6 Apr 2014, 10:40pm
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  • The Ghost of Negative Equity will stalk the land again – a cautionary mortgage tale from 25 years ago

    What was the dumbest thing an Ermine has ever done in personal finance?

    I bought a house in 1989. With an endowment mortgage, a 20% deposit and a 10% interest-free loan from a credit card, which I paid back. The how isn’t the mistake, though it had errors. It’s the when. 1989, and early in my working life.

    You can’t go wrong with property. everybody needs somewhere to live. Safe as houses

    Bollocks, says the Ermine, with feeling

    This is a story from a distant front line for first-time buyers in the first half of their working lives. No prediction about house prices is made or implied, because the market can stay irrational for longer than you can stay solvent.  Most of us will only get three quarter-centuries in our lifetimes, and the first 25 years is wasted on learning how to drive the world, from the mewling and puking stage to young adult, ‘cos humans are slow learners with grand ambitions.

    Of all the financial asset classes out there, residential property is exceptionally evil, because we buy the asset class in the first half of our working lives, with borrowed money. For the simple reason that we want the byproduct – it gives us somewhere to live.

    If you’re over 35 and think Buy To Let when you hear “house” don’t bother reading this. You are much better capitalised than a FTB, you have more experience, you can make your own risk assessment, and quite frankly if it all goes titsup you have only yourself to blame.

    The Ermine is the Ancient Mariner

    The Rime of the Ancient Mariner

    In Coleridge’s The Rime of the Ancient Mariner the Wedding Guest hears, but does not understand. I was once that Wedding-Guest, in 1989 – people did suggest to me that it might be an unwise time to buy, what with all the frenzy of MIRAS 1. But that’s the trouble with housing, you WANT IT, WANT IT, WANT IT so bad. RENT IS THROWING MONEY AWAY, MUST MUST MUST get on the HOUSING LADDER. So you lose your mind. If this tale is a warning for you, you will not heed it, such is the way. But like the Ancient Mariner, I’ll tell it anyway.


    what the housing ladder seems to look like

    I’ve told it before in February when my original 25 year mortgage would have been due, but this one has added analysis to show just how badly it could have gone wrong. Imagine, for a moment, some starry-eyed young pup in the pub talking to his mates

    I’m going to borrow a shitload of money – five times my gross salary, if you please, and I am going to stick it on the stock market, in a FTSE100 tracker.

    Hopefully they’d wrestle him to the ground, or at least ask “are you crazy, man?

    Same pub, same bunch of mates, and he goes “I’m going to borrow five times my salary, and I’m going to buy a house

    And everybody around the table goes “hey that’s fantastic, congratulations you’re getting on the housing ladder, woot” and high fives him.

    Jenn Ashworth

    Jenn Ashworth

    The Grauniad’s personable Jenn Ashworth tells us that by 31 she’s had 14 addresses. And she’s sick of it. Sorry, dahlink, it’s not that unusual. For an ermine that was

    1. parents (SE london)
    2. Southside (Sth Kensington halls of residence, now demolished)
    3. Earl’s Court shared room three storeys up, gas appliances defective – you lit the oven throwing lighted matches into it
    4. Knightsbridge bedsit sublet from someone who did a runner with three month’s rent. The ermine learns that people steal money
    5. Different and crummier part of Earl’s Court
    6. short stay with parents – 1 hour commute to work, then when I moved to the BBC a 3 hour commute to work. enough to get me out ASAP into
    7. Acton Town house shared with four other guys, deposit stolen by landlord, shower powered off lighting circuit so I had to isolate before getting killed/burnt down.
    8. Southampton student accommodation (I took time out to do an MSc)
    9. Alperton shared with 2
    10. Ealing 2 bedsit infested with black slugs. One month’s rent stolen by landlord
    11. Ipswich digs 1
    12. Ipswich digs 2
    13. first Ipswich house this article is about. This is only the second time I had my own toilet and bathroom ;)

    I was in my late 20s then. Having lots of addresses goes with the patch of being young ;)

    How did buying a house all go wrong for me?

    Thatcher and Nigel Lawson

    Thatcher and Nigel Lawson

    Let’s cast our mind back to what the world looked like in 1989. Nigel Lawson hadn’t discovered climate change or that money was to be had in denying it but he had discovered money, he was Chancellor. There had been a boom going on ever since the end of Thatcher’s first recession (1980-82), the young Ermine had switched jobs a few times as you do in your twenties and discovered that while London was a fantastic place to be young in I was never going to be able to buy a house unless I got a better job than design engineer for the BBC.

    So I left to come to Suffolk and work for The Firm, at the time a premier research facility for a FTSE100 company. Fantastic place to work, the pay was better and houses were cheaper less expensive than in London.

    Young ermine to world – what is this Boom and Bust you speak of? I have no experience of that, so it doesn’t happen…

    You know how kids are absolutely convinced you can’t see them if they can’t see you? Well, that sort of thought error doesn’t always stop at 11. I graduated in 1982 into Thatcher’s first recession. All I had seen over my working life was an improving economy. I started in the pits of six months of unemployment as the economy slowly crawled from the wreckage, then getting the first real job, all around the gradual upswing was the backdrop of what I expected of the economy. So I rock up in 1989, and house prices are rising, the economy is booming, everybody is feeling chipper.

    25 years of high living has taken its toll on our Nige. presumably the Domestic Goddess got her looks from her mother :)

    25 years of high living has taken its toll on our Nige. Presumably the Domestic Goddess got her looks from her mother :)

    That Lawson bloke says he’s going to stop couples getting mortgage interest relief at source. At the time the Ermine was not wise in the ways of the world, so I didn’t join up the fact that this would give everyone Torschlußpanik thus increasing demand for a short time, leading to a ramp in price 2.

    That sounds incredibly dumb, now. In fairness to my new colleagues, several of them did even highlight that possibly there might be distorting effects due to this policy which might be something to think about. However, in one’s late 20s you’re so flushed with the grand victory of having spent your first 25 years successfully getting a handle on how the world works. And you haven’t had the stuffing knocked out of you by discovering that your map of how the world works has holes, and by itself doesn’t track changes in the world. So you are smarter that everyone else and invincible. The good news for me was I made that class of mistake at the wheel of personal finance, rather than at the wheel of a car…

    So I bought that house. With an endowment mortgage, if you please. Single man, no dependants, so the life insurance aspect of the endowment was worth sod all to me, and The Firm’s pension offered death lump sum anyway. A dead young Ermine would have been worth a lot of money to someone.

    My parents, bless ‘em, had done their bit for my financial enlightenment – although it seems that these days parents don’t bother to share the hows and whys of personal finance mine did.  I knew how mortgages worked and what the difference between and endowment mortgage and a repayment mortgage was. Hell, I even knew what the NAV of an investment trust was and how it could be at a premium or a discount, though I wasn’t to use that knowledge for 20 years. And had been educated in no uncertain terms that an endowment mortgage was a dipstick sort of move. But hey, the LAUTRO saleswoman had pretty green eyes and how can you turn down the promise of a 3x lift on the expected endowment outcome 3? It sounded good to me! That’s the trouble, you can know something but not understand it. You can teach knowledge, but you can’t teach wisdom, because wisdom is integrated knowledge. I had always seen things getting better throughout my working life, so I knew that house prices were always going to be rising relative to wages, and I feared getting left out.

    1404_2ITNow some of that knowledge was correct, but not for the reasons I understood. House prices were rising relative to wages because of the increasing entry of women into the workforce since the 1980s. Prior to that, a household typically used the man’s wages to pay the mortgage from, but all of a sudden households had more resources available to them, with two incomes coming into the household. What they did with that is throw it down the toilet of inflating house prices, so houses got dearer relative to wages, and everybody moans how hard it is to have children and afford a house these days, because more of the combined household capacity to do work is focused on paid work outside the home. Don’t shoot the messenger – Elizabeth Warren’s book first highlighted to me exactly why I struggled so hard to raise the cash to buy a house. I was a single man, at a decent job, with a 20% deposit and in interest-free loan of 10%. I was fighting couples with two incomes, and that’s not a fair fight, hence the difficulty.

    So I purchased the house, settled in, had all the usual shocking costs you have when you buy your first house because you have no furniture (I bought mine secondhand), you have no tools, you have precious little physical capital. I was paying 6.5% on the low start (ARM) loan 4, and paid back my interest free credit card loan in one year, as required. What I didn’t pick up was that there was a shitstorm. Incoming. Take a look at this

    the total costs and savings associated with buying a house. £ on the lHS, % on the RHS

    the total costs and savings associated with buying a house. 2012 rebased £ on the LHS, % on the RHS. It also explains why the greybeards have all the money…


    It covers a period of a little over twenty years, and shows the inflation-adjusted to 2012 prices equity, payments and imputed rent of an ermine’s first house 5

    Now every bugger tells you you can’t lose on houses. Take a look at the equity blue line, which shows the difference between the house price tracking the index for that year and what the purchase cost was. For ten long years that line is negative. You can’t lose on houses. Until you do, and then you lose big-time.

    In negative equity you cannot move, must not lose your job, and must keep paying the mortgage

    Because if you don’t, you get evicted from ‘your’ home, and to add insult to injury, they flog it at a knockdown price, and unlike in the States, they still come after you for the difference. It happened to my neighbours and a few other places in the street. The mortgage company comes along, sticks a notice on your window that this property will be foreclosed on such and such a date, and you’re out on your ear. Oh yeah, and you still have a mahoosive debt that follows you around like a lost dog.

    What do all those coloured bars mean?

    Although everybody talks about houses as if they were a financial investment and part of your free cash flow, only BTL landlords buy houses as a straight financial investment. The rest of us buy them to avoid paying rent, and give us a place to put all our stuff, watch TV, make love, raise children, all that sort of thing. You can do all that in a rented place too, but since you ‘own’ a house you don’t have to pay rent on the house. Instead you get to pay rent on the money you bought it with. So instead of throwing it away paying it to a landlord you throw it away paying it to a bank.

    The red bars represent all the cumulative money I saved through not paying rent to some shyster landlord, estimated at about 4% of the Nationwide adjusted house price and then scaled to 2012 prices by inflation. It is possible these should be adjusted to interest rates, in which case I understate the cumulative benefit of the rent I didn’t pay.

    The blue bars represent the cumulative excess that I paid over and above the cumulative amount I would have paid in rent to a landlord 6, because I am paying it in rent to a bank. This is also adjusted to 2012 pounds, like the rent. I am buying a great big wodge of Stuff, so obviously it’s gonna cost me more than if I just rented the usage of it for 25 years. You can see that even after 24 years I’ve actually still paid out more than I would have done if I just rented. This conundrum is basically why you rent when you are poor. It’s cheaper, and that was particularly the case at a time of very high interest rates, of which more later.

    The lime green bars are the equity in the house, the same as the blue line, but tossed on the debit or credit side of the ledger as appropriate.  The value of the rent is the value delivered by the asset, and looking at the blue lines which are the excess paid over the value gotten as rent I would estimate break-even in about 25 years. However, since this is an asset that increases in value and is bought with borrowed money I actually broke even in 2001, when the increasing value of the house added to the accumulated rent I hadn’t paid beat out all the money I had paid to the mortgage company. Note in 2001 I don’t own the house as of yet, it’s just that I could theoretically sell up and breathe a sigh of relief that I hadn’t paid more than if I had rented.

    Why was that such a big mistake?

    I stayed put for 10 years. Now imagine all the shit that can go on in a life.

    • You can lose your job. There was a hell of a recession on in the early 1990s. Look at what would have happened in 1993 – I would have been foreclosed, would have lost £20,000 in 2012 money, would be bankrupt and without a roof over my head. No fun at all.
    • If you buy the house in your early 30s the pitter-patter of tiny feet tends to happen in the next decade. Tragically unromantic, but the years after the first child are high risk years for relationship breakdown. If your house is in negative equity you’re going to take a big hit at a rough time
    • You have to move for work. Now you get to rent your house out and rent another. There are parasitic costs and voids associated with renting a house out

    I was single when I bought that house so I avoided 2 but the other two scared me. For a long time. This graph simplifies things so I assume I have a 100% mortgage. I was dumb, but not that dumb. I had a deposit and an interest-free loan from MBNA, to the tune of 30%, but even so I was in negative equity till about 1995. Negative equity kills you fast and kills you good, because of the leveraged way we buy houses.

    Was it just an ermine that got this wrong? No, apparently a million other dumbasses had such an awful sense of timing as I did – but this newspaper article is from 1992, so still in radio silence on the Internet, because the WWW started in 1994.

    With roughly ten million mortgage holders, that means that more than one in ten people with mortgages are trapped by debt. They are unable to sell till prices go up. They can’t sell and are stuck. [UBS Phillips & Drew]research analyses house price falls and the number of first time buyers, the group most likely to be in trouble because at least 50% of them took out mortgages of more than 95% of the value of their home.

    Rachel Kelly,  “A million first-time buyers caught in mortgage debt trap.” Times 24 Apr. 1992: 4. The Times Digital Archive

    I had a 30% deposit (ie a 70% LTV). That wouldn’t have helped me in the suckout, though it did shorten the period of negative equity relative to that shown on the chart, by shifting the line up a bit.

    So how does that affect Mr Wannabe 2014 house buyer? Houses always go up. Everybody says my house is my pension.

    To be honest, I don’t know why everybody says my house is my pension, though RIT has a good take on that subject. It would scare me shitless if I had housing as a large part of a pension, because you need several houses in different areas to get sector diversity, the baby boomers are going to die off in the next 20 years so their houses will be sold and it’s hardly like I’ve seen property as a great wealth store. Everybody else has it as a religion and who am I to criticise other Britons’ religion as long as they leave me be. Fill your boots guys.

    If they’d bought a house worth of the FTSE100 on the same leveraged basis and paid their rent with the dividends they would probably be saying the FTSE100 is my pension. It’s buying a long term appreciating asset with leverage and not trading the bugger come what may and not getting marked to market in suckouts that makes houses a good investment – if you stay the course and don’t take those hits in the early days. Look at that chart and note that buying on a high meant I was exposed to the risk of having to sell up and having the house marked to market at a loss for a third of my working life. Safe as houses, guv, safe as houses.

    The cyclical rises and falls of the house prices are slower than those of the stock market. Just because it’s a quarter of a century from the last turn of the cycle doesn’t mean it’s all different now, like the mills of God this one grinds exceedingly fine and exceedingly slow… 25 years ago jobs were more stable for the average employee, waiting to pass through the meshing gears of the mill until they turned you out the other side was a realistic option. But look at that 10 year suckout. It’s one of those questions you gotta ask yourself, really…


    So what is different this time? It’s not about price, it’s about affordability!

    Monevator observes that the house price to earnings ratio is creeping up. Some of the ideas about increasing ratio of two-earner households resonate with Elizabeth Warren’s book about the US situation. So obviously the whole price to earnings metric is hard to make fit these days. The new in word around town is affordability. Don’t worry about the amount of money you are borrowing, that’s just a number, it doesn’t mean anything. Can you afford to pay the mortgage okay?

    Now if someone waltzed into a shop selling LED TVs with a credit card and said that, it would be viewed as a personal finance faux pas. Do that for a purchase three orders of magnitude bigger and suddenly we all go hey, that’s cool, don’t look at the price, can you make the repayments?

    There is a case that the 3 x single, 2.5 x double income multiples that were the maximum lenders would advance in the past are too conservative now. 25 years ago we were coming off long runs of double-digit interest rates from ’78 onwards. That sort of thing limits the amount of mortgage you can pay off in a 30 or 40 year working life; 1991 was the last time interest rates were in double figures, so for 20 years they have been lower. But the average is closer to 5% than the 0.5% they are now.

    I kind of feel the need for Clint again. Take a look at the yellow line, interest rates. Now just like the young ermine didn’t catch on with this whole boom-bust kerfuffle, because he hadn’t seen it, there are no doubt people who are thinking

    what are these double-digit interest rates you speak of? I know nothing of such fiscal brutality

    Look at the chart. Most of the time it spent at the long-run value of British interest rates of 5 or 6 %. That has a direct bearing on your affordability. The young ermine, though foolish in many ways, had the sense to ask of the mortgage company what would repayments be if interest rates doubles. It’s actually quite easy with an interest-only mortgage which is running alongside an endowment. If the interest rates double, you pay twice as much per month ;) I figured I could managed that, just. I didn’t expect to be doing that, the very next year. I froze in that place. I didn’t go out much. Then the high interest rates started to depress house prices, and it began to dawn on me that I had made the most stupendous personal finance mistake of my whole life.

    It dwarfs the second biggest PF cockup I made, which was a rash two years of major momentum-chasing and trading muppetry in the dotcom boom and bust. I only used ISAs and wasn’t rich enough to fill the first one. I probably destroyed about £7000 worshipping at the altar of Buying High and Selling Low, with a side order of Excessive Churn. I blew about £10,000 in 2012 pounds, but I got something of value in return. Education – it made me ready to learn how to go about things better. There was no bias or scamming in the training course that Mr Market dished out, and more to the point I threw away the money as I earned it. I didn’t borrow it from a mortgage company, and once it was gone it was gone, but I didn’t owe it to anyone.

    The stock market has been a lot kinder to me than the housing market, and in a much shorter time, too. True, it delivers a jolly good kicking every so often, there aren’t the slow languorous cycles of the housing market. Perhaps the background radiation of this epic fail remains in my personal finances, because unlike the case for most Britons in my age and ex-income group, my house is not the dominant part of my net-worth, excluding pensions, if I were irrational enough to compute it as part of my financial assets ;)

    Interest rates are at historic lows, that’s a good thing, surely?

    On interest rates we’re a little off the right-hand side, but interest rates haven’t budged since then. They’re at historic lows. They can’t go any lower, because otherwise the Bank of England would be paying us to borrow money from it. So when you are making the switch from price to earnings (3 x single or 2.5 * double ISTR) you are making a nasty little pact with Mephistopheles.

    you shouldn't be strinking deals with this bad boy. He tends to turn up and the most inopportune times

    you shouldn’t be striking deals with this bad boy. He tends to turn up and the most inopportune times to call in his dues

    You are making a bet that things really are different this time, and that for reasons you can’t explain, unlike over the last 25 years interest rates are going to remain at historic lows of a tenth of their long run average for at least the first 3/4 of your mortgage (19 years of a 25-year mortgage). You can afford for ‘em to let rip a bit after that, because inflation will have reduced the value of your debt by about half then anyway, plus in an ideal world you’d have paid off some of the capital too.

    You’re also making some other assumptions. That your pay will keep up with inflation, which given the power shift from labour to capital may be unwise. That nothing untoward will befall your employment, or if so, then you will be able to find another job at similar or better pay without moving. Unless you live in London, that may also be unwise. If you do live in London you can’t afford to buy a house if you are a prole, or even one of the 99%. Then there’s the risk of the more personal crap that can get in the way of things – divorce, children dropping the second salary for a while and upping your costs. But hey, it’s affordable…for now

    You can see what an interest rate hike did for me. Obviously the heave-ho from 7.5 to 14% raised the payment, but it also made the aggregate payments much higher for a while. Look how fast the cumulative overpayments relative to renting ramped up (the blue bars). They only start to yield to the cumulative imputed rent in 2000 over half-way through my working life, and it is probably only about now that the total amount paid in mortgage costs is less than the total amount I would have paid if I had rented. Of course, I now have a fully paid-up house that has a future income stream associated with it – the rent I don’t have to pay.

    The risk of being hit by negative equity is highest at the beginning, when you are young, for the simple reason that you haven’t paid off any of the house yet. The amount of total money sucked out relative to renting is highest in one’s 40s. It’s not a personal finance trajectory that is for the poor, and not one that fits well with the costs of having children in one’s 30s.

    I can’t yet work out whether this cost peak is an artifact of having eaten that fall in house prices and the high interest rates early on. The fall in house prices is not reflected in the running cumulative costs, however, except as an effect on imputed rent.

    what do interest rates do to house prices?

    George Soros - this bad boy did for the Ermine in '92

    George Soros – this bad boy did for the Ermine in ’92 by ejecting the UK from the ERM. Lamont skyrocketed interest rates to try and stay in

    They make them fall in real terms or at least reduce the rate of increase relative to inflation. Particularly in the Brave New World of gauging how much you will pay according to affordability, rather than a price/earning ratio. Affordability is inversely proportional to interest rates, so as interest rates go up, prices have to fall to stay affordable. You can see that in the negative equity that I suffered at the start, though this may be correlation with the long drawn out 1990s recession. The interest rate spike was cause by Britain being ejected from the ERM – interest rates were raised to try and stop the pound falling, but the Bank of England lost the fight. That is the trouble with economic variables – they are hard to separate and qualify individually.

    Why do governments push home-ownership so hard?

    Not all governments do. Not even all British governments did until 1980. When I was at school it was perfectly normal for middle managers to live in a council house. Then Thatcher got in, and it’s been a world of hurt from 1980 onwards. When I look at this I can’t help feeling that it is a rum way to run an economy and seems to do a lot of hurt to a lot of people trying to catch up with the shibboleth that you must own your own home. The huge exposure to risk when you are young, the massive suckout of money in one’s 40s to buy the house compared to the rental option. Is this really worth all the pain? At the moment it is because the rental option is really horrible – there is no useful security of tenure in the UK and the army of amateur landlords seem to be patchers and bodgers when it comes to maintenance. It seems the solution to complaints about the state of the place is to get a less discriminating tenant – it is a landlord’s market.

    If the government were interested in the maximum quality of life for the most people, it would stop fiddling about in the housing market and fix the alternative, renting. Most of the house-building in the post-war period was done by councils building council housing

    post-war housebuilding

    post-war housebuilding (BBC)

    and this carried on at a notable rate until it was shut down by Thatcher’s Right To Buy – there was no point in building houses with ratepayers money to flog them off cheap to somebody who was in the right place at the right time. Private enterprise clearly hasn’t picked up the slack, because presumably there is a profit incentive to maximise house prices for new-builds by controlling supply ;) Or some other reason, but it’s clearly not happening.

    Renting in the private sector is miserable. If you favour the tenants too much you get misery for the landlords and then misery for the tenants who don’t have a place, though joy for those who do. If you favour the landlords, as is the general case now, you get misery for the tenants, and drive people towards owner-occupation who perhaps aren’t ready for the financial hit. Owner occupation is much more expensive for the first ten or fifteen years. Calculators like this make me laugh because they are simplistic, assuming a constant interest rate, and constant house price inflation and they also take the equity in the house on the plus side. The only time you get to see the increasing equity in your house is if you downsize. The next time is when your kids sell the house after they’ve come back from the crematorium. Even after 25 years I’m not sure I’m up on the deal yet as far as money spent on buying relative to what I’d have spent on renting is. I do have an expensive asset and I’m done paying rent and mortgage for the foreseeable future, so I’m better off overall. But it was an expensive ride and I took outrageous shedloads of risk. After all, nobody sat me down when quoting for a mortgage and went

    Now Mr Ermine, how do you feel about the possibility of losing 33% of the value of this house should you be SOL and lose your job in the first ten years?

    Saying yes to that sort of risk that puts you into Highly Adventurous nutcase levels with shares, and yet people become gibbering wrecks if it’s intimated to them that the stock market can do that to you :) Safe as houses, they say, safe as houses… What the hell did the stock market do to get all the bad rap? A financial adviser won’t let you sit down and open your mouth without you taking an attitude to risk test, and yet you can blithely sign up for a mortgage and the only warning you get is

    Your home may be repossessed if you do not keep up repayments on your mortgage.

    No shit, Sherlock. No mention of the risk, eh?

    You are about to take the sort of risk that put a million buyers at risk in within living memory – the Bank of England interest rate is at historic lows and could increase tenfold without drifting out of the long run average. Have you thought about what that would do to your repayments, and have you had a word with Clint about it?

    Nary a word that this might happen

    Lindsay Cook Money Editor. "Coming to grips with negative equity." Times  24 Oct. 1992: 25

    Lindsay Cook Money Editor. “Coming to grips with negative equity.” Times 24 Oct. 1992: 25

    Housing is, however, not just about money. The excess cost of buying is probably worth it to get rid of AST tenancies, horrible landlords, one month eviction periods, shitty house maintenance and all the other hurt that often comes with amateur BTL landlords. Fixing the rental market probably means building decent social housing, enough to compete down rental prices and set standards, and relieve the pressure on the owner-occupier market. Owner-occupation is much less suitable for a world of shorter-duration or less secure jobs. I don’t know if Thatcher was right in her time but that world is long gone now.

    Of timescale-blindness

    We are scale-blind to extremely short timescales. That much is clear when you try and swat a fly, or watch a sparrow land on a blackthorn bush without impaling itself, as it makes micro-adjustments to its flight path to avoid the might spines. Listen to this whitethroat at normal speed – it sounds pretty scratchy and nasty to me

    Now listen to what that presumably sounds like to a real whitethroat, which can hear finer temporal detail than us. All I have done is slowed it by 8 times

    That’s still coarse on the sort of timescale that high-frequency trading works. You can’t stay on top of that. The effect happens at long time scales too, we just don’t see things that change over decades as much as we see them if they change day to day, which means that we become increasingly blind to groundswells in finance that have a longer period than a working life. Hence this article, it is a distant report from a receding event horizon. It happened, and it’ll happen again. What makes this worse is that the WWW started in 1994, so for the Internet generation this history is not accessible. I used my local Library’s newspaper search facility to research some of this, and it is uncanny how the themes from 1988/9 seem to be repeating themselves now, and how certain pathologies associated with mortgages seems to be evergreen. Such as stupid berks taking money out of their home equity in the good times to pump up their lifestyle only to come over all surprised when it all goes titsup in crashes. Life has rainy days in it. Save up for them.

    Should I not buy then?

    Markets can remain irrational longer than you can remain solvent

    John Maynard Keynes

    Search me guv. London, for a start, is a different place. I’m not in that league. I left London 25 years ago because I was too poor to live there. You’re competing against foreign money treating London real estate as a reserve currency, and there’s a lot more of the rest of the world’s 1% than there are Londoners. It’s not a fair fight. I could earn enough as a single man to fight the DINKY couples but the 1% are way out there, sometimes you gotta know when to hold ‘em and know when to fold ‘em. For most people London falls into the latter category.

    Elsewhere, you buy a specific house in a specific part of the UK, subject to local conditions. I personally wouldn’t buy right now, but then I haven’t lived with AST tenacies and scummy BTL landlords 7 for a long time. I can see how that makes people prepared to pay over the odds. Maybe it really is different this time.

    I learned something writing this and analysing the costs – in particular that when you buy a house with a mortgage you commit to ongoing higher outgoings for over twenty years – that’s real money you have to earn and pay out. It’s true that the break-even point was 10 years in my case, but my spending was still higher than it would have been renting to 20 years. The break-even point is brought forward by the nominal value of the house, which is only realised when you die or partially on downsizing.

    I didn’t have any idea when I started down the mortgage track that this was the case. I earned enough and was lucky enough to dodge the negative equity bullet to get away with it, but it could easily have gone a different way, and then the ermine would not have been retired. Safe as houses – think of those million people in negative equity in the early 1990s. I was started down this track of thinking by Paul Claireaux’s blog post on House Prices Now – he has some other charts of interest there, and a far better grounding in the financial technicalities, where I’ve just lived it. His summary?

    What I conclude – is that  (in broad terms) UK house prices have gone into outer space!

    There is a general message that when buying investments one should take valuation into account. That is doubly the case if you are going to buy it leveraged – and a house is one of the few assets Joe Public buys on margin. Negative Equity is what happens when you get that wrong, and being foreclosed, going bankrupt and having the debt chase you is what happens when you get that wrong and lose the ability to pay the mortgage. Only you can say if getting away from those crappy landlords is worth the risk.


    1. MIRAS is a historical piece of Government fiddling in the housing market being changed where they didn’t tax you on the interest paid on a mortgage. Interest rates and tax rates were much higher in the 1980s than they are now
    2. short-term Government interference leading to a pulse in demand just before an election. Any connection with Help to Buy is of course specious scuttlebutt and should be ignored. Of course.
    3. in those days money halved in value every ten years. So that 3 x lift was pretty much breakeven after 25 years with free investment risk chucked in, but optimism and being a smartass is one of the privilege of the youthful, eh. Boy was I taken for a ride ;)
    4. I used the low start loan so I’d have a chance to pay back that interest free credit card. It was the correct use fo an ARM loan – the young ermine got the details right, it was the big picture that I made a hash of
    5. To track the house value I used the Nationwide house price index for old properties, East Anglia section. The house was a two-up two-down built in 1840, the Nationwide are pretty accurate because scaling the price I bought at forward to 2012 gives pretty much the value Zoopla gives for a similar joint in a similar area. To track inflation I used the January of the year figures from this Guardian spreadsheet. For the Bank rate I took figures from the Bank of England and did the manual calculation to get the yearly interest rates, and assumed a mortgage was 1% more. I estimated rental prices as 4% of the yearly house price, which would fit for now. I moved around the middle of the period, so the second half of this is a simulation.
    6. I had to subtract what was already indicated otherwise the overall picture would be wrong. When the blue bars disappear, it will have finally been cheaper in terms of money paid out to have bought, not rented
    7. I’m sure there are some decent landlords. It’s just that I never ran into them and from what I hear most tenants don’t either. OTOH I’ve heard from some landlords about some seriously chavvy tenants. Shame that so much money changes hands and both parties seem to be pissed off with the deal
    2 Mar 2014, 4:15pm
    economy personal finance


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  • Doom and Death Spiral Deliberations

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

    The engine of consumer spending is spluttering and dying

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

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

    Lucy Mangan – downward mobility

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

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

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

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

    I was tickled by

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

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

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

    Values matter

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

    The Ermine is fearful

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

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

    GDP growth

    GDP growth

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

    Vanguard US and UK, rebased to GBP

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

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

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


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



    1. the yield will rise because the stock prices tank – I’m not saying the dividends will rise
    2. yes, I know, that’s you and me, though in my defence I don’t expect it to be up here, certainly don’t want to buy at this price and couldn’t find anything worth buying last ISA year
    28 Feb 2014, 12:37pm
    economy housing personal finance


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  • A cautionary housing tale from a quarter of a century ago

    It’s the last day of February 2014- a notable date for me, because twenty-five years ago I read this date on a form I signed to take out a 25-year mortgage as  I perpetrated the biggest personal finance error in my entire life. Of course my twenty-something self didn’t know that. It dwarfs any stock market losses I took in the dotcom bust, and it hit me earlier in my working life. I bought a house – a two-up-two down, at a four and a bit income multiple, with a 20% deposit, half of which was an interest-free loan from a credit card 1.

    Ten years later I ate nearly a 50% loss on that house. Some of it was poor house maintenance, but most of it was buying at the wrong time, in the Lawson boom of 1989. And that 50% loss is slightly offset by the rent I would have otherwise paid. So when Millennials hear that the older generation had it easy on housing etc etc – well, not all of us did. It’s a cautionary tale

    The UK housing market can be irrational for longer than you can stay solvent

    three years after I bought, paying a standard variable interest rate of 6.5%, I was paying a mortgage interest rate of 14%. I froze in that place in winter because I didn’t dare run the inefficient gas fires longer than I had to, and made friends with Sainsbury’s packets of mixed beans for cheap eating. However, I didn’t stop going out with pals drinking beers, so maybe hold on the violins ;)

    Colleagues at The Firm did highlight the macro picture, that Lawson was going to axe MIRAS for couples and that this was pushing up demand. But I was already running from high house prices in London, leaving the city of my birth and where I had grown up and started work. The crux point was when I was in the Broadcasting House bar, slowly drinking Fuller’s E.S.B. until the pain went away from all the people taking about how much their houses had gone up in value and all the yuppie consumer shit they were going to buy with the proceeds. All I had to look forward to was to get on the tube back to Television Centre, and then get on my bike and cycle up the A40 Westway to Park Royal, to go back to my bedsit with the salt round the outside so the black slugs didn’t invade and to shovel 50p pieces into the meter to heat up something in the Baby Belling pie heater. And I thought to myself there has to be a better way, and that was the day I realised that I was too poor to live in London. So I left.

    In running from that experience I ran into trouble here. I was lucky, that I kept my job, I have never defaulted on the mortgage. The 25 years I had signed to looked like an endless amount of time – I had only been on this earth for a few years more, and economically active for a fraction of the time. The way we do housing is really horrible in the UK – the expectation that people have of buying a house in their 20s – when life is changing, careers and life stories are changing – it’s nasty, but the ramping upwards of house prices to earnings pushes people to get a foot on the ladder when they are not yet experienced enough to understand a financial market or have experienced that markets have cycles. I started at a peak, because of my inexperience, I extrapolated the upswing that was all I had known into the future.

    There are three messages from this cautionary tale. One is that the cycle time of the housing market is shorter than a typical mortgage period, so as long as you don’t suffer a calamity that makes you a forced seller without rebuying 2 it comes out in the wash.I sold in the late 1990s, but immediately bought the same sort of asset with the proceeds and a bit more. I benefited from the upswing since, that compensated for my losses, so integrated over 25 years I am probably a slight beneficiary of the housing market.

    For what it’s worth, shares have done me much better. My shareholding net-worth – even evaluated at the low-water mark of the 2009 of half the value now is more than my housing net-worth. That’s because though I suffered losses at the beginning, they weren’t leveraged losses like a mortgage is, so I could start again with the learning and get ahead. Whereas housing losses set you into negative equity – you soullessly pour half your salary into a money pit and have nothing to show for it. And you can’t move until you have backfilled that hole.

    The second is that rent is not wasted money – not if the alternative is negative equity. Now that is wasted money – you pay into a black hole that stops you moving.

    Lastly, there is some hope. Even after a rotten start I discharged my mortgage in 2008, after about 20 years. It felt good, and it was about 20% short of the original term of that first house. All starting from a 5 times single salary house price multiple and a market crash. It looked as horrible to me then as it does to many people now, though I do acknowledge that middling jobs were better then than now.

    It doesn’t necessarily turn out as bad as it looked at the start. But try not to buy a house at high valuations. I have no idea if houses are valued high at the moment – if there is an economic boom in Britain as we crawl from the twisted wreckage of the financial crisis then perhaps they are at fair value.

    On the side of the young is that the Baby Boomers will start to become decrepit and die off in the coming couple of decades; this should release some family homes back onto the market. Against that there is increasing polarisation and jobs flow to London.

    I think the London market is a lost cause for the young and impoverished – in the end London will probably have to become an independent city state. As a mark of what’s gone on there even now I would have to commit nearly all my capital resources other than pension to buy my mother’s house in London – the aggregate value of my career doesn’t match the capital value of what my dad managed to buy forty years ago on a single blue-collar salary. But that’s London for you. It’s a different country.

    I don’t know why Britons love the housing market so much and yet are so fearful of the stock market. In my experience the bite of the housing market is far worse, and it’s responsible for far more human misery than the stock market. The housing market hurts poor Britons in its rapacious rents and dead hands on the lifetime earnings of people even if they own, whereas the stock market tends to hurt mainly the well-off. And yet housing is much-loved, whereas the stock market is considered a fickle mistress. There’s n’owt as queer as folk, as they say up north.

    Would the young Ermine have recognised his future self, playing the role of the Ancient Mariner and the young Ermine as the Wedding-Guest? Probably not…


    1. MBNA got all their money back, on time, and didn’t charge me a bean
    2. if you sell into negative equity you will usually not be able to buy again because of an excessive loan to value of > 100%
    26 Feb 2014, 7:29pm
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  • Stockpickers and indexers alike – aren’t you a little bit fearful…?

    Think back to 1999 – World + dog was going to make a shedload of cash on the stock market. No idea was too barmy to fly. Videologic – to become Imagination tech. Rage software – to become nothing. In the US Webvan – the idea was good, the time was wrong ;)

    Martha Lane-Fox, founder of Lastminute.com and now in the House of Lords

    Martha Lane-Fox, founder of Lastminute.com and now in the House of Lords

    Boo.com and closer to home, Lastminute.com, in a last hurrah before the dotcom era imploded as the dream died. We were all going to be rich, you, me, and the taxi-drivers of Britain. We bought high, on the greater fool theory. Then somebody turned the lights on, and we were that greater fool.

    Go on, admit it - just a teeny bit fearful?

    Go on, admit it – just a teeny bit fearful?

    The party was great, but the hangover stank. Every stock market rally carries with it the seeds of its own decay. We had seven years of relative plenty since the year 2000, despite the lean years soaking that I and many dotcom investors had – the general public had a blast. remember the Goldilocks economy?

    As I have said before Mr deputy Speaker: No return to boom and bust

    UK Prime Minister Gordon Brown, 2006

    Since the seven fat years the Great British Public have had seven lean years, and we can survey the twisted wreckage of the 99%’s hopes of a middle class life. The feeling now is very different to that Millennium eve – there was hope and opportunity, Stuff was getting cheaper and we hadn’t yet opened our eyes to the driving forces, that were going to wash in and suck the middle-class jobs out of the developed world. Now we can see that power-shift from labour to capital written large across the economy. Allister Heath of City AM tells us we’ve never had it so good:

    OK, we have a cost of living crisis – but life is so much better now

    To most people, the UK’s 6pc or so national pay cut to date remains a price worth paying for having access to the convenience, goods, services and jobs delivered by the economy of 2014

    Hmm, Allister, exactly what part of cost-of-living crisis do you not get? Allow me to remind you of Maslow’s hierarchy of needs


    the clue is in security of body and employment – the cost of housing is being pushed up and some people seem to have trouble affording to buy food. Your consumer goods and iPads are up in the esteem section – you need a roof over your head and ideally a job before the convenience, goods, services and jobs delivered by the economy of 2014 become worth having. The sex and family part also seems hard in the first years of the century too, at any rate for those who want to have children, which seems to be increasingly out of kilter with the rest of life. That’s not to say I particularly want to pay over the odds for other people’s lifestyle choices, but I don’t think making such a common life aim harder than it has to be is a great step forward in the pursuit of human happiness. In a conclusion that rivals Marie Antoinette

    The digital revolution is creating a lot of free value that is accruing to consumers, making them better off, but that isn’t appearing anywhere in the official GDP, productivity or real wages statistics, despite the best efforts of our number crunchers. In fact, new technologies are often having the opposite impact: in some cases, they are actually reducing reported output and thus purporting to show that we have become poorer, even though almost everybody is in fact being made better off.

    The ‘let them eat cake’ approach of denying that shit is happening because you can now afford to pave your rented flat with cheap TVs seems flippant.

    Now you can make a good case that current valuations of the FTSE100 aren’t that high – after all, fourteen harsh years of inflation have rolled by, and the Bank of England tells me that 6933 (estimated) December high-water mark would be 10174 now. So we are a long way off the peak in real terms. But there’s the whole animal spirits thing that is going to hit a bump in the road here and in the US.

    When we look at the big picture from 1985 it’s clear that the engine of capitalism turned over and misfired twice- once in 2000 and again in 2007. And it has slowed, at least in its FTSE100 manifestation – look at the way all the action is in the 1985-2000 part. So the question is whether industrial capitalism is running into resource limits, be they natural, or simply that the power shift from labour to capital is now starving the engine of fuel – after all, somebody has to be buying all the value. I don’t know who that somebody is going to be in the years to come. That’s the bit that Allister is missing – it’s all very well producing all those iPods but they can’t all be bought on ever-extended credit. Where are the firm foundations to this – is the final dream of Reagonomics coming to pass? It appears that two thirds of the income tax revenue comes from about a third of the taxpayers in the UK. Perhaps the 33% has reached critical mass, and can keep the engines running while the 66% peck from the swarf that trickles down.

    Maybe this is how the 66% will realise Keynes' 1930s vision of Economic Possibilities for our Grandchildren

    Maybe this is how the 66% will realise Keynes’ 1930s vision of Economic Possibilities for our Grandchildren

    I got no idea of where to now. It wouldn’t surprise me to hear the resounding bang of yet another misfire as the engine demands more than it can be supplied with. there will be opportunities there. Or maybe there will be another party like it’s 1999 all over again. Or perhaps we are at a paradigm shift, when people will recognise what Enough looks like, and eschew consumerism in search of value.

    Once again I heard the Last Post sounded for Keynes Economic Possibilities for our Grandchildren – where increased automation would lead to a world where the four-hour work-week was a reality. The closest we seem to have got is the TV show Portlandia. (Hat tip to Mr Money Mustache – I’ve never seen the show. Or Portland itself)

    Whats’ actually wrong with young people going somewhere to retire? Previous generations had this as dropping out, or bohemian living. It doesn’t seem so easy now 1. Tim Worstall tells me I got it all wrong, that we live in that City-AM world where everything is hunky-dory and Keynes got his Economic Possibilities. We just can’t see it, like all that digital value that consumers got, at the price of decent jobs… And other stuff down the bottom end of the pyramid, like, er, food

    food banks

    food banks

    Our Tim has an fairly hard-line answer to that too. I think I might find a few people that may disagree with the ‘let them eat cake’ version of how it all panned out ;) Somewhere there’s the sound of the engine of capitalism running low and lean under the load. I suspect I hear the pinking that precedes another misfire – I’m a little bit fearful. But it’s just a number, and the high-water mark is a long way off in real terms. Maybe it is just the echo of the dot-com bust and the seven years of plenty and the seven lean years that ensued ;)


    1. Obviously I’ve done it. But a) I’m not young, with the peculiar fire of creativity and single-mindedness that burns brightly in one’s twenties. And b) I’ve done my time serving The Man for thirty years…
    24 Jan 2014, 3:33pm
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  • More Interesting times in the markets, oy vey…

    No sooner does Under the Money Tree comment to the effect of steady on – not so fast on my interest in Emerging Markets then he’s proved right and the Argies are in trouble (again) and there’s another bust-up in the markets. Is this Global Financial crisis part II or the backwash from GFC I. I’m sure Argentina has been here before in the late 1990s

    Looks like no end of, er, fun :( On the upside, looks like 2014 could be the year of emerging markets, for those with strong stomachs and intestinal fortitude. Not in the results department, but I have very little EM in my ISA, because I started it when emerging markets were going to be the saving of the world. Now that people have forgotten all that and really hate emerging markets it’s probably one for drip-feeding.

    I can take a breather until the next ISA year in April, then start to learn how drip feed investing works over with those people at Charles Stanley, as I have far too much with TD given the limited FSCS compensation limit. I don’t want to go into another financial crisis with shields down ;)

    So let’s take a look at what happened last time it all went titsup in Argentina.

    their economy went down but didn't stay down

    their economy went down but didn’t stay down

    Now there’s a case to be made that they had it easier then, as the world started to pull out of the post-dotcom recession, and the price of some of their key exports went up. Argentina has a bad rep already for defaulting. Nevertheless, it’s been damn tedious in the markets of late, and 2014 was a bad year for actually buying anything new because everything was up in the sky. I’m all for interesting times in the markets, and we seem to be heading for some of that now…

    11 Dec 2013, 9:24pm
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  • living standards are going down because of a power shift from labour to capital

    Imagine. You’re in a tunnel and it’s dark, then you hear a thunderous noise and see an approaching light. Wouldn’t the sensible thing to do be to accept that an oncoming train is happening and prepare for it? Hit the deck and you might survive it.

    When it comes to falling average wages in the West, however, the approach seems to be to ignore what is happening and yell out “living standards are going down! It’s unfair! How can we stop this!”. It’s a vote-winner maybe, but it isn’t effective. From an individual point of view – the response should be to try and get ahead of the curve. Consume less – and sign off the treadmill of Buying More Stuff Makes You Happy.

    This applies particularly to the so-called ‘middle class’ – you are the people that are in the line of fire. If you don’t believe me, look at what Blackrock has shown is happening in the US in a throwaway chart in its 2014 Investment Outlook -

    Capital is getting more of the pie than labour for years now (source - BlackRock)

    Capital is getting more of the pie than labour for years now (source – BlackRock)

    What happened after 2000, then? The Happy Investors title is questionable, after haven’t we heard often enough that the stock market has been trading sideways ever since the dotcom bust

    S&P500 - log Y axis

    S&P500 – log Y axis

    Well, it seems to have broken out of that now, and of course what isn’t shown on the chart is the dividend income. So what did happen after 2000 then?

    I would hazard a guess at improved communications from the Internet, improved data processing, and the arrival of a shed-load of keen young workers from what used to be called the third world. Although it’s been fashionable for the likes of the Resolution Foundation to pretend that government action can push back on this:

    The US experience also shows us that the fate of everyday workers in America is a product of economic and social policy choices, rather than the inevitable result of globalization, technological change and immigration.

    In other words, we too have a choice: it is possible to reverse the trends in living standards that are beginning to emerge here in the UK.

    I don’t think they’re right at all. For sure, government action may be able to ameliorate the effects of this via redistribution, but only up to a point. These improved communications and technology means that capital can flee taxation and regulation. Capital, labour and land/mineral resources are the factors of production, and it makes sense for capital to move towards where labour is cheaper.

    Others blame the damn baby boomers for it all, and the yell goes up that it’s all so unfair, Living standards are going down. I would actually challenge that statement -I think living standards are going up for humanity as a whole.

    Although not strictly about wealth, Hans Rosling’s time series shows improved living standards across the world in a pretty fundamental way. Seeing a lower proportion of of your kids die before 5 has got to be a step up in living standards!

    It’s part of why people don’t talk about the Third World any more. It wasn’t aid that helped them up – it was trade. That trade made our goods a lot cheaper and a lot more varied in the 2000s, but it also brought a hell of a lot of competition into the workplace. And while living standards for humanity as a whole are going up, the backdraft of that means that wages will fall in the West relative to what they were for any typical skill level, until they roughly equalise globally. Robert Peston had a program on Europe and Niall Ferguson on China – both of them called out some inconvenient truths about competition and living standards in the West. President Obama called it out in two years ago in a State of the Union address.

    “Many people watching tonight can probably remember a time when finding a good job meant showing up at a nearby factory or a business downtown. You didn’t always need a degree, and your competition was pretty much limited to your neighbours. If you worked hard, chances are you’d have a job for life, with a decent paycheck, good benefits, and the occasional promotion. Maybe you’d even have the pride of seeing your kids work at the same company. That world has changed. And for many, the change has been painful.”

    That’s what globalisation does – it means you can buy a DVD player for £18 in Tesco 1. But the downside of that is your kids will struggle to get a job if they are of average ability, so all of a sudden cheap doesn’t look so cheap, really.

    Your wages will fall, compared to what you’re used to, if you have a middle class job.

    You will have less than your parents, if they were doing the same sort of job. They were competing against the rest of the West, you will be competing with half the world. Your gadgets will be far better and varied, and cheaper than theirs were. You will be healthier and live longer. But they had a more stable work environment, their employers were better because they had less choice. You will find it much easier, arguably too easy, to borrow money. Just because you can doesn’t mean you should.

    Maybe Baby? Maybe not

    You will find it much dearer to have children than your parents, because  consumer society is now set anticipating dual income households. The opportunity cost of children is more that it was for your parents. Having it all was never an option, though perhaps your grandchildren may get it if resource crunches or global warming don’t get humanity first. 2

    So for God’s sake do some forward planning. Think about the big things in life – who/if you marry/partner with. Think about where you are going to work, and live. Think about whether you can afford to have children before you have them. You are unlikely to be able to afford to have as many as your parents did, and if you do, your disposable income will be squeezed more than theirs was, all other things being equal.

    You cna own your house. You can have four chidlren. What you can't do, Shona, is do both, not on your money.

    You can own your house. You can have four children. What you can’t do, Shona, is both, not on your money.

    Think about how much house you buy, and remember that a bigger house needs more maintenance, heating and furnishing than a smaller one. That also impacts the children decision – having children is a responsibility, not a right. Consider Shona Sibary as a cautionary tale  – far too many children for her means is the fundamental problem there, though it’s compounded by a lack of strategic planning and general economic muppetry.

    Having children is a emotive subject, and there are some physical constraints. However, unlike some former generations, it is a choice nowadays. There has been a lot of focus on relative child poverty in the last administration, but one of the best ways of reducing child poverty is for people to have fewer children if resources are limited. Hans Rosling’s video shows that for what we may think of as poor countries, but Britain is becoming a poorer country for most people. The logic still applies even if the results of the poverty aren’t so stark. You incur a debt to the child as soon as you bring it into the word – the debt of nurturing and love – it isn’t simply a means of self-actualisation in creating a mini-me. It’s a responsibility, not a right that others have to help you with, despite what some people seem to think

    The UK housing nightmare

    Housing is a particular pathology in the UK, for several reasons. Thatcher’s sale of council housing to buy votes destabilised an effective system of social housing for those who couldn’t afford to buy, and the damage this did to the housing market, together with the rotten terms of the assured shorthold tenancies that prevail in UK renting gives owner-occupation a particularly privileged position. Owner occupation is a crap deal for tenancy for the owner, with huge fixed costs (moving, estate agent’s fees, Stamp Duty in some cases, redecoration/furnishing) and the risk of frozen capital if you have to move to chase work – all of which are more likely now as jobs are less secure and more mobile now than in Thatcher’s time. However, although it’s a crap deal, it’s a lot less crap than strings of assured threshold tenancies (AST) which is the alternative. Which is why people aspire to own rather than rent in the UK despite ownership being a very bad fit for modern working patterns.

    There don’t seem to be any good answers here. Other European countries seem to have made renting a lot more attractive, and people are happy in accommodation that is often a lot denser in cities. The British preference for  houses rather than flats means housing is much dearer, and distances to amenities end up longer. This seems to be where the crunch is happening at the moment with living standards – we simply tie far too much of our earnings up in bricks and mortar. If you buy a house at a 4-5 times income multiple, that will consume about 8 times your gross salary 3. You pay out about a third of your gross salary in tax, so you are agreeing to pour your entire earnings for about 10 years into that house. The situation is improved by inflation (you want lots, as long as your earnings track, which they aren’t likely to nowadays), and many people get some career progression. The arithmetic is ugly, and rents follow the cost of housing by substitution since everyone needs to live somewhere.

    Live intentionally – to live well

    The global  competition isn’t going away any time real soon, and that means the value of Western middle class labour is going to fall because it’s no longer the only game in town. This is a long-term secular trend, it isn’t particularly about the credit crunch or this particular financial crisis, but the crisis throws a harsh light on it – in the UK the welfare system was used to soften the blow, but that’s likely to be scaled back more and more. These trends will adversely affect the lower end and the middle, they will probably favour the top 10%. That means that essentials like housing, energy and food will cost more than they used to, relatively speaking, because more people with the means to pay will be competing for it globally.

    Gadgets and consumer frippery will probably cost less, because there will be more production and a far larger supply of skilled workers in the design and production side, as well as automation removing the need for medium-skilled workers, reducing costs. Looking more widely, the time will come in 5-20 years when a lot of the NHS will be so financially constrained that you will want to have options to go private for some elective treatments.  About £6,000 will get you most elective treatments. It isn’t a bad deal when you look at the fear and loathing that is the US system, but you will probably want to save towards that. Where the NHS scores is in acute and in chronic treatments, but I’m not banking on relying on it for elective medical intervention. It should be noted that saving to a medical emergency fund is not the only way of investing in health. As an early retiree who owns their own time, I choose to walk to places far more than when I was working. Keeping the machinery running is an indirect investment in health, and best of all it is free. Better than free, indeed – as it saves the bus fare/fuel for driving.

    Much of the unhappiness about living standards is from unfulfilled expectations – if you are aware of the trends and accept the results of your actions, you will have less of the pain, because you are living intentionally. Whereas if it comes as a surprise to you because you feel you are fundamentally entitled to a steady increase, then you will feel sore and angry. One of the enduring myths of the West was that things always got better.

    It’s not even true in living memory, it’s just been a while since the exceptions. Real incomes have fallen in the periods 1974-1977 and 1979-1982 4. Britain will still be a rich country even if living standards fall to the levels of the 1990s. Many Britons had a good time then. It really wasn’t so terrible. So if we plan for that, and suddenly some magic happens and the economy takes off and median wages get dragged up, well, we get to have more parties. Whereas if expectations are set to more parties and we end up with 1990s living standards a lot of people will be pissed off. It just seems wise to set expectations lower. Buy less crap, and avoid building too many fixed costs into your life  -

    the key to financial success is never taking financial responsibility for anything that eats

    Jonathan Pond

    As consumers, we are part of the problem

    How did the world end up in such a screwed up state? Well, as consumers, we are also part of the problem, because capitalism is values-blind. I went to town to get some replacement bulbs for some Christmas lights, and watched in amazement at people spending shitloads of money on crap. Mainly cheap crap – in 99p and pound shops, this was stuff that should never have been made, never mind shipped here and sold. I eventually bought a replacement set of lights for £2.50, because they deliberately change the lamp bases so spares are only available for a couple of years. There’s no good reason for that, it is designed obsolescence. 5

    We are part of the problem, because we want our stuff cheap. And getting stuff cheap means we buy from Amazon, supporting shit working conditions. We buy £2 chickens from Tesco, supporting shit animal welfare, and buying a load of overpriced water too. I saw a woman buy 20 boxes of Thornton’s chocolates in Wilkinson because they told her it was half-price, and £3, not £6. What they didn’t tell her was that these were non-standard boxes and the weight was lower ;) She was rewarding deceptive marketing practices.

    We fall for cynical marketing – an Apple iPhone is deliberately designed not to last a long time and have non-user replaceable parts, because you are renting an experience from Apple, with the rent levied on the capital cost of the gadget 6 – the rental period is defined by the average service life. Even if you look after it, as the operating system moves on, older hardware becomes unsupported, and since you use apps rather than open standards an unsupported device becomes unusable, and destined for landfill even if it works correctly as originally designed. Contrast this with a preamplifier I purchased when I started my first job 31 years ago for £1500, the equivalent of £4000 in today’s money. Financially it was a damn fool thing to have done at that point, though at least I bought it on interest-free credit and paid on time. It is still in service.

    The whole way we make electronics anything now is focused on new manufacture, planned obsolescence and no expectation of repair. I repaired a Maplin 150W inverter recently – it cost me a fiver to change two power transistors and a driver transistor. I could buy a new one for £20 – I repaired the old one because I just didn’t want to keep on adding needlessly to the mountains of e-waste when I could do otherwise. That worked for me because I had the skills – for most people this would be beyond economical repair once past the guarantee period.

    If we wonder why many jobs are so shit now compared to what they were, occasionally we have to be prepared to charge the face in the mirror. Capital cares only about the bottom line, and it is gaining power, because whenever somebody presents us with a bill for protecting labour, we don’t want to pay the levy. So it goes away and does what we tell it to do – cut costs – do whatever it takes. At the moment capitalism is probably serving humanity okay from a global perspective as it lifts billions out of poverty. It’s not serving many people in the UK that well, because of this, which I’ve swiped from the Resolution Foundation

    Median wages are tracing down, and that's what most people feel (from the Resolution Foundaton)

    Median wages are tracking down as a share of GDP, and that’s what most people feel (from the Resolution Foundation)

    Although I agree with their narrative, I don’t agree with their solution. In the end the fundamental problem is that middle-ability jobs are being leached from the economy. You can’t legislate for more GDP going to labour, because what will happen is that capital will scarper to places where it can produce GDP without being taxed for redistribution. Of course, we could renationalise the energy industry, which is where Ed Miliband is probably going in the end. In which case the question will change to “how would Sir like to pay for the increasing cost of energy? Higher bills or higher taxes, bit of both? It’s your call.”

    You can run, but you can’t hide…

    That global competition is coming your way. You can deal with is several ways. You can upskill, if you are bright enough, which will bring more in. You can hop from one leg to another and make a low keening noise that it isn’t fair, which won’t help your situation but will make you feel better for a while. You can downshift or not take on as many commitments – in the form of smaller housing, fewer children, fewer consumer purchases and knick-knacks or do what Jacob from ERE does. Or you can stick your fingers in your ears and go “la-lal-la-la-la”. Only two of those responses will help you avoid getting flattened by the oncoming train of falling average wages…

    Of course, one of the ways of avoiding this is to add income from capital to the mix. But the rub here is that you need about 20 times your annual income from capital as a capital stake, and it isn’t easy to save that much up over a 40-year working life while being a good little consumer and buying crap all the time. However, if you are prepared to live differently and dramatically below your means you can make this work for you – it is part of the RITERE and MMM way. These guys will be better insulated from falling wages – because their income is coming from capital as time goes by, rather than labour, and the 21st seems to be the Century of Capital where the 20th was the Century of Labour – in the West at least.



    1. That still sounds awesome to me because I remember buying my first VCR secondhand ex-rental for £150 – about £400 in today’s money
    2. If Hans Rosling is right, there may one day become a day when the fertility rate has fallen so low that governments may actively promote new citizens for economic reasons, and then you may have it all. At the moment it is far easier and cheaper to import them, and the world is not short of humans at the moment.
    3. at typical UK long-term interest rates of 4-6% you pay roughly double for your house over 25 years
    4. IFS
    5. You can, however, retain the old bases and pick out the lamps, so I made sure to match the voltage and power, so I will scavenge the old set for lamps to insert into the plastic bases of the new set as the bulbs fail. The price of replacement bulbs is usurous – you get three for £1 or 20 for £2.50 – in a new set ;)
    6. You may explicitly rent the device capital cost subsidized as part of a mobile phone contract
    1 Nov 2013, 8:57pm
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  • I’ve still got no idea what we are doing up here, mate. There’ll be trouble brewing…

    A while ago I posted the observation of a trader at FinanceRomance’s workplace, and it seems to hold just as much now. I was browsing the Ermine ISA, and looked at the bit on TD where they say the difference in purchase price and valuation and thought to myself WTF? Has there been a party on the markets these last few months?

    FTSE100. Mad, don'tcha think?

    FTSE100. Mad, don’tcha think?

    I struggled to find value this year, so I did a capital gains transfer into my ISA rather than buying new shares. And I’m still struggling to find value, though of course a lot can happen by the time of the next ISA allowance in April. Presumably our American friends are going to shut down the government a couple of times and generally give people the willies, though the last shutdown wasn’t really a great win on buying opportunities. In general I’ve dismally failed to find much worth purchasing. Royal Mail was a win, but £300, while worth having isn’t going to make a tremendous difference. The Direct Line IPO was more lucrative but that was so last year. I took a punt on Europe last year and swapped my HSBC dirty funds 1 for Blackrock’s clean funds in the same space, adding to it. That’s performed well enough since I suppose. But other than that, nothing much of note. I had to liquidate £5000 worth of The Firm’s shares to make space for the Royal Mail IPO, and have had a devil of a time finding somewhere to lodge the remainder. I’ve put half of it in RDSB because I had nothing from that sector, but the remaining half is in cash awaiting opportunities, and they’re thin on the ground.

    Let’s take a look around us at the twisted wreckage that still surrounds us in Britain. The economy seems to be doing well, but it’s been saved by a neutron bomb – the structures are standing but many people seem to be doing badly and falling behind. Some stupid tosser has gone and pumped up house prices again by charging about doling out free money 2 to people who can’t afford to buy houses. I suppose there may be a case for more Castle Trust I suppose. Or Grainger

    Grainger - on a roll

    Grainger – on a roll

    but everything about their fundamentals either offends me like the astronomical PE and the yield of <1%. In a HYP? Sometimes you hafta accept you know that you don’t know and leave alone – it’ll probably carry on rising forever – things to do with British housing tend to do that. Until I touch them ;)

    It's mad, it's bad, and it's gonna go downOver in my non-ISA account I have mainly index trackers, another wodge of Europe value shares from an idea by Monevator who has served me well once again. I didn’t have to hold my nose to buy in Europe because I was already in there and filling my boots because it looked like it was going to blow imminently. I used a generalist EU ex-UK index – and these were big European firms earning money all over the world, in some ways more attuned to a HYP approach, so I had some of that IDJV. I like a jolly bad smell in the morning when it comes to buying. Emerging markets have got that sort of feel at the moment, but I’m not yet that brave and I have zero expertise – this seems to be one of the few areas there’s something to be said for active management, but I’m damned if I know what that looks like. Whereas indexing seem to work a treat in the developed world – I may move on from being a HYP investor 3, now that everyone else is at it and mine is up to the target size to becoming a contrarian indexer – find regions/sectors out of favour and buy into them.

    But the biggest indication that there’s trouble ahead at t’mill is this extract from my ISA on the right. It’s telling me the markets are overvalued.

    In a previous life I would have loved everything going up, and would have piled in. This now gives me the willies – it’s frothy and it’s mad, bad, and it’s gonna blow at some stage. As a net buyer, I want to be buying after the blow, not now when the market is becalmed in the waters of irrational exuberance. I can’t say the sight of all those nominal gains doesn’t give me some sort of a sugar rush – the gain exclude the dividends which I recycled to buy more shares – the spreadsheet version of this looks more outrageous. But it doesn’t feel like it will hold. And I can’t find anything to buy that gives me decent dividend returns these days, not without having to take on dodgy operations.

    I’ve learned however – looking back at my 2011 review I have learned one simple move to improve my results no end. It’s simple

    never sell

    Yes, I’ve broken that rule to try and diversify my large shareholding of The Firm, from all the employee sharesave and Share Incentive Plan shares – it’s just mad to hold more than 50% of one’s total shareholdings in one firm. And I’ve broken the rule in selling that HSBC European Tracker to pick up Blackrock’s fund investing in…exactly the same thing, but with lower fees.

    Although that sea of green and some of those nice figures are great, the sooner we get off this high horse and back to buying territory the better IMO. There’s work to be done, this party needs to stop! Dammit, I’ve been so bored this year I’ve bought more index trackers than anything else – even Vanguard Lifestrategy 100% as I feel somewhat exposed with no US, not AsiaPac or Japan and no emerging markets, There’s no thrill of the chase there though, it’s not like buying something stinking up the place in the hope of a reversion to the mean…

    That trader was right in May, and he’s right again now. I’ve still got no ‘king idea what we are doing up here, mate.



    1. dirty with trail commission
    2. It’s not officially free, but who’s going to be paying off a 95% mortgage in a world of 6* earning multiples and falling real wages?
    3. move on as in leave my existing HYP shares right where they are, not sell and chop and change
    2 Jul 2013, 6:40pm
    economy living intentionally reflections:

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  • Lost in France, a homage to some old European notes dearly departed – will Lazarus have his day?

    It’s coming up to the silly season now, and we even seem to be having some hot weather. Hopefully it won’t lead to an actual hot summer of rage on the streets, but the markets have got that sort of lazy, hazy indolence that gave rise to such opportunity a couple of years ago, and I have a shitload of wedge looking for a home even if I don’t have any ISA allowance left.

    It was time to shoot some pictures in sunny France in return for accommodation, fine wine and cheese, then later on meeting up with an expat pal of old. We fought the Calvados, and the Calvados won.

    no slag-heaps round here, just fertile countryside

    no slag-heaps round here, just fertile countryside

    Whimsical church, in Rue I seem to recall

    Whimsical church, in Rue I seem to recall


    I was pleasantly surprised by the French region of Picardy, I had anticipated it all to be slag-heaps and post-industrial devastation of the sort that happens if you turn left on arriving at Calais, but in fact it was very pleasant indeed. If this is really what Suffolk is going to be like after climate change then it’s not too bad at all… There is the usual whimsical Gallic architecture, and the French retain a more local form of government. The County council is probably our smallest effective district authority, but in France it seems to go down to the village mairie, who take on some quite localised duties. In some ways there’s something comforting-ish that the Mairie has the capacity to rouse the town from its post-prandial verre du vin with a universal signal that some Really Bad Shit is going down. Yeah, I know everybody’s meant to have a smartphone always on these days, but the performance of the mobile network has a lot of dependencies, and I like the gonzo analogue simplicity and low-cost always with you always on receiving equipment.

    A universal signalling device. Receiving equipment is stuck to either side of everybody's head

    A universal signalling device. Receiving equipment is stuck to either side of everybody’s head. That sparrow might crap itself though…

    the strawberries were divine

    the strawberries were divine

    You can’t go to France without sampling some of the local produce, particularly since Mrs Ermine was researching what we could learn from their approach if we experience an increase in average temperature. Florent’s strawberries were fabulous, an opinion shared by the local merles (blackbirds) hence the netting. I was surprised the problem wasn’t starlings!

    The Ermine, as befits a creature of cold climates, really, really hates the classic British summer holiday destination of sun, sea and sand. I’ve only ever been to Spain for work, Madrid in November was quite agreeable ;)

    So I’ve had a bias to Northern European destinations, though I haven’t been averse to the the US and one day fancy a long trip to see some small part of Canada. You always end up with some foreign currency when you come back. There’s no point at all in keeping coins but you do end up with some notes, and every so often you forget where the heck you put them. These ones I inherited, but they probably date back twenty years or so

    Wonder how many of these old friends will return to grace our wallets in years to come

    Wonder how many of these old friends will return to grace our wallets in years to come

    It’s disturbing to think that at the start of my career one of the greenies would be a perfectly serviceable beer token – in London! Some Germans must be feeling a fond memory of those stable Deutschemarks that slowly and steadily dragged Germany’s post-war economy out the shit through Konrad Adenauer’s Wirtschaftswunder and the French may feel a twinge for the old FFr. It feels like the Euro crisis is limbering up for another rumble – it seems to be a summer thing, a bit like the screaming of swifts in the hot city nights.

    It was also a time to lay to rest the question of just how much horse I had been eating. I really don’t have any problem eating horse, as long as the supplier tells me that it is. Which you can’t really accuse the Richelieu Corporation of avoiding. The price probably tells me it isn’t the idyllic pastoral scene on the top of the packet, but it was all horse. Maybe the copywriter was feeling the bad rap of horsegate when he put 100% musclemeat on the packet,

    Horse. As it says on the packet. Tesco, take note.

    Cheval (Horse). As it says on the packet. Tesco, Findus et al take note.

    but I couldn’t argue with the result, a decent horseburger with the classic large-herbivore-but-not-beef-though-there-is-significant-similarity sort of taste. Horse is distinctive and good. I can see how you might be able to pass it off as beef in something that’s only 30% meat as it is, but I’m of the view that less is more as long as it’s of a decent quality.

    Horse cooked expertly by Mrs Ermine

    Horse cooked expertly by Mrs Ermine

    I’d be happy to see more horse on the menu. Just cut the crap and tell us what it is ;)


    17 Jan 2013, 11:16am
    economy living intentionally reflections shares:


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  • The wheel of the year turns, and a pause for reflection

    The Ermine household took itself to the West country at the beginning of the year, for a time of rest, and reflection on the year passed and the year to come. The culturally preferred way of doing that in the UK is to get hammered on the last day of the old year and welcome in the new with a humdinger of a headache and hazy recollections of indiscretions. Nothing wrong in that in itself, but it gets tougher on the constitution as you get older ;) So happy new year to y’all if you’re still here!

    It so happened that Mrs Ermine wanted to go the the Oxford Real Farming conference. That’s an alternative to the conventional Oxford Farming Conference, where Owen Paterson told the assembled mass of agri-business that he was going to pay for PR to convince the recalcitrant refuseniks of  the Great British Public that GM food is good for them. Really it is. I’ve offed the GM rant to later as it isn’t the main topic here.

    So we stayed at a lovely campsite near Oxford for a couple of days. Oxford looked pretty much like it did three-and-a-half decades ago when I went up there for an interview, only the tourists have changed,

    old-worlde building graced by asian lady

    old-worlde building graced by pretty Asian girl wrapped up against the British weather. Time moves slowly in Oxford; Photoshop her out, fade to grainy black and white and it could be the same as my 1978 photo

    Wandering around the city you can practically smell the old money oozing from the stones

    old money keeping this gilded gate nice. It would be shabby if paid for by an Austerity Britain council

    old money keeping this gilded gate nice. It would be shabby if paid for by an Austerity Britain council

    Then it was time to move on, to Glastonbury in Somerset, for a period of reflection on the year past and the years to come. The weather was kind to us – we were prepared to eat the cost of a lost booking if the weather had turned all snowy,  since  our FWD camper van is back-heavy and handles poorly in the snow. We had a lovely few days in a magical environment, though I fear a 1970s revival seems on its way by some of the garb on show.

    on the tor, I'm sure there's a 1970's revival in there somewhere

    on the tor, I’m sure there’s a 1970′s revival in there somewhere

    We stayed at a self-catering cottage near the town, and ate well from the slightly off the beaten track greengrocer and the fine town butcher, both near the market cross.

    alrternative shopfitting for this greencrocer, but their stuff was good

    alternative shopfitting for this greencrocer, but their stuff was good

    Although it’s ringed by the usual rash of out of town shopping and supermarkets, the people in the town have enough non-clone-town concerns to support a decent number of shops, and not the usual rash of casinos (not one I recall) and charity shops that infest the hollowed-out High streets of many market towns.

    Yup. Think we get the message of what's important to some folk round these parts ;)

    Yup. Think we get the message of what’s important to some folk round these parts ;)

    Recession? What recession? We don't do that round here

    Recession? What recession? We don’t do that round here

    I love city streets in the rain, okay so it's cheesy and Thomas Kincade but so what

    I love city streets in the rain, okay so it’s cheesy and Thomas Kinkade but so what, it’s kind of magical. And no chain stores, no clone – town Britain

    You can’t really talk about Glastonbury without a reference to the eponymous Tor so here it is. It’s still a right grunt to get up it, though it is easier now than it has been for me in the past.

    Glastonbury Tor

    Glastonbury Tor

    One of the joys of this holiday is we rented a really characterful stone cottage in nearby Butleigh that dated from the 1500s, though we had the advantages of modern plumbing and electric heating. There was a wood stove in an enormous inglenook, but this was more for the atmosphere than a useful source of heat as it was leaky as hell and tiny. It made me appreciate the quality of my own wood stove, but hell, it added character and we had electric heating to do the real work ;)

    wood stove

    So where’s the personal finance angle? Well, it was also a good time to look back at six months since leaving work, what happened, what is likely to happen, where I want to go.

    what happened since leaving work

    • I lost some weight. That is not a bad thing. I haven’t consciously tackled this, it seems that the stress while working had negative physical effects.
    • I drink less coffee – often just in the morning. Hell, I can even code without it, despite it being the software writer’s legal drug of choice.
    • I drink a little bit less booze. Okay a lot less compared with the immediate end of my working life. That stress thing again I guess ;)

    One of the things that became clear, is that I started my journey unprepared, particularly psychologically. I had expected to get to 60, retire normally and get on with life. In 2009 I discovered I needed to do that 8-11 years short. In times of need the Ermine will fight, and so I chose to fly into the storm, accept the rotten work environment but save madly.

    Unwisely I assumed that the primary risks were financial, that I would be kicked out. In retrospect this was not the case. I had already accumulated significant capital, unlike everybody else in Britain is seems I paid down my mortgage rather than going on holidays and buying cars with the increased house prices. And indeed lived significantly below my means, accumulating capital in terms of housing and some shareholdings, as well as the usual rainy day fund. I measured this against income, but in fact it makes more sense to measure it against outgoings, which made it bigger in effect.

    The financial risks were overblown. I could probably  have made it bailing in 2010, because I had projected my outgoings to be the same as while at work. A life retired is one where you can take joy in things that are free and low cost, those which take an investment of time, or improving skills, becoming self-critical and honing one’s art rather than searching for the technological quick fix or having to pay over the odds to pack everything into the weekend.

    One of the gifts that not working has done for me is that I can aim to do things with respect, or not do them at all. When I was working I had to do all sorts of things ‘just because’. I couldn’t respect anything to do with the stupid performance management system. WTF is the point of a performance management system – my performance showed in what I did. The back of house guys in the Olympics could see what was going on in real time, because of the efforts of me in high-level design and the subcontractors in mid and low-level and getting boots on the ground. I didn’t need some stupid prick ticking boxes or not. And indeed all due respect to my last and final line manager who got the balance on this right, it was the previous one who was the box-ticking prick. But I had to do PM, ‘just because’ some management consultant twits on an MBA said that was the way to do things. Where the hell were these guys when the West was built, funny how they only showed up as it is being lost!

    There are very few things I have to do just because somebody says so now. So when I do something, I try and take time, to address the job in hand, reflect a few moments, and then engage properly, indeed to live intentionally. Whether it’s roasting a chicken, cutting a piece of wood or designing a piece of kit. While working I sleepwalked like an automaton through stuff that needed to be sleepwalked through, but also through things that needed to be done with respect.

    I missed two risks. No man is an island, entire of itself. In flying into the storm of organisational values that had become so disconnected from mine, the Ermine’s brilliant white pelt was tainted as I had to run with some of the stupidity and pretend to agree with what I believed to be arrant rubbish. I paid for being so at odds with the values New Lean and Mean Firm. Overtly, by nearly being ejected for struggling after parting the ways with DxGF. And covertly, because in retrospect pretending to be something I wasn’t for so long seriously damaged my physical and mental health.

    In 2007 I came to Glastonbury with a couple of pals. And failed to climb the Tor, I got too out of breath and abandoned the attempt. Which is piss poor, the path rises 80m in about 400m linear distance. Now I can’t say that I raced up it this time but I was okay, stopped a few times to gather strength but the recovery was a couple of minutes, not tens of minutes then fail as it was five years ago. And not too many people overetook me ;) . I am sure that Mr Money Mustache would consider that a really low grade performance but I’m not him, I’m probably twenty years older. And I don’t have the physical fitness fetish. Decent for my age is what I want. His original weight target is what I’d like, it’s roughly what I weighed at 21, and at least  it isn’t so bad I’d have to lose half my body weight to get there. I have absolutely no comprehension of why he wants to become heavier. Good luck to him, I’m sure he’ll get there by the end of the year!

    I want to be able to cycle up the grade from Tuddenham on an ordinary road bike at more than walking speed without feeling like shit for fifty yards afterwards. I’d like to be able to cycle from Ipswich to Minsmere and back again. Pumping iron and being able to lift cars single handed – nah. Life’s too short for that, even if doing that makes it a little bit longer. Each to their own.

    So much for physical health, but not living my values cost me mental health too, it robbed me of hope and fire to illuminate my world, to choose life and direction. When I left, I gained by the removal of much of what was wrong. It looked good, and for some time I did not miss the hole – the absence of agency and direction that should have been there but wasn’t. I followed the originally designed financial plan, but the greatest fear was running out of money. So, like an unconscious pilot slumped at the controls, the plane to run on autopilot, and it did well ,the original flight plan was sound. I tried to wrestle against my net worth falling, but that was a fight I can’t win. By various synchronicities events conspired to make it look as if I could win, but it won’t be possible in the medium term. It doesn’t need to be, I don’t need to satisfy Micawber’s rule over the next few years, and my original plan did not demand that. It had two requirements – that I should not run out of cash, and that I allocate my ISA allowance each and every year for several years to come.

    Hope is a fragile thing. DW played for time, and guided the inspirationless ermine across the gap until the spark of the internal flame could strike and hold again. There are times in life when one must be prepared to fall back and fall back until somewhere, like Albert Camus in Return to Tipasa, in the midst of winter you learn of the invincible summer that lies within.  Somewhere in Glastonbury this happened. It is time to ease back into the pilot’s seat and survey the controls. Not necessarily time to do anything yet, but to look and see if anything has changed that the flight plan needs to take into account.

    GM rant

    My personal objection to GM food isn’t that it’s bad for you. I mean, some variants will no doubt turn out to be bad for you and/or the environment in general. But there’s plenty of regular millennia old stuff out there that’s bad for you. Try making wine out of ivy or eating foxglove, or most fungi. Plants are aggressive bastards, out to kill you with strong poisons 1 in the fight for Darwinian supremacy. Vegetables have feelings too and don’t actually want to be eaten by great hairy apes. Fortunately a whole host of humanity has gone before to ID or learn how to cook the nasty stuff. We didn’t need GM to make a mess of the environment – DDT, the non-decaying plastics waste choking the oceans, there’s more than enough mess made perfectly conventionally. more »


    1. if you have ever tried eating red kidney beans without boiling the suckers for ten minutes you get to know this up close and personal. I saw the results in a student flat when one guy sampled a couple of red kidney beans on the stove. The results were dramatic, he didn’t make it to the bog before chundering violently
    20 Nov 2012, 10:31pm
    economy fixing things frugality reflections:


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  • where did we lose the basic skills of self-reliance to cope with financial austerity?

    The Grauniad’s had a series called Breadline Britain about how dreadful life is for our increasingly financially challenged nation. Now I just about experienced Britain in the 1960s, as it was pulling itself out of the post-war austerity, and one of the things that strikes me about the difference between the Britain I saw as a child and that of now is that adults have become far less self-reliant. We have lost many basic skills that soften the issues of having less money, and it appears that many adults just don’t seem interested in learning. The second thing that strikes me is the appalling incompetence at household financial management. Perhaps it was easier for my parents’ generation because borrowing money was much harder in the past, so people had to live within their means or just lump it. And the last thing that is obviously wrong is people don’t seem to be asking themselves whether they can afford to have children before doing so. This lady has four children – on a family income of £44k. It isn’t hard to see why she is struggling.

    People design in fixed costs into their lives without giving them enough thought. It first struck me when I reflected on a colleague who lived 25 miles away from work, where I was 6.5 miles from work. We were both higher rate taxpayers, and I calculated that he needed to earn ~£5k more than me, just to have the same disposable income. How’s that? Well, design in a 50 mile round trip instead of a 13 mile round trip. That’s an extra 37 miles he needs to drive, each and every day. That’s about £1300 a year in fuel alone. He’s putting 8100 extra miles a year on his car, with all the wear and tear that entails. I could keep my cars for 10 years and buy them well secondhand; he bought his cars new – in the service life of one of mine, he’d have put 80,000 miles on the clock, so that just wasn’t an option for him. I could bike to work when the weather was congenial. Taken in the round he was taking a hit that was probably equivalent to a salary cut of £5000 a year. And of course he was losing about an hour of his time each day.

    Every time you pay someone to do something you can do yourself, you have to earn enough to be able to pay tax on the money you are paying out. If that person is employed, you have to cover the overheads, sick pay, employer’s contributions, the lot, whereas if you are doing it yourself, you do not have to earn the money and pay the tax and NI on it.

    It is always much more expensive in cash terms to pay someone else to do something that you can do yourself.

    Now that isn’t a reason to insource everything, because there’s the opportunity cost to the money you could be earning at the same time ;) If you are hiring someone on minimum wage and you’re on minimum wage yourself, that is barmy – do your own cleaning. If you’re earning £50k then knock yourself out and hire the cleaner if it means you can earn £20 an hour net and paying them £6.19.

    The cleaner on minimum wage is the obvious example, but there are more subtle costs. For instance, it’s more expensive to get Tesco to prepare your meals for you rather than do it yourself, which is why ready meals are more expensive than the ingredients, and if the cost is the same then the ready meal will contain ropey ingredients ;)

    I was staggered at this bunch of Guardianistas who are struggling to feed two children and two adults on the meagre income of… £35,000 if you please, and they’re living with his parents! Let’s take a closer look. They were on a combined household income of £75,000. Now I have never lived in a household that had this much income – ever! I haven’t been in a household with two incomes for most of my life. The Ermine is not one of the 1%. So I ask myself how the hell these good people managed to get made bankrupt. She lost her job when they had twins. Now I appreciate that it’s not meant to happen that way but in general many mums leave the workforce for a few years after having kids, so the loss of that income was to be expected. Have they never heard of savings? Now they are complaining of not being able to afford decent food, and having to use ready meals. Mrs Ermine has examined that fallacy in this post and found it wanting – the problem there is food preparation skills, or the lack thereof, as well as a shocking lack of imagination and general get-off-your-backside-and-do-something smarts.

    Now eating is one of those fundamental things that everybody needs to do. If you’re rich enough to afford ready meals, then have at it, but if you’re not, or you have the temerity to want your food to taste of something other than sugar. vegetable fats and monosodium glutamate, or maybe you are rude enough to want vitamins, then you have to re-acquaint yourself with the food prep skills that humanity has preserved across generations – until now. Sometimes I wonder if people realise that food doesn’t only come from supermarkets – it’s actually possible to grow some things yourself ;) I particularly like the line

    I’m not stupid: I know this is going to have a detrimental effect on my children’s health.

    For God’s sake, woman, you’re running on £35,000 a year, and have more time, being unemployed. And yet you see fit to switch from cooking yourself to using ready meals? Where’s the rest of that £35k going, on the horses?

    It is the loss of skills that will hurt people in future. In the past people grew food on allotments and in gardens, which saves a lot of money – Mrs Ermine qualifies that at about £2000 a year saved; for a basic rate taxpayer that’s equivalent to needing to earn about £3000 less every year! As an added bonus, although your veg will look gnarlier that Tesco’s, it will actually taste of something and be good for you, as well as filling you up.

    Food does this – it just sprouts from the ground, despite what Tesco would have you believe, and here some citizens of Ipswich are taking advantage of that fact

    There are other skills that could save people money. When I bought my first house, I had a problem with a stuck main intake stopcock under the kitchen sink. Now I could have called in a plumber, but because I had seen my Dad do plumbing, I figured I’d change this myself. I had ambitions of using a blowtorch and Yorkshire fittings but couldn’t reduce the seepage from the Water board stopcock enough to get enough heat into this, so once I got within 5cm of the inlet with some abortive attempts I sucked it up and used a compression stopcock. Job done. I replaced the guttering myself on that house – for the cost of an aluminium ladder and the materials, which was a lot cheaper than when I had that job done on this house; I was time-poor and wanted the soffit and bargeboads changed to uPVC which wasn’t within my capability. I fixed my heating system when the timer/programmer died and again when one of the motorised diverter valves died. I changed my own cold water tank, taking the opportunity to relocate the bugger to the apex of the roof to give a decent head of water to the shower, rather than run a power shower. I changed the water pump on my car, and replaced brake pads in the past. I did this because I grew up with the expectation that any halfway competent person who wasn’t rich would be able to do those – people just couldn’t afford not to.

    More work, yes. More money, no – I can’t save any more money on heating ;)

    Mrs Ermine asked me recently if I was going to run the wood stove in the day. I don’t generally, because the heat is preserved in the house from the evening before. I said no, because I didn’t want to spend the money. She looked at me as if I was crazy. “How’s that going to cost us more then?”. She was right – we don’t pay for heating, because we are prepared to chop up wood and pallets. I did some of that today. Heating less doesn’t save us money. But we need to chop up more wood.

    In Britain we need to become more self-reliant. We need to learn how to cook decent food from ingredients that our grandmothers would recognise. We need to learn to fix some of the basics ourselves. We need to learn to go without if we haven’t got the money, rather than borrow money and have our future selves pay even more back. In the last decade or so we have outsourced a lot of these basics to outside agencies and to the welfare and benefits system, to try and buy our way out of needing to tackle the gritty basics of life. It’s time to roll up our sleeves, spit on our hands, and get to work relearning some of the basic skills our grandparents used to take for granted.

    Where’d they print the instructions on this darn thing?

    Knowing how to feed yourself and your children from food not sourced from supermarkets and food that doesn’t come with instructions printed on the back is a skill we seem to have lost somewhere. My mother’s opinion of supermarket veg was unprintable – she got that from Lewisham market stallholders who would get it from Covent Garden market in the early morning. Even as a student supermarket veg was tired and low-grade. Fortunately students don’t need veg ;) The supermarkets have found how to make veg last longer by chicanery like de-oxygenated atmospheres in plastic packaging and the like, but they can’t get round the problem that the flavour of food fades with time, and most of it seems to fade in the first day or two. It’s why those stallholders got their produce from Covent Garden barrow-boys in the early morning – because they’d have got an earful from their customers if their produce tasted as poor as Tesco’s finest. But it was more faff, and somewhere between the 1970s and now we collectively decided that all the adults in a household should go to work, so we don’t have time to buy decent fruit and veg, or grow it, or cook our own food, or fix our own plumbing or any of those things that our grandparents took for granted.

    We could afford the luxury of losing those skills in the last couple of decades. From the Guardian’s Breadline Britain series it looks to me that these skills are now being very sorely missed. We need to stop borrowing so much money and start living within our means. We need to think about whether we can afford to have as many children because it looks like some of the freebies there are drying up. And all in all we need to man up and start to take responsibility for the choices we make in our lives and skill up to be able to do more with less. The Guardian’s we never had it so bad is absolute bullshit. I grew up in a London of coal fires where only a single room in a house was heated in general, where most people didn’t have cars, and where people grew their own food and cooked it themselves.

    Fridges had no freezer compartment – I recall the excitement when we got the first one with a two-star icebox – you could store frozen food in that but couldn’t freeze it I think. Respiratory ailments were widespread, because the damp and condensation were endless problems; I got bronchitis nearly every year until we moved to a house with central heating. That was not poverty in a Guardianista sense of the word – nearly everybody was like that. But what we did have was a broad base of basic skills, and good and reasonably stable communities. The move to paying for everything and having both adults working has atomised those communities and we have surrendered some basic skills for the blandishments of advertising. It would make the Guardianistas wring their hands in horror.

    And yet there was some satisfaction and camaraderie there. People had hobbies other than watching television, and often these were creative, in quite eccentric ways. There may not be so much money about in future, but we have enormous advantages over those times, communications are far cheaper, the relative level of wealth in much higher.

    The essential difference is that Britain in the 1960s, though it was far poorer than the Britain of 2012, was improving. It was better than Britain in the 1950s, and immeasurably better than the Britain that had endured its darkest hour standing alone against the Axis. The Britain of 2012 stands wanting compared to the Britain of 2006/7, and the Britain of 2015 will probably be wanting in material terms compared to today never mind 2007, for many people.

    We probably can’t dodge that, but we can soften the blow by taking our lives back from the endless messages of spend spend spend. There is a certain reward in taking control of some of the variables, and pulling back from the money economy to improve our quality of life, rather than our standard of living. In a previous life, I used my meagre skills to grow tomatoes in the back garden. The crop was variable because I didn’t really know what I was doing, but for a lot of the time they were far better than Tesco’s Finest vine-ripened tomatoes-  because they had experienced th sun until the day they were eaten. Some simple pleasures can’t easily be bought, and perhaps we will find pursuing these more rewarding than chasing the admen’s plastic dreams. There’s something peculiarly short-lived about the enjoyment derived from satisfying a want that is created by marketing, because it is always a hostage to the next updated version. The stillness when the treadmill stops is a silence that is valuable in itself…