13 Jul 2015, 2:32pm
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  • the Irresistible Force and the Immovable Object meet again

    Another day, another sideshow in the Punch and Judy sideshow that is the slow crawl towards Grexit. It’s getting tiresome, because this is a crisis of leadership – problems don’t go away by whistling a dancing tune and come up with ever more outlandish ways of looking the other way.

    At the heart of the matter is that Greece doesn’t like austerity, and doesn’t want to exit the Euro. They can have that, provided there’s a permanent influx of other people’s money. Those other people are getting shirty about this, and are saying that the price of our money is that we get to run your country in a different way. That different way looks pretty rough to me – there’s no way it’s going to stick.

    Greece has promised to pass laws introducing controversial economic reforms by Wednesday. These include reforming the VAT system, overhauling pensions and signing up to plans that ensure immediate spending cuts in the event of breaching creditor-mandated budget targets.

    In the end Greece needs to find the cojones to seize control of their own destiny and quit the Euro – because it’s clear that the price of support is getting dearer and dearer. In the long run things that can’t go on, don’t, but it takes time to resolve the conundrum of the irresistible force and the immovable object. In the long run, of course, we’re all dead – it’s not surprising that most of the Oxi came from the young, who have most long run left 😉 By the looks of it the consensus of avoiding Grexit at all costs is losing the fight as it drags on. One of the flecks of gold panned from the endless tailings of random wibble from G Dubya Bush was

    If money isn’t loosened up, this sucker could go down

    Dubya in a moment of clarity

    Fortune favours the brave and the decisive in situations like that, those that look at the predicament they are in and who take decisive action early to try and influence the outcome. I kinda like the pithy summary of

    “The facts tell us what to do and how to do it, but it is our humanity which tells us that we must do something and why we must do it.”
    — Sully Sullenberger

    Sullenberger was piloting a jet aircraft over New York when suddenly a flock of geese stopped the clockwork 3000ft above the city. Unlike the Greeks and the Troika with their endless river of make-believe deadlines, he had three and a half minutes to bring things to a definite conclusion.

    Tsipras failed the Greek people in asking them in a referendum ‘do you want the particular form of austerity that was on offer in early July’. He should have asked them the straight question

    This much austerity or more, or leave the Euro?

    At the moment it looks like he went to the country, asked them their opinion in an incomplete manner, then tore it up the confusing result 1. This is not a fellow I would want in the cockpit.

    Financial problems don’t get better through fudging them. The Ermine didn’t fudge the problem of my career going down the pan in 2009, within a month I had shifted savings to ISAs and drove my spending down to be able to save the maximum possible. I lived on the minimum wage plus an ISA allowance and saving the ISA with the rest going into pension savings to stop paying tax and NI on it. It worked – I was able to leave after three years and coast for three years more before I can get those pension savings. It wasn’t fun spending minimum wage while working at a higher level, because I couldn’t afford the middle class distractions that compensate for the suckyness of the way the job was going. I was lucky to be able to jump to a different project, but unlucky to run into the wall in the first place.

    Sometimes you have to accept that all solutions before you stink, but that some of them are more ugly than others. The Greeks can either be a lot poorer soon, but then stop getting poorer and possibly turn things round, or they can face becoming incrementally poorer without a clear end stop, dependent on the unknown future grace and favour of others.

    this fine Greek graffito says it well

    a fine Greek graffito

    Greece has a lot going for it – but not in the Euro, and all the time they spend chasing the chimera of less austerity within the Euro the situation is degrading. Everyone with movable assets has been moving them, that much is sensible. The middle class’s savings will be destroyed, just like they were in Germany – twice. They will be destroyed in the fall of the drachma or destroyed in trying to stave off the impact of austerity – basically the choice is death of their savings fast or slow.

    It’s all too easy to choose the slow death approach by trying to avoid making a decision, but it nearly always makes the outcome worse. This ain’t going to end well. Germany can afford to throw money down this money pit, but are getting increasingly unwilling to do so. The question is can Greece afford to live the way that the Troika want them to, and I venture probably not. We’ll get to watch this movie again.

    Notes:

    1. Since writing this I have learned that referenda are advisory not binding in Greece which makes this a little bit more understandable

    China doesn’t really seem to get this stock market thing

    While our eyes are focused on the slow train crash that is Grexit, over on the other side of the world there is an interesting example of King Canute seeking to hold back the waves. In China they seem to be of the opinion that their overheated stock market, having gained over 100% in the last year, is supposed to stay there. If you’re one of those capitalist running-dogs that is going against the story looking to sell, well, you can stop what you’re doing right there. Hardened Western investors who went through the dot-com boom might ask themselves what the good reasons were for last year’s 100% heft in a generalised index 1

    from Bloomberg

    Shanghai Composite Index from Bloomberg

    So they stopped people with a 5% or more stake selling, and the government lends money to people to buy shares :) There’s something about the point of this whole stock market thing that is being missed here. The Chinese stock market is also a young market, it seems compared to other world markets there are a lot of retail investors buying shares on margin – what on earth could go wrong? This is classic New York 1929 bucket-shop trading. Maybe in a few decades they will  become sober index fund passive investors, but first they have to get the momentum-chasing speculator out of their systems.

    China’s investing culture remains backward and immature.

    Howard Gold

    Markets elsewhere have been on a roll of a long time, and while Grexit is unlikely to hurt too much outside Greece this one could be the second shoe dropping. There seems to be a lot of ruin in China as it tries to reorient itself from its early 2000s economic model to something that matches the post Lehman-crash world. There’s a lot of ruin in most economies, and it doesn’t necessarily lead to trouble, but by its sheer size China could have big knock-on effects.

    Better to be a dog in a peaceful time, than to be a man in a chaotic period 2

    There haven’t been tremendous buying opportunities in the markets for two or three years now. But interesting times lead to interesting opportunities. There’s still too much zombie puffery inflated by easy money after the 2007 crisis. Emerging markets are probably where it’s at in 20 years’ time, and perhaps we will have more opportunities to pick ’em up cheap in the next few years if this sucker goes down. Of course, associated with that will be all sorts of other misery. I’m not doing a Dubya and saying ‘bring ’em on‘. China has big challenges ahead with the whole get rich before getting old thing, and I personally have avoided investing in it 3 because I have no feel at all for the country – my preferences in emerging markets lean towards India, Latin America and Africa from a demographic point of view. Howard Gold is quite right to describe EMs as having gone down the toilet, but I’ll be surprised if they stay there for the ten years he is calling out. I don’t have enough EM exposure, because in the years after 2009 I was building a HYP. And I don’t want to be a dog…

    Notes:

    1. this question being, of course, the one they failed to ask themselves in 1999 – ain’t experience and hindsight a wonderful thing?
    2. May you live in interesting times is a good line, but not Chinese, so it’s not right to to use it for China ;)
    3. other than in generalised index funds
    29 Jun 2015, 1:07pm
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  • A long hot summer, perhaps a Grexit – and hopefully a rescue mission

    This is a story too hard to call, and yet it seems to be gathering speed. Hot summers are also good for a decent rumble in the markets, in the immortal words of George “Dubya” Bush

    If money isn’t loosened up, this sucker could go down,

    And here it is from Tsipras himself

    Now I’m sure there’s going to be loads of punters and talking heads, most of them better qualified than I on the whole macro thing, but this is my blog so I’ll add to the wall of noise.

    I think the Greeks are taking the piss wanting to stay in the Euro on other people’s ticket, though I do see the point that the Germans are also taking the piss in a different way. The advantage the Germans have is they are the ones with the money. Fundamentally there seems to be the tension in the design of the Euro and the regulations about fiscal probity and not having it as a transferunion, it’s like wanting things to be light and dark at the same time. We’re about to find out, when push comes to shove whether we will have fiscal probity or we will have a transfer union in the Euro, and the symptom will be Grexit in the first case and Grescue in the second.

    My hope is for Grexit – it is a second shoe that didn’t drop in the 2009 financial crisis. Something unsustainable gets worse and worse as time goes by. I see the point that Europe stiffed the Greeks by bailing out Europe’s banks in 2010. Greece is owed something by Europe, but not everlasting transfer – unless that is democratically agreed not just by Greeks wanting it or not but by Germans and the rest of the Eurozone voting for a transferunion – it’s not just up to the debtors to holler “I want”. Too much of European policy is decided before putting it to the people, and that sort of thing needs to stop until the people can catch up or say “enough of that”. Half the trouble we have is that it’s not clear if there’s enough common cause for a United States of the Eurozone, the symptoms seem to indicate not. A lack of common cause in Europe has been ugly in the past.

    Europe does owe the Greeks something. A Grexit will be a serious shitstorm. Not much can be done to avert the initial storm, but Europe could do well to take inspiration from the United States. Both the Marshall Plan, and indeed how Nixon handled Hurricane Camille in the 1960s rather better than Dubya handled Katrina that attacked the same region.

    The Nixon administration realised they could not fight the storm, but they could chase it, and render assistance the day after. Perhaps something similar is owed Greece – yes, they may have to default, and return to the drachma to regain fiscal sovereignty. In the shitstorm that ensues, Europe should render humanitarian and basic stabilising  financial assistance without strings and given, not lent. It will then be up to the Greek people how they want to live, with some semblance of fiscal probity or with the high levels of tax evasion they seemed to have. In the latter the value of the drachma can fall to adjust, and people still feel good.It’s got form…

    As time went by you needed more and more drachma to buy that 1990s US dollar

    As time went by you needed more and more drachma to buy that 1990s US dollar (I mislabelled the £ and DM which need to be switched)

    I called this too early in February and maybe I call this early now. A long,hot summer is good for damn fine financial crisis.

    Interesting times ahoy?

    Too tough to call at this stage, but it’s worth getting ready. I don’t think that the credit crunch was ever properly fixed – what seemed to happen is QE went into inflating asset prices – that’s houses for you lucky BTL landlords if you can sell at the higher price and share prices for the rest of the PF community. The hard-pressed middle seemed to get the short end of the stick, and indeed are due for a second helping in Osborne’s budget next month. Further afield there seems to be trouble in paradise China though there seems to have been a fair bit of irrational exuberance too.

    I need to shift about half my AVCs to my SIPP, but the remaining half is due to come out in just over five years time, and I don’t need it for income. Although as a deferred member I am a second-class citizen it appears I can still switch from the cash fund I have been in for a while (when I thought I would have to draw it early) to the 50:50 Global:FTSE100 index fund that served me so well between 2009 and 2012. Since I can shift some to a SIPP I am not up against the 25% tax-free PCLS limit any more, so I may well go back in for another bite of the cherry over the next few months, spreading myself over time buying into (hopefully) a falling market.

    At the moment the market isn’t really reacting in any big way. For sure, I may look stupid saying that in the coming week!  The Grauniad says Shares slide as deepening Greek crisis shakes global markets and the Torygraph says World Markets in Turmoil but we’re only talking 2% – at the elevated levels shares have been this last couple of years a 20% fall would probably still be a correction rather than a dive IMO :) Only hindsight will tell us if these are the trumpets at dawn heralding the second phase of the 2007-9 credit crunch. But yeah, looks like times could get more interesting and the stock market a lot less boring than it has been of late.

    Interesting times are also times when it’s more comforting to have paid down the mortgage and be debt-free, with a unreasonable amount of cash, and have most of this year’s ISA allowance free. Mind you, over at Fidelity there are fellows telling you to go a step further and hold physical cash in the mattress…

    Let’s hope for some statesmanship from our EU leaders

    It may be time to surrender a piece of the Eurozone dream in the case of Greece. But I despise the talk of Greece having to leave the EU at the same time, and I hope in the back rooms there are people drafting a different tone. If the Greeks move to the drachma which is probably their best long-term route, the history of the EU and indeed the spirit of the people who set up the Treaty of Rome in 1958 should prevail. Europe fought a second world war because the victors pushed for an ignominious defeat. Greece doesn’t belong in the Eurozone, but it belongs in the EU if that is the wish of the Greek people, and the EU as a whole owes it the grace of assistance across the troubled times ahead. It’s time for a magnanimous resolution, and giving thought to establishing what a successful Eurozone looks like, what needs to happen and whether the people really want that. The markets will be gunning for the next target soon…

     

     

     

    Middle-Class inflation – it’s big, it’s bad, and it’s eating your lifestyle

    Brought to you by the Ermine department of first-world problems  this Torygraph article ruminating on how terrible middle class inflation is gives me much to sink some needle-sharp teeth into on so many fronts. It misdiagnoses the problem, the sense of entitlement is risible, and hell, there’s opportunity for much fun. Let’s take the headline and standfirst

    How ‘middle class’ inflation is threatening your standard of living

    An extensive Telegraph Money study into our readers’ spending habits reveals the alarming rate at which “middle class inflation” is taking hold

    Telegraph

    Dudes, your lunch was eaten, digested and shat out t’other side years ago. How come you only just noticed? People have had the time to write books about the problem. Ermines have written posts on how the middle class needs to wake the ***k up and get ready to take the sucker punch, middle class families on the brink, savoured the come-uppance of Shona Sibary stupidly selling her house in bits to fund her excessive lifestyle then discovering she doesn’t own her house anymore. The middle class threw the poor and the working class under the bus by voting for neoliberalism in the 1980s 1 that destroyed blue collar jobs, without asking the questions about where this was all going to lead. The Guardian was drawn out with a riposte along the lines of what part of we’re all in this together did you not understand…

    So what is this lifestyle-eating inflation you speak of, Mr Telegraph? Well, the cost of some desiderata has been going up faster than average wage increases – to wit

    increasing cost of luvverly stuff going up

    increasing cost of luvverly stuff going up

    Let’s take a butcher’s hook at what these essentials are. School Fees – despite every child being entitled to free education in the UK and indeed this is wot drug up your ‘umble scrivener that’s not enough for some people, and all those hard-working furreners are bidding up the price. Health insurance. Eh? We have the NHS, and if you are rich enough to be middle class then if you want to jump the queue for your hip replacements then take the Ermine line. It’s about 15k to pay privately. Things like that are what the middle class used to save for before they discovered home equity lines of credit to buy consumable shit. They knew a thing or two, your grandparents when they saved for rainy days, ‘cos they’d seen hard times… Dental care, well, yes, it probably is increasing, but it’s what, £200 a year. You’re not middle class if a 100% increase in that is going to make you sweat, and stop giving your kids sugary shit advertised on TV, at least after they have changed out their milk teeth. Holidays – the middle class used to have one foreign and maybe a UK holiday a year. Now you’re deprived if you don’t have four. The enemy is consumerism, and the enemy is within – lifestyle inflation.

    What are we comparing this with? Average wages covers a multitude of sins, but most jobs created in Britain since the mid 1990s have been  at the lower end of the scale. These are not middle class jobs where people aim to send Tabitha to public school. Some of these are jobs where people aim to make last week’s rent. These are some of the people that you, Middle Class Boss Person Sitting in your Corner Office, downsized or outsourced or just plain fired. You would have to compare middle class wages for this to have meaning. In fairness, the poll of their subscribers’ income indicates times are getting hard for them. Again, there could be sample bias – Telegraph readers are not spring chickens  – indeed a fair number may have retired between 2007 and now time because they’re not picking up da yoof.

    The Daily Mail and The Telegraph have the largest percentages of over 65s, making up almost half of their audiences – at 45 and 46 percent respectively.

    themediabriefing

    One item shows just how damned ungrateful the middle class is. The price of the average new car driven by Telegraph readers is £13,456. When I first read this I went WTF? you can get a new car for that little? The last car I bought second-hand in the early 2000s was ~£5000. These Torygraph readers presumably buy a new car every three years because that’s what one does if you haven’t been educated otherwise. Given that they therefore spend on average a shade under 10% of their gross wages, roughly £4000 p.a. on new cars and this big-ticket item gets 6% cheaper than the last time they bought it you’d think the blighters would show a bit more gratitude.

    A word in your shell-like, Mr and Mrs Middle Class. The good times ain’t ever gonna roll again, because you are in competition with the whole freakin’ world now, rather than a third of it. And most of the rest of the world is generally poorer than you, they’re ready to work harder, because the extra wedge will make a bigger difference to their lives. They want to eat your lunch and your nice sinecures where Mr Wealthy but Dim used to cling to the pipes of capitalism like slime-moulds slowing down the system a bit. Your kids may actually end up richer in absolute terms but feel far poorer and less secure, because being middle class is all about relative status.

    How did we get to such a sorry pass, eh? Let’s take a look at history, shall we.

    A history aside

    We have to go a long way back, to when the definitions of a middle class lifestyle were defined – roughly meaning owning your own house in the ‘burbs outright by retirement, a decent middle-management job, sending up to two kids to private school 2, owning a car and having a foreign holiday a year, though the latter were children of the 60’s and 70’s. This was the deal struck by Whyte’s Organisation Man 3

    Way back in time, there was a hell of a bust-up called the Second World War. Shitloads of capital got destroyed and a lot of people got killed and hurt. The British Empire that had coloured in most of the map of the world pink imploded, because so much of the energy that was used to rule other places had to be recalled to defend the homeland in an existential struggle that is still now worthy of admiration and I am grateful that a flame was kept alive in Britain while the lamps went out all across Europe, twice in 50 years.

    The British Empire in 1915, when the sun didn't set on it. Sic transit gloria mundi and all that...

    The British Empire in 1915, when the sun didn’t set on it. Sic transit gloria mundi and all that…

    In the aftermath of this the world divided into power blocs with different ideologies, glowering at each other across iron curtains and Berlin walls and suchlike – they drew clear borders and so it came to pass that Russia and China were outside the global trading system as perceived by Western middle class consumers and the firms they worked for. And the green bit didn’t endanger Western jobs either.

    First, second and Third worlds. Decoding the colour scheme should be clear enough :)

    First, second and Third worlds. Decoding the colour scheme should be clear enough. You’re with the blue team :)

    Communications were expensive and computers were dear, hard to use and few and far between. 4 There were no useful databases  – there were shocking levels of basic admin work and most middle management couldn’t type – they dictated their memos for others to type out for them. In 1979 at university in one of the premier science institutions of Britain I looked up books in the library using the high-tech solution of…6×4″ index cards in polished wooden cabinets.

    What a database looked like 30 years ago

    What a database looked like 30 years ago

    Cold war capitalism’s world was smaller, productivity stank by modern standards, far more people were employed and there was far more work for people at lower end of the ability spectrum.  People had children earlier, and jobs were more stable – the residual defined benefit pensions were a carry-over from this era, when employers sought to hold on to staff (and in the case of scientific and technical jobs, invested in training people).

    There is an argument to be made that the number of scientific and technical jobs were artificially inflated during the Cold War compared to what the economy needs which is why there was a push to educate some of the lumpenproletariat in grammar schools and free university education provided you could pass the tougher exams of the time. Again, I am personally grateful for this – I gained from the grammar schools and free university places, but when I entered Imperial College 7% of school leavers went to university. We could afford free university education then, and I would be all for making it free again – provided the entrance criteria were made tightened up again so that these free places went to, say 10% of school leavers. 5

    Then in the 1990s along came the Internet improving communications enormously, the Iron Curtain came down because it turned out that the problems of communism showed up in economic breakdown earlier than the problems of capitalism show up in economic breakdown 6. The Chinese decided they would like to join the party on their own terms.

    This means that a UK worker at the start of their working life now is competing with three times as many people as I did in 1982; the odds are in fact worse because the world population is higher 7 and better communications means that the pool of workers that can be drawn upon is far larger by at least an order of magnitude than it used to be. On the plus side you live in a far richer country, healthcare is better, opportunities for the talented are far-far better, which is the flipside of the better communication, so the average post-Gen X reader of this (if there are any :) ) has probably progressed a lot further in their career than I had at the same age. Many such have travelled and worked abroad and had a wider experience that I have. I’ve worked in international teams but never based abroad – it was by no means impossible but it seems much more prevalent now. 8

    Living standards are normalising worldwide. So far this is a win for humanity but a lose for Mr Daily Telegraph and his kids

    So, roughly boiled down, the problem with the middle class is that they are in competition with a lot of their worldwide peers, but they normalised how rich they expected to be relative to other people in Britain in an era when they were only in competition with the rest of the First World. Globalisation is reducing inequality worldwide, but increasing it in the First World 9. When it comes to specifically their children and their dreams for them, then not only are their children going to face far worse competition than their parents in the employment market did as communications get better. The birthrate in the UK isn’t as high as it is in places that can supply the competing workers which amplifies the competition. It is patently clear to me that middle class parents who want their offspring to have a middle class lifestyle need to start getting on the side of capital for their kids unless those kids are both brilliant and driven. Leave them shitloads of money, because Dim Rich isn’t going to find sinecures like they used to in a more competitive world. Even Halfway Average rich ain’t gonna get ahead through hard work faced with those odds.

    Alternatively they could adjust their expectations of how rich relative to other people they want their children to be. Mr Money Mustache’s takes the battle to the enemy as usual – if you don’t want your kids to join the rat race then maybe teach them not to race rats, which is broadly what the current charade that passes for ‘education’ goes for. We need to teach children to learn and adapt in a changing world, we aren’t making factory units any more. Then there’s the whole automation and Humans Need Not Apply thing. Just like Dustin Hoffman was urged to get into plastics, Capital is your best hope now – don’t buy shit you can’t afford and identify yourself with what you spend money on.

    Seeking validation in what you are as opposed to what you have is also a potential win here- Erich Fromm posited the question in the 1970s. If you’re rich enough to be reading the Telegraph article and thinking ‘that’s me’ then you have the choice – clearly if you are a single mother working five zero-hours jobs to pay last week’s rent you don’t really have this choice, but that’s a different problem from grizzling that the price of wine and holidays is so expensive these days, dahlink.

    Living standards will go down for the middle class – they need to keep an eye on quality of life

    One of the problems the middle class seems to have had is they lost their historic values of thrift and deferred gratification. Once upon a time they knew to put money into healthcare and schools before blowing it all on holidays, wine, eating out and going to the movies. The middle class had annuities to look after them when they got old (before those DB pension) because they saved for it, no doubt encouraged to do so by seeing what happened to the poor in the poorhouse.  Then they got soft.

    Living standards are going to go down because of the shift of power from labour to capital. Mine is, yours is probably. The smart response is to roll with it – because although there’s some correlation of quality of life with living standard, if you deliberately change attitudes to the changes ahead of time you can do more with less, your quality of life need not go down with your lowered living standard. This is because many aspects of quality of life (autonomy and being able to express free will) are not a function of stuff or resources. It won’t be easy but fortune favours the adaptable.

    The middle class are locked into the school-university-job loop. It’s broken for the middle classes – an ever increasing money pit that is less and less likely to pay off for the next generation anyway. Mr Money Mustache nails the problem succinctly

    It may be that most parents of the very-upper-middle class are still operating from a scarcity mindset. If they are addicted to a high consumption lifestyle, earning $600,000 per year but still making car and house payments, they will assume that their children will need to earn and consume just as much in order to be happy. This of course dictates a job in the top fraction of the top percent of the economy, and education with enough prestige to secure such a job.

    There’s a lot of conspicuous consumption in the Telegraph’s list. The school fees etc are all passing on the image of replicating what worked in the past. Fingers crossed that past performance is a guide to future returns despite the rapidly changing world, because if not this is a dramatic misallocation of capital. Above a certain level, quality of life and standard of living are different things. That rings hollow if you’re poor, because it isn’t true for you. But if you’re griping about the price of wine and foreign holidays over the canapes like our DT readers, then you still have choices. Use them well, before you don’t have any choices because you can’t tell the difference between what you want and what you like.

    Notes:

    1. That’s a slightly harsh charge as technological progress would have done that job a little bit later, but they didn’t  help people change, since the postwar consensus was nuked around then
    2. this seems to be a peculiarly UK aberration, I haven’t detected in from US writers for instance
    3. that old  ideal cast a long shadow on the ermine, because I did not grow up in a middle class background, I learned some of this from books and inferred from the values of those around me, particularly those at university, who were mainly from a richer background than me. The deal started to fall through in the early 1990s, paradoxically just as Thatcher was defenestrated. This distorted model jammed my vision to seeing what was going wrong. I learned from my mistake – the OODA loop is a description of how to stay on guard against being trapped by a mental model becoming obsolete. There are many assumptions about the modern world that may unravel – and the principle of being able to preserve value in financial instruments and the SWR aren’t immune from that
    4. When I started as a professional electronics engineer in the eighties there was a single VAX computer for circuit simulation accessed by green-screen terminals via 9600 baud serial cables and all the output was in Courier text – shared across the entire facility of a couple hundred people. Most of the time you did your circuit simulation by building it in the lab and measuring and messing with components – I can do all this at the same time on the same machine as writing this now.
    5. I’m not against those that don’t make the bar paying their way as now – if you want a vanity degree or have an insight that you will get a return on investment knock yourself out
    6. harbingers of trouble with capitalism seem to be the destruction of the middle classes that I’m writing about, rapacious consumption of natural resources to produce worthless tat and increasing inequality leading to revolution as the rough trajectory capitalism is on, so it won’t necessarily end better. A capitalist consumer economy needs consumers and rising inequality is running consumers out of town, a process slowed by rising debt.
    7. when I started work in 1982 there were 4.5 billion of us compared to 7 billion now
    8. As a simple example, I admire and am gobsmacked by Early Retirement Guy who had the bad luck to graduate into the credit crunch recession and took the enterprising solution to take off and travel and see if the dust would settle. I left school after the Winter of Discontent, worked as a kitchen porter over the summer and started university in September. Gap years were for rich kids in those days ;)
    9. A view from the City of London’s Gresham College – the words of Christine Keeler ‘well they would say that wouldn’t they’ spring to mind, but the case is made well. Similarly the Social Affairs Unit and this paper seem to support this view
    9 May 2015, 6:41pm
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  • England’s shy Tories take the day

    Surprise result to the election it appears, well a surprise to the punditry though not necessarily to the odd canny investor :)Shy Tories turned out in force and David Cameron is back in No 10, without the moderating influence of the crybaby Nick Clegg, who marched his party to their greatest success and their greatest doom all in the same action. I had a temptation to go with the headline England goes John Galt but that’s probably taking it a little bit too far, even in search of a decent headline. Why are shy Tories shy? – presumably because of the Scruton doctrine

    ‘Leftwing people find it very hard to get on with rightwing people, because they believe that they are evil. Whereas I have no problem getting on with leftwing people, because I simply believe that they are mistaken’

    Most people pursing financial independence will probably benefit on the finance front relative to other possible outcomes, some of the key items of the Tory manifesto are

    • Take everyone earning less than £12,500 pa out of Income Tax altogether 1

    Now on a technicality pension income doesn’t count as ‘earning’ although it’s subject to income tax, but the Tories probably don’t want to piss pensioners off either. The changes in personal allowance are quite transformational for the value of pension income, particularly when combined with Osborne’s changes. Before the Coalition, the personal allowance was £7,200 – with the best will in the world it’s probably a struggle to live well with an income below that even if you have paid your house off and gotten shot of the kids, whereas according to TFS £10,000 p.a. allows for relative luxuries including a serious consumption of alcohol which is just as well since it appears that pensioners are a bibulous bunch going on regular benders.

    I could wish for an end to the theatre of of passing laws to try and embed rises in taxes etc. The whole point of government is to pass laws, and to unmake them, so this is a damn fool waste of parliamentary time. As the old boy Yoda said, do or do not, there is no try. There’s no need for a faux legalistic framework, simply follow your manifesto and don’t put up the specific range of taxes you said you wouldn’t.It’s not like last time, Dave, where you could blame Nick for stopping you implementing Conservative manifesto promises. And let’s face it, you landed the mother of all sucker punches by getting Nick to renege on his no rise in tuition fees 2010 manifesto promise 😉 Nearly all voters have a dog in that race – either their children entering university or their grandchildren

    For those working and earning well I guess

    • we will raise the 40p Income Tax threshold to £50,000

    will be sort of welcome, though it’s not such a huge raise on what it was when I was working, unless it interacts with the notably raised personal allowance, in which case the combination is probably a decent lift on what it was five years ago.

    And yet the Ermine does wonder if we will get the 1980s back. Let’s have a song

    because on page 8 there is

    • We will find £12 billion from welfare savings

    Let’s hope that the theory is true that in the developed world we are all becoming more peaceful and less violent people because of the removal of tetraethyl lead from petrol. Caitlin Moran makes an interesting point in the Times (paywall, but free syndicated version in the Australian – Google is always your friend to read the Times for free – search the title :) )

    Push the highest rate of tax for a few thousand people to 90 per cent and let the bin-men go on strike. Annoying but not fatal. If you are generally secure, a government can inconvenience you, make you poorer or make you angrier – it can, let’s be frank, be a massive, incompetent, depressing, maybe even immoral pain in the arse – but you, and your family, and your social circle will survive it. It is unlikely that the course of your life will be much different under one government than the next, however diverse their ideas.

    By way of contrast, what’s the worst – the very worst – that a government policy can do to you if you’re poor? Food-bank poor? Dependant-on-the- government poor? Well, everything. It can suddenly freeze, drop, or cancel your benefits – leaving you in the panic of unpayable bills and deciding which meals to skip.

    I have been lucky enough to have been in the first category, and now is time to tip a hat to Lady Luck, particularly as I came from a working class background, I grew up in a much much poorer Britain but perhaps a kinder one, and particularly one a bit more meritocratic. It’s not all luck – I didn’t spend money I hadn’t earned other than having a mortgage, which I did pay off, and I didn’t have children I couldn’t afford.

    We are all much, much richer now in material terms, but that is not enough – the contrast between us is widening 2it’s now much, much greater than they were when I was growing up. The rich are richer, strict rationalists will say the poor are richer than they used to be too, but humans are social animals who compare themselves against each other, so there be trouble in this materially better off paradise. And that, sadly, is part of the problem with how rich or poor we all feel, together with macro shifts in employment that are destroying the ability of the Average Joe to earn a living enough to buy a house and raise up to two children. It’s hard to establish what is really the cause of this – some blame the Establishment, some blame the inherent complexity and interconnectedness of the world and a loss of shared narratives, some blame peak oil and resource crunches 3, some blame the rich for ratcheting up the expectations of us all and pricing us out of the markets for fundamentals.  Take your pick, and of course remember the bearish argument always sounds smarter.

    I really hope that those £12bn of benefit cuts (can I nominate the £2bn welfare benefits for rich landowners be included in the roster of cuts) don’t give us another roll-call like the 1980s – Brixton, Toxteth, Southall, Lewisham, the Battle of Trafalgar Square. In a narrow sense I will probably be richer with the result of the elections, though there probably isn’t that much in it – I am not rich enough or poor enough to have been in great hazard from any likely government action. But I am fearful – of social unrest. As a student in London I shot grainy images of the soup kitchens under Charing Cross railway arches. That was not the Trussell Trust, but maybe it’s where it is going.

    Though I am in good health I am fearful of what will happen to the NHS in the next 30,40 years -I will need a larger emergency fund to deal with that, although at least the fear and loathing that is the US medical system is still some distance away.

    The Ermine will become richer soon…

    because I am getting older, specifically at some point I will pass the 55 mark and all of a sudden I will get hands on some of my own savings 4. Along with the saying that coffee is there to help me with the things I can do something about, red wine to help with the things I can’t, it is time to look to some of my values. I used to have a CAF card from years ago, but on that fateful day in Feb 2009 when I realised I was going to retire early I shut down all such activities. I have tried to reactivate this, because although I will become richer I will take every step not to pay tax 5. However, even as a non-taxpayer but an investor I do pay some tax, just not very much, in the form of dividend tax credits. There are in fact two great benefits of using a CAF card. The most specific one is that it makes it possible to take advantage of gift-aid and have it recorded and totted up in a way I can see, and presumably print off in evidence should I ever need to for HMRC, along with my dividend tax credits – I can track that I am not over-claiming.

    It should be noted that you can only set dividend tax credits in unwrapped accounts against Gift Aid – so ISAs don’t count. However, I have significant unwrapped holdings, and once I get hold of my own savings I will prioritise transferring SIPP money into ISA savings over unwinding capital gains allowances. So I will probably have enough unwrapped dividend tax credits for my relatively modest plans, at least until I become a taxpayer again as a pensioner.

    The second benefit is in some ways far greater. The trouble with charities nowadays is that they have adopted many of the traits of business, and in particular once they have your personal details they will pester you shitless with requests for more money, and if you’re unlucky, sell your details to some sort of do-gooding sucker’s list to other like minded sorts. I originally got a CAF card to avoid that malarkey. The Ermine has a simple principle when it comes to charities – unless there’s some sort of return, like with my RSPB membership 6 where it actually does something for me to reveal who I am then I want anonymity. Particularly if it’s a charity that deals with human problems, anonymity is king – don’t call me, I’ll call you, because of this selling of mugs lists.

     

    Notes:

    1. Conservative Manifesto 2015 page 5
    2. As an example, CEO pay was about 40 times that of the grunts (US study, Table 6), compared to over 200 times now
    3. I generally fall into this category, though I subscribe a little to the other camps too
    4. Yeah, I know, I don’t so much become richer but I get access to my own money
    5. I will run out of road on that once I draw my main pension, but I still have a few years of flying under the HMRC personal allowance to go
    6. where I get into RSPB reserves like Minsmere that normally charge for free or effectively prepaid with membership. Most RSPB reserves don’t charge.
    1 May 2015, 11:56am
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  • Representation without Taxation

    There’s an election in the offing in Blighty, as it’s been nearly five years since the last one. There’s much hue and cry, although to my eyes less separates the three main parties than there used to, much is about the details and less about the big picture. Some of the big picture stuff is changing, and it’s changing is some pretty rum ways.

    Many years ago, in the 1770s in the reign of good ‘ole King George there was a bunch of uppity upstarts in one of the colonies of the Empire that got all het up about paying tax without any say in how it got spent, and their rallying cry was no taxation without representation. They had a point, and the rest is the history of the United States of America, no longer a colony for over 200 years.

    Now one of the aims of becoming financially independent is of course to minimise taxes. One of the curious twists of fate in Britain is that it’s much easier to do that when you have money – you can influence how much tax you pay by using pensions and by controlling your income. As a wage slave I was always a PAYE employee, so the main option I used was using pensions, but the ways of controlling your income are much greater for the self-employed. In particular paying yourself in limited company dividends can be a lot more attractive that paying yourself in cash income.

    However, a more recent accelerating trend seems to be increasing the personal allowance, which lifts more and more people out of the tax system altogether. Of course they still pay consumption taxes like VAT; another curious twist of fate is that those chasing financial freedom probably pay less of this sort of tax simply because you probably buy less Consumer Stuff.

    From a personal point of view, that’s dandy. And yet I do wonder what will happen as this trend increases, and we have a larger and larger number of people represented in elections but who aren’t personally impacted by the grubby costs of all the jam today we would like. Some of this trend is simply the results of increasing inequality of income and wealth, of course – if the 1% own 99% of the wealth and most of the income then it isn’t surprising that most of the tax revenue comes from a smaller tax base. Although I don’t agree with all of his conclusions, I think the Torygraph’s Jeremy Warner makes an interesting case in his article about the tax and benefits system –

    it also makes the government dangerously reliant on those with increasingly less direct interest in what the money is actually spent on, the more so given the growing focus on pensions, health care and other welfare entitlements. The contributory principle in taxation has all but disappeared. By progressively raising the tax-free allowance, the Coalition has turbo-charged this process of disassociation between revenue providers and users.

    Obviously the Torygraph is there to bang the drum for Wealth, but his case is supported by Mona Chalabi’s brilliant Guardian article that shows that higher rate taxpayers contribute the vast majority of tax revenues, though they are only 15% of the taxpayers by number.

    Contrast this with the situation when the Ermine started work in 1982. Ignoring university infill summer jobs and suchlike, this was my first real job, a junior test engineer lining up electronic sensor heads. I was intrigued to find that after compensating for inflation it paid better than the average wage is now. However, the personal allowance in 1982/83 was shockingly low – £1565, so most of that salary was taxable, and the basic rate of income tax was 30% with an additional ~9% national insurance. The young Ermine paid nearly 40% tax/NI on a higher proportion of his salary at the beginning of this career than the 2006 higher-rate taxpaying Ermine.

    People in those days were much more involved in the costs side of the tax and spend equation than they are now – if the personal allowance goes up to £15,000, which of course I am all for, personally :), then a typical two-person household earning the average UK household income of £27,000 need not pay any tax at all if they both earn roughly half. The whole tax/spend/representation thing is very different to how it used to be. Perhaps the argument is that inequality has gone up and so this is inevitable.

    Inequality has risen since 1982

    Inequality has risen since 1982

    There’s some support for that argument in the change in GINI coefficient since 1982, unfortunately although the figures show inequality has increased I have no feel for how significant a shift from ~33% to ~37% actually is.

    Maybe representation without taxation is just what you get as power shifts from labour to capital. I figure it’s going to lead to some strange places at times. It’s easy to make the case to no taxation without representation. I’m not so sure the other way round won’t have difficult birth pangs of its own…

    Working for The Man post 45 is a risky business

    The Man is an unreliable dance parter, the hazard is in relying on working for The Man into middle age. The LA times has a mini series on the shrinking middle class. Unlike the British middle class whinathons and SAHM child benefistas and grizzling journalists that I’ve taken the piss out of earlier these guys are closer to the manufacturing industry end of things, and they seem less culpable than our lot with school fee ambitions for their progeny. All these guys seem to want is a house, two cars and a dog –  one of them sums up the feeling

    The promise that your kids would have a better life than you, with the house, the two cars, the dog and everything else, it’s gone.

    In fairness to the promise it  didn’t go away, it moved eastwards with globalisation. They were probably chuffed with how cheap DVD players and iPhones are these days… But it’s tough to feel good about that when it’s your end of the boat that’s sinking. Two things are common to all their stories:

    They relied on an employer in some form or another. The other is just like me, they failed to lift their eyes to the distant horizons, though they had fewer savings than I had.

    I don’t know the stats for the US, but in the UK most of us work for an employer. Fewer than 10% of us were self-employed when I started work in the early 1980s, rising to 15% in 2014.

    The Man seems to like ’em  25-35…

    You could could be lucky, get all the way to retirement working for him in one form or another. But The Man prefers younger models usually – they’re cheaper, probably more pliable, and in some industries like tech there’s the Zuckerberg doctrine of which more later. For occupations that need some skills he doesn’t like ’em too young, because he can’t see track record, but I’d say late twenties to mid thirties seems to be his favoured the age bracket, old rich favouring the young is not just a dating problem.

    There’s more change in technologies and ways of working now. Pretty much everything a young web designer starting now knows will be hopelessly obsolete in thirty years’ time, and this trend devalues and depreciates skills quicker than before. On the flipside things often improve faster now and we will probably be able to do more with less in those thirty years, whatever the equivalent of the Internet will be then. For consumers and users this isn’t all bad at all. There is a corollary of this.

    Your peak earnings are probably coming earlier in your career than for previous generations

    This is a terribly difficult one to tease out of the statistics. The ONS published this report that seemed to indicate this is true –

    1410_onswages

    more »

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

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

    Warren Buffett

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

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

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

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

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

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

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

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

    bunch of contract notes from two years of my dotcom days

    bunch of contract notes from two years of my dotcom days

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

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

    Virgin tracker ISA

    Virgin tracker ISA

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

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

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

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

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

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

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

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

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

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

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

    Notes:

    1. well, it also means our govenrments have printed a shitload of money that needs to stick to something I guess, and in the UK housing and equities is as good as any.
    2. I am lucky this is largely in an ISA
    3. There’s nothing inherently wrong with churning though your costs start to rise. But I have learned that I am absolutely crap in that mode. so I don’t do it – I favour being catatonic when investing.
    12 Feb 2015, 2:15am
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  • Zorba the Gr€€k is still skint after five years

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

    Patrick Blower, Feb 2010

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

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

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

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

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

    Abraham Lincoln, 1858

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

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

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

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

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

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

    Can’t pay, won’t pay

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

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

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

    The Greeks may be the canary in the coal-mine

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

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

    […]

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

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

    Why? For crying out load, why?

    Consumerism. Why did this misallocation of resources happen?

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

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

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

    The drachma is dead. Long live the drachma.

    Notes:

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

    Here’s to interesting times in 2015

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

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

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

    Glastonbury Tor in the mist

    Glastonbury Tor in the mist

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

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

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

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

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

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

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

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

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

    I was/am a salaryman at heart

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

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

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

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

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

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

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

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

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

    Vlad on the horn, irreverently swiped from UTMT

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

    2014 shares review

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

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

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

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

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

    Notes:

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