November 2022 – Musing on… The death of the NHS, long live the NHS.

Delayed by the miserable flu-like illness going round.

This post has been a long time coming, hence the old ‘musing on’ title. It’s sat in my drafts as I’ve watched things gradually crumble across the NHS. Things are now so bad I see open discussion in doctor’s forums about futures in private healthcare, and no denial that the NHS has already collapsed (1). Therefore I guess this post will lead into some musing on how the death of the NHS will affect FIRE plans, and what you should do, if anything, about it.

But let’s take it back a bit first. I wrote the first collation of links, draft ideas and title for this post back in 2018. At that time I must have believed the NHS cold be saved, hence the “… long live the NHS” ending. I don’t think that any more. Not in it’s current form, or anything approaching the best treatments for everyone free at point of care. It’s dead wood now. Don’t believe me? Here’s an article and further evidence saying similar (2, 3):

I stood on the picket lines in 2016, arguing for a better contract, as we recognised that we were the first domino to fall before the conservative agenda. Since then below inflation increases to funding have not just impoverished but actively harmed as the populations gets older, fatter and sicker. The British public have been fed an expectation that they can live their life how they want and the NHS will patch them up. Not all have swallowed it, and the sensible continue to take responsibility for their health and quality of life, but for many we are expected to fix the problems of a lifetime of neglect, in a system itself neglected for a generation (4). This is “the national conversation”, that c-suite healthcare managers and politicians are starting to talk about. The NHS and social care system will not be able to support the needs of the coming elderly. It’s going to be a seriously hard lesson for some folks. A bitter pill.

Public Sector Fixed Investment in Healthcare as % of GDP, adapted version pinched from Twitter, originally from this article (5)

Back in 2016 it probably was saveable. Do you remember in 2017 when the Conservative Party were talking about the “dementia tax” in the run up to the election (6, 7). It was a big thing at the time, caused lots of pushback and was canned because the public didn’t like it. It was exactly the sort of hard thing that needed to happen, which the public wouldn’t like but which would save the system. The issues with the social care system were known then, and the issue was kicked down the road, snowballing as it went. It’s not just the Tories, it should have been reformed in the 90s, but Blair dodged it (6).

The under-funding, under-resourcing and under-supply of social care, particularly for the elderly in the community, backs up the systems into hospitals. Hospitals then have fewer beds available. Since 2020 some of those beds are also taken up with COVID patients (8). Per this IFS report, “the number of beds available for non-COVID activity in the third quarter of 2022 was still lower than pre-pandemic” (8). Additional funds from the government cover only half the increase on costs of inflation. Flow is slower, with people taking longer to discharge, with fewer admissions (they’re just discharging people at the front door who are more unwell) and fewer procedures (8).

The number of staff working for the NHS has gone up by between 8-15% since 2020 (8, 9). Accounting for increased staff sickness that still means more FTE bodies on the shop floor. It’s unlikely to last, as COVID stopped the fairly common practice of junior doctors post foundation year but pre-registrar training jetting off to the antipodes for a few years working R&R. Everyone stayed put as they couldn’t travel, those who were abroad came home to be near family during the pandemix, and doctors just got on with the business of the next stage of training whilst accumulating PTSD from COVID. Now 45% of junior doctors want to leave the NHS (10). Many are planning to leave medicine altogether. The Daily Mail comments (in fact the whole article) on that story is a shitshow: “Nurses and doctors should get free education but contracted to NHS for 10 years or pay for education”; “We need to be recruiting our own people to be doctors and nurses, using health professionals from abroad is not the answer(11). On the former, most of the money from the government to universities that goes towards our clinical training (by being paid to the NHS for placements) actually just serves to subsidise healthcare. I went to plenty of placements in med school where the clinic time was part funded by my education and I got little learning except as a ward dogsbody. Which is a kind of learning I guess. Some of that payment is still being recouped as my student loan.

On the latter Daily Mail point, finding the people to recruit isn’t always the problem. The gov has increased university medical school places (nice earner for the unis) without increasing the corresponding first year junior doctor posts. Consequently people are graduating medical degrees without a job to go into (12). If you’re lucky enough to get a job, which might be hundreds of miles from family and friends (it was for me), then you can be stuck essentially providing service provision with minimal support for onward training. If you grind through training, paid £12-20/hour to make life or death decisions, then maybe you get to be a consultant. Or you step off the grind, and use the free market economy of locum work to discover your real >£100/hour value (doctors and nurses here) (13). And the NHS wonders why it has a staffing problem (14).

The FIRE bit

Ok, so why does this matter for FIRE. Well if you’re planning for FIRE that should probably include the bit where you get older. That means including old age care, and the chance that you might have chronic illnesses. Something people consistently underestimate, as I wrote about back in 2018. Monevator did an excellent series over the course of 2022 trying to fill in the blanks of how old age social care funding works (15). It’s a big black box of future financial risk that people ignore because it’s scary and complicated. Helpfully the Monevator post does offer a route through, but it’s a messy job.

What happens if the NHS does morph into a different form. It can’t stay as it is, and to make it free for everything everyone wants all the time is going to cost a lot of tax. I suspect we will shift towards the NHS covering urgent/ emergency work, and all elective work being done privately (the lucrative bit anyway). National insurance shifting to covering social care, and an expectation that each individual pays for a hybrid health insurance, like France and Germany. Could or would you cover private insurance in your FI number? TEA and the Mad Fientist kind of discussed this in their chat back in 2021 (16). A sort of self-insurance. If you don’t want to do that, and are as equally pessimistic about the extent to which the NHS will be able to save your bum in the future as I am, then factoring in a degree of flex for private insurance might be an option. In France it seems to be about 40 euro a month, and covers medication and extra services on top of their semi-national health care (17). In Germany it’s 14.6% (+0.9% charge) of your income, though it’s a lot more complicated (18, 19). We don’t want to go the route of the USA, where health insurance is a persistent barrier to FIRE (20). Over there getting sick means debt, financial toxicity (21). I can’t see the UK public stomaching that, although it may insidiously spread.

Ultimately, things can’t stay the same as they are (22):

That means either more tax, or some form of private healthcare. Impossible to predict the future on it, but expect a bigger budget line in the future, and factor in some inflation in FIRE modelling.

Other interesting stuff (usually from Twitter):

Fairly awe-inspiring application of the GPT3 chat AI by Danny Richman on Twitter, which shows what could be done (23).

Graphic from r/dataisbeautiful user u/jcceagle which shows how UK housing is at it’s most unaffordable since the Victorian era (24):

Thread from @CarDealershipGuy on Twitter discussing looming issues in their car market caused by price inflation (and now deflation) and knock on effects (25).

A window into what happens when you go from no COVID to all the COVID, provided by a threat from a Doctor with access to China’s healthcare system (26).

Nils Pratley in the Guardian on Curry’s (27).

November 2022 Finances

Here’s the numbers:

These are taken, as always, from my Beast Budget spreadsheet. I saved an anomalous 60% of my income in November. This figure is actually a bit skewed, as a got a large wodge of expenses paid back, which immediately went into paying off the associated credit card bill (and basically balancing out). I also got backpaid for a bit of private work, so that topped up the regular saver (emergency fund). Some will also get invested in passive trackers naughtiness. My net worth finally bounced back up thanks to paying back that credit card, up 3% this month.

Budgets:

As compared to my four year back-calculated mean monthly spend:

  • Groceries: October £330, November £155, budget £220 – Being much more sensible pays off
  • Eating out & Takeaway: Oct £105, Nov £160, budget £50 – But also this…
  • Transport: Oct £280, Nov £270, budget £330
  • Holiday: Oct £10, Nov £0, budget £40
  • Personal: Oct £465, Nov £100, budget £120
  • Health: Oct £52, Nov £52, budget £150
  • Misc: Oct £699, Nov £620, budget £215 – Nursery – a continuous new line on the budget
  • Work fees: Oct £394, Nov £135, budget £265 – A reminder this is what I pay each month to be allowed to be a doctor in the UK. I can claim it back via self-assessment tax, but that’s it, big NHS says suck it up.

In the garden:

Digging over compost and general tidying only.

Cheers,

The Shrink

References:

  1. https://www.reddit.com/r/JuniorDoctorsUK/comments/zaufaq/at_what_point_do_we_conclude_that_the_nhs_has/
  2. https://twitter.com/KHoulgate/status/1604979026199576576?s=20&t=Hdg5t5XvjkI2iseBXZLtOQ
  3. https://www.theguardian.com/society/2022/nov/27/stress-exhaustion-1000-patients-a-day-english-gp-nhs-collapse
  4. https://www.reddit.com/r/JuniorDoctorsUK/comments/zbdcvi/frustrated_with_being_a_sticking_plaster_on_our/
  5. https://www.ft.com/content/2f1d62ee-bc1b-4eae-bebd-f4e32076bcd5
  6. https://www.bbc.co.uk/news/health-45750384
  7. https://www.bbc.co.uk/news/election-2017-40001221
  8. https://ifs.org.uk/news/nhs-2022-more-funding-more-staff-treating-fewer-patients-covid-impacts-linger
  9. https://www.gov.uk/government/news/record-numbers-of-staff-working-in-the-nhs
  10. https://www.businesswire.com/news/home/20220808005334/en/Nearly-1-in-2-Junior-Doctors-Are-Considering-Leaving-Their-Profession-Medscape-UK-Report-Finds
  11. https://www.dailymail.co.uk/health/article-11579113/Four-10-junior-doctors-plan-quit-NHS-soon-possible.html
  12. https://www.theguardian.com/society/2022/mar/15/791-medical-graduates-could-miss-out-on-nhs-junior-doctor-training
  13. https://www.bbc.co.uk/news/health-63588959
  14. https://www.ft.com/content/3f8c35ed-e7b6-4f96-b965-a2b97bee45cc
  15. https://monevator.com/social-care/
  16. https://www.madfientist.com/escape-artist-interview/
  17. https://www.internations.org/france-expats/guide/healthcare#:~:text=In%20France%2C%20the%20average%20cost,types%20of%20health%20insurance%20plans.
  18. https://www.academics.com/guide/health-insurance-germany
  19. https://www.howtogermany.com/pages/healthinsurance.html#brexit
  20. https://www.reddit.com/r/financialindependence/comments/8zx7iq/health_insurance_as_a_barrier_to_fire_in_the_usa/
  21. https://www.amjmed.com/article/S0002-9343(18)30509-6/fulltext
  22. https://twitter.com/ShaunLintern/status/1609895676153925632?s=20&t=QL0jTgTMJFjlHkR2oakn3g
  23. https://twitter.com/DannyRichman/status/1598254671591723008?s=20&t=RmBfIA8Hg3iFCkEj8D6cug
  24. https://www.reddit.com/r/dataisbeautiful/comments/zktc6r/oc_uk_housing_most_unaffordable_since_victorian/
  25. https://twitter.com/GuyDealership/status/1603794722140688384
  26. https://twitter.com/DrEricDing/status/1604748747640119296?s=20&t=jQjVmvTlJu_8Hfj823eWRw
  27. https://www.theguardian.com/business/nils-pratley-on-finance/2022/dec/15/currys-no-longer-flavour-of-the-month-in-the-scando-countries
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October 2022 – Just how bad is it [house prices] Doc?

When we bought our first home my dad, not one to mince (or even use) words, said not to ever worry about the price. A home was always worth another home. Once you were in, all that mattered was whether you could keep up repayments.

It’s therefore with morbid curiosity that I’m watching the news articles roll around about people not being able to afford their homes. Emma from Norfolk is having to sell and move into shared ownership as her two year fix is up, and she has to pay an extra £200/month (1). There’s been a flurry of questions like below on Reddit from people trying to work out what is the cheapest option for them, or how to afford a new mortgage (2). Chloe from London can’t afford her east end flat with the higher bills, although that might have something to do with changing from a city job to teaching (3). It comes on the back of research from Citizen’s Advice who suggest that 1/4 couldn’t afford an extra £100/month on their mortgage, and half can’t afford £250/month (4). The estate agent says “buy the biggest house you can afford, it can only go up”, and the populace jump how high.

I continue to sound like Cassandra (Burry), but this has been coming down the tracks for yonks. Years. It’s an interest rate reversion to mean people. 0.5% as a base rate is bonkers. 4-6% is a long term average, depending on whether you talk median or mean and time periods. Everyone’s so sodding focused on the next 24 hours, the next week, the next month, they’re not looking further out. How many of these lot do you think stress tested their mortgage to greater than long-term averages? Monevator talked about it twice in the summer (5, 6). I did it last year when we remortgaged. It’s just prudent personal finance. Now they’re all getting their towels wet as the tide comes in. Poor planning means…

Scan the horizon

How bad is this going to get? The BoE reckons two years of recession and unemployment doubling (7). It’s turning off the easy money tap (8). I’m not sure what to think, but am wary of this being a warning shot to prepare people, as has happened with interest rates. They started going up, and then accelerated rapidly. A warning to prepare people for recession might soften the blow of 3-4 years of shit, when you don’t want to tell them straight up. Mixing metaphors, the frogs in the pot and the heat is being turned up. Interest rates, energy bills, higher materials and wage costs are all going to pinch employers (9). Those just-about-managing businesses and the zombie companies supported by cheap loans, they’re all going to go. The recession is going to build lean businesses. I was planning a stag do for next year and noticed a load of local hostelries are shut over the winter, citing energy costs, with vague plans to re-open in the spring for the summer trade.

Back on property, there’s a balance at play between bank mortgage books, house prices, and mortgages as proportion of ownership (in my head a bit like stock float). The BoE is going to tighten stress tests on banks, because they know there will be more repossessions and bank failures if they don’t (10):

So the banks are going to want safer lending and aren’t going to be giving out easy money. Higher interest rates, and tightened lending on stretched LTVs. Higher mortgage rates have a lovely negative feedback loop on the wider economy (11), as the you lose the discretionary £100 in your pocket for spending every month to the bank to cover your new mortgage. Higher mortgage rates also discourage people from buying (12). If you can’t afford to move to a bigger home you stay put – sort of the position we’re in now. Early indicators suggest a reasonable fall in new mortgage approvals – 10% (12). It’s one of the few relatively contemporaneous measures, as most house price indicators are backward looking. Data on average mortgage % agreements are about six months behind current, as they’re fixed in advance, and house prices are similarly slow as they rely on data from completion on the land registry, not current marketing conditions.

Mortgage rates can only go so high. It’s a market. People can’t/ won’t pay silly prices. There are signs rates may be stabilising, at least in the interim. There’s been a dip of some fractions of percent in recent weeks (13, 14). A combo of the BoE base rate rise and having apparently sober politicians in charge. However the cheapest rates are still from small providers, and at low LTVs, showing that risk aversion is still there in banks balance sheets (15).

That’s well founded. This month has seen house prices fall, following on from a fall into October (16, 17). Only a little bit, but it’s a sign the heat is coming off the market. My perpetual Rightmove search is now full of reduced properties, whereas last year is was all Sold Subject To Completion. Lloyd’s caused headlines by speculating on an 8% fall in prices over the next year (18). There’s other figures between 6-15% (19). That’s still above pre-pandemic levels.

I was really worried about a bigger fall, but I’ve updated based on a different consideration. It’s not Fred Harrison’s 18 year property cycle prediction of rises until 2026 (20). It’s about that float/ percentage mortgaged. Mortgage affordability may have reached 9x average wages, house prices may have dipped, new build sales may be falling, but this all only matters if you’re moving and have a mortgage (21). Only 28% of properties are owned with a mortgage (22). 36% are owned outright. For Margot and Jerry, who own their home and have no plans to move, the market matters not. There’s a kicker about people using second properties owned outright as rental income for a pension, but the corresponding rise in rental prices seen over the last couple of years is still a market. If people can’t afford to pay they’ll have to do something else, and the market has to cool. They’ll just have to accept a lower (pension) income from the poor bugger renting from them.

So I don’t think it’s going to be catastrophic. A fall yes. Outliers who overstretched themselves in negative equity, like 2008. A loss in net worth (on paper) for most. A real terms loss of income (BTL) for some, and potentially a further old-age pensions/ income sting. But the market will re-balance. House repossessions are starting to climb, but they’re still at low levels (23, 24). 10% off the top isn’t awful for most who are at better than 75% LTV, and the market might actually be sensible again. Shit houses might not sell for silly money. Look at me being all not-Cassandra-ey.

Why do I even care when I’m sat in an alright house with a 4 years left of a fix at 1.65%? Well our house is just alright, and we want to go bigger to get more space for tat and potential sprogs. We’ll probably move next summer, when things have stabilized a bit and we’re in a better position to sell. The BBC’s calculator reckons if we just re-mortgaged we would be paying £350 extra a month. Doubling our mortgage, and extending the term out to compensate, would add £900/month on. Oof. Luckily we can port, but I better get cracking on promotions to meet the lifestyle bloat.

That’s how this FIRE thing works right?

P.S. Vaguely interesting other stuff

Guardian opinion piece on the impact of cost of childcare on the economy (25). As someone living this I feel the pain.

The Republicans likely did worse in the midterms because more of their voter base died of COVID (26). Anti-vax politicians; play stupid games, win (lose) stupid prizes.

October 2022 Finances

Here’s what my finances done done:

These are taken, as always, from my Beast Budget spreadsheet. I saved 10% of my income in October. Pretty poor that. I’m still fronting up for a load of work expenses, so hopefully that should offset from the figure later in the year. My net worth did sod all, up 0.6%, as I toe the line of £100k net worth. Once again all saving was just into rebuilding my existing emergency funds, though I did look at a Barclay’s 5% Blue Rewards account.

Budgets:

As compared to my four year back-calculated mean monthly spend:

  • Groceries: September £234, October £330, budget £220 – Booo
  • Eating out & Takeaway: Sept £93, Oct £105, budget £50
  • Transport: Sept £220, Oct £280, budget £330
  • Holiday: Sept £330, Oct £10, budget £40
  • Personal: Sept £32, Oct £465, budget £120 – This was buying a couple of large special gifts for close family
  • Health: Sept £52, Oct £52, budget £150
  • Misc: Sept £515, Oct £699, budget £215 – Nursery
  • Work fees: Sept £130, Oct £394, budget £265

In the garden:

Just tidying up now with everything put to bed for winter.

Cheers,

The Shrink

References:

  1. https://www.bbc.co.uk/news/uk-england-norfolk-63568495
  2. https://www.reddit.com/r/UKPersonalFinance/comments/y70g4i/am_i_better_off_going_onto_a_tracker_mortgage/
  3. https://www.mylondon.news/news/cost-of-living/london-teacher-37-forced-sell-25543958
  4. https://www.thisismoney.co.uk/money/mortgageshome/article-11361933/One-four-mortgage-holders-wont-afford-monthly-payments-rise-100-says-Citizens-Advice.html
  5. https://monevator.com/higher-interest-rates-havent-yet-derailed-my-mortgage-strategy/
  6. https://monevator.com/mortgage-rates-rise/
  7. https://www.bbc.co.uk/news/business-63471725
  8. https://www.bbc.co.uk/news/business-63474176
  9. https://www.bbc.co.uk/news/business-63566945
  10. https://twitter.com/BruceReuters/status/1574324723047022592
  11. https://www.thisismoney.co.uk/money/markets/article-11348595/Soaring-mortgage-rates-key-UK-recession-risk-economy-stagnates.html
  12. https://www.thisismoney.co.uk/money/mortgageshome/article-11373183/BoE-Home-buyer-mortgage-approvals-dive-10.html
  13. https://www.thisismoney.co.uk/money/mortgageshome/article-11351701/Mortgage-rates-going-Major-lenders-including-HSBC-Virgin-cut-interest.html
  14. https://inews.co.uk/inews-lifestyle/money/mortgage-rates-fall-uk-homeowners-interest-drop-further-1963617
  15. https://www.moneysavingexpert.com/news/2022/11/cheapest-fixed-mortgage-deals-dip-below-5—-lowest-rate-in-a-mo/
  16. https://www.thisismoney.co.uk/money/house-prices/article-11417517/Average-house-asking-prices-fall-4-100-month-says-Rightmove.html
  17. https://www.thetimes.co.uk/article/house-prices-fall-for-the-first-time-in-15-months-h62j9h6jf
  18. https://www.bbc.co.uk/news/business-63411783
  19. https://www.bbc.com/news/business-63676119
  20. https://www.thisismoney.co.uk/money/mortgageshome/article-11327445/There-wont-house-price-crash-says-Fred-Harrison.html
  21. https://www.theguardian.com/money/2022/nov/14/what-is-happening-to-the-uk-homebuying-and-rental-markets
  22. https://www.uswitch.com/mortgages/mortgage-statistics/
  23. https://www.thisismoney.co.uk/money/mortgageshome/article-11413579/House-repossessions-rise-15-three-months-amid-high-mortgage-rates.html
  24. https://www.independent.co.uk/news/business/mortgages-repossessions-landlord-evictions-rent-b2222207.html
  25. https://www.theguardian.com/commentisfree/2022/oct/28/rishi-sunak-fixing-british-economy-invest-in-childcare
  26. https://politicalwire.com/2022/11/14/covid-deaths-probably-cost-republicans-the-midterms/

Quarterly Returns – Q3 2022

Quarterly return posts supplement my monthly Financial Dashboard, covering investments in detail and looking at my yearly targets. Here I track purchases and sales, document progress against my (in progress) investment strategy, and discuss re-balancing and changes over time.

TL:DR Flatline of minimal savings, uptick thanks to property value increase.

Net Worth tracked over 2022

Q3 Returns:

  • Cash Accounts £11,100 (+£700)
  • Investments £12,050 (+£250)
  • Property £70,600 (+£11,100)
  • Cars £8000 (-)

My net worth at the end of Q3 2022 has jumped around £10k. This is purely down to our quarterly review of what Zoopla and Rightmove reckons out house is worth. As previously mentioned, some bonkers person bought (a very extended and tarted up) house on our perpendicular street of the same age and type as ours for £100k over the previous local ceiling price. This, plus a 7 bed HMO up for half a million, has pushed the local valuations up about 25%. I don’t completely believe it (more on that in my October 2022 Financial Dashboard), but it’s what the paper valuation says. Our location is also potentially a bit insulated from any property price fluctuations as it remains in high demand for first-time buying young families/ professionals (maybe wishful thinking). Otherwise my investments are flat, while my savings have gone up a bit offset by work costs on a credit card (which are pending expense acceptance).

Investments:

Core/ Satellite Passive/ Active Split

My 2022 Financial Year ISA is in Vanguard. Still not paid anything in. No spare cash while I build back up my emergency fund. £5k of outstanding invoices for private work may solve that. In my Freetrade ISA account from last year I reinvested some dividends. As I’m overweight active investments I bought a bit of iShares EM ETF (promptly down 5%), and then threw my best-laid plans out the window by also opening a new position in Scottish Mortgage Trust. They have been on my watch list for years, as I sat on the sideline as they went stratospheric to a November 2021 high of around £15.40. Since then they’ve fallen around 50%. I bought at ~£7.80, and they’re now around £7.50 (another 5% loss), and priced more fairly. Some sources seem to have around a 15% discount to NAV, but who knows given the amount of early stage stuff they hold. I like pretty much all of their top holdings, their ethos and approach, and will probably expand this position gradually balancing against my passive holdings.

My general equity holdings are down over the quarter, alongside everything else in the market. That has pushed me further into imbalance, as my crowdfunded holdings have also increased. Freetrade did an 8th (!) round of crowdfunding, but I didn’t partake as I’m a bit dubious as to their plan for growth, burn rate, and general direction vs competitors. It did give me a new approximate price per share, so updating that puts me at about a 250% return. More boring investing needs to be done in Q4, but I’ll likely still be restricted to sticking cash in savings accounts.

Passive to active split of the portfolio
Holding class

Goals

In terms of goals for 2022:

  • Save 35% of my income – 40% prediction

This looks basically impossible now. Kids cost money.

  • Save £8k towards a new car – 40% prediction

Completed in Q2.

  • Finish the house renovations – 75% prediction

Very little progress on this this quarter, as we were variously ill, then away on holiday, then seeing family/ friends. I’ve booked a few days annual leave to finish some brickwork and rendering (weather permitting), and hopefully will find time to build a new log shed. The final pieces of the puzzle after that are a new patio and repainting the hallway. All takes time, and that’s in short supply. It may be that it gets finished over the Christmas period, but we’ll see.

Happy autumn,

The Shrink

September 2022 – A solution to the productivity crisis

WARNING: Musing on macro-trends ahead.

Hat-tip /u/Snkssmb on /r/CasualUK

Dry wit emerges and casts into light an uncomfortable truth.

The UK is economically bollocksed.

It would seem we’re currently at an awkward crossroads, 30 years in the making, and leaders in the next five years will decide decades of future. How and why? In the (rose-tinted) view of the Industrial Revolution the UK built it’s economy on empire (slaves, colonies, stealing stuff), technology and cheap labour (workhouses). The lead was so striking that it took the first world war to knock us off our perch, and the following 50 years were one of loss of a century of economic lead punctuated by the second world war. (There’s an argument we’re still winning at global Civ via culture victory). Come the ’80s, Thatcher yanks the handbrake and powerslides us out of industrial-focus to financial-focus. Vis-a-vis the rise of London finance as the engine room of the British economy. If you’re outside of a 50 mile radius of London then you’re irrelevant, and your contribution to a productive economy was essentially on attentional tick-over. Just enough funds and support to keep going and maintain an attempt at a standard of living.

I was reading an Atlantic article that was arguing that Britain’s current nadir is resultant from the 2008 financial crisis, fear amongst the banks, the subsequent austerity policies, and the xenophobia which added fuel to the Brexit fire (1). I half agree, but I don’t think you can blame it all on that. I think it’s more about the people left behind outside of the M25. Without a positive vision for their future, those people looked to a past where their wages bought more and their (childhood) quality of life was better. Here’s a great cost-of-living post from r/CasualUK (2):

So that household is supported by a single individual’s pay. There’s a reasonable standard of living, even if some things are a stretch. How much of current consumerism improvements to people’s existence is masked by decreased prices on items around the home?

We’re not the only ones facing this economic change. The rest of Europe has it too, but it never quite de-industrialised/ centralised to the extent of post-Thatcher Britain, and never became so reliant on their own equivalents of London financial cash, so they don’t have so far to fall (3). The pivot to the World Bank of London has left millions of people in the provinces with less incentive for productivity, creating a generational attitude. I think that’s what Truss, Kwarteng et al are tapping into in their “Britain Unchained” booklet (4). Unfortunately they lay the fault at the foot of the individual, not the collective culture:

“The British are among the worst idlers in the world,” they wrote. “We work among the lowest hours, we retire early and our productivity is poor. Whereas Indian children aspire to be doctors or businessmen, the British are more interested in football and pop music.” (4)

Alright, complain about laziness, idleness, sloth and lack of productivity, but God forbid they actually explore the reasons why.

The engine room

We come back to productivity. The UK is no more productive now than it was 10 years ago (5, 6). COVID hasn’t helped, but it’s not like we were on a parabolic trajectory. Output per hour is increasing by factions of a percent (6):

Prior to 2008 productivity rose about 2% a year, and since then it’s stalled (7):

Productivity since 2000, from October 2022 Productivity House of Commons Research Briefing (7)

We’re living in a political culture of finger-pointing blame. Truss, Kwarteng et al seem to reckon it’s lazy people, not working long enough hours or hard enough (at what job I wonder?!), whilst the movement that fuelled Brexit pointed at foreigners either taking jobs or making political decisions. They’re all keen to say the problem is x or y’s fault, and therefore the solution is to target x or y. Hence Brexit. Hence Truss-onomics. In my work with people in therapy often a solution is not to focus on why or who is to blame, but where we are now and how we get out of it.

Truss’ idea about growth wasn’t necessarily wrong, but the methods via unfunded tax breaks and what essentially amounted to trickle-down economics were those of an idealistic undergraduate’s. They lacked a knowledge of the world outside of insulated belief. We’re probably in a recession, and a “doom-loop” of low-growth, low productivity, low investment (8).

Hat-tip /u/what_am_i_not via r/dataisbeautiful

A solution

Part of the proposed ongoing solution is to get more skilled people into work. Rich, skilled workers are retiring early, leaving a skills gap in the economy (9). That means you, FIRE advocate and believer. The government wants your skills back in work. Business leaders want your skills back in work (10).

Underlying this lots of people over 50 have left work since 2020, reversing a trend that held since the 1970s of people working longer (11). Those people can afford to. Skilled workers are richer (9). They have Defined Contribution pensions that have sat in the market for long periods, and now due to pension freedoms (short-term gain) they can do with that money as they wish. What they wish is retiring early. FIRE are the early achievers. 40 years ago a Defined Benefit pension usually meant working to a set age (or taking a trade off to retire early). You had to work, you had no choice. Now the choice is yours.

I actually lay part of the blame for this productivity issue at the feet of passive investments. I tried to read up on links between passive investment strategies and decreased productivity, but could find nothing macro. It all focused on dilution of company management and loss of productivity in individual companies, e.g. Forbes and the Atlantic (12, 13). My opinion is that the rise of passive investing has meant self-management of investments is easier, so more people do it, so more people are aware of how much they have and how they could retire. As the markets go up, so do people’s passive investments, providing them with the financial resources to retire. I can’t find anything on what happens when your baby boomer population bulge all retires early thanks to passive investments dependent on these decreasingly productive companies. Maybe that’s a bit too Burry/ Cassandra.

Back to the UK and our relaxed, retired, educated workers. Living their best lives now they’ve FIRE’d. How do you get them back in work?

A large stick

You remove the thing that enables them not to work. You strip out the economic insulation protecting your older workers. A cynic would argue you could do this by:

  • Tanking the bond market that supports many retirement funds
  • Tanking the property market that supports buy-to-let property prices and the ‘capital return’ on investment properties
  • Pushing up interest rates such that mortgages on said buy-to-let or owned properties become difficult to pay without further gainful employment, whilst simultaneously removing tax and pro-BTL/property tax mechanisms.

I would argue that said cynic is attributing to strategy what could be attributed to stupidity and blind-luck. The result is the same. You force people back into work. That means you FIRE person.

A carrot

You don’t have to do the above, it’s just the alternative means doing quite a bit of tearing down of current institutions. If you’re buddied up with those institutions and people that’s not palatable. It’s massive reform, switching from finance and old industrial manufacturing to tech/ green industries. It’s what the EU are doing via their COVID Recovery Fund (3). But it means ignoring the existing big manufacturing companies, and not focusing on the Bank of London. It’s not what the Tories are currently doing. It would mean ignoring a lot of their historic voter base. They seem to be doing a halfway house by encouraging and promoting productivity via technology without diverting the economy away from it’s previous path. I wonder how much of that is down to being wedded to the idea of the City of London being the engine of growth, and how much is down to being friends with people in the City of London. Individual company improvement in productivity through technology is wonderful; you get huge net margins from your software profits without huge overheads of staff/ space (14). It doesn’t solve the wider issue at a population level. There’s a quote in that original Atlantic article about how the UK now has 50% more hand car washes and 50% fewer automatic machine car washes than it did in 2003 (1). Low skilled workers are cheaper than robots.

The strongest expert voices seem to suggest investment in human capital and infrastructure (5). Train people to do more skilled work, and invest (privately or publicly) in the facilities and environment to do that. Not just the workplace, but transport, internet services, healthcare, the lot. The people can be imported, or trained locally through university/ training centre expansion (5). We are well-placed to do this in some sectors; the UK is a world leader in biotech, and was in renewable energy infrastructure. It’s just not a quick fix. These are long-term policies, with few short-term gains, and lots of cost. If you’ve got two years until an election is it something you would want to do?

September 2022 Finances

Checking the assets and liabilities:

These are taken, as always, from my Beast Budget spreadsheet. I saved 39% of my salary in September. Its turns out that my pay had been miscalculated for the past 7 months, meaning juicy backpay. MrsShrink is back full-time in work now, and splitting house bills plus childcare between two full-time salaries is easier. My net worth is still stumbling around the £100k mark, and all saving this month was into boring monthly savers to recoup our emergency fund. That’s now sitting around the £5.5k mark and inching up.

Budgets:

As compared to my four year back-calculated mean monthly spend:

  • Groceries: August £317, September £234, budget £220 – Closer, and proving hard given current economic climates
  • Eating out & Takeaway: Aug £129, Sept £93, budget £50
  • Transport: Aug £170, Sept £220, budget £330
  • Holiday: Aug £0, Sept £330, budget £40 – We had a trip away, and blew the saved holiday pot on nice food and fun activities. I use a Starling pot to put aside £25-50/month and this seems to work well psychologically
  • Personal: Aug £62, Sept £75, budget £120
  • Health: Aug £52, Sept £52, budget £150
  • Misc: Aug £767, Sept £515, budget £215 – Nursery
  • Work fees: Aug £160, Sept £130, budget £265

In the garden:

Harvested tomatoes, squash, some salad crops, and started tidying ahead of autumn.

Cheers,

The Shrink

References:

  1. https://www.theatlantic.com/newsletters/archive/2022/10/uk-economy-disaster-degrowth-brexit/671847/
  2. https://www.reddit.com/r/CasualUK/comments/xhs119/i_found_my_greatgranddads_bills_from_the_1950s/
  3. https://hbr.org/2022/10/the-uk-economic-crisis-might-not-be-a-one-off
  4. https://www.npr.org/sections/money/2022/10/25/1130633196/britains-productivity-problem
  5. https://blogs.lse.ac.uk/businessreview/2020/03/07/if-the-uk-is-high-tech-why-is-productivity-growth-slow-economists-weigh-in/
  6. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/articles/ukproductivityintroduction/2022-10-07
  7. https://commonslibrary.parliament.uk/research-briefings/sn02791/
  8. https://edition.cnn.com/2022/10/25/economy/rishi-sunak-uk-economy-crisis-choices/index.html
  9. https://www.thetimes.co.uk/article/skilled-workers-ability-to-retire-early-is-creating-unhealthy-social-division-dhfh50263
  10. https://www.smeweb.com/2022/10/19/businesses-need-to-invest-in-older-workers-to-unlock-economic-growth/
  11. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/movementsoutofworkforthoseagedover50yearssincethestartofthecoronaviruspandemic/2022-03-14
  12. https://www.forbes.com/sites/greatspeculations/2020/06/01/the-hidden-dangers-of-passive-investing/?sh=36e4ce6a4d96
  13. https://www.theatlantic.com/ideas/archive/2021/04/the-autopilot-economy/618497/
  14. https://www.forbes.com/sites/adigaskell/2022/10/20/why-is-technology-not-producing-productivity-improvements/?sh=1cebe7a170e8

August 2022 – Things I wish I could invest in (part I)

I sometimes work in a University in a department with a tech-heavy focus, and am fortunate to have friends in the tech/ engineering industry. One of my school friends runs an engineering firm which they founded a decade ago (straight out of uni) and now employs 100 people and is going through Series C. Another friend runs an IT security start-up (which could be insanely disruptive), going through Series B. Various others work in interesting high-flying places. This is a long way round to say I hear about things socially which sound very interesting, and then I frequently get pissed off I can’t invest in them (along with questioning my career choices). So here are three:

Reaction Engines Limited

Start with the biggest, oldest, and possibly most well known, Reaction Engines Limited (1). A literal moonshot investment. They were founded in 1989 by three engineers who were ex-employees of Rolls Royce and BAe. Back in the day one worked on Project Daedalus (a UK design for a fusion-powered starship), and then together on the 1980s Horizontal Take-Off and Landing (HOTOL) spaceplace – particularly it’s rocket motor which could switch from air to vacuum (2). They developed an engine and associated pre-cooler, however details were covered by the Official Secrets Act (no shit). There were a lot of technical issues, the European Space Agency weren’t interested, and without them BAe, RR and the UK Gov pulled the plug (3). The main issues were around the heat exchangers, pre-cooling the air going into the engine. After BAe and RR canned the project, the lead engineers set up RE to continue development around the patents and OSA. They have spent the last 30 years developing the heat exchanger tech, including some massive technological and materials achievements, to a point where it is now doing static test firing in hypersonic conditions (4). They have investment from the British Gov, DARPA, and quite a bit from BAe. Given this, and the limited nature of the firm, I suspect what they’re telling the press is a bit off what is actually possible (5). Are they profitable? No. Are they likely to be any time soon? No. Could they produce a dramatic change in my lifetime? Yes.

TL:DR – UK company developing world-leading heat exchange and rocket engine technology to develop spaceplanes with US and UK gov interest.

Yasa Motors

These were founded in 2008, as a spin-out from Oxford University to develop electric motors (6). They developed a different form of electric motor (revisiting very early designs), Axial Flux over Radial Flux, which has 4x the power of standard electric motors used in EVs for half the weight and size (7). Essentially most electric motors in the world have the same basic principle; the coils are wound around the shaft (so radially) with a gap, and apply electromagnetic force in a turning direction to that shaft along the field lines, as per GCSE physics (I found myself pulling out the Right Hand Rule here). Yasa flip this, where the axis of flux is parallel to the desired rotation (8). They recently (July/Aug 2022) got bought out by Mercedes-Benz (9). Think this is probably a win for MB, as they will be able to licence the tech to people like Tesla (based on patents), or take a huge lead in power-to-weight and torque in electric vehicles.

TL:DR – UK company developing world-leading electric motor technology, now bought out by Mercedes-Benz.

Riverside.fm

Founded in 2019, this is an Isreali software developer who have a recording/ podcasting/ streaming service that works regardless of internet connection quality (10). I’ve come across a couple of media types using this for remote interview/ streaming recording, as it saves and records the content locally at higher quality. It’s also used by an enormous list of household name media outlets for their recording work. A work-around for the shit-quality of Zoom/ MS Teams calls, with a great UI. They finished a Series B round in April 2022 for $35 million and are growing like a weed (11). I remember a colleague using Zoom for a video call about five years ago, and this feels like that. I guess their main issue is how big can their market be (given they seem to have mostly cornered the business-side), and competition from Streamlabs (just streaming) and open-source stuff like OBS (more hobbyist than business) (12).

TL:DR – Israeli software dev for streaming and remote recording in high quality for broadcast.

Other Nonsense

I’m deliberately not discussing the shambolic government/ financial mess, because everyone else is. Here are some bits from social media I enjoyed:

Can’t remember where I found this. Somewhere on reddit. Apologies to the creator for not properly crediting.

August 2022 Finances

Behind as always. Checking the assets and liabilities:

These are taken, as always, from my Beast Budget spreadsheet. I saved just over 26% of my salary in August. Some of this was a one-off bonus for some locum work, which got swiftly shifted into the emergency fund. Keen eyes will notice further churn. I sold my old daily driver for £1000 locally, not bad considering I paid £2000 for it in 2014. I’ve kept accurate spreadsheets of all the costs, which I’ll share at some point. We also updated our estimated valuation for our house, and hence equity (valuation minus outstanding mortgage). Some absolute nutjob recently paid £100k more than the previous ceiling price for a, albeit seriously extended and tarted up, house a road over from us. This has pushed up the ceiling price, and hence what estate agents are asking. How long can this last? Difficult to know. We’re not in one of the really overblown areas, and we haven’t seen the insane price rises of the south east. Maybe we don’t have as far to fall.

Budgets:

As compared to my four year back-calculated mean monthly spend:

  • Groceries: July £186, August £153, budget £220
  • Eating out & Takeaway: July £60, Aug £129, budget £50 – I thought this looked wrong, but no, we actually just socialised a lot. Whoops
  • Transport: July £210, Aug £170, budget £330 – The new daily merely sips the crushed dinos
  • Holiday: July £0, Aug £0, budget £40
  • Personal: July £0, Aug £62, budget £120
  • Health: July £52, Aug £52, budget £150
  • Misc: July £67, Aug £767, budget £215 – This is the start of a new big spending line, nursery fees
  • Work fees: July £323, Aug £160, budget £265

In the garden:

Harvested potatoes and tomatoes, everything else ignored. Boo.

Cheers,

The Shrink

References:

  1. https://www.crunchbase.com/organization/reaction-engines-ltd
  2. https://en.wikipedia.org/wiki/Reaction_Engines
  3. https://en.wikipedia.org/wiki/British_Aerospace_HOTOL
  4. https://reactionengines.co.uk/high-mach-propulsion-technology-testing-begins/
  5. https://reactionengines.co.uk/delivering-the-future-of-uk-hypersonic-capabilities/
  6. https://www.crunchbase.com/organization/yasa-motors
  7. https://www.yasa.com/technology/
  8. https://en.wikipedia.org/wiki/Axial_flux_motor
  9. https://pitchbook.com/profiles/company/61050-34#overview
  10. https://riverside.fm/
  11. https://pitchbook.com/profiles/company/442463-59#overview
  12. https://en.wikipedia.org/wiki/OBS_Studio

Quarterly Returns – Q2 2022

Quarterly return posts supplement my monthly Financial Dashboard, covering investments in detail and looking at my yearly targets. Here I track purchases and sales, document progress against my (in progress) investment strategy, and discuss re-balancing and changes over time.

TL:DR Another quarter on tickover whilst we function as a household on just one income.

Q2 2022 Net Worth

Q2 Returns:

  • Cash Accounts £10,400 (-£6,200)
  • Investments £11,800 (-£900)
  • Property £59,500 (+£3,400)
  • Cars £8000 (+£4,000)

My net worth at the end of Q2 2022 has nudged up about £1,500, having wobbled all over the place. Most of the increase is down to mortgage repayments, as everywhere else I’ve been in the negative. I also replaced my trusty, crusty, rusty old daily with something more executive and suitable for ferrying the infantShrink. #Lifestyleinflation. Cash reserves were raided, and have not been topped up as we run the household on just my income while MrsShrink is off work on maternity leave. The markets have been bearish, with some moderate impact on me.

Investments:

Core/ Satellite Passive/ Active Split

My 2022 Financial Year ISA is in Vanguard, however I again didn’t pay in anything this quarter.  There was also no activity in my Freetrade account, as that slowly accrues dividends. I have further separated out my investment portfolio tracking to identify funds/ETFs and stocks/equities as individual sections of the pies. I’m heavily overweight active funds and stock at the moment, a combination hangover of putting some money into crowdfunding rounds and then a couple of companies massively outperforming the rest of the market. Time to be boring for a while in Q3/4.

Ratio of satellite active holdings to core passive trackers
Asset allocation ratios

Goals

In terms of goals for 2022:

  • Save 35% of my income – 40% prediction

Q2 continues Q1s poor run, as life events get in the way of a decent savings rate. I’m still hovering around the 20% mark, and it’s going to need some extra income (possible) or a fall in outgoings (in this economy?) to pull me up to the 35%.

  • Save £8k towards a new car – 40% prediction

Completed it mate.

  • Finish the house renovations – 75% prediction

Further progress, though not as quickly as I would like. Finished painting the exterior of the house on a hot week of annual leave, but there remains some flashing/ pointing/ rendering to be repaired. I have half an idea to book another week and lay a patio/ build a logshed to fill ahead of the winter. MrsShrink is busy painting the inside of the house in her time off, and the list of to-do jobs is gradually diminishing. We’re 90% sure we’re going to try and move at the tail end of 2023. The aim would be to get more space, but timing will depend on what’s for sale and the wider market. Our friend is still making noises about buying our house from us, which aids in flexibility – they’re a first time buyer with a deposit ready living in rented accommodation. Going with the flow a bit on that one, but getting damn itchy feet.

Happy, autumn all,

The Shrink

July 2022 – The tiniest violin for Buy-To-Let YouTubers

Do you get blasted with adverts or recommendations on YouTube for ‘creators’ discussing their buy-to-let (BTL) property empire? Usually swiftly followed by a time-limited invite to their course on how to become a BTL magnate yourself? The course which costs >£50, and covers easily google-able things. Yeah those chaps/chapesses. Well they are my new canary in the economic coalmine. They still seem to be tweeting (hawking?) but for how much longer?

How do I distill this view?

Right now things are economically bleak. Here’s a thread from Prof Richard Murphy, who is far more dour on this than me:

Misery and doom (1)

Also available through thread reader (if you don’t have Twitter) here (2).

It’s a fairly erudite consideration of where we are headed. To summarise the summary, inflation is going up due to food, fuel and shipping price rises. Supply-side inflation. This is pushing up the cost of everything due to knock-on effects, at a rate currently ~10%, with an expected peak next year of 18% (3). A lot of people are cutting back on discretionary expenditure (stuff and ting) as they are worried about affording their essential bills like food and heating. This will trigger a recession, if we’re not already in one (4). The due energy price cap increase only protects residential bills, not commercial (see tweet below) (5). Leisure, hospitality and retail companies are likely to fail, triggering unemployment, in turn triggering further poverty. People default on rent and mortgages, worsened by increased mortgage interest rates. The cycle of debt, unemployment, lower spending and higher interest continues until interest rates are higher than inflation and people begin to believe positively in the economy (6).

What’s interesting here is the media optics. Inflation means that people’s wages don’t go as far, so their ‘real pay’ falls. It’s fallen like a stone over the last decade (7, 8). As a doctor I earn about 30% less, accounting for inflation, than I did in 2008 (9). There’s open talk amongst colleagues of striking, which would see us on the picket lines alongside the RMT, barristers, port workers, Royal Mail staff, council bin men, and many others. The focus from the government is on preventing pay rises ‘to stop inflation’.

Man of the people, or Wolfie Smith? (10)

This is a classical tactic of changing the Overton window. If enough media sources tell the people a wage increase will cause them pain through inflation they will believe it. It categorically ignores the fact this is not demand-side inflation caused by lots of people spending lots of money from high wages. It’s supply-side inflation caused by increased costs from… well… let’s start with the pandemic, shipping/ just-in-time supply chain changes, easy fiscal policy, the Ukraine-Russia war, our old friend Brexit, the list goes on. Repeatedly talking about demand-side inflation keeps supply-side inflation out of the public consciousness. It sounds like things politicians can do something about, and plays nicely into the conservative ideological agendas. It avoids the painful fact most of what’s causing this inflation is down to past (sometimes poor) choices, or just shit chance.

What could fix supply-side inflation? Increasing interest rates, decreasing taxes, increasing wages or capping essential costs at much lower levels (1, 11, 12). Basically putting more money in people’s pockets so they can spend, whilst simultaneously trying to sort the supply side issues so that you don’t get demand-side inflation.

There’s an interesting possibilities fork that lies in the ongoing Tory leadership election. Wonderful that it’s happening at a time we need clarity of vision and leadership. Truss and Sunak are talking a big game of anti-wage inflation and anti-union legislation. There’s the suggestion of banning strikes (13, 14). Laws have been implemented over the last decade which make it harder to strike, and easier to break strikes through the use of agency staff – see P&O events (15). Liz Truss, who looks likely to win the vote and be the next PM, has outlined further laws to limit unions (16). This may be posturing for the Tory internal vote. It plays well into the party ideology. It will win her blue votes, and Liz swings with the wind more than a weather-vane.

I worry that she will carry through though. Does she envision herself as a new Thatcher? An economy for economies sake government may argue that the removal of barely profitable zombie companies, just about hanging on with low interest debts serviced, is a good thing. A big ole recession will sort the economic wheat from the chaff. A more open market, with plenty of economic opportunities and less pension/ debt/ commitments to meet. Sod the employees. Sod the unions. My mate wants to buy those assets at 3 pence on the pound, so burn it all down. Build back better. Northern Powerhouse waffle. Further nonsense slogans. For two years until another general election.

You can only cause people so much pain before they revolt. In the 1970s this played out as strikes and the Winter of Discontent, which ironically led to Thatcher’s rise to power (17). Trade union membership has been falling for years, and they are now limited by the laws passed by Thatcher and BoJo (17, 18). There’s an interesting balance here, as with the fall of the red wall and the general shift of political alignment across traditional class boundaries, traditionally unionist working-class individuals have been voting Tory recently. BoJo’s 2019 majority was former labour voters who are those likely to be hit hardest by the ongoing recession, and most likely to unionise (18). Unions are again pushing for higher wages, and we may see a resurgence of membership ahead of protests against government policy (19).

But still, how do people hawking their BTL courses on YouTube figure into this?

First, a final bit of background. Over the last few years the Government have introduced a load of new laws and rules on buy-to-let landlords ostensibly designed to ensure financial stability and protect renters, but practically designed to make it more expensive to be a BTL landlord, get more for the treasury, and drive properties back into private ownership or bigger commercial rental firms (20). This is causing some landlords to raise rents, and forcing other smaller mum-and-dad type set-ups to either inadvertently break the law, or just plain sell up (20, 21). This in turn is driving down the number of properties available to rent (as a lot are selling to residential buyers), and when combined with an increasing population and very limited housebuilding, means the rental market has gone bananas. We’re talking bidding wars, massive rent hikes, queues to view, etc (22).

Now step in our future interest rate hikes. Our current 1.75% (already!) BoE base rate is predicted to hit 3.75% over the next 6-9 months (3). BoE gotta do what it gotta do to deal with that inflation, natch. Some economists are estimating the base rate will need to hit 7% to beat down this inflation round (3). Practically it’s just a reversion to the mean, but it’s a shock for millennials like me who entered the job market in the last couple of decades. The FireShrink household stress-tested our mortgage interest rate in my budgeting spreadsheet up to a theoretical 12%, and then locked in 5 years at 1.65% with a big bank 12 months ago. Excessive maybe, but we were budgeting going from dual income to single whilst still meeting all bills, and various other financial rearguard actions. Monevator advocates a similar stress-testing policy (23). How many did that, especially on BTL mortgages, heavily leveraged or interest-only?

UK interest rates since 1800, courtesy Wikimedia Commons (24)

I am much more cynical on the inflation/ interest rate outlook than Monevator or BoE, probably due to my plan-for-the-worst, aim-for-the-best attitude. I don’t think they’re pricing in just how many people are living paycheque to paycheque, or just how many properties were bought at large salary multipliers on 2 year fixed deals during the pandemic. There’s a lot of people out there who were encouraged to max out their borrowing (Location Location Location). What proportion checked their mortgage repayments at a theoretical 5%?

Which brings us back to BTL. The hawkers tell us that returns from BTL are (a) steady rent, and (b) capital appreciation (the house value rises). Your sums shouldn’t just be about (a), because (b) can bail you out, and house prices always rise, right? So don’t worry that people won’t be able to pay their rent in the recession, you can sell your house for more than you bought it for, and get your capital that way. Except if you can’t, because people can’t pay their mortgages at an unexpected 5+% interest and default/ sell up, and house prices fall.

One of the old adages about investing is you know you’re near the top or in a bubble when your barber or taxi-driver is telling you about the asset. You’ve missed the most profitable climb when you see it advertised on the tube. You’re near the bottom when all of that goes away, and media stories are predominantly negative.

The property market is still rampant, though with signs of exhaustion. The BTL Youtube content creators are still producing, and selling their product. When they stop advertising, it will be a sign of BTL investment capitulation. Beyond that, there be dragons.

July Finances

Checking the assets and liabilities:

These are taken, as always, from my Beast Budget spreadsheet. I saved 14% of my salary in July, as I was repaid some owed cash. Still not great, but starting to return to form. My net worth actually sank as I paid out on credit card for some work expenses which will (unusually for medical work) be expensed in the next few months. For now I’m down about 0.5% and hovering around the £90k market (excluding NHS pension).

Budgets:

As compared to my four year back-calculated mean monthly spend:

  • Groceries: June £270, July £186, budget £220
  • Eating out & Takeaway: June £3, July £60, budget £50
  • Transport: June £711, July £210, budget £330 – Much improved
  • Holiday: Jun £0, July £0, budget £40
  • Personal: Jun £10, July £0, budget £120
  • Health: Jun £50, July £52, budget £150
  • Misc: Jun £141, July £67, budget £215
  • Work fees: Jun £150, July £323, budget £265 – Sigh, this is stuff that won’t get paid as expenses or re-reimbursed. Do other professions spend >10% of their monthly salary to be able to work?

In the garden:

It’s been hot, most things are dried up, but at least my tomatoes, squashes and potatoes are surviving.

Cheers,

The Shrink

References:

  1. https://twitter.com/RichardJMurphy/status/1554735116764827648
  2. https://threadreaderapp.com/thread/1554735116764827648.html
  3. https://www.thisismoney.co.uk/money/markets/article-11134163/UK-inflation-set-peak-18-early-2023-warns-Citi.html
  4. https://www.theguardian.com/money/2022/aug/26/energy-cap-leap-looks-to-be-moment-when-recession-fears-for-uk-turn-into-reality
  5. https://twitter.com/RoseAndCrownBeb/status/1563451257376763908
  6. https://www.thetimes.co.uk/money-mentor/article/inflation-interest-rates/
  7. https://www.bbc.co.uk/news/business-62550069
  8. https://www.ft.com/content/28f2b344-e2a6-4e10-bf4a-c924660eded0
  9. https://www.independent.co.uk/news/health/nhs-doctor-pay-strike-bma-b2110717.html
  10. https://twitter.com/PeterStefanovi2/status/1556367454720462849
  11. https://www.investopedia.com/articles/05/012005.asp
  12. https://www.cnbc.com/2022/07/05/hiking-interest-rates-the-wrong-solution-to-inflation-problem-analyst.html
  13. https://inews.co.uk/news/politics/tory-law-minimum-staffing-strikes-desperate-nonsense-unions-1644221
  14. https://www.independent.co.uk/news/uk/politics/unions-general-strike-industrial-action-ban-b2132802.html
  15. https://www.theguardian.com/business/2022/jun/23/rail-strikes-tories-agency-workers-rights
  16. https://www.ft.com/content/deab4e48-b22d-4278-b31c-f018a534ddbc
  17. https://en.wikipedia.org/wiki/Winter_of_Discontent
  18. https://www.bloomberg.com/opinion/articles/2022-08-02/uk-rail-strikes-tories-can-fight-the-unions-but-they-might-not-win
  19. https://www.bbc.co.uk/news/business-62656500
  20. https://www.telegraph.co.uk/property/buy-to-let/buy-to-let-crackdown-will-force-landlords-raise-rents/
  21. https://www.dailymail.co.uk/property/article-10547227/Buy-let-landlords-struggle-new-regulations.html
  22. https://www.theguardian.com/money/2022/aug/28/bidding-wars-cash-up-front-and-auditions-inside-britains-broken-renting-market
  23. https://monevator.com/higher-interest-rates-havent-yet-derailed-my-mortgage-strategy/
  24. https://commons.wikimedia.org/wiki/File:UK_interest_rate_since_1800.png

June 2022 – Hibernating, through bear markets and trolls

I am dimly aware that there has been a bear market ongoing. New(ish) child means that the amount of time I have available to read or care about the markets is limited. The news and media are awash with people trying to get your attention to tell you the bear market is over (1), trading tips for the moment (2, 3), or that the worst is yet to come (4). It all flies over my head. Funds are currently siphoned to childcare and supporting the household on one income, rather than getting plowed into discounted/ now correctly priced stocks. Not entirely providing thrust towards FIRE goals, but evidence that deliberate decisions about finances have paid off. We had always planned to live within one salary, so that the rest could either be saved or used as situations changed.

My investments prior to BabyShrink were mostly boring. I followed an 80/20 rule. The 80% passive is still up from where it was purchased, as the benefit of time in the market has outweighed picking or timing the market. The 20% is more of a mixed bag. My crypto is down 75%. The choices there were always very long term plays, not get rich quick schemes. That was definitely not the case for many, with stories of people losing their life savings (5).

I have some sympathy for those who have lost serious moulah in crypto. There is the line that crypto was essentially gambling, and therefore these individuals have just run out of luck. I don’t think that captures everything. Most gamblers go into classical gambling environments knowing that it’s a game of chance, whether that be betting on sport, roulette, cards, the lottery, whatever. The process is what gets them hooked, the dopamine reinforcement, the just-one-more flushed along with the occasional win. Crypto ain’t that.

Others say crypto is just one big lesser fools pile-on, buying and hoping the person behind you buys for more. An exceptional froth, worthy successor to the South Sea Bubble (6). The ongoing Wikipedia page on the Cryptocurrency bubble is quite the read, with daily updates as more funds go under and exchanges close (7). (Incidentally that also links to the “Everything bubble”, but that’s for my next post (8)).

I think the bubble/ lesser fools argument is fair. A high tide lifts all boats, and big funds have set up as the tide continued to rise. Herd mentality. This doesn’t explain it all though. We have a guy locally known as “the crypto king”. Kid who invested in his teens in BTC, and now as a twenty-something drives around his council estate ends in a Lamborghini. He’s not your typical financial investment early adopter. Lots of those who have made (and literally lost in landfill (9)) fortunes aren’t city bankers. They might be IT programmers and engineers, who realised early potential or simply had a punt that paid off in a sector of industry they understood.

Finally there’s the dank forum dwellers. The 4chan denizens. The r/CryptoCurrency bros. There’s a bit of herd mentality there, but it’s also driven by a counter-cultural urge. The belief that cryptocurrencies like bitcoin will succeed by de-centralising and democratising finance. It will unseat money from the banks, seceding currency from institutional control. I think the big banks are smart enough to get in on the act (set up funds, make their own cryptocurrency economy), but that doesn’t stop the belief, and if you go delving in these forums you’ll find anti-establishment sentiment and a drive to disrupt the system.

I think it’s these crypto investors I feel most sorry for. They have invested as part of a belief that they will make money AND they’re sticking it to the man. The psychology of this approach shares it’s basis in the reasons individuals believe in conspiracy theories. People believe these things because they want agency, understanding and control. The world got big and scary. People choose ideas that appeal as they can understand them as part of their environment (epistemic), allow them to enact control over their situation or environment and make them feel sale (existential), and fit in with the friends or peers (social) (10). Individuals, sometimes due to cognitive deficit or social exclusion, cannot integrate real world happenings into their internal schema and system of worldview. This self-reinforces, as individuals aggregate with groups with similar views, who then share a belief that they are right and everyone else is wrong, serving to improve their own self-worth (11). You’re more likely to end up here if you don’t have much agency or control in your life otherwise (unstable job, unstable friends/family relationships), and are either unwilling or unable to integrate complex reasoning behind events. A simpler answer, with your friends around you supporting you, is much more pleasant to the ego than accepting you don’t understand why something is happening and it’s out of your control.

Which I think is where we come back to the crypto bros. Does your average poster in these places understand how to write the code to make a blockchain. Questionable. Have they been sold a message that they can regain control of their finances by doing something the establishment don’t want? It’s a nice answer if you have little other prospect of reaching financial dreams. And when it all falls down you scream into the darkness and wonder how (5). A little reminder not to take financial advice from people claiming to know a great secret. And don’t feed the trolls.

Credit: (12)/ MemeCenter

June Finances

Checking the assets and liabilities:

These are taken, as always, from my Beast Budget spreadsheet. I saved 8% of my salary in June, however that was almost all payments into my NHS pension. If you ignore my NHS pension I actually dipped 2% into my savings. Only a few more months of SICK (single income costly kid) living, paying nursery fees and mortgage out of just my salary. Counting down the days to growth.

Budgets:

As compared to my four year back-calculated mean monthly spend:

  • Groceries: May £315, June £270, budget £220 – (recalculating this a bit, as it looked off)
  • Eating out & Takeaway: May £54, June £3, budget £50
  • Transport: May £1000, June £711, budget £330 – Fixing flaws in the new car
  • Holiday: May £180, Jun £0, budget £40
  • Personal: May £20, Jun £10, budget £120
  • Health: May £50, Jun £50, budget £150
  • Misc: May £7500, Jun £141, budget £215
  • Work fees: May £125, Jun £150, budget £265

In the garden:

Due to harvest potatoes soon, and tomatoes and squashes are growing nicely. Still enjoying this blog in the Guardian (6).

Cheers,

The Shrink

References:

  1. https://markets.businessinsider.com/news/stocks/stock-market-outlook-bear-market-over-new-sp500-highs-fundstrat-2022-7
  2. https://lifehacker.com/how-to-tell-when-a-bear-market-is-over-1849340869
  3. https://www.businessinsider.com/stock-market-book-recommendations-recession-investing-wall-street-big-short-2022-7?r=US&IR=T
  4. https://www.businessinsider.com/stock-market-crash-expert-warns-further-downside-ahead-bear-market-2022-7?r=US&IR=T
  5. https://www.theguardian.com/technology/2022/jul/12/they-couldnt-even-scream-any-more-they-were-just-sobbing-the-amateur-investors-ruined-by-the-crypto-crash
  6. https://en.wikipedia.org/wiki/South_Sea_Company
  7. https://en.wikipedia.org/wiki/Cryptocurrency_bubble
  8. https://en.wikipedia.org/wiki/Everything_bubble
  9. https://www.bbc.co.uk/news/uk-wales-62381682
  10. Douglas, Sutton and Cichocka, Current Directions in Psychological Science, https://journals.sagepub.com/doi/full/10.1177/0963721417718261
  11. https://www.nationalgeographic.com/science/article/why-people-latch-on-to-conspiracy-theories-according-to-science
  12. https://theconversation.com/dont-feed-the-trolls-really-is-good-advice-heres-the-evidence-63657
  13. https://www.theguardian.com/lifeandstyle/2022/jul/03/allan-jenkins-on-gardening-with-july-comes-a-whole-new-gardening-agenda

May 2022 – Calculating my personal inflation rate

Yes, I know I’m late again. June’s one following up soon.

I really enjoyed this animation from r/dataisbeautiful, which elegantly shows (US) inflation. Think the UK is fairly similar, at least according to my wallet (1).

In response to this, I thought it worthwhile to follow up on a good Monevator post, and calculate my personal inflation rate (2). I’ve been systematically tracking my household expenses using broadly the same spreadsheet since 2018. All our household bills go through our joint account, which I’ve used for this. It doesn’t take into account personal spending, where there is likely some inflation matching my work overheads (increased seniority = increased GMC/ indemnity/ royal college fees). I also excluded the costs for our wedding, and paying off our old joint credit card which is now empty – i.e. one-offs that are not repeating. Since 2018 our household expenditure was:

  • 2018 – £34,828
  • 2019 – £25,895
  • 2020 – £25,405
  • 2021 – £26,005
  • 2022 – £29,118 – projected based on spending to May replicated across the year

Can you tell when I started paying attention to the money-out category?

If we treat 2018 as an outlier this suggests my inflationary change from 2019 to 2020 was -1.89%, 2020 to 2021 was 2.36%, and 2021 to 2022’s projected spend is 11.97%. A little above the reported UK figure, but not crazy especially given we’ve added a new family member. Plug this into the geometric average return calculator (3) suggested by Monevator and I get a return of 3.99% per year. This seems properly realistic, so I’ll use this figure for future household predictions, and continue to update as we go. A nice little maths exercise which I would recommend to those with a finance interest.

May Finances

Checking the assets and liabilities:

These are taken, as always, from my Beast Budget spreadsheet. I saved 2% of my salary in May. A new car was bought draining some savings, and I’m holding my usually saved/ invested cash to pay for some childcare, so it’s not really saving. Helpfully my net worth actually increased slightly (1%), due to mortgage payments and market movements.

Budgets:

As compared to my four year back-calculated mean monthly spend:

  • Groceries: April £220, May £150, budget £220
  • Eating out & Takeaway: April £50, May £54, budget £50
  • Transport: April £158, May £1000, budget £330 – Insurance mostly
  • Holiday: Apr £0, May £180, budget £40
  • Personal: Apr £60, May £20, budget £120
  • Health: Apr £92, May £50, budget £150
  • Misc: Apr £92, May £7500, budget £215 – And the new car
  • Work fees: Apr £344, May £125, budget £265

In the garden:

Low maintenance growth this year, as all my time is taken up by the Shrink infant. Beans, potatoes and squash will have to do. I’m enjoying this blog from Allan Jenkins about general gardening stuff (4).

Cheers,

The Shrink

References:

  1. https://www.reddit.com/r/dataisbeautiful/comments/vhciop/oc_inflation_and_the_cost_of_every_day_items/
  2. https://monevator.com/personal-inflation-rate/
  3. https://goodcalculators.com/geometric-average-return-calculator/
  4. https://www.theguardian.com/lifeandstyle/2022/jun/05/the-growing-season-gets-into-full-swing

Quarterly Returns – Q1 2022

Quarterly return posts supplement my monthly Financial Dashboard, covering investments in detail and looking at my yearly targets. Here I track purchases and sales, document progress against my (in progress) investment strategy, and discuss re-balancing and changes over time.

Permanently chasing my tail on these, but it’s partly because I don’t have much interesting to share at the moment…

Q1 Returns:

  • Cash Accounts £17,600 (+£1,850)
  • Investments £12,700 (-£580)
  • Property £56,150 (+£1,100)
  • Cars £2000 (no changes)

My net worth has essentially tracked sideways, as money squirreled away in cash savings accounts gets offset by losses on the markets. The fact I can maintain my net worth at time when we’re running mortgage, nursery fees and all household bills on just my income is satisfying. I won’t say we’re lucky, hard work and budgeting have equal shares, but it was intentional that we could ‘manage’ in this sort of situation. Q2 will likely continue this vein, as MrsShrink doesn’t go back to work until Q3, and the baby is gradually upping her hours at nursery.

Investments:

Core/ Satellite Passive/ Active Split

My 2021 Financial Year ISA is in Vanguard, however I again didn’t pay in anything this quarter.  Activity in my Freetrade account was just topping up an existing holding in Unilever. (fancy a free share? Sign up to Freetrade using this link, and we both get one). I’ve got round to adding my crowdfunding account to my investment portfolio spreadsheet. This, combined with some good returns on my active stock selections and a fall on the trackers, means I’m now overweight on my active UK satellite portfolio. Any spare cash I do have hanging around once I’ve topped off emergency funds is therefore likely to go into dull ole trackers.

Ratio of satellite active holdings to core passive trackers
Asset allocation ratios

Goals

In terms of goals for 2022:

  • Save 35% of my income – 40% prediction

I will be amazed if I achieve this to be honest. Q1 saw a savings rate of 25%, all in cash. Given what my financial year is looking at I’m going to aim to keep it at that, and hope that a big return to saving can be achieved towards the end of the year.

  • Save £8k towards a new car – 40% prediction

This steadily ticks upward, with my cash accounts at their healthiest level ever. Should be ready to pull the trigger soon.

  • Finish the house renovations – 75% prediction

Some good progress made here, doing the sort of jobs that add little value but make a big difference to the state of the property. I painted a load of the stone and woodwork on the outside of the house, so it’s got a bit of kerb appeal, and we’ve started on re-rendering some other sections, along with painting the last few rooms. A friend recently commented that she would be willing to buy the house from us when we move, which would save a lot of hassle and fees, so we’ll see how that pans out.

Happy, wait is this supposed to be summer?

The Shrink