means building a diversifying shell around the income core. I accept my yield will fall, and yields are generally falling at the moment. But there will come a time when things are different, and there will be a time to buy income again. Hopefully those ITs at a discount – I had only got started with one and was going to buy more but ran out of ISA space in 2009, there is unfinished business there. In the meantime, there is a time for everything – the various sectors fall in and out of favour over time. Buying into the ones in favour (right now US equities, UK residential property) doesn’t work for me. Some people make momentum investing work, but I’m not one of them. Buying sectors that are out of favour works for me, but it’s hard seeing things go down before they come good – I can get a feel for lows but not for market bottoms. Which is why I hate it when markets hit new highs – Mr Market want you to pay so much to get on the dancefloor, I want to sit those ones out 🙂

    the search for safety leads to danger

    Donald Rumsfeld had a point. It’s the unknown unknowns that are hazardous, but believing you have found safety leads you to have apparent knowns that are really unknowns.

    But one thing I know, from personal experience. A Cash ISA is not safe – over several years, never mind decades. Yes, the cash ISAniks will say – but the stock market can halve its value from one moth to the next. They’re right, but there’s a faintly discernible upward trend over the years, whereas cash has a downward trend that dares not speak its name 5. When I was at university in London many years ago, you could get a pint of beer for under a pound. Slowly and stealthily the value of that pound fell away.

    It doesn’t matter than 9 in 10 cats prefer the cash ISA door. Somebody should make a ‘here be dogs‘ sign for that door.

    Notes:

    1. I know they said ten to one which isn’t exactly the same thing
    2. great when you’re borrowing, sucks when you’re holding
    3. If you are going to retire early, before 55, then for God’s sake don’t pay off your mortgage if interest rates are low. They weren’t as low as now when I did that, so the folly wasn’t as clear.
    4. Once again I’m not claiming to be a fantastic investor with hot hands there – the ask is made a lot easier by the fact that my spend rate was so dramatically lower than projected I have been able to defer for a year, and indeed with Mr Osborne’s shenaigans will be able to defer for another year after that. In general, for civilian Sheep of Wall Street spending less trumps greater investing chops
    5. it’s called inflation, and NS&I were the last people to offer a believable hedge against inflation
    22 Aug 2014, 11:49am
    rant savvy shopping:
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  • Self-seeking vacuum cleaner manufacturers lambast energy efficiency moves

    Consumerism, don’tcha love it. Take the humble vacuum cleaner – invented around the turn of the last century. They served previous generations well, given our Northern European habit of carpeting homes. In much of the rest of the world people use hard surfaces for floors like wood or tiles, but that’s a bit chilly in winter. Hence the need to clean carpets using technology more advanced than a broom or a mop.

    In a curious marketing arms race started by that James Dyson fellow, what was once a pedestrian and functional piece of kit throughout the 1970s and 1980s after being perfected over the previous 50 years became an aspirational product with innovation for the sake of it – one obvious problem was solved and a few more subtle ones introduced. Consumerism loves that sort of thing – make big positive changes and introduce faults that take time to develop – you only find out about the irritations as you own the product. It also became a damn sight more noisy that it used to be, with a particularly horrible high-frequency whine, in the case of the Dyson DC03 I used to have. Yeah, I was that middle class consumer suckered by the hype. The Dyson was a lot harder to troubleshoot. There were only four things that could go wrong with a bag-ful vacuum cleaner. The bag filled up, something got stuck in the intake hose or something jammed the brush roller, and all of these were something that were easily visible to the untrained householder. The fourth thing was the motor burning out, and you could smell that 🙂

    Compared with that the airflow of my old DC03 had loads of rubber seals, plastic channels that would crack under use and the whole thing gradually degraded so it was replaced after changing lots of expensive parts because it lacked suction compared to the basic Henry vac in a church hall we hired. I pulled it apart to see if there was anything worth salvaging, expecting to see all sorts of high-tech wondrousness. And was greeted with a bog-standard universal motor – so much for all the high-tech wizardry, eh, James? I don’t doubt the cleverness of the cyclone engineering, but it was the marketing of a new, and ultimately not very useful, technology that enabled you to jack up prices in the 1990s. Yes, bags make the suction fade, but the consumer can fix that. Whereas whatever made the DC03 fade over a few years wasn’t replaceable by a reasonably technical consumer – for all I know the usual little lumps that get sucked into the airways and trashed the plastic channels I replaced may have knackered the cyclone bit. I always hated that DC03 for the earache, anyway, glad to see the back of it 🙂

    Vacuum cleaners are now marketed by the power of the motor, which seems to be pure specmanship and lazy engineering. Previous generations worked in dirty manual industries, their kids played out in the street and garden rather than sitting in front of the computer. These generations were served by vacuum cleaners that were specified in hundreds of watts – I recall being surprised in the late 1980s to see a Miele vacuum cleaner that was rated at 1100W on the high range. So the question has to be asked, if one and a bit horsepower 1was enough to clean the homes of our grandparents with their grubby street urchins, why do we now all of a sudden need the power of three horses running flat-out to clean a carpet?

    Apparently, according to Which,and Dyson  an affront is being perpetrated on the human rights of European consumers by those pesky bureaucrats in Brussels limiting vacuum cleaner motor powers to 1600W, one and a half times the power of the machine that surprised me 20 years ago. It’s still more than two horsepower – people used to deliver coal and collect scrap metal with less power than that.

    Right. So you're telling me that after 100 years of impovement, you need more power to clean your carpet than this guy needed to haul tons of coal? Ain't progress marvellous, and don't spare the horses...

    Right. So you’re telling me that after 100 years of vacuum cleaner refinement, you need more power to clean your carpet than was needed to haul tons of coal? Ain’t progress marvellous, and don’t spare the horses…

    Now some pieces of technology have been reasonably perfected for the requirements most consumers have of them. The bicycle, screwdriver, the pen and paper, the digital SLR and many others. It’s not that innovation isn’t possible in any of these, but 90% of users’ needs are met adequately. The vacuum cleaner reached this stage by the beginning of the 1980s – my experience of Mr Dyson’s much vaunted advances were mixed – great at the start but hellaciously noisy, and, to be honest, overpriced to boot as well as fading over the years and being fiddly to maintain.

    I’m with the Eurocrats here – you don’t need three horsepower to clean a domestic carpet, and motor power doesn’t seem to be turned that well into sucking power. This is specmanship and marketing spin, and more power means more weight and more noise. It’s easy to sell something on a number, but after more than a century of making vacuum cleaners this isn’t a high-tech market in its infancy.

    Also if you have to make more vacuum cleaning stuff to sell to people to make them buy things they don’t need ,why not go the Roomba route – at least it’s genuine innovation in one aspect, rather than just making the motor bigger, noisier and heavier so the marketing droids can push the bigger number? Then at least you can use the time you save to go to work to pay for it. The very fact that people will put up with a Roomba, which clearly doesn’t have a three-horsepower motor 2 shows you don’t need stupendous amounts of power. One horse power, maybe. Knock yourself out with the power of two horses – the eurocrats are easy with that too.

    1408_Mailcoach

    It’s when you running the same sort of power  that used to pull a coach and horses up the Great North Road that you have to ask yourself whether you aren’t just being suckered by specmanship.

    More power, more noise and more weight  is not the answer. Let’s hear it from Mrs Kingsland – whose machine failed in service after 70 years of cleaning her B&Bs. Apparently the new one is quieter – but too big and heavy 😉 They don’t make ’em like they used to, eh?

    Notes:

    1. one horse is good for about 750Watts – your can call on the rippling muscles of nearly three from one UK socket – ain’t modern technology marvellous
    2. very few things powered by batteries have a 3hp motor. And yes, total energy consumed is a function of power and time – even there it seems the Roomba scores relative to one of those eighties-powered units of 2/3 the new EU limit, never mind a 2010 behemoth, and there are many extra inefficiencies to a Roomba)
    15 Aug 2014, 6:30pm
    debt economy
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  • What will the power shift from labour to capital make things look like?

    As we wander around the many lovely historical relics that Britain has, usually in the care of the National Trust these days, we think we are looking at the past. Wander around the many rooms, and marvel at the effort it would have taken to keep these clean in a world without fossil fuels or vacuum cleaners.

    Stately pile in Leicestershire

    Stately pile in Leicestershire

    Now everybody in the personal finance world is trying to build capital, to make income. It’s the Holy Grail of pension planning, the vanishing point at the distant horizon, the Ermine sitting in his back garden drinking iced coffee while other people toil to fix the sewers and bring water and power and ideas to him. We don’t do this in the up-close and personal way that the Downton Abbey set do 1. We use machines and energy to do it, and if you see people power substituting for capital you know that someone’s thrown the big red switch and the projection reels are rolling – in reverse, and that the aristocracy will be in the ascendant again.

    Financial Independence is the non plus ultra  – the destination for which we PF types forego all the gratuitous consumerism of our fellow men, living like celibate monks in a brothel. It’s quite a new concept in human societies. Those grand buildings in the care of the NT were serviced by an army of grunts, basically working for The Man. Over a working lifetime, they didn’t get to save enough money to retire, because they didn’t earn enough money over and above their living requirements. Although we often associate this retirement with the welfare state, trades unions and friendly societies were in this space in the early years of the 20th century.

    One of the mantras of the PF world is you can earn a 4-5% real return on capital in a suitably diversified portfolio of assets. This isn’t bad – be grateful you’re living now rather than earlier in the 20th century 😉 In even earlier times, however, the return on capital was better, presumably because the servants never earned enough spare over their needs to retire! On the downside if you were the Man you had to be the first-born son of The Previous Man – capital was inherited, passed down the line by the doctrine of primogeniture. It was a drag if you were the second son, and you were SOL if you were female.

    shamelessly pinched from Krugman who pinched it from piketty

    shamelessly pinched from Krugman who pinched it from Piketty

    I got this from Krugman’s Why We’re in a New Gilded Age but I think he got it from Thomas Piketty. There are a few interesting things here. One is that this is the return on capital after taxes – it can of course be varied using taxes. You’ll note there was a low in the period that had the two World Wars – I guess taxation was high and the destruction of capital too. Another thing that is interesting is that the high-water mark of world GDP growth encompasses my working lifetime – I finished work at the end of it. I guess there’s some kind of limits To Growth forecasting in there, or maybe Piketty’s been reading Life After Growth. Either way we’re seriously into unknown unknowns there.

    It is, therefore, possible, that my story is a blip on the thread of financial planning – the thought that an average grunt who left school owning a kettle and the shirt on his back could command enough resources to retire 34 years later. For that piece of luck I am duly grateful.

    What do we learn from this? One is that the rate of return on capital assumed by a lot of PF thinking isn’t that unusual, from a historical perspective. It is, however, a bit unusual compared to recent historical perspective. We really could do without any more bloody wars in Europe, and the associated high taxation. OTOH there did seem a big stimulus to growth, although on such a coarse scale it’s hard to say that this wasn’t due to progress in agricultural yields or due to electrification. One of the valid questions would be does growth inherently reduce the return on capital, or is this correlation with something else?

    An ermine looking back 30 years, about to enter university. Or not.

    One thing does seem clear, however. We are headed towards a world where capital is getting a larger slice of the pie. We see that in wage stagnation, and also in a fall in growth. One fo the hypotheses for the fall in growth is the increasing cost of energy. So what does the future look like?

    Much more stratified and class-bound, I would hazard. If I were collecting my A levels today, and if there were and older Ermine-head on the shoulders 2, I would question some of the shibboleths and assumptions of the consumer lifestyle and image.

    I would note that the modern world offers three doors for the A level student. One is the route of university and £30,000 worth of debt. Now in the world I have worked through, £30,000 of debt would probably have been worth the candle, but in the world I see before me, I don’t feel that way at all – I have much sympathy for this viewpoint that university is an unaffordable luxury. There are two reasons why this is different today from 30 years ago:

    • 30 years ago, the exams were much harder 3 I think it was 7% when I entered and 11% when I left in 1982 of school leavers went to university at all. The exams screened strongly for academic ability, in ways you aren’t even allowed to think about today because it hurts the feelings of those that don’t make it. As a result of this, there were far fewer graduates in the workforce, the graduate premium was stronger.
    • Poorer students got grants and I believe everyone had their course fees paid for by the LEA, whereas now we have the loans situation, which means a student is indebted by £30,000 as well as the opportunity cost of losing the money they might have earned in the first 8-10% of their working life. Although it’s not exactly the same as going to Mastercard and taking out a loan for £30,000 as Martin Lewis is at pains to explain, the trouble is that with a 50% entry target, university is by definition targets at those of average academic ability and up. As a result the graduate premium is much lower, for the simple reason that the product is a lot more common. It’s true that in there are the same 11% of old, but the problem now is employers have to find them, assuming academic ability correlates with better ability at what they want. One of the biggest problems has been that heft in student numbers – it meant that the taxpayer couldn’t afford to support five times 4 as many so the cost of the opportunity has gone up for the students at the same time as the value of the product has been dropped because the market has been flooded.

    All round this seems to be a policy failure. We haven’t asked the fundamental questions, which are

    what is university for?

    • if it is to provide better work cannon-fodder, is this what companies and the available work want?
    • is it better if companies train their staff themselves – vocational training used to be a lot better – the Ermine was trained in how to use a lathe and other gear by companies, not schools, even though it was a peripheral part of what I would be doing, I have never used a lathe directly in my line of work but needed to know what could be done with one.
    • Is is right to normalise debt to our young adults so early in life – a student debt is more money than I have ever borrowed in my life other than as a mortgage

    At the same time I note that there are other routes

    • England is an expensive place to go to university, particularly if you are English – European universities where under EU rules you have equivalent access to courses and support may be a cheaper option (and often taught in English!)
    • The modern world offers the entrepreneurial and talented more opportunities to get to market and a much more efficient business operation than was possible in the past. You don’t need a university degree if you don’t have to convince an employer to employ you – code an app needs knowledge, not a degree and you can learn an awful lot of things online nowadays. Against that the odds against the successful entrepreneur are bad. Many are called but few are chosen to succeed.

    The good thing is you have far more options. The bad thing is that the value of the default option has been mullered – price up and value down. I personally wouldn’t go to university in England if I were 18 now, though I would consider Europe 5.

    Minimize debt in a slow-growth world

    One of the macro reasons is that in a low-growth world, debt is a very-dangerous thing indeed, because it’s hard to outrun with wage inflation. Debt also means mortgages. Part of the romance Britain has with house price inflation is because one generation did well out of that (it was my Dad’s generation, not mine – I got slaughtered by housing in the UK). The oil shocks of the 1970s caused high inflation and labour had the whip hand – enough power to drive up wages. They didn’t get any richer, because productivity didn’t go up, but inflation did and their wages kept pace with inflation, reducing the value of the debt in real terms.

    Labour will be much, much weaker in the coming thirty years 6. Globalisation and increasing automation will see to that. We may get inflation, but wages need to keep up with it for house price inflation to be A Good Thing. Otherwise we get what we have now – the real value of houses rising and fewer people being able to afford them, and that is not a Good Thing – for anybody 7

    In a low-growth world, even those student loans are going to be more onerous. So beware the debt, or at least investigate getting it down, first by asking whether university is necessary and a good match to your skills and aspirations 8, and if so considering the foreign option while it’s still open to you. Hopefully Cameron’s plans for an EU referendum won’t bugger that up.

    Logan's Run

    Logan’s Run, I suppose there are some compensations for the YOLO set

    Student debt is an obvious one to minimise, but lifestyle costs are one way that the young do get through money 9. You do need some conspicuous consumption to wine and dine and play the mating game, but a little bit of excess goes a long way, as long as it’s the right sort of excess. There’s a limit to how long it’s wise to take the YOLO mantra, unless you plan on taking a Logan’s Run approach to extreme early retirement. I avoided debt in my twenties by being exceedingly tight with housing 10– I shared houses and targeted the lower, more tatty end of the market. I regularly pass one rental in town aimed at students that has a rate of £56pw – that’s probably the end I was running at. And debt due to consumerism is bad, again particularly so where labour is weak. The normalisation of consumer debt and student debt are the most toxic features arising since 1980 for personal finances. If you can’t pay for your consumer goods in  cash, you’re not worth it. End of.

    If we zoom out even further, that power shift from labour to capital is harming productivity in the UK – it means it’s cheaper to hire people to do some jobs that capital. Take the humble car wash. In Britain garages used to get great big furry roller things that you’d drive into and put a coin in and it would wash your car for you while you were inside, not a human in sight.

    The Ermine knows the meaning of the plastic bottle on the Downton promo shot

    The Ermine knows the meaning of the plastic bottle on the Downton promo shot

    Nowadays you see a lot of these car washes broken, but you see loads of signs for hand car wash in supermarket parking lots and btis of waste ground – people with a few buckets, chamois leathers and a pressure washer are cheap, It’s cheaper to pay people to do this now than invest in the machines. That is not a good sign – not a good sign at all. The Ermine knows the symbolic meaning of the plastic water bottle on the Downton Abbey promotion picture. The plot of Downton’s Abbey is running backwards, and the power of inherited wealth and aristocracy is rising again 😉

    Look at the retired colonels of The Telegraph fulminating about death taxes. These parents know in their hearts that the best way for their children to get ahead is for them to inherit wealth, because they will probably not be able to earn it. It’s the most natural thing in the world for parents to want to featherbed their kids, over and above others. And parents realise in other ways that they try and buy privilege for their offspring – the whole independent school fees is also to try and build in advantage. Pass on capital – be it financial or social web capital, because the chance to earn your way ahead is thinning out. The aristocracy will be back. Not necessarily land, this time, financial capital will do, perhaps. Some of George Osborne’s DC pension changes play into this too – now the 55% tax rate on pensions going into an estate is removed.

    So take care about the things you assume about the world ahead. What worked in the past won’t necessarily work that well in future – and loadsadebt and easy money are a particular hazard to getting ahead. Labour is going to be poorer than capital relative to the last 50 years. On the upside, the talented, the crafty and the well-connected will make bank like gangbusters, it’s the average to the modestly bright that will take the shaft – many of those that will be considering that £30,000 debt.

    Wealth warning – this is the scribblings of a jaded fiftysomething that grew tired of the the way the modern world of work is. If you are a twentysomething you have the energy of youth, you have fire in your belly and I wish you all the best of British luck. I don’t think I have said anything that’s explicitly wrong, but the glass is half empty, and one of the specific advantages of youth is that your glass should always be viewed as half full.

    From a personal finance point of view I do believe you should think about taking on a £30k claim on your future earnings very carefully and know why you’re doing it rather than just drift into it because it’s the done thing, and have a clear vision of how doing this will help you earn more than 30k in real terms across your lifetime  and compensate you for three years of not earning. Or if you are rich enough, whether a damn good time and one of the few rites of passage we have in the West is worth it as a consumer experience regardless…

    Zooming even further out, what will that society look like? Staid and sclerotic – who you are will matter much more than what you know or even what you can do. Maybe Downton Abbey with more mod cons and better contraception. Don’t think we’ll be going to the moon. Or Mars. It’s where we are going if Life After Growth is true. But it isn’t predestined, maybe the other side of Wilkins Micawber will show, the one that isn’t normally cited in PF circles

    Something will turn up

    Notes:

    1. I’m inferring this from press reports about the programme, I’ve never watched it personally
    2. because in reality I was much more susceptible to peer-pressure and going along with established norms in my 20s
    3. the exams were norm-referenced (ie a fixed percentage of entrants got As) 
    4. one of the things that pisses me off is the mantra oh my generation pulled up the drawbridge. We didn’t do it deliberately, but did it by being so weak-willed that we couldn’t face telling the less able of our blessed children they weren’t smart enough to benefit from university. This was lily-livered incompetence, not malice as far as I can tell. It is bad, but without knowing how we got ourselves into the shit we can’t formulate a way out of it. Paying fees and maintenance to five times as many people wouldn’t help. We either need to make more jobs that are matched to the lower levels of ability, or eliminate enough undergraduate places to get the proportion to match the jobs we do have. It was right 30 years ago, maybe the proportions want to be higher now because we have a different employment scene and people might be a bit smarter but an increase of FIVE times in 30 years? You don’t need a degree to work a call centre. And society should be honest enough about your ability not to encourage you to spend £30k chasing an empty dream. Which would you rather have – not getting your grades or a place in clearing or picking up a £30,000 debt and lose three years of potential working life to end up in the same position but with a fancy piece of paper? I do accept that the adult world is not serving its offspring at all well here but the answer isn’t pay five times as many people through university as we did three decades ago. Two times, maybe, and there I am all for student grants and fees being paid from general taxation – HMRC will get it back in higher tax receipts later
    5. studying abroad also makes you look more enterprising and go-getting, which everybody likes, and at ease with other cultures which some employers seem to like. But I’m no expert, so DYOR
    6. I mean labour in aggregate. At the moment a lot of capital is being appropriated by the 1% and particularly the 0.1% as income, and technically this is also labour
    7. I guess it is a good thing for buy to letters but that’s it. It isn’t a good thing for owners unless they downsize, as they still need somewhere to live, and it tempts twits like Shona Sibary to live above their means.
    8. this in itself is a beastly tough thing to ask when you’ve just started out – how the bloody hell are you supposed to know?
    9. I am staggered at what the kids of my ex-colleagues buy, though I am pleased to see one old trick is still active – if you want Dad to help you buy a car say to Mum you’re thinking of getting a moped or a motorbike 🙂
    10. only to throw the win away when I did buy a house – you can survive some big mistakes, just not too many
    11 Aug 2014, 2:52pm
    reflections Suffolk:
    by

    6 comments

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  • Supermoon reflections

    It’s not often that someone goes and moves a celestial body closer to us so we can see it clearer. The Grauniad has a far better series of supermoon pictures along with why it’s a supermoon, ‘cos decent photography is about the context and telling a story.

    However, although the tail of storm Bertha had been giving the region some stick it all cleared for the moon. I don’t know how your astronomer types get to see anything through a telescope, because when I stuck my birdwatching telescope at it it was far too bright to see much. However, it was easy to take a photo 1and I was surprised to see all the gnarly bits on the bottom. Taken a hell of a hammering, that has

    1408_moon_a_IMG_1410

    And I’d never noticed that in many decades of looking up at the moon. Obviously if you want a decent picture of the Moon you head over to NASA, cos they have better gear, my photo shows I’m not totally over the chimping of a tourist with their crappy smartphone photo – but hell, it’s my picture, I pressed the button. Kudos to NASA for a superior take, nevertheless 🙂

    NASA have better gear and get to spin it round a bit

    NASA have better gear and get to spin it round a bit

    While over at NASA I took a gander at their Apollo mission pages, I have fond memories of watching the July 1969 landing at school (we didn’t have a TV at home) at about lunchtime – they had dragged the great big set into the assembly hall. Either it’s me or we just don’t have big stuff like that with the widespread buzz of some Really Interesting Stuff Going Down now. Then I looked at the timeline, and thought of Jacob ERE

    How far are we?
    That depends on your perspective. If you take the view from 400000km, humans are no longer going to the moon and have not been doing so for 40 years. From an energy perspective, the available energy/capita ratio peaked 30 years ago. Real wages have been declining for a good 30 years as well (a connection?)

    and of course Tim Morgan on the same string in a different key. Basically the 1973 oil crisis pole-axed the world I’d read about in far too much crappy science-fiction where everything was going to get better and more exciting because people were going to boldly go into an ever-expanding space exploration.

    Carter and his solar panels

    Carter and his solar panels

    Then the price of oil went up, Jimmy Carter stuck solar panels on the roof of the White House, told people to ease off the gas 2 and the American people went bugger this for a game of tin soldiers. They considered that defeatist cheese-eating surrender-monkey cobblers and elected a B movie actor who told a much more cheerful story, which sort of stuck for the next 30 years, but I notice that humanity is still too skint to go to the moon. We last put boots on the ground in December 1972.

    Strange to think back at those fast and furious years of innovation and exciting stuff in my primary school years. It’s not like we haven’t made things a lot better and progress has arrested – if things had stayed like 1972 most of Britain wouldn’t have central heating, never mind a notable section being able to live like kings. Somewhere, however, I wonder whether that last footprint in 1972 wasn’t the day some of the vision died in the West, the first time we came up against insurmountable limits to growth… You can coast a long way from the peak with the engines out, and as ERE said, it took many years for Rome to fall. Maybe we are partying in the endgame…

    Notes:

    1. There was a surprisinglylarge amount of  light – ISO200, f/8, 1/250s
    2. the story of what happened to those panels is interesting, you can read it courtesy of the Scientific American
    7 Aug 2014, 1:08pm
    peak oil:
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  • Life After Growth

    Dr Tim Morgan, he of Tullet Prebon’s research department, has a new book out; well it’s new to me although it came out in 2013. Apparently he quit Tullett Prebon to get serious about scaring the shit out of the proletariat.

    Now our Tim isn’t known for his cheery outlook. You only have to take a butcher’s at what he wrote while at Tullett Prebon to see he isn’t chipper about the prognosis for the global economy and the Anglo-Saxon variant of it in particular. You get the drift with a title like “Thinking the unthinkable: might there be no way out for Britain? Project Armageddon – the final report”

    Tim is a bright fellow, and his book Life after Growth is a cogent summary of how he looks at the world. It’s interesting because some of his insights are well worth taking on board in their own right, and have direct application to the personal finance world.

    A Tale of Two Economies

    We often think about finance in the abstract, as if it is a law unto itself, you diversify to minimise risk, the long-run real return from equities is something between 3 and 5% etc etc. Tim Morgan is at pains to remind us that the money economy is a map, it isn’t the territory. There is a real economy underlying it – that is the economy that puts food on people’s plates, moves stuff around, makes iFads and takes away your sewage. As I observed in Today I shall live like a King, this economy is astronomically more productive than it was a century or more ago. On a pretty average day I can live a lifestyle a lot higher with much more capability than Queen Victoria – and that’s without indulging in any consumerism.

    The money economy overlays that – money is a claim on future work. Yours if you owe me money, mine if I owe you money. The abstractions helps us manage our work across time – when you take out a mortgage, you get to use the work of all the builders and the land right away. But the bank owns part of your soul – part of your wages is garnished and you work for the bank for the next twenty or thirty years.

    In a way the money economy is a model of the real economy, but we have set up the model with some implicit assumptions of how the real economy works. We have taken past performance as a guide to the future, exactly the same sort of thing that the FCA mandates nearly all investment details to tell you not to do.

    The assumption Tim Morgan fingers as the big one is that of assumed growth. Growth is how Western democracies have alleviated poverty – because the overall size of the pie is increasing the material wealth gradually increases over time. Much of that growth, Morgan postulates, is because we have had cheap energy for a long time, but gradually the amount of energy available after that used for extraction is falling, and this is strangling the global economy.

    The real economy is running out of energy

    energy returned on energy invested

    energy returned on energy invested

    So why does our Tim reckon growth is over? Largely because of this chart – the cost of getting hold of energy is rising, because not unreasonably oil companies focused on the low-hanging fruit of easy to get at stuff first  – in the early years of the 20th century you only had to drop a nail in Texas to end up with a gusher it seemed.

    Spindletop. Texas, 1901. We haven't seen one of these for a little while

    Spindletop. Texas, 1901. We haven’t seen one of these for a little while

    Where Tim Morgan  does very well is in making some of the fundamentals clear in unusual ways. Take the rise in oil prices – in his afterword he says

    It might interest you to know that, if you are an average earner – in Britain, in this instance, though this is true across the world – your salary would have bought you 1,076 barrels of oil ten years ago, but would only buy you 328 barrels now.

    That is a large change. Morgan hasn’t got any nice words to say about how Western governments encouraged their firms to outsource production to emerging markets either. I have never understood why there is a shift of power from labour to capital. I observed it – as a professional engineer I saw the deterioration in the workplace, I see it in the changing nature of jobs, it’s shown indirectly in the earlier peaking of the career arc for younger people. Tim Morgan outlines why this is so in a succinct way

    The globalisation process is pretty easy to describe (which makes the ignorance of policymakers and their advisors even less excusable). Suppose that an American company manufactured a television at a cost of $350, and sold it for $400, earning a margin of $50. The company then became able, courtesy of globalisation, to manufacture the same television in China for $50, boosting its profit margin dramatically.

    This outsourcing of manufacturing boosted corporate profitability enormously, and created big cash inflows that were placed in the banking system. At the same time, there was a haemorrhaging of skilled jobs from the United States and other Western economies, and countervailing increases in skilled employment in China and other emerging countries. In terms of the West, it is a simplification, but also a truism, that corporate profits expanded whilst wages deteriorated.

    He challenges the Ricardian advantage that underlies a lot of free-market thinking that underpinned globalisation. But essentially, what happened is the the West produced less and consumed more, and the difference was fuelled by debt, which was cheap because of the money coming in to Western banks from the new wealth in the producing nations. These banks had to lend this money out – and a lot of it has been shovelled into inflating property prices in the West, so that twits like Shona Sibary could take the money out again and spend it on middle class consumerism and school fees, not to mention having more children than she can afford at the lifestyle she wants to lead.

    And then it all went titsup in 2007-9. The chart from his book that should scare the shit out of anybody accumulating financial wealth is that the map is not staying in track with the territory.

    the map and the territory are out of whack

    the map and the territory are out of sync

    Now if he is true there’s no point in saving into a pension, because the value of what you will get back will be worth bugger all. Tim sums up the situation in Is Globalisation the Culprit, to be had from his old stamping ground at Tullet Prebon.

    In the West, a small minority prospers, principally the CEOs of companies whose profits have surged, and bankers who gain from the expansion of the lending sector. On the other hand, the majority suffers, both because of declining wages and because of rising indebtedness.

    […]

    The next sequential stage – which probably lies in the very near future – is the realisation that the claimed reversibility of QE is nonsense. For example, do we really believe that the Bank of England can ever reverse £375bn of money creation? And that, logically, is where the tragedy ends – in money-printing, hyperinflation and collapse.

    What can you do?

    Not a lot.There’s not much that is actionable as this sort of thing requires a collective response on a fairly wide scale. It also depends on the time-scale – something that changes over 100 years is easier to adapt to than something that takes place over 10. The obvious responses fall into two opposing camps

    Spend – live for today

    One is to do all the energy-intensive stuff you want to do sooner rather than later, so if you want to see Australia or Macchu Picchu prioritise that. Hell, if money will drop in real value then borrow it like gangbusters. Maybe the consumerism addicts are right after all? The problem with that approach is that creditors may be getting increasingly keen on payback, and become increasingly creative about it, which implies a different tack

    Save – get out of debt

    However, the transition will take time. You don’t want to be carrying too much debt because as it becomes more apparent that debts may not be honoured, creditors will become keener to make sure they get their bit first. You see this endlessly on the debt boards in MoneysavingExpert – it tends to involve guys with thick necks and an intimidating attitude. FWIW this is the approach I have taken 1, though for different reasons.

    There aren’t many actionable takeaways because of the uncertainty

    That’s largely the trouble with that sort of doomsterism – the confidence interval of the predictions is huge, so it’s hard to come up with effective action. After getting out of debt you could do a lot worse than take a look at Mistersquirrel’s list of things you can do, particularly the personal skills from point 1, because these are independent of the financial system and inalienable.

    Unfortunately becoming more skilful and self-reliant is not the way that consumerism takes us – people are becoming less and less self-reliant even at some of the basic skills in life like cooking and basic construction. The increasing specialisation and antipathy to generalists in professional work is also running against that. You only have to look at back-issues of Popular Mechanics or Woodworking to see that previous generations were far more self-reliant. I am probably a fair way ahead of most people – I have built a fair number of odds and sods but I don’t have the solid grounding of my father’s and grandfather’s generations because I learned a lot of this from books, not from seeing people do it. I didn’t even know how to make a packing crate right.

    On the upside, there is much room for improvement. Many of the ways we use energy are terribly wasteful. Transportation, for instance, is bizarre. I once worked in Beckenham and lived further in London than that, and it was amazing that the trains I was using were empty whereas the platforms on the other side were chock-a-bloc with people travelling to the City. Now the Guardian is advocating long commutes as a way to save money – how long is that going to last in a world of rising energy costs and train fares?

    Things like the Internet and mobile networks are increasingly power-hungry. In principle we could have gone the decentralised resilient approach but we went for great big server farms instead. Humanity is a bit like the Americans Churchill groused about – we do like to eliminate the alternatives before doing the right thing. Even in Life After Growth there are surprisingly upbeat indications –

    1408_fig18_eroei_trendsI was very surprised to see two renewables and nuclear power clustered at the knee of the curve around current oil and gas finds, so still very useful. And the appalling return on shale gas shows that for the sugar rush that it is 🙂 It should be noted, however, that renewables and nuclear provide electricity, which is not very useful for small-scale transport or for shipping, so it does imply changes will be afoot in the use of transport. With the cost of energy rising the world will become a larger world again – there aren’t any good alternatives to the convenience and compactness of liquid transport fuels and the concept of an electric passenger aircraft carrying 300 people at 500 mph is laughable at the moment, and indeed the thought of charging that aircraft isn’t a cheery thought at all.

    Right, capt'n, where do I plug this sucker in? Photo Dave Croker, Geograph

    Right, capt’n, where do I plug this sucker in? Photo Dave Croker, Geograph

    A 747 takes 184,000 litres of kerosene (43.15 MJ/kg, so  ~6400GJ, ~ 1.8GWh ) If we take the output of Sizewell B nuclear power station and plug all of it into our electrically powered 747 then it will be charged in about 1.5 hours. I don’t know how many aircraft Heathrow turns round in a day 2 but something tells me this won’t fly.

    The future will have less material wealth in it, for average Westerners

    and probably for others too. But let’s face it, when we look at some of what we do with our material Stuff, we have gone a bit nutty. And it only takes a bit of a push to jump the tracks from the nuttyness. Take this from Tim’s Afterword describing the effects of the changes on the average person

    This person is most of us, and his or her life is already being affected profoundly by the processes described in this book. Over the last decade, his pay has increased, and may even have risen by more than the official amount of inflation, but he does not feel better off. The prices of many things that he has to buy (such as electricity, gas, food and petrol) have gone up by a lot more than his wage packet. It is a fair bet, too, that the various departments of government, no less than utilities, are taking a far bigger bite out of his income than used to be the case.

    If his employer provides a pension scheme, its real value has probably fallen. If he has saved for retirement, the income that he can expect to enjoy is far less than seemed likely until a few years ago. If he expects to rely on a state pension, he wonders whether it will really keep pace with the soaring cost of essentials.

    Despite the squeeze on his disposable income, he is subjected to seemingly continuous commercial pressure to spend. If he has children, it is likely that peer pressure is fuelling ever greater demands for new gadgets. If he is a young person (between, say, 16 and 30), he faces the additional problems of scarce, costly accommodation and a lack of well-paid jobs. Whoever he is, he quite probably has far more debt (including mortgages and credit) than he had ten years ago.

    Although I see where he is coming from, some of it doesn’t ring true. I have fought some of these. I have reduced energy consumption and tried to switch space heating to more local sources. We have reduced food miles, along with a fair number of other people, by growing this ourselves (or rather Mrs Ermine does). I have iced most of the commercial pressure to spend, by decommissioning my TV, using ad-block plus on the Internet and realising that much of this spend simply didn’t contribute usefully to my quality of life.

    Some of the fight lies between your ears.

    Think differently. Most of our gadgets are fantastic value – as long as you don’t churn them every year following stupid peer pressure. Learn to fix some of the damn things – most of the problems lie with connectors and batteries, and there seems to be a huge aftermarket industry supplying spares. Buy fewer but better things.

    Don’t be a sucker for stupid fads that make other people money at your expense – the whole wedding industry seems to be a serious case of that, what with organised stag and hen parties that involve flying somewhere to get pissed. You’re being rooked, guys, WTF is the point of going somewhere fancy and spending shitloads of money if you’re going to be hammered all the time? According to MSE the average cost of a wedding is £18,000 3.

    Only a generation ago ordinary people used to get married on Saturday and be back at work on Monday and the cost of the proceedings were a few rounds down the pub. £18k is 10% of the cost of the average house the average happy couple aspires to. It’s barmy to spend all that on your ‘special day’ and then sweat the next five years moaning you can’t buy a house. What makes a wedding special is the interaction between the people, not the amount of money spent trying to feel like a Kardashian for a day. You aren’t a sleb. Get over it. And picture the saving for five years towards a house before you casually toss it into the maw of wedding consumerism. At least ask yourself the question of which is more valuable to you, and if it’s the wedding then STFU about not being able to get the house. You can’t bloody well Have It All™  – but you can choose the It you will have.

    I’ve picked on the wedding industry because it seems to be a particularly egregious example of “You’re Worth It” consumerism but there’s plenty more out there. I spent too much money on fast and furious holidays because it was a break from the crappiness of the working environment towards the end, until I realised that the more I spend on trying to forget about work the longer I would have to work, and that was the time I put a tin lid on it.

    you can win the fight with consumerism because you own the battleground

    Consumerism offers empty dreams that make other people richer and bind you deeper into wage slavery. It is illogical to indulge in consumerism or sponsor your kids’ consumerism if you moan about work. If you like your work or are neutral towards it, then no problem. But for every pound you spend on an iFad, you have to typically earn twice that much – you have to pay tax on the money, you have the parasitic overhead costs of commuting.

    You aren’t what you buy. And the advantage of the battle with consumerism is that it is entirely within your head. This is a space that you should control. Buying things isn’t bad – but buying things because other people tell you to is. Buying things because you’ve considered the value delivered and come to the conclusion it’s worth the opportunity cost of spending the money elsewhere or later is fair enough. Live intentionally. We don’t need so much damn Stuff to be happy. We live like kings already, and need to cure ourselves of Tiny Details Exaggeration Syndrome. The latest iPhone is nowhere near as much better to what went before as the first iPhone was to what went before it.

    Oh yeah. And don’t buy your Consumer Shit on credit, mkay? As the man said, your debt makes other people rich, That’s not cool and that’s not clever. If we could ice the Great British Consumer’s addiction to credit, we’d be in a much better position to tackle Tim’s Life After Growth. We’d probably then have to tackle the Great British Government’s addiction to debt, but one step at a time, eh?

    Notes:

    1. getting out of debt, that is. I’ve gone easy on the thick neck and intimidating attitude
    2. looking at this, a lot more than 18 long-haul
    3. I struggle to find any sympathy for the stupid bint cited by MSE who was gifted £12k by her dad only to find the bank used £6k of it to pay off her credit card debt. If you are in debt then don’t spend stupid money on your wedding. You are NOT worth it, by definition.
     
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