25 May 2014, 9:16pm
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  • Dear Mr Gove. Do not be such a parochial prat

    An Ermine notes with displeasure that a certain Mr Gove appears to have charged out of the stable with his blinkers on. To wit he has decreed English Literature will be dictated thusly

    Students taking the OCR exam from 2015 will be required to study a pre-20th century novel, Romantic poetry and a Shakespeare play.

    i.e. none of that damned American stuff like To Kill a Mockingbird. Or perhaps appositely, The Grapes of Wrath, maybe…

    Now unlike the NUT I’m not implacably against Mr Gove. I do agree that our children should leave primary school being able to read, write and do ‘rithmetic including tables. And that whatever today’s equivalent of maths O level should at least have acquainted the little dears with differential calculus. But hasn’t anybody told Mr Gove that the past is a different country?

    I had the bad luck to have to do Charles Dickens’ Great Expectations at O level. The prose is turgid, dense and repetitive. It’s like trying to read a newspaper with a 1″ loupe – you can’t stand back enough to get an overview. Let’s face it, here was a dude who was paid by the flippin’ word. Plus the gruesome detail is of an age that was a different country. I cite Exhibit A

    A now economically worthless document because my human capital is worth jack shit in the marketplace. One line stands out ;)

    An economically worthless document because my human capital is now worth jack shit in the marketplace. One line stands out for all the wrong reasons ;)

    Now I was to become an engineer, and had already done maths and physics early to get the suckers out of the way. You will already see the signs of weakness in the humanities in the History grade 1 . But I wasn’t so terrible at reading – but I just could not get enough overview of the tedious turgid tripe that is Great Expectations.

    Over thirty-five years have rolled by since I sat that exam and flunked Eng Lit because I hadn’t read enough of the the book, and what I had read had been routed to the trash dump of my brain, which had tried to parse it for meaning and had come up with a null pointer.

    The world has become more global since then. And around Europe the lamps are going out in the intellectual sphere as fearful citizens from Scotland to Greece  seek to make their world a smaller place and hold the tides of globalisation at bay because ‘dem furreners a comin’ fer ours jobs’. These citizens were happy when dem furreners were making their DVD players and their iPhones cheaper, and they are not being served well by the spineless political class that hasn’t got the balls to tell the electorate that the good times are gone for good – living standards will stagnate or decline because power is shifting East. GDP will no doubt increase, it’s the slice of it available to the 99% that will fall.

    This is no time for parochialism, Mr Gove. We need to light the lamps of Reason and of culture so that some pathfinders will be strong enough to navigate their way across the long Western Intercession of the next 30, 50, 100 years. I read Harper Lee’s To Kill a Mockingbird at the same time as Great Expectations – for interest, because the story captured my attention. It is not time now, Mr Gove, to pull up the shutters and look inwards at a little Britain of its Victorian heyday. If anything we need to read a wider pool of literature, so let’s not lop out our American novelists, eh?  Maybe das Glasperlenspiel in translation or Flaubert’s Mme Bovary. It is probably too big an ask to include non-western literature and teenagers are hardly well-read enough to put it into context, but the British canon is too old and too narrow now. The journey is longer to Dickensian London than to the American South of the early 20th century.

    Mr Gove, keep the windows to the world open. We aren’t little England now. The flame of the Enlightenment is flickering in the wind, now is not the time to drain the fuel supply. Spengler had it nailed in Der Untergang des Abendlandes

    [of a culture that has passed the high-water mark]

    And we find, too, that everywhere, at moments, the coming fulfilment suggested itself in such moments were created the head of Amenemhet III (the so-called ” Hyksos Sphinx ” of Tanis), the domes of Hagia Sophia, the paintings of Titian Still later, tender to the point of fragility, fragrant with the sweetness of late October days, come the Cnidian Aphrodite and the Hall of the Maidens in the Erechtheum, the arabesques on Saracen horseshoe-arches, the Zwinger of Dresden, Watteau, Mozart.

    At last, in the grey dawn of Civilization the fire in the Soul dies down. The dwindling powers rise to one more, half-successful, effort of creation, and produce the Classicism that is common to all dying Cultures. The soul thinks once again, and in Romanticism looks back piteously to its childhood; then finally, weary, reluctant, cold, it loses its desire to be, and, as in Imperial Rome, wishes itself out of the overlong daylight and back in the darkness of protomysticism in the womb of the mother in the grave. The spell of a “second religiousness” comes upon it, and Late-Classical man turns to the practice of the cults of Mithras, of Isis, of the Sun – those very cults into which a soul just born in the East has been pouring a new wine of dreams and fears and loneliness.

    That Intercession must come to pass, the West is tired and weak, it’s once shared values lost, and its energy washed out in dissipation, bread and circuses. The seed must lie dormant, perhaps for centuries, until it is ready and willing to serve humanity again, perhaps in a totally different form. Your hearkening back to the old, Mr Gove, is just as hubristic though perhaps less disastrous as the Project for the New American Century, but it’s born of the same refusal to see that death is the necessary counterbalance to birth, in human cultures as well as in Nature.

    Look outwards Mr Gove. You cannot forestall the Intercession, but maybe, if the seed is fed well in the dying of the Light, you can shorten the Interregnum. Somebody has to staff the Second Foundation 2of the West. That child may enter one of your schools, Mr Gove, and you are cutting him off  from the narrative of the recent West in favour of the small-Britain distant past. We don’t need to be reframing our cultural references for a smaller world. One of those kids may be charged with carrying the Staff of Knowledge across the rocky pass that leads future Europeans out of the darkness as the new wine begins to flow.

     

    Notes:

    1. note that these exams were norm-referenced and not the everyone’s a winner sort now. A B was still respectable and nowhere near as dreadful as it would be considered now. This is because norm referencing is autocalibrating. However an E was definitely  an incontrovertible fail, the pass mark was C I believe
    2. A reference to Isaac Asimov’s Foundation series, which held the  same Spenglerian concept that the Intercession cannot be avoided, but had the thesis that if some way can be found to preserve the essential values then it can be shortened.  Science Fiction was considered arrant trash and the lowest form of literature in my school-days, I still don’t know why it’s so reviled. Perhaps there was more reason why I got that E than failing to read Dickens, maybe the Ermine has really has no understanding of literature :) I really liked the Foundation trilogy
    23 May 2014, 12:43pm
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  • The subtle way Hargreaves Lansdown make their money

    One of the things I rather admire about Hargreaves Lansdown is the slickness of their operation. It’s a full-service shop, and the Ermine is nowhere near rich enough to fly First Class, use valet parking, or invest with Hargreaves Lansdown.

    Managing your income is an excellent way to stop feeding the Beast of HMRC – as a PAYE grunt paying the mortgage there were only limited ways I could do this, basically pension AVCs and employee Share Incentive Programmes though the latter were only good for sheltering about £1.5k from tax a year. However, it means an Ermine is now sitting in First Class of the investing platform world albeit with a cattle class ticket, and I get to see how HL works.

    One of the things you notice about First Class 1 is that paper is king. Ditto with HL, so the Ermine has this lot on the dining table -

    A single mailing from HL

    A single mailing from HL

    I recently read this article in the Grauiniad, which chimed in with the book Authenticity: what consumers really want I read from the library a while back, that we are increasingly being sold lifestyles rather than specific products. I’m still not sure whether the Grauniad article is really insightful or absolute bollocks, but anything that makes me think has been time well used IMO. A great quote is

    This is how capitalism, at the level of consumption, has integrated the legacy of 1968, the critique of alienated consumption: authentic experience matters.

    And I thought of that when I looked at this wodge of HL stuff. Clearly HL targets their advertising a people of a certain age, preferably people who have more money than I have and therefore can afford to not look a the price ticket too much :) One of the things that struck me is that it’s all about funds. For historical reasons I’ve never been that much about funds and the way the whole market is going I am going to get out of funds all together, because they induce platform fees whereas so far you can avoid platform fees on things like shares and ETFs. Not only that, but funds seem to offer the opportunity for all sorts of indirection and fees upon fees. This is clearly how HL operate. Their fundamental platform fee is 0.45% 2  – bearing in mind the long-term return form stocks is typically estimated at ~5% you’re paying a 10% income tax right off the bat, just for being there. The reason I have left my money there as cash is that this fee doesn’t exist for cash, though obviously you are paying the government about 3% inflation tax to manage the money supply for the benefit of mortgaged homeowners to depreciate the currency ;) However, since they are giving me back a load of tax I paid in previous years I can eat that.

    However, riffling through the HL paperwork, this is clearly a fund shop, and the fee loadings on the funds are usually over 0.5% so you’re looking at fees of over 1% just to be in the market. Annually. The Ermine is just not used to the concept of being rushed each and every year just to exist. But the words are warm, in the typical vapid style when talking about the unknowable future. Everything is good, and if it isn’t, it’s suffered a temporary setback and is an excellent buying opportunity. There was one chart that made me sit up and go WTF, which was the chart of the UK stock market by CAPE

    The UK stock market - good value right now

    The UK stock market – good value right now

    Now I look at that and think bloody hell, the reason I haven’t yet sorted out what I am doing this year is that the market looks on the upper side of the good value line to me. Better people have suggested that it isn’t so much the headline FTSE100 price level but that earnings are improving, but nevertheless I’ve still got some feeling for the WTF are we doing up here mate fellow, though it’s not as bad as it was maybe. That’s why I am looking at emerging markets, and Russia still draws me, with their PE of 5 nowadays, but I still can’t get my head round what exactly the meaning of the word ‘ownership’ is in a Russian context ;)

    Anyway, the UK stock market – good value by historical CAPE? There are three things wrong with that. The first is look at that great big spike from the mid-Nineties up. That, my friends, was called the dotcom boom. Everybody was charging around like blue-arsed flies buying anything with internet in it. Then anything with www. then any company with an e in the name. Seriously, it was a real case of the madness of crowds. Everybody’s brains fell out on the floor and some people are still looking for theirs fifteen years later. I was there. It really was that mad. I made about quarter of my gross salary in the run-up. And lost half in the bust ;) The training was excellent value, because I learned not to buy into momentum. You will run out of greater fools, because in general you are one of them.

    Just like Mark Twain said about the unique learning you get from carrying a cat by it’s tail 3there are some things you have to do to learn things in a way you can’t learn any other way.

    A man who carries a cat by the tail learns something he can learn in no other way

    Same with the madness of crowds, You gotta be in it to know it. The trick to success is to retain that knowledge  for future use. It’s always a fight…

    If we lop out that piece of irrational exuberance, the chart doesn’t look quite so wild, and there’s also a general downtrend, possibly because the power-shift from the West means the market may be prepared to pay less for any given earnings because it suspects that profitability is falling. After all, with the level of debt both personal and national, where’s the money going to come from to buy your stuff 10,20 years down the line? We can’t all keep borrowing from the Chinese ;)

    Standard Deviation? On Stock prices? Mr Gauss would not approve, m’lud

    The second thing wrong with this is that the trouble with using things like standard deviation on stock prices is that stock markets do not obey the central limit theorem. Mr Market is not a collection of independent random variables, and every so often everybody decides “Holy shit, the world is going to end”. On the flipside, we all sometimes decide that it’s all different now and we have reached a plateau of permanently increased productivity, which leads to irrational exuberance about stock prices. In priciple a government can row back against that by increasing interest rates, but on the other hand they can promise all sorts of Good Stuff to the electorate to get re-elected. Any resemblance to Help To Buy is of course purely coincidental. As a result, the distribution is fat-tailed and is not typical of a normal distribution, so using standard deviation of a normal distribution is iffy. Companies got into hot water with their value at risk calculations because they were seeing events that typically you’d only expect to see in longer than the age of the universe – in about ten years. It actually staggers me, that, in trying to substantiate this paragraph, I discovered people really did use the normal distribution as the model for financial markets.

    I am sure that once upon a time, the level of general and scientific knowledge in the West was widespread enough that it would have been obvious what was wrong with doing that to people in a professional organisation. We seem to search more and more for stupid metrics and valueless numbers rather than seeking knowledge. The world is complex, it’s messy, and one size rarely fits all. The abuse of the scientific heritage of the West that this represents is shocking. This is not new stuff – Carl Gauss died in 1855. Mind you, to my shame I only scored a lousy 5 on the Grauniad’s science quiz so clearly the rot is spreading. But I’m not in charge of shedloads of other people’s money.

    Have you ever seen what happens in a mass of humans when somebody yells Fire? They all lock into each other and start running the same way. That is not a canonical example of a set of mutually independent variables acting individually, so the central limit theorem breaks down. In crises – at the very time when you need your model to work to qualify the severity of the problem. Maths doesn’t help you in dealing with human emotion.

    The third thing wrong with that chart is the data source: internal, with the data set from Jan 1974 giving a veneer of respectability to something that, basically, HL could have made up entirely. And since they benefit from shifting your cash into their funds there’s always the temptation. You can’t validate that data against anything. HL might well have said “trust me, I’m a salesman”.

    I have nothing but admiration for HL

    HL did serve we well when the Chancellor decided to improve the usefulness of DC pension savings no end - just before the end of the tax year! So I needed a place to stash £2880 with a pension firm, pronto, and HL were the only people who managed to open an account and take the money, within a week. TD, my current ISA provider, demanded proof of identity through the post, because their system isn’t joined up presumably, and Cavendish were also after that.

    Now the ermine is not a million years away from getting my hands on that money back, and in a rare turn-up for the books, I can claim back 20% of the tax I paid on earning that money – by simply leaving it with HL and HMRC will add £720 to my £2880. That’s an effective interest rate on cash of about 12% (it’s amortised over two and a bit years) and I can do the same next year and the year after that, for an interest rate of about 20%. I don’t know about you, but I sure as hell don’t know anywhere you can turn that sort of interest rate on cash. Okay, so it is only the money stolen from historical pay packets being returned to me, but it’s worth shifting an Ermine paw and banking with the might of SIPP rather than the Nationwide. I stand to win about £2000 back from HMRC. The trick, of course, is to manage one’s income and make sure I don’t have any when I hook this cash back out – it’s about £10800 which is currently above the personal allowance, but you can get 25% of it tax-free. By living on this for a year I get to defer my main pension, too, which goes up by ~5% each year I defer. Although actually 4% since HMRC will be tapping me for tax- I’m tempted to save my taxable part of the pension into a SIPP to reduce the tax on my pension to 15% since I can manage the cash-flow. The main challenge is having enough cash reserves to keep loading my ISA allowance each year, which has suddenly got a bit harder with the increased allowance. I may consider taking out an cash loan for the last year, if anybody will lend me some money, simply to fill up that ISA allowance. 4

    The Ermine has been freeloading on the money that fund investors have been putting in for years when it comes to the costs of running a platform. I don’t need the lifestyle stuff, but I’m happy for it to pay for my seat on the boat. Most of HL’s customers have a lot more money than I have, so every so often they may see the flash of white fur and a small black tip to the tail scurrying about, but in the end it’s the rake of their wealth that is keeping this ship afloat and in good condition. I salute my well-heeled fellow passengers and raise a glass of proscetto to their choice of lifestyle, if not their quest for value for money. Perhaps the Guardian article was right. When you have enough, you don’t need to seek value for money. The quality of the ride may matter more. HL is selling an experience – giving you the warm feeling

    “You are a wealthy sort of chap, probably a chap, probably 50+. You are knowledgeable in the ways of the world, so here is a shitload of complexity and a teeny bit of salami-slicing of fees. Needless to say, an experienced individual of your calibre has the savvy to make shitloads of money from these fine opportunities despite the fees, so take it away from here. For those of you into shares, we now offer real time live share prices, so you can ride the markets like a pro. Come on in”

    And they do – HL is apparently one of the biggest retail investment platforms in the UK.It’s a slick operation, and probably a nice ride. just not the cheapest. Except for their okay 0% rate on cash, which will do me fine. I live in hope that the new NISA integrated accounts will actually pay you a return on cash, but it’ll never approach the HMRC rate on a SIPP.

    Notes:

    1. I’ve never flown First Class, though I flew Business class enough for work, and you got a lot more bumph there too compared to cattle. But it’s a long time since I have boarded an aircraft – not because I can’t afford it but the experience is so horrible and I get to hate my fellow humans so much for their screaming brats and inability to follow written instructions holding up the queues. So I really try not to do that to myself, or them.
    2. capped at £200, corresponding to an account value of £45k. Now my ISA is more than that, but I don’t currently pay £200 to TD to hold it. I checked last year’s statement and my platform fee was £2.31, so HL are 8600% dearer. In fairness, I made 9 purchases and zero disposals, and HL are 65p cheaper on share purchases, so the difference of £5.85 should be added to TD. So HL is only 2450% dearer than TD, a much more manageable difference for some chrome trim and a slicker operation, no?
    3. I suspect he didn’t say that directly, it is a paraphrase of  Tom Sawyer’sa person that started in to carry a cat home by the tail was getting knowledge that was always going to be useful to him, and warn’t ever going to grow dim or doubtful” but I’m damned if I’m going to surrender the thought picture on the altar of technical accuracy.
    4. You should never, ever, borrow money to invest in the stock market. However, I have a large AVC fund that is in cash and can come out when my main pension commences. So I am not borrowing money I don’t have, I am borrowing money that I can’t access yet. If you want to borrow money to invest then you may as well go into spread-betting.
    13 May 2014, 2:51pm
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  • The sleep of Reason is producing monsters in the UK

    We recently received the postal ballot papers in the UK, and I was reminded of this classic drawing by Goya in 17th century Spain

    Goya's darwing from 1799

    “Fantasy abandoned by reason produces impossible monsters: united with her, she is the mother of the arts and the origin of their marvels.”

    We humans tread a thin line between rationality and unreason, and it feels like the trendline is pointing away from the direction of Reason and has been for the last three decades. I recently discovered that the proportion of GDP Britain spends on R&D has really fallen over the years I have been in work, which might explain why my experience of the world of work moved towards a tedious paint-by-numbers and away from the interesting stuff as time went on. But that’s all for another day, because this ballot paper showed me, at a glance, what is wrong. And it is frightening

    This ballot paper is either a triumph of the democratic process in giving an insight into the true feelings of my fellow countrymen. And giving them a way to vent their spleen in a way that really doesn’t matter one whit, because the European Parliament has no executive power. Don’t take my word for it, get it from the horse’s mouth

    To wit

    Under Article 289 of the Treaty on the Functioning of the European Union (TFEU), consultation is a special legislative procedure, whereby Parliament is asked for its opinion on proposed legislation before the Council adopts it.

    The European Parliament may approve or reject a legislative proposal, or propose amendments to it. The Council is not legally obliged to take account of Parliament’s opinion but in line with the case-law of the Court of Justice, it must not take a decision without having received it.

    In the beginning, the 1957 Treaty of Rome gave Parliament an advisory role in the legislative process; the Commission proposed and the Council adopted legislation.

    So it doesn’t really matter who becomes an MEP – I personally would be in favour of abolishing the whole shooting match and making the Council of Europe representative to the electorate in some population-related way. I don’t think the European Parliament performs any useful function and costs us shitloads of money, and gives a platform for some very strange people of which Nigel Farage is by no means an outlier – he’s positively square compared to some. It’s not gonna be changed in my lifetime. These European elections therefore give the opportunity it seems for a primal scream.

    Psychology tells us that the human mind has to deal with a lot of complexity, and the self-aware I is only partially self-aware/conscious. There is an unknown part of the mind that runs in the background, collecting and sifting data, forming opinions, holding grudges, simplifying the world around to make it digestible by the limited lens of consciousness, at it scans across the too big to read newspaper of our experiences.

    This unknown part of the mind is the back-seat driver to the conscious mind, and it guards the boundary well. It has to, because if the thin line fails under the load then you have a range of rotten experiences from bad dreams through a nervous breakdown to the a full blown breakdown of everything like the effects of LSD gone wrong. Huxley got away with it, Syd Barrett didn’t… That line is there for a purpose, mess with it at your peril. But you can see it indirectly. If you want to know what your worst character fault is, think of what all the people you instantly dislike have in common. The unconscious mind projects some of this upon the world it sees outside, and that gets read back through the lens of the conscious mind.

    Despite that fact that Britain is immensely richer than it was in 1973/5, this primal scream is taking the form of ‘There’s lots of stuff that I can’t have and it’s not fair. It’s all somebody else’s fault’. And this scream is getting voiced in this ballot paper.

     

    the sleep of reason

    the sleep of reason

     

     

    11 May 2014, 10:58am
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  • The Scotland problem

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

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

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

    Tomnaverie stone circle in Aberdeenshire

    Tomnaverie stone circle in Aberdeenshire

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

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

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

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

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

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

    Scottish independence and the Ermine

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

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

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

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

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

     

     

     

    Notes:

    1. I know there aren’t any offshore ISAs :)
    7 May 2014, 4:51pm
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  • The Squeezed Middle are Doomed

    Because they are puppet slaves buying empty dreams. They’ve lost the ability to look around them and the cornucopia of goods and services an advanced industrial nation has to offer them, and ask themselves the simple question

    Does buying this crap improve my quality of life?”

    and if the answer is no, then leave it well alone!

    Firestarter and MMM kicked this off with a deconstruction of one example from the USA, and I’ve now found one from the UK. Get your violins out for Guy and Shaz on £120,000 who haven’t been out for a meal for yonks.

    Annually it’s costing £45,000 after tax, which is a considerable outlay, but I’m happy to pay because I want them to have the best start

    Folks, you were part of building a world where there are no bloody jobs for your kids no matter how much money you throw down the toilet of school fees. We’re talking a sunk cost of  £157,000 per child (11 to 18). There’s a case to be made for setting up the trust fund – it’ll deliver ~£8k each for your precious nippers to sit on their backsides all day. Every year for good.

    Independent schooling seems to be one of those empty dreams that caters to people’s understandable sense of vicarious living and immortality through their children. But here’s a shock finding – it is values, grit and integrity that maketh the man, along with a decent dollop of good old-fashioned luck. That used to be your job as parents to do bar the luck, but I guess along with the usual trend of outsourcing things so you can earn more money to outsource more things that sort of thinking seems to be passe.

    Now you can tell that this is ad-land berlercks from the Mission Statement of Lord Wandsworth college where Guy sends his progeny to -

    LWC is a socially inclusive non-denominational boarding and day Foundation school for boys and girls. We focus on the needs of each individual, while developing in each child a concern for others and a love for and loyalty towards the school community. We ensure that each pupil shapes their values and aspirations within a stimulating and supportive environment, and strive constantly to improve the quality of teaching and learning.

    We aim to equip pupils with character attributes, passion, resourcefulness, independence, skills, knowledge and qualifications so they can become the best possible version of themselves and make a great contribution to a changing world.

    LWC should reach out and become known as a leading and opinion forming school, in principle and in practice.

    Now bearing in mind that presumably if you are charging shitloads of money for entry you can hire the best ad copywriters, WTF is this passionless management speak that we see before us – it’s more befitting an firm of book-keepers that a bunch of people who will relieve you of nearly 200 grand to do a job you could get done for free if you were prepared to be part of the solution. Let’s deconstruct this fine prose. It isn’t a fair fight – the Ermine has merely a thirty-year old grammar-school edukayshun and I failed 1 English Literature. Whereas Lord Wandsworth are education.

    LWC is a socially inclusive non-denominational boarding and day Foundation school for boys and girls

    To be honest, if I’m a parent, I want a school that is a bit socially exclusive – to keep the thickos and oiks away from Tarquin. Even if Tarquin is a moron and I know it, I want him to go to a school where they keep out the rough sorts. With the exception of people like Fiona Millar, most parents are like this, once you have loosened their tongues with enough wine. People are tribal that way. However, this is achieved in a roundabout way. Obviously if you can stump up £20k+ per head per annum, you have automatically eliminated most of the lower classes ;)

    Of course the social inclusives would say ah but 10% of our intake have bursaries. Well yeah but you gotta know the lingo to apply for a bursary. I had to look it up to know what it means in a school context.

    We focus on the needs of each individual, while developing in each child a concern for others and a love for and loyalty towards the school community.

    The usual oxymoronic claptrap. Humans are not multitaskers and you can develop the individual or generate good community sheeple, but you cannae do both. Look around you are the people who have made a difference in the world. They are often borderline sociopathic, driven and not balanced all-round team players. It goes with the patch – great talent sticks out because it is so rare. So don’t go cutting my tall poppies down, school. It’s a dog-eat-dog world out there.

    We ensure that each pupil shapes their values and aspirations within a stimulating and supportive environment, and strive constantly to improve the quality of teaching and learning.

    The Ermine has parsed this sentence searching with his beady eyes for any semblance of meaning beyond the sort of random gwana-gwana that exercised the Register years ago. And failed to discover any. It’s like the snow you used to get on a television when the aerial had fallen out – the random hiss as the intermediate frequency amplifiers are turned up in the vain search for an incoming signal. Is it a dog-whistle to acolytes of Tom Peters, MBAs an other purveyors of management-speak who torture the English language daily? WTF does it mean? How exactly do you do this? Where do you start, and where do you go for help?

    Do or do not, do not try

    We aim to equip pupils with character attributes, passion, resourcefulness, independence, skills, knowledge and qualifications so they can become the best possible version of themselves and make a great contribution to a changing world.

    Way back in the mists of time, when there was still talent and creativity flowing in George Lucas’s veins rather than an unending search for filthy lucre amongst the twisted wreckage of his youthful originality, he created a remarkably plug-ugly character whose greatest statement highlights what’s wrong with that sentence 2.

    It seems following generations have projected these wise words upon subsequent heroes, according to Google. The truth is timeless.

    my fellow Google searchers consider this worth of Dumbledore and Gandalf

    my fellow Google searchers consider this epithet worthy of Dumbledore and Gandalf

     

    LWC should reach out and become known as a leading and opinion forming school, in principle and in practice

    More of the same, really. If you should reach out and become known, then what is standing in your way, FFS, and give no quarter – sack them or eliminate them from your world. Do or do not, people.

    So I thought I would investigate more as to what Mr Squeezed Middle is shelling out for. They have an entry in the Good Schools Guide, so I took a butcher’s hook

    A good, broad, mid-range school, and a good place to be a bright kid – they are well rewarded for working hard, half a dozen Oxbridge candidates each year.

    Obviously nobody has stupid kids, because this might be a crap place to be dumb. But then no parent has stupid kids, right? Have you ever known any  parent who says “my child has shit for brains and is talent-free, not even good with his hands”? Obviously all humans are above average, then…

    That yells out aspirational mediocrity to me. Now Guy and Shaz may know that their kids are no-hopers in the smarts department, but as I said, the trust fund is the alternative, and the great thing about investing in that is that Guy can evaluate the likely return what with being a finance compliance wallah, presumably some of the know-how sticks around. The advantage of the trust fund is even if the kids have the entrepreneurial instincts of a beach pebble there’s a known return.

    As for the Oxbridge entry the odds look poor – three decades ago even my sarf London grammar school of 600 kids all in managed to muster half a dozen Oxbridge candidate in my year 3. I was one of them – though not up to scratch. I’m always suspicious of schools that talk about the candidates and not the entry, too.

    And we had genuine problems, like dimwits kicking a hole in the plaster because they were bored and wanted to leave at 16. I couldn’t determine how many kids LWC has but if he’s dropping three hundred grand on buying the best start it might behoove Guy to look at what he’s actually getting for his hard-earned money. And slightly lower odds than a south London grammar school could muster when five times as many people go to university now as did then is a little bit crap in my view.

    But it’s the mealy-mouthed mission statement that made me smell a rat. Now obviously if you’re dropping well over half your take-home to pay for a service that can be had for free then you don’t get to eat out much. But you’re also not going to get shedloads of sympathy. I’ve never earned anywhere near what Guy earned, and while I don’t begrudge him his hard-earned, nor his right to piss it up the wall of a school that can’t see what’s wrong with not being able to say what they stand for, I can’t really find it in myself to feel a great deal of sympathy. The single mother going to a food bank to buy her kids a book, yes. Guy who is buying what he thinks he ought to buy because he’s only a member of the middle class because he pays for his children’s education, no. Since when did you have to be paying for public school, never mind boarding school, to become middle class?

    This is where the middle class went wrong and why they are doomed. Somewhere along the line they lost their values. They’s skint because they buy without thinking, they are sold dreams of the way they should be living and go for it hell for leather. You only get one chance at life, and it’s too bloody short to spend living somebody else’s dream. Particularly if the somebody else is advertisers looking to created desires in you to make as much money out of you by selling you services and stuff.

    Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need.

    Tyler Durden, Fight Club

    Look at LWC’s website. It’s all about the sizzle, not the steak. It’s about the 1200 acres, the founder, the farm. What do you need to have a good school? You need good teachers, you need to have clear aims and goals. I’ve never been to LWC -  they may be a perfectly good school. Maybe Guy assessed this himself. Or maybe he is just buying into a chimera of what it’s like to be a well-off resident of the Home Counties doing the job of financial compliance and raising kids. Which apparently means paying shedloads of money on public schools to be in with the in crowd. I suppose you gotta spend your money on something, can’t take it with you…

    There seems to have been an explosion of independent schools out there to shake down the ‘middle class’, feeding off the inchoate fear of not doing the best for their children. I take the point that if you want political influence and are rich enough, send your offspring to Eton or somewhere where you can buy influence. Money has always bought influence. It is crystallised claim on future human work, so it goes with the patch. I suspect there are a lot of redbrick independent schools set up to feed the increasing aspiration. And why not – if people want to pay for it, let ‘em.

     

    How much you need to earn gross as a household to enter the relevant decile accordig to the ONS. Guy's well over to the right

    How much you need to earn gross p.a. as a household to enter the relevant decile according to the ONS. Guy’s well over to the right, assuming his wife doesn’t work

    Finally, Guy should take a butcher’s hook at the ONS Gross Household Income by Income Decile (Excel sheet) You need a household income of £70k to enter the highest income decile. Guy and Shaz, you are not the squeezed middle. There are people queueing up at foodbanks. They are squeezed. Finding out that you have to budget and discovering it is a stretch to pay more than a 7th decile household earns for public school education 4 is not being squeezed. You have options that many Britons couldn’t dream of, so you’ll have to excuse us when we say tough luck mate.

    I don’t actually have anything against LWC, apart from their pedestrian ad copy. They may be a perfectly good independent school, just a tad short on the imagination and self-critical side. In old-skool-speak that used to be called ‘could do better’. I believe these characteristics used to be considered important aspects of self-development from Socrates onwards.

    LWC are unlucky enough to have one of their customers moaning in a national newspaper that they are bleeding him dry with their outrageous fees so he can’t afford to go for a meal with his good lady wife. His lack of irony demanded a snarl, LWC is collateral damage. I’m sure they’ll weather the storm.

     

    Notes:

    1. I got an E. In those days people weren’t afraid of calling that a fail. But then I only sampled Great Expectations, despised poetry and was slightly bored with Shakespeare. I was to become an engineer, FFS
    2. SW geeks, of which there are many, will slam me for misquoting the Great Yoda. I like my version better, this is my blog, and if you don’t like it then go read another of the several billion pages on the internet
    3. This should be taken into perspective; far fewer people went to university when I left school, roughly a fifth of the current proportion
    4. for any bemused Americans reading, in Britain public schools are the ones you pay for privately, and State schools are the one the public pays for
    3 May 2014, 9:22am
    economy:
    by

    16 comments

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  • There is trouble burning underground in Britain

    The Times They Are a-Changin

    Bob Dylan, 1964

    We have a problem in Britain. There are a lot of people who are pissed off with the way things are working. One of the good things is that there is some recognition now that the shift of power from labour to capital is causing grief for an increasing number of people. I’m not claiming to know what the answers are, but the one thing that I hope is that the way we humans try and work things out will stick with jaw-jaw rather than the sort of thing we had in the long hot summer of 2011 when people were rioting. And using Blackberry phones – it seems so long ago ;)

    One of the problems is the increasing polarisation of the workforce. I earned a decent wage at The Firm, but I never got anywhere near paying 45%/50% (in those days) tax, though I paid plenty of 40% tax until I wised up. I never got anywhere near six figures. That doesn’t bother me particularly 1  – if people want to push themselves hard enough have at it. Part of the secret to happiness seems to be to value  the riches that you do have 2It doesn’t particularly please me when CEOs pay themselves shitloads of money, but that’s because I don’t think they are worth it, this is a cartel in action and they are stealing money from the shareholders. I’d rather they actually got the money they want but actually did more to make the firms work better, rather than go for the willy-waving of loads of mergers and buying other firms up. Their yachts don’t really trouble me, and while I despise the louche taste so often displayed by the über rich that’s more because it’s a crime against culture and aesthetics than its effect on my world.

     

    That is one tasteless ugly piece of kit, non? And this is the attractive side. Apparently something to do with Philippe Starck, he of the elegant lemon squeezer. Where’s a Viking longboat or Jonny Ive when you need ‘em eh?

    That polarisation is starting a fight. The Torygraph highlights that higher rate taxpayers pay more than two-thirds of the income tax burden in the UK, which is supported by the excellent infographic by Mona Chalabi of the Guardian. That obviously hacks people off. It hacked me off – at the time I hadn’t jumped to the obvious incentive/conclusion, although instinctively I found an answer in the form of employee share incentive schemes, AVCs and retiring early.

    And yet I equally despise bollocks like Help To Work, which Suzanne Moore rightly called punishment for the undeserving poor. I’ve never been anywhere near a Jobcentre ever since it was called the DHSS in the early 1980s. I also don’t have a problem with calling some sectors the undeserving poor, if people want me to work because they can’t be arsed then it does make me wonder why. However, there is a deep problem in Britain today.

    There are no jobs that match the talents and living costs of an increasing part of the potential workforce. They are either not up to it, or the costs of living the way they would like to is not commensurate with the pay they can get. The whole endless hurt that is house prices in Britain is associated with that. The high house prices are where the work is. We can shovel our old gits out to the seaside as much as we want and large swathes of the North are acceptably priced, but that’s not where a lot of the jobs are. Help to Work should honestly be called workfare. And it should ideally do something useful for society, not just make people who have been out of work for three years go to a Jobcentre every flippin’ day. What the hell is the point of that? Unfortunately it’s structural, it’s not a Depression era New Deal building the interstate highways. It’s just employing a bunch of civil servants to get the long term unemployed out of bed every day. The civil servants/PFI firms are just as unemployed as the unemployed, but they get their benefits in a different way.

    We need new thinking here. Despite the ermine probably being on the right of centre, I don’t have a deep issue against the idea of a citizen’s wage, though I do feel uncomfortable being on the same side of the road as George Monbiot, never mind the Greens who couldn’t punch their way out of a paper bag IMO. At least I am also in there with the Swiss, with their vote on a Grundeinkommen who aren’t usually noted for being raving Communists. Unlike the first two, it’s also not about the ethics , it’s the interest of self-preservation. Obviously as wages polarise the highly paid will pay more in tax, for the simple reason that in the immortal words of Al Capone, that’s where the money is. No other bugger has any. With the citizen’s wage, however, I would like to see a whole load of other social  fiddling stopped.

    All the explicit subs going to families for a start – the citizen’s wage ought to be enough for two adults to put enough on their own and two kids plates, and actually get to enjoy their company. If you want three, or you want to send Tarquin to Eton, or you want to run a car, well go out to work or do without. We run a perfectly workable state school system, indeed if we could break the stranglehold of chuntering out economic units we might well run a better one from an all-round education point of view. And let’s rack back on the crazy expansion of the university system. University is about research and advancing the sum total of human knowledge. The average punter isn’t bright enough to do that, and a 50% university entrance target is basically aiming at the average and up. And the way we’ve rigged the system means that it won’t get you a better job often and the graduate premium is dropping anyway, presumably because of all the dim bulbs but also because, fundamentally, machines are getting smarter and the equalisation with China and India still has a way to go.

    There’s just less and less work to go round, and what there is demands more cognitive function, or it’s relatively mindless and low rent. The exams either need to get harder and university more elitist so the taxpayer can support people properly, or people need to lose the idea that you can pre-retire for three years at the beginning of your working life. And if you are going to pre-retire, then for God’s sake keep costs down – the fanciness of student accommodation is presumably a large part of the living costs now. It’s better than anything I was living in until I was in my late thirties!

    Luxury and student living don't go together. As a rule, avoid luxury when you're financing it with debt...

    Luxury and student living don’t go together. As a rule, avoid luxury when you’re financing it with debt…

    Pretending that power shift isn’t happening and calling workfare  Help to Work isn’t the way to fix it. Let’s have the discussions in the political arena about what might work in the future. It isn’t like Britain is creating no value, but fewer and fewer people are doing the creating, and paying a larger share of the tax burden in doing so. What the hell does success look like? Obviously everybody earning loads of money or with capital wants to hang on to it, but OTOH starving hordes of people running through the streets isn’t that much of a laugh for anyone. Somewhere in between lies the maximized quality of life for the most people. You don’t wanna be killed by the not-haves, but you don’t wanna be bled dry for the 40inch TVs either, as Jamie Oliver called out.

    I read The Spirit Level a while ago, and though I didn’t agree with the rationale or the interpretation I’m not so stupid that I’ll let prejudice stand in the way of data.  At least it opened up the debate. There’s more of this lefty stuff in Thomas Piketty’s Capital in the 21st century. I note that Piketty has a very good handle on capital, inasmuch as it costs £18 to buy an ephemeral copy as Kindle format. The Ermine generally tries to avoid buying what I can’t touch so I’m happy to wait for the library or the secondhand market to fix this for me. However, the Guardian is pretty much serialising it in a lot of articles.

    The Guardian has been getting themselves into a wet mess about Piketty’s book, so I turned to The Economist for a bit of balance. They were pleasantly even-handed to his ideas in this article, although whoever drafted the x-axis in the return on capital chart demands a lot of his readers. However, I will pinch the summary from one of the Guardian’s less breathless articles to summarise Piketty’s thesis

    Piketty deploys 200 years of data to prove them wrong. Capital, he argues, is blind. Once its returns – investing in anything from buy-to-let property to a new car factory – exceed the real growth of wages and output, as historically they always have done (excepting a few periods such as 1910 to 1950), then inevitably the stock of capital will rise disproportionately faster within the overall pattern of output. Wealth inequality rises exponentially.

    The process is made worse by inheritance and, in the US and UK, by the rise of extravagantly paid “super managers”. High executive pay has nothing to do with real merit, writes Piketty – it is much lower, for example, in mainland Europe and Japan. Rather, it has become an Anglo-Saxon social norm permitted by the ideology of “meritocratic extremism”, in essence, self-serving greed to keep up with the other rich. This is an important element in Piketty’s thinking: rising inequality of wealth is not immutable. Societies can indulge it or they can challenge it.

    I remember challenging somebody at work to a bet since he flatly refused to believe that he was in the upper 10% by income 3. I am nowhere near the top 10% by wealth – conveniently it appears you need to be a sterling millionaire according to the ONS to be in the top decile. But it is at least all my own accumulated wealth from when I started work. It is interesting what Piketty says about the toxicity of inheritance to the distribution of accumulated wealth. As an example, take a look around you. Two thirds of the land in England is owned by 0.6% of the population, and it was largely the same families who owned it 200 years ago. 50% of land in Britain is unregistered – by definition it hasn’t changed hands in modern times, but is part of ancestral wealth.

    Some might say that inheritance tax is there to address that, but it is only the little people who pay that. The aristocracy struck a deal with the post-war governments who were were keen to shift the balance, mindful of the efforts of the people in the wars. The deal was this “UK.gov, you wouldn’t want people driven off their farms because when Dad hands it on to Son, Son would have to pay 50% IHT, would you?” So there is no inheritance tax on agricultural land in the UK, so it becomes the ancestral wealth store of first resort for old money. The land has to be farmed, but now that’s hived out to contract farmers. These are good enough to rapaciously farm the land using the soil as blotting paper for chemical fertilisers, so we have increased runoff which floods some of our towns and cities, given that our forebears built their habitations around rivers that historically weren’t flash-flooded by industrial agriculture.

    This way there’s an income from the wealth and it can be kept inside the family IHT-free though it has nothing to do with farming. The little people obviously get to pay IHT, which hopefully slows down a little bit of the rampant rise in house prices compared to what it would otherwise be, but old money has nailed that IHT problem that seems to exercise the old buffers at the Torygraph ;)

    In general we seem to have designed a society in which we live materially richer than kings in recent times – and that includes people sucked into Help To Work. But we are hammering people’s emotional needs. We encourage rapacious advertising to make them always want more, we collectively mentally torture people who are unable to find work in the rapidly shrinking pool by dishonesty telling them that it is all their fault that they can’t find work to match their aptitudes that gives enough return to live in the way the advertising tells them. We make it difficult for people to raise children which is a pretty common aim of human animals, oddly enough. We glorify paid work and despise the unpaid graft that goes into making a human community. In fact generally we despise service to people and glorify service to stuff.

    Taylor Schilling in Atlas Shrugged. Apparently the movie stank. The novel has over 1000 pages so it's a big ask ;)

    Taylor Schilling in one of the movies of Atlas Shrugged. Apparently the movie stank. The novel has over 1000 pages so it’s a big ask ;)

    Before readers think the Ermine has been taken over by space aliens and become a raving Communist I don’t agree with Piketty, or the Guardian, that the answer is to steal the money from one group of people to give it all to another. Reading Ayn Rand’s Atlas Shrugged did not cause me to spill my beer. Niall Ferguson’s The Great Degeneration sums up a lot of the problems. What I’d like is for us to apply some mind and intellect to establish where we are, what we want of an economy – the hint is probably to make human life more enjoyable, rather than to worship metrics 4  and digits on a screen, and then to have a decent debate on the big picture. I’m with Scott Fitzgerald that

    The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.

    Politics now is all to much micromanagement of detail and polarised crap. I fell into that damned trap myself – I kept on earning even when the process of earning money was beginning to seriously piss me off, but never opened my mind to what am I trying to do with life, until I encountered a sudden stop. And then realised that I could stop and should stop bashing my head on a brick wall, but it would demand changes in how I did things.

    Let’s avoid that sudden stop and inquire on how to do things differently. As I wander through the neighbourhood I spot loads of UKIP posters. It reminds me of the 1970s when the National Front was marching through Lewisham High Street. UKIP seem racist in a different way – less about colour, but let’s not forget that Europe has known a terrible amount of human misery perpetrated between groups that one would be troubled to spot a difference between by sight 5. The troubled history of the Balkans and the dreadful conflict that started 100 years ago shows where that sort of thing goes. One of the delightful collective qualities of the English are that they are generally a tolerant and easy going bunch of people in comparison.

    Hopefully we will think our way out of the problems rather than fight our way out of it. But the language of some of the election literature I am receiving troubles me. I don’t normally bother with European elections for the simple reason that the European Parliament has no executive power, I of the same opinion as both Piketty and UKIP that there is a serious democratic deficit in the EU, and it would be remedied with a Parliament that was elected in proportion to population and had the power to make the running. The EU was historically a trade body set up by technocrats, and that is fine. For a trade body.  The expansion of the mandate needs different structures. But smashing it all up in a fit of pique doesn’t strike me as the smartest option either. And what I really, really, want is to lean against a UKIP victory. The East of England is already a redoubt for that party, and these guys scare me, because when you start to hear that the end justifies the means it’s not usually a sign of good times coming.

    And we need to stop lying to the people that the economy is disenfranchising.

    There’s nothing we can do for you, you’re on your own

    would be a far more honest response to the long-term unemployed than bullshit like ‘Help to Work’ and oxymoronic compulsory volunteering. I’m not smart enough to know what the answer there is, but I am smart enough to know that collectively lying to ourselves isn’t the answer. We have to deal with the world as it is, not how it was. And right now the pool of work for the averagely endowed is dropping, the returns on that work is falling, and there seems to be an increasing amount of hurt as a result. There are also a fair few own goals – one of the things I am deeply grateful to Gordon Brown for is keeping Britain out of the Euro. The Island Kingdom is essentially different when it comes to handling money, it is perhaps a shame for other members of the Europe that Britain is not the only exceptionalism.

    There’s a lot of slow-burning crap at the moment. To be fair there’s probably always a lot of slow-burning crap at any time through modern history, and every time somebody declares that the slow burning crap has been nailed it turns out that he’s standing right on top of it, like Francis Fukuyama’s The End of History and the Last Man. It’s not just human development where declaring victory is unwise, Lord Kelvin thought physics was done and largely dusted in 1900 bar improving accuracy. But it probably does to engage with the slow burn rather than pretend it isn’t there and end up like Centralia.

    Notes:

    1. a lot of people get worked up about the unfairness of some people earning shitloads of money. As a citizen of a First World country in the 21st century, many Britons are  probably doing pretty well, on a global scale…
    2. That’s maybe easier for old gits who have known outside bogs, no central heating and draughty windows. Clean water, which in fairness to Britain I have always known, being warm enough and having decent food knocks having the right iFads and consumer goods into a cocked hat. Try doing without any of them for a couple of days in February.
    3. He declined, because he had already lost £5 to me because he didn’t believe that Mustela erminea has a baculum some time before
    4. The most common metric of economic growth, GDP, has serious deficiencies as described by the OECD
    5. I’m really trying to avoid Godwin’s law here, particularly this year
    11 Apr 2014, 4:36pm
    housing
    by

    9 comments

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  • Mortgage income multiples and affordability

    One of the ways people are finding to pay more for houses is to switch from the historical use of income multiples to the new measure of ‘affordability’. The former gives the wrong answer, but the latter is great. Progress is good, but it’s worth understanding. When I bought my first house in 1989 mortgage providers would qualify a prospective mortgagee by asking how much did they want to borrow as a proportion of their gross salary 1. You’d typically get a mortgage of 3.5 times a single salary or 2.5 times joint salaries in the case of a couple.

    These sound low today. To the extent of being unworkable at current house prices for most people. It made sense 30 years ago, because Britain had just come off a run of double digit interest rates, personal taxation was much higher (the personal allowance nowadays is over a third of the median salary of £26,000, it was lower relative to salaries in the past). It is instructive to observe the relative proportions of mortgage interest and capital repayments over the typical 25 year period at 10% interest rates and the current ~2% rates.

    You spend much more time repaying capital at 2% APR

    You spend much more time repaying capital at 2% APR

    Compared to, say, my mortgage career at higher interest rates

    you pais a higher absolute amount relative ot the price of the house, and you pay interest for longer in the old days

    you paid a higher absolute amount relative to the price of the house, and you pay interest for longer in 1980s/1990s

    Which is much more like the canonical sudden rush of repayment towards the end that we used to know and love. When you tot up the total amount repaid, the 2% fellow pays 3*gross or 4* net salary, the 10% guy pays 7*gross or 9* net salary 2

    There’s clearly some case to be made for increasing the income multiple – provided that interest rates stay the same. After all, if we say I was paying the long-run British average of about 6% interest rates over my working life, then had I been earning the average wage, I’d have sunk 6*net/5* gross wages into my house 3. If it’s all different now, and low interest rates are here to stay, then it’s perfectly justified to sink twice as much into a house. In the end it’s what you pay over your working life that matters, and at lower interest rates the total amount paid is less.

    So bring it on, let’s run at twice the income multiples that were lent to people 25 years ago. That’s 7* single income and 5* double incomes. Now 7* median single income will buy you my house I believe, so the residual 10% gives you room to may the parasitic costs of moving and all the hangers-on.

    This isn’t recommendation or otherwise. Housing still rates as the greatest finance screw-up of my life, so what do I know ;)

    Thing is, it’s all different now are the most dangerous words in finance. Secular changes takes years to take effect. QE can’t last for ever. If you’re looking to buy a house as a first time buyer, you may not like Buy-to-Letters who are essentially front-running your heart’s desire. But say what you like about them, they’ve probably got a fair awareness of the mortgage market.It’s the oldest law of the jungle – when the big beasts start looking nervous it’s worth knowing why…

    Some of the BTL guys are running scared and fixing

    And it appears some of them are running scared and remortgaging now. Had I bought just three years later, the Ermine would probably be a buy-to-letter with a deep belief in the value of housing rather than still feeling it was a Weapon of Mass Wealth destruction – one’s early experiences with an asset class tend to be formative. However, I have recently seen younger BTLers come a cropper with the usual problems, underestimating the effect of voids, and underestimating the chavviness and lack of character of some tenants. As a tenant years ago I only saw the lack of character of landlords, but it seems to cut all ways. The residential housing market seems to bring out a particularly nasty streak in the British psyche – buying and selling houses is pretty horrible experience too. BTL landlords seem to need significant capital resources, and preferably a number of BTL properties to average these lumpy setbacks.

    It probably is a bit different now…

    But not as much as to justify a doubling of price to earnings. 4 or 5 time single, maybe. The double salary premium might go up a little bit more – mothers return to work quicker now than they used to. Let us postulate that it’s all different now. Mortgages are given on an income multiple of 7 times single salary, but it is required that you have a 10% deposit (ie 90% of the purchase price is advanced to you). Sounds fair enough?

    Let’s take a look at what your monthly repayments would be like, assuming you’re on a standard variable rate, ranging from the 1% it’s around now to the 14-16% at the high-water mark of what I saw in my mortgage career.

    your mortgage payments as a function of annual interest rates

    your mortgage payments as a function of annual interest rates

    at 15% you’re paying out more than 90% of your net pay in mortgage. Nothing left to pay bills, council tax and you had better become a breatharian or start scavenging food from bins like Top Cat. Note that you don’t have to see sustained rates like this for several years. Just a couple of years of that can slaughter you unless you have significant savings behind you. It all boils down to the usual question.

    I’ve been there – well less than that, but I’ve spent more than half my net pay on the mortgage.

    If you’re going to start down that track then at least know what the enemy looks like. This has nothing to do with negative equity, it’s straight interest rates. You need to either have savings, live more frugally, or get a payment holiday. Those savings need to be about two years of running costs. Then it’s a fair gamble, because after two years of 15% interest rates Britain will look very different. The general misery would be such that some government would probably have to do whatever it takes to reduce them, or start dropping money from helicopters 4.

    an old idea from 1969

    an old idea from 1969

    Your aim as that homeowner is to be still standing when all the people around you have been repossessed.

    It can be done. But it’s rough being the house between two evicted properties. You do start to wonder when it’ll be your turn. It’s no fun at all…

    Frugality is the solution there; by definition. If you were earning more then your earnings multiple would be lower. It’s not something that sits easily with expectations now. And God help you if you have any other debt.

    Income multiples will matter again if interest rates rise to historical norms of ~6%. Mr putative 7 times net  income multiple will be paying ~50% of his income on the mortgage.

    Methodology

    This spreadsheet. I calibrated it against this calculator and derived the formula from Francis Webb’s Mortgage interest calculator template. 5

    I’m done with property now. Even after 25 years the thought of residential property as an asset class brings me out in hives ;) Good luck all and be careful out there.

     

    Notes:

    1. The rationale for gross salary was Mortgage Interest Relief At Source(MIRAS) allowed you to pay the interest from pre-tax salary. Barmy, I know, though notably the United States still has mortgage interest on residential property as tax-deductible I believe
    2. I have assumed the 3.5 times multiple applies to net salary since you don’t get MIRAS any more
    3. I earned more than the median wage for nearly a lot of my working life, so this isn’t that bad. However, I am looking for the scale factor, the old mortgage income multiples were workable, many people have paid off their mortgages from then
    4. Milton Friedman, 1969 The Optimum Quantity of Money And Other Essays
    5. I regret to say that I didn’t bother trying to understand the function, simply copied it and tested it against Monevator’s calculator. It was too nice a day to wrangle that sort of detail, so as long as there isn’t s systematic error across both sources it should be right :)
    6 Apr 2014, 10:40pm
    economy housing personal finance:
    by

    51 comments

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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.

    1404_hamsterwheel

    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 7

    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 8 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.

    Notes:

    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. Update 22 April – a house just like mine has gone up for rent across the way, so I looked up how much it would cost to rent. The imputed rent assumption is pretty damn close, it’s nice to get a real-life confirmation of the cost-modelling.
    8. 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
    4 Apr 2014, 12:07pm
    personal finance:
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  • Hargreaves Lansdown saves the day at the eleventh hour of the old tax year

    I’ve never had any dealings with HL, because the Ermine is a cheapskate when it comes to platforms, and Hargeaves Lansdown has the rep of being a high-cost full-service shop. However, given that that nice Mr Osborne seems to indicate that we can now draw our pension funds in full subject to regular taxation, I want a SIPP. Held in cash, possibly, though I need to reflect on that at my leisure. The rationale is here – although I can’t draw it as of yet, I’m not far from the 55 cutoff.

    When I researched the original article I looked at Cavendish Online, for a stakeholder, which would be the cheapest. But they wanted me to fill in forms sent through the post with all the money laundering fun and games of certified copies of this and that. There’s not enough time for that given that the end of the tax year is tomorrow so I didn’t fancy my chances with the post. Online is the way to go.I would have thought a SIPP wouldn’t need all that garbage because presumably they go to HMRC and go ‘have you got any records of this geezer with national insurance number xxx name An Ermine living at this address. If it matches, fine, if not the alarm bells go off and somebody sends a SWAT team out. But no.

    So I attempted with TD Direct, on the principle I already have an ISA with them, so all the know your customer malarkey has been done already. Had a go a couple of days ago, they seem to have lost the application, and certainly haven’t asked me for any money yet. In the unlikely event they find it and do something I’ll tell them they’ve missed their chance under the 30-day cooling off rule, basically for gross incompetence :) They know what the end of the tax year is all about, FFS, and although I normally expect people to get their act together about the end of the tax year for ISAs and SIPPs it’s not like Osborne gave us huge amounts of notice to process what’s changed and how to use it.

    Since I am a canonical example of somebody who can use a short DC pension to my advantage I want some. And since I have no income, the most I can lob in in a tax year is £2880, so missing out this tax year costs me £720 (less running costs). As a minor snarl, why is it that whenever I fill in a form and it has status of employment, do they have no entry of Gentleman of Leisure? I am not employed, and I am not unemployed either. I’m not down the Labour Exchange claiming JSA. At least HL had the ‘other’ category.

    So I take a leaf out of Boardgamer’s book, and figure I may as well give it a go.

    Hargreaves Lansdown know the tax year is ending

    Hargreaves Lansdown know the tax year is ending

    Obviously I simulated the effect of their charges; there are no opening charges, but there is a 0.45% p.a. hit on all investments (including shares!!!!) and there is a stupendous £354 flexible DD/exit charge. So be it, there’s still a win from the £720 the taxman lobs into the pot, and since these are savings I will be living on anyway I may as well park them in a pension and get my tax back from them – it beats the hell out of the interest on any cash savings account I can get.

    Now I have to say that as I went through the application I saw why HL gets its rep as a slick operation – they took the cash via a debit card, opened the account, allowed me to defer investment choices to later and the whole experience was a lot better than the un-joined-up mess that TD were offering. They may still manage to make a muddle somewhere but so far so good. Even with that shocking exit charge the simulation indicates I am good for about a 16% ROI on cash over the next three years after costs and assuming 3% inflation. 5% p.a. real return is worth getting out of bed for. Presumably all the know your customer crap is coming my way, but at least that can be done at my leisure after the deadline.

    Using Hargreaves Lansdown’s website brought it home to me just how crappy all the low-cost platform websites I’ve used were. TD Direct probably just about get the wooden spoon award for usability, though I don’t really get on with Charles Stanley that well either. CS looks prettier but I still get lost in it. III’s was serviceable but the funds selection was truly horrible, hopefully they’ve improved it since I told III to sling their hook for ramping charges.

     

     

    2 Apr 2014, 4:26pm
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  • a little bit of Africa comes to Suffolk

    Noticed more dust in the air and it’s a git to get off the windscreen. Apparently a little bit of the Sahara is paying a visit, so the wipers are sanding the glass. The reports in the grauniad seems to be particularly dire, however – I walked four miles today, partly in search of the perfect black car to take this. Can’t say I felt particularly like this mother and child - it must be really bad in The Smoke!

    Leanne Stewart, from Eltham in south-east London, described feeling breathless after a routine half-mile walk to her son’s school this morning.

    “I’ve been doing the usual school run about half a mile from my house, which is usually quite an easy walk, but I’m still breathless now,” she said. “I could feel my chest getting tighter and tighter and my son, who’s eight, had to stop and have his inhaler.

    What I really wanted was a classic black Beemer with the dust on the bonnet but we clearly don’t have the wealth or the drug dealers in my part of town

    Saharan dust on a black car in Ipswich

    Exotic Saharan dust on a black car in Ipswich

    with London and East Anglia in the boresight of the winds bringing this sand

    incoming pollution aleart from DEFRA

    incoming pollution alert from DEFRA

    It’ll be interesting to stick a microscope slide outside tonight and try and catch some of this stuff and see if it looks like miniature sharp sand. It’s a shame that I didn’t try that when we had those lovely aircraft-free skies with the volcanish ash clouds from Eyjafjallajökull

    The Guardian has a bit more about where the dust comes from

    So just where does this pinky-red dust come from? Dr Steven Godby, a drylands expert at Nottingham Trent University, thinks he has the answer:

    The Sahara is the largest desert in the world and contains a number of significant dust source areas. Looking at satellite images captured last Thursday and Friday it seems the dust was generated from two source areas, one in central Algeria close to Tamanrasset and another in southern Morocco to the south of the Atlas Mountains.

    To generate dust storms large numbers of silt-sized particles are needed for the wind to pick up and transport and these two areas have been identified as dust ‘hot spots’ in the past.

    Google maps link

    All this talk of the winds from the south making the old ones feel lethargic brought this old Grace Slick tune from the cusp of the 1980s to mind :)

    Postscript 4 April – I got my Beemer in the end

    one dusty black BMW

    one dusty black BMW

    I left a microscope slide out in the garden for 24 hours to pick up some dust. The dust looks reasonably sharp and spiky through a microscope. It’s been a long time since I’ve driven a microscope, and the Ermine student microscope is probably not really up to the job ;)

    the odd sharp little bits

    odd sharp little bits of Africa

     

    dark field variant

    dark field variant