The Full English Accompaniment – Idle Speculation

The effects of COVID-19 have extended into all walks of life. Most of us have been distracted by the stock market crash, bare shops, lack of social contact and the spectre of death stalking the land. In the meanwhile the housing market has also been shuttered, with BoJo & Co telling people to delay house moves and cancel viewings until after it’s all over (1, 2). In an industry that was already wounded, these effects may be the death knell for staggering companies. The post-COVID-19 probate boom looks a long way ahead. Not that any of this matters, since companies like Halifax/ Lloyds and Barclays are pulling their mortgage products (3, 4). Staffing rather than liquidity apparently. Though the use of repayment holidays and the inability to survey property for pricing is definitely going to feed into it (5, 6). Like most things in these uncertain times, we’re not going to know the truth of it until we’re out of the crisis zone.

In such times speculation reigns supreme. We turn to ‘experts’ for advice on the stock market (7). Misunderstanding, misinterpretation of the facts and conspiracy theories are spreading. During the first 4 weeks of January 2020 there were over 15 million Twitter posts on the topic (8). Those posts are unlikely to give a balanced view of the science. To quote Joana Gonçalves-Sá and her Nature Medicine commentary:

“Overall, it is possible that people sharing such misinformation overestimate their ability to understand very complex problems and might be experiencing a form of the Dunning-Kruger effect, which states that people are often more confident than they are knowledgeable. This may be exacerbated by a lack of trust in institutions, be they governments, the pharmaceutical industry, or the traditional media.” (8)

Our old friend the Dunning-Kruger Effect. The argument to explain Trump. We’re unaware of our overconfidence when we should be demonstrating intellectual humility. The world is full of cognitive blind spots (9).

Image Credit: (9)

Social media is the vector in the viral spread of disinformation (8, 10). I really love this tongue-in-cheek article on Medium, framing it as DKE-19 (10).

“Signs of DKE-19 generally appear 3–5 days after learning that the word “epidemiology” is not the study of skin diseases…

DKE-19 is in the same family of misinformation viruses as the one that caused the b00m3R-FB outbreak in 2016. It is transmitted person-to-person through a variety of means, including listening to/repeating bullshit while on the toilet (“feco-aural transmission”), and sharing dirty tweedles.” (10)

Image Credit: (10)

The amount of misinformation out there is frankly staggering, so don’t contribute to it. Engage social media distancing. Pick relevant and trusted providers. As a starter, try Richard Lehman’s weekly round up in BMJ Opinion (11). Tomas Pueyo’s excellent The Hammer and The Dance, with 10 million views, is a longer explanatory piece (12). As for day to day updates, if you really fancy pushing your knowledge meddit has a daily Megathread for COVID-19 discussing the latest science – here’s the 28th/29th (13). The subreddit is for medical professionals only and layperson questions/ comments will be deleted. It’s heavily moderated, and layered in medic-chat. You likely need a medic on tap just to wade through our acronyms/ slang/ approach, but the discussions of the latest science and data are detailed and there’s some amazing views from the frontline. Choose your sources wisely, and cut the crap.

Keep handwashing, and take care!

The Shrink

COVID-19:

Life goes on:

Comment/ Opinion:

References

  1. https://www.theguardian.com/business/2020/mar/26/housing-market-frozen-by-government-during-coronavirus-lockdown
  2. https://www.bbc.co.uk/news/business-52051174
  3. https://www.theguardian.com/money/2020/mar/26/halifax-withdraws-majority-of-mortgages-coronavirus
  4. https://www.financialreporter.co.uk/mortgages/barclays-withdraws-almost-all-mortgage-products-above-60-ltv.html
  5. https://www.thisismoney.co.uk/money/mortgageshome/article-8147909/Should-mortgage-hold-three-months.html
  6. https://www.ft.com/content/c08ec3d9-079e-40ff-baae-11388c650f6c
  7. https://www.thisismoney.co.uk/money/investing/article-8138239/What-investments-markets-fall-Five-financial-gurus-respond.html
  8. https://www.nature.com/articles/s41591-020-0802-y
  9. https://www.vox.com/science-and-health/2019/1/31/18200497/dunning-kruger-effect-explained-trump
  10. https://medium.com/@noahhaber/flatten-the-curve-of-armchair-epidemiology-9aa8cf92d652
  11. https://blogs.bmj.com/bmj/2020/03/23/richard-lehmans-covid-19-reviews-23-march-2020/
  12. https://medium.com/@tomaspueyo/coronavirus-the-hammer-and-the-dance-be9337092b56
  13. https://www.reddit.com/r/medicine/comments/fqkf3g/megathread_covid19sarscov2_march_28th29th_2020/
  14. https://www.theguardian.com/commentisfree/2020/mar/27/can-us-reopen-economy-coronavirus
  15. https://www.nytimes.com/interactive/2020/03/25/opinion/coronavirus-trump-reopen-america.html
  16. https://www.theguardian.com/environment/2020/mar/27/trump-pollution-laws-epa-allows-companies-pollute-without-penalty-during-coronavirus
  17. https://www.bbc.co.uk/news/science-environment-52065140
  18. https://www.cnbc.com/2020/03/27/imf-chief-georgieva-says-the-world-is-in-a-recession-containment-will-dictate-strength-of-recovery.html
  19. https://www.newscientist.com/article/2238578-uk-has-enough-intensive-care-units-for-coronavirus-expert-predicts/
  20. http://www.cardiffandvaleuhb.wales.nhs.uk/news/52357
  21. https://www.thisismoney.co.uk/money/markets/article-8157781/Stock-markets-fight-FTSE-100-16-5-3-days.html
  22. https://www.independent.co.uk/environment/grow-food-coronavirus-urban-allotments-fruit-vegetables-a9431051.html
  23. https://www.vox.com/the-highlight/2020/3/18/21182018/financial-independence-retire-early-fire-early-retirement-mr-money-mustache-pete-adeney
  24. https://www.theguardian.com/business/2020/mar/21/100-years-on-another-great-depression-coronavirus-fiscal-response
  25. https://www.financialsamurai.com/fire-confessionals-in-a-bear-market/
  26. https://awealthofcommonsense.com/2020/03/how-does-the-market-crash-impact-retirees/
  27. https://awealthofcommonsense.com/2020/03/surviving-your-very-first-market-crash/
  28. https://www.ukvalueinvestor.com/2020/03/coronavirus-impact-on-dividends.html/
  29. http://www.psyfitec.com/2020/03/anchors-weigh.html
  30. https://simplelivingsomerset.wordpress.com/2020/03/27/of-natural-beauty-and-interesting-markets/
  31. https://theescapeartist.me/2020/03/27/the-inestimable-advantages-of-having-a-plan/
  32. http://bankeronfire.com/finding-gratitude-in-challenging-times
  33. https://firevlondon.com/2020/03/21/the-worst-crash-in-history/
  34. https://asimplelifewithsam.com/2020/03/21/ten-simple-living-ideas-during-covid-19/
  35. https://indeedably.com/predictive/
  36. https://indeedably.com/i-note/

The Full English Accompaniment – Is COVID-19 the crisis to heal Brexit divisions?

Ever since the swine-fancier-in-chief started on the Brexit linedance the UK has been divided. People were told their opinion mattered, and allowed to express it through a referendum. The voxpops mattered. 6-pints Ken in the pub mattered. Brexit was such a grey area, with so many fake statistics and hollow arguments, that just about any opinion could be aired without hindrance. Families were divided.

Ours was. Even now certain arms of our family won’t speak to each other. The use of the phrase “racist bigots” might have something to do with it.

In such a void battle lines were drawn, and programs like Question Time became copy-paste wars of words. Campaigners, politicians and ‘celebrities’ with nought but strong opinions rose to the top, froth on a slurry pit.

But in the last few weeks, something has changed. Fighting this Coronavirus, defeating COVID-19, requires us to work together. It doesn’t discriminate based on how you voted in 2016 (well…). Experts are called upon. Opinions are surplus to fact. United action across the world is required. There is suddenly a bigger enemy, a bigger battle. A reason to forget the artificial divisions and remember the reasons that bind us. We are all human.

People are reaching out to each other for support. Across borders, generations, timezones, opinions. Picking up shopping, refilling prescriptions, taking the dog for a walk (1, 2, 3). The sense of community that was lost is returning. Kindness, care and altruism will get us through this (4, 5, 6).

Keep handwashing, and take care!

The Shrink

Other News:

Positive news on COVID-19:

You may have missed:

A couple of weeks back the Competition and Markets Authority reported there was evidence of mis-selling and unfair contracts on the sale of new homes by developers (14). This was significantly stronger wording than anticipated, and has been considered a huge victory for leaseholders (15, 16, 17). With that stronger wording, the legal sharks left hungry after PPI dried up have smelt blood, and are already circling for mis-selling class action claims (18, 19).

Life goes on:

Comment/ Opinion:

References

  1. https://www.thecanary.co/uk/news/2020/03/14/city-residents-set-up-aid-group-for-people-struggling-with-coronavirus-measures/
  2. https://www.manchestereveningnews.co.uk/news/greater-manchester-news/amazing-things-people-greater-manchester-17947422
  3. https://www.theguardian.com/society/2020/mar/16/community-aid-groups-set-up-across-uk-amid-coronavirus-crisis
  4. https://www.bbc.co.uk/news/uk-51991566
  5. https://www.greenpeace.org/international/story/29371/11-simple-ways-to-care-for-each-other-during-the-covid-19-coronavirus-pandemic/
  6. https://www.theguardian.com/lifeandstyle/2020/mar/21/like-an-emotional-mexican-wave-how-coronavirus-kindness-makes-the-world-seem-smaller
  7. https://www.theguardian.com/world/2020/mar/18/japanese-flu-drug-clearly-effective-in-treating-coronavirus-says-china
  8. https://www.sciencedirect.com/science/article/pii/S2095809920300631?via%3Dihub
  9. https://www.statnews.com/2020/03/18/who-to-launch-multinational-trial-to-jumpstart-search-for-coronavirus-drugs/
  10. https://www.statnews.com/2020/03/16/remdesivir-surges-ahead-against-coronavirus/
  11. https://seekingalpha.com/article/4332561-gilead-sciences-even-not-counting-covidminus-19-company-significant-potential
  12. https://www.mediterranee-infection.com/wp-content/uploads/2020/03/Hydroxychloroquine_final_DOI_IJAA.pdf
  13. https://www.independent.ie/world-news/coronavirus/irish-developed-kit-confirms-infection-in-15-minutes-39046582.html
  14. https://www.moneywise.co.uk/news/2020-03-02/thousands-leaseholders-have-been-mis-sold-homes-unfairly-charged-developers
  15. https://thenegotiator.co.uk/leasehold-knowledge-partnership-victory/
  16. https://www.lovemoney.com/news/93583/cma-leasehold-buyers-being-taken-advantage-of-by-dodgy-developers
  17. https://www.bbc.co.uk/news/business-51671363
  18. https://www.claimexperts.co.uk/mis-sold-leasehold-property-claims/
  19. https://www.smoothcl.co.uk/site/services/mis-sold-leasehold-claims/
  20. https://www.independent.co.uk/news/business/analysis-and-features/stock-market-dow-jones-index-trump-coronavirus-wall-street-1929-crash-a9412221.html
  21. https://www.thisismoney.co.uk/money/mortgageshome/article-8134443/Has-mortgage-rate-fallen-bank-rate-cut.html
  22. https://www.cnbc.com/2020/03/17/crash-shows-major-corporations-broke-no-1-personal-finance-rule.html
  23. https://ofdollarsanddata.com/lessons-from-coronavirus/
  24. http://quietlysaving.co.uk/2020/03/14/our-hopes-and-expectations/
  25. http://bankeronfire.com/have-no-fear-surviving-and-thriving-in-a-recession
  26. https://monevator.com/weekend-reading-lockdown-links-for-days/
  27. https://firevlondon.com/2020/03/20/manic-month-still-in-progress/
  28. https://southwalesfi.co.uk/2020/03/20/why-your-car-is-making-you-retire-5-years-later-or-longer/
  29. https://obviousinvestor.com/obvious-investor-covid-19-investments-update/
  30. http://thefirestarter.co.uk/and-they-say-timing-is-everything/
  31. https://www.madfientist.com/coronavirus-market-crash/
  32. https://theescapeartist.me/2020/03/20/victory-is-inevitable-part-2/
  33. https://averagemoneymanagement.wordpress.com/2020/03/19/what-is-a-circuit-breaker/
  34. https://www.finumus.com/blog/burn-down-the-disco
  35. https://tuppennysfireplace.com/fast-easy-recipes-with-few-ingredients-5-ingredients-or-less/
  36. https://medfiblog.wordpress.com/2020/03/15/baked-beans-and-shotgun-cartridges/
  37. https://www.foxymonkey.com/coronavirus-special-investing/
  38. https://awaytoless.com/a-way-to-less-one-year-blogging/
  39. https://indeedably.com/isolation/

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Belated) Full English Accompaniment – Ways to skin a bear

Over the course of the next few months, as the news is dominated by ‘OMG CORONAVIRUS TERROR’, I’ll try and stay off the topic. I couldn’t fail to discuss the changes in markets this week though. It’s quite hard to actually get a long term graph to show the progress of the market, so here’s one I knocked up using every week end closing value for the FTSE 100 since it’s inception:

FTSE

At the start of last week, when I started writing this post, there was fear that we were in a correction, that there might be a larger drawdown. The market has moved fast, driven by anxiety. December 2018’s correction is suddenly a distant memory. There were plenty of potential threats, many detailed in SeekingAlpha’s article from last week (1). Everybody was already looking for a reason for recession, eyes peeled for the signs. What they didn’t expect was this viral black swan to come drifting serenely over the horizon before shitting all over the picnic (2, 3). That is the nature of the cause of a bear market; if it was predictable it could be expected and adjusted for. The cause will always emerge from the unknown unknowns.

What’s working now won’t always work

I’m not going to speak to the markers, numbers and hallmarks of a bear market. The figures and data used by investors are better discussed in that same SeekingAlpha article than I ever could (1). As it explains:

“Bull and bear markets are NOT defined by a 20% move. They are defined by a change of direction in the trend of prices.”

There have been times (see below) in the last decade where the long term moving average has trended downwards, but they have not resulted in a bear market. Quantitative Easing (QE) at those times has shored up the market and returned us to the Bull course. So what has changed? Looking at it from my stock and trade, I would have to say anxiety amongst the general public and uncertainty. When looking at data and analysis we often fall prey to cognitive biases; cherry picking evidence to support our decisions, applying selection bias (4, 5). We look for the news we want to see. When anxiety peaked previously amongst market investors the FED/ ECB/ BoE stepped in and applied QE. This reassured investors and dampened anxiety. Joe Public, for whom it was a blip on the road, were fairly nonplussed.

Image credit: Seeking Alpha/ Real Investment Advice

Was the market the boy that cried wolf too many times to central banks? That allegory was being touted last year, with the observation that the commitment from central banks to maintaining asset prices had left them unable to normalise policies without risking recession (6). At some point the propping up would no longer support the fall. This time, as the Fed/ BoE reached once again for the chequebook, it’s not worked. Instead it’s been called ‘misjudged’, and appears to have driven the markets further (7). Fear and anxiety has not been eased, it’s remained high. Anxiety amongst the general population, visible in panic buying and the general hysterical pitch of the news cycle, has infected the markets. The VIX, a measure of the stock markets expected volatility, shot up from a moderate baseline to the mid-70s last week, and is currently sitting around the 78 mark (8). That’s well into expected nosedive territory. 

vix

Is this a reversion to mean – Fed rate cuts usually accompany recessions because declining interest rates suggest wider economic deterioration. Hard nosed market timers have been scoffing at new normals (9).

Image credit: Elliott Wave International

‘All bull markets are the same, all bear markets are different’

So, as I write this on March 15/16/17th, the Fed has slashed the interest rate to 0-0.25% (10). It’s a hallmark of a bear trend, accompanying volatility. We’re seeing 4-12% swings daily. This market is the saw blade, whipping down through your investment logpile. But this market noise covers the underlying drivers; uncertainty and anxiety. The market thrives on certainty and predictable outcomes. COVID-19 is an unknown and can’t be priced into the efficient market. We’ve never had a virus driven recession we have data for (11). The Black Death, Smallpox and Plague of Justinian tell no tales. 

We don’t know when it will end or what the fallout will be. People try to provide structure and certainty by reflecting on what can now be expected (12). They tell themselves it’s cyclical, that we’re in a recession and will bounce back (13). This market is not a response to internal cyclical events, or broad economic fallacies. This is the result of a pandemic threatening millions of lives and requiring a global response. The market won’t be able to price in the outcome until we’re past the peak of the virus, and we’re only just getting started. Leave your speculation at the door. Keep calm and carry on investing (14)As TI/ TA on Monevator intone:

“DO NOT SELL.” (15)

We’ve all got bigger things to worry about.

Keep handwashing!

The Shrink

Thought for the week:
“It is a mark of a mean capacity to spend much time on the things which concern the body, such as much exercise, much eating, much drinking, much easing of the body, much copulation. But these things should be done as subordinate things: and let all your care be directed to the mind” – Enchiridion XLI, Epictetus

Other News:

Covid-19 mini-special:

The History of Pandemics by Death Toll

Image credit: The Visual Capitalist (16)

Capture

Life goes on:

Comment/ Opinion:

References:

  1. https://seekingalpha.com/article/4330865-technically-speaking-on-cusp-of-bear-market
  2. https://en.wikipedia.org/wiki/Black_swan_theory
  3. https://monevator.com/investing-in-the-face-of-a-disaster/
  4. https://en.wikipedia.org/wiki/Cherry_picking
  5. https://en.wikipedia.org/wiki/Selection_bias
  6. https://www.marketwatch.com/story/the-fed-put-on-the-stock-market-may-expire-worthless-because-of-these-mistakes-stifels-bannister-2019-09-19
  7. https://www.telegraph.co.uk/business/2020/03/04/feds-misjudged-pyrotechnics-may-have-brought-us-even-closer/
  8. http://www.cboe.com/vix
  9. https://www.forbes.com/sites/investor/2019/07/27/the-fed-is-going-to-cut-rates-be-careful-what-you-wish-for/#4ed414f560b2
  10. https://www.theguardian.com/business/2020/mar/15/federal-reserve-cuts-interest-rates-near-zero-prop-up-us-economy-coronavirus
  11. https://www.marketwatch.com/story/goldman-sachs-analyzed-bear-markets-back-to-1835-and-heres-the-bad-news-and-the-good-about-the-current-slump-2020-03-11
  12. https://www.forbes.com/sites/simonmoore/2020/03/14/what-to-expect-from-this-bear-market/#4def34e661ff
  13. https://www.cnbc.com/2020/03/14/not-every-bear-market-is-accompanied-by-an-economic-recession-but-chances-are-high.html
  14. https://www.ukvalueinvestor.com/2020/03/coronavirus-stock-market-crash.html/
  15. https://monevator.com/weekend-reading-do-not-sell/
  16. https://www.visualcapitalist.com/history-of-pandemics-deadliest/
  17. https://www.history.com/topics/middle-ages/pandemics-timeline
  18. https://www.theguardian.com/commentisfree/2020/mar/05/even-as-behavioural-researchers-we-couldnt-resist-the-urge-to-buy-toilet-paper
  19. https://markets.businessinsider.com/news/stocks/stock-market-news-today-indexes-plunge-oil-market-coronavirus-selloff-2020-3-1028978137
  20. https://www.independent.co.uk/news/world/americas/coronavirus-cdc-1918-flu-pandemic-death-toll-symptoms-a9389171.html
  21. https://t.co/ZejfSQcO0Y?amp=1
  22. https://www.bbc.co.uk/news/science-environment-51825089
  23. https://www.bbc.co.uk/news/uk-england-york-north-yorkshire-51736395
  24. https://www.mortgagesolutions.co.uk/better-business/2020/03/02/equity-release-is-heading-into-the-eye-of-a-perfect-storm-blackwell/
  25. https://www.ft.com/content/fa038361-1faf-4083-8128-257f83d4b2ed
  26. https://www.bbc.co.uk/news/business-your-money-51841748
  27. https://www.theguardian.com/business/2020/mar/15/prepare-for-the-coronavirus-global-recession
  28. https://investornews.vanguard/a-message-from-vanguards-ceo-on-the-coronavirus/
  29. https://monevator.com/how-to-prepare-for-a-recession/
  30. https://www.cnbc.com/2020/03/01/millennial-millionaire-shares-what-he-refuses-to-spend-money-on.html
  31. https://metro.co.uk/2020/03/07/couple-ditch-jobs-retire-30s-live-greek-island-5000-year-12362827/
  32. https://ofdollarsanddata.com/the-worst-day-of-our-investment-lives/
  33. https://www.ukvalueinvestor.com/2020/03/hunting-for-dividends.html/
  34. https://www.finumus.com/blog/covid-19-and-bonds-no-time-to-die
  35. http://diyinvestoruk.blogspot.com/2020/03/asset-allocation-re-visited.html
  36. http://diyinvestoruk.blogspot.com/2020/03/national-grid-portfolio-addition.html
  37. http://www.retirementinvestingtoday.com/2020/03/lenses.html
  38. http://eaglesfeartoperch.blogspot.com/2020/03/thoughts-on-investment-portfolio.html
  39. http://eaglesfeartoperch.blogspot.com/2020/03/lockdown-in-tenerife.html
  40. https://gentlemansfamilyfinances.wordpress.com/2020/03/09/february-2020-month-end-accounts/
  41. https://awaytoless.com/monthly-spending-february-2020/
  42. http://quietlysaving.co.uk/2020/03/08/ravaged-dogs-of-the-ftse-and-random-shares-update/
  43. https://firevlondon.com/2020/03/10/feb-2020-buy-high/
  44. https://www.thefrugalcottage.com/my-updated-portfolio-march-2020/
  45. https://southwalesfi.co.uk/2020/03/13/innovative-finance-isa-pros-and-cons-ifisa/
  46. http://bankeronfire.com/pension-vs-isa-settling-the-debate
  47. https://pursuefire.com/playing-the-long-game/
  48. https://theescapeartist.me/2020/03/13/victory-is-inevitable/
  49. https://indeedably.com/prison-of-my-own-making/

The Full English Accompaniment – Premium Bonds: The time is now?

One of the cardinal rules of financial security is to have an emergency fund. If you need to ask why, you’re in the wrong place, and I suggest you read Monevator’s excellent explanation (1). A big credit line isn’t enough. You need 3-6 six months of expenses in a liquid, easily-accessed account. For the basic rules and steps Monevator again has your back (2)

So far, so basic.

Beyond that the arguments start. What classifies as an emergency? How much is too much? Where do you put it?

High yield current accounts and instant-access savings accounts have long been the go-to. Which was fine when returns were 3% plus in the early noughties, but over the past decade interest rates on savings accounts have drifted down (3, 4). The best easy access accounts, including the once-vaunted Marcus, are now returning 1.3% (5). Meanwhile inflation hovers around the 1.3-1.5% mark (6).


So we’re left with a dilemma: do we accept our emergency fund will (at best) tread water or (at worst) lose money relative to inflation, or do we chase returns?

The latter has led to some very creative accounting by some authors, including the suggestion that your emergency fund spending should be built into your household budget (7). Which sort of suggests it’s predictable, and not an unforseen emergency.

Or you could be like a number of other FIRE bloggers (Early Retirement Now, Physician on FIRE), and go without an emergency fund, relying instead on lines of credit and your investments to bail you out (8, 9). This reduces your opportunity cost and improves your returns (10). It also tackles the behavioural problem with an emergency fund; the temptation to dip into it for that emergency TV or holiday. It’s much harder to impulse spend an investment. But do you risk crystallising losses during the inevitable downturn?

Step forward premium bonds; long-derided though the UK’s biggest savings product (11). They’re a psychological leap from an instant access savings account, yet improvements in IT means you can check results on your phone and transfer into cash within a couple of days (ticking that liquidity box) (12, 13). The prize rate has been cut, but it’s still 1.3% – the same as instant access savings (14). And given you’re reading this and into FIRE, you’re probably a higher rate tax payer. Here premium bonds sweeten the deal further, with no tax to pay on winnings (15).

You’re still not likely to see a win, as that 1.3% is practically lower due to the skewing effects on the average of the top prizes. But maybe now, in the days of rubbish cash returns, premium bonds offer a credible emergency fund safe haven.

Have a great week,

The Shrink

P.S. Couldn’t really get away without mentioning the Coronavirus outbreak could I? I’ve briefly mentioned my thoughts in the Reasons to be cheerful/fearful post, and for how I think it’s going to go see Scenario 5 of the Thought Experiment. Ultimately it’s going to be a difficult time for the markets. Due to the number of unknowns we’re dealing with, trying to price in predictions is near impossible. The efficient market is going to struggle with the level of uncertainty. We’ve been near a market top for a long time. No-one knows the future. Stick with your plan and be confident in your preparation.

Other News:

Covid-19 mini-special:

And elsewhere:

Opinion/ blogs:

References:

  1. https://monevator.com/its-an-emergency-fund/
  2. https://monevator.com/emergency-funds-the-ten-essential-steps/
  3. https://thistimeitisdifferent.com/uk-savings-interest-rates-feb-2018
  4. https://www.bbc.co.uk/news/business-49752883
  5. https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/
  6. https://www.bbc.co.uk/news/business-51117888
  7. https://awealthofcommonsense.com/2019/09/what-do-i-want-my-money-to-do-for-me/
  8. https://earlyretirementnow.com/2016/05/05/emergency-fund/
  9. https://www.physicianonfire.com/dont-bother-with-emergency-fund/
  10. https://www.fool.com/investing/2018/04/15/people-are-thinking-about-emergency-funds-wrong.aspx
  11. https://www.moneysavingexpert.com/savings/premium-bonds/
  12. https://moneyfacts.co.uk/news/savings/nsi-enhances-its-premium-bonds/
  13. https://www.yourmoney.com/saving-banking/premium-bonds-winners-can-now-be-notified-by-text/
  14. https://www.moneysavingexpert.com/news/2020/02/premium-bond-prize-rate-to-be-cut-to-1-3-/
  15. https://monevator.com/are-premium-bonds-a-good-investment/
  16. https://twitter.com/i/status/1230554753182003203
  17. https://twitter.com/andrewgregory/status/1233076394084720640?s=19
  18. https://www.bbc.co.uk/news/business-51681620
  19. https://www.nejm.org/doi/full/10.1056/NEJMp2003762
  20. https://www.theguardian.com/world/ng-interactive/2020/feb/26/coronavirus-map-how-covid-19-is-spreading-across-the-world
  21. https://www.theguardian.com/business/2020/feb/15/coronavirus-black-swan-shadow-global-economy
  22. https://www.theguardian.com/world/2020/feb/26/coronavirus-spreads-further-as-who-expert-warns-world-not-ready-for-pandemic
  23. https://www.ft.com/content/e0ca01ee-57cb-11ea-abe5-8e03987b7b20
  24. https://www.theguardian.com/money/2020/feb/17/uk-housing-boom-leads-to-2500-jump-in-asking-prices
  25. https://www.thisismoney.co.uk/money/buytolet/article-8019811/Hundreds-thousands-landlords-sold-tax-relief-began-phased-out.html
  26. https://www.cnbc.com/2020/02/21/elon-musk-recommends-science-fiction-book-series-that-inspired-spacex.html
  27. https://www.theguardian.com/environment/2020/feb/17/west-midlands-canals-help-heat-hospitals-homes-plans
  28. https://www.theguardian.com/us-news/2020/feb/25/anti-greta-teen-activist-cpac-conference-climate-sceptic
  29. https://www.bbc.co.uk/news/uk-wales-51633458
  30. https://www.thisismoney.co.uk/money/investing/article-7978521/Is-worth-investing-space-stocks-Virgin-Galactic.html
  31. https://www.cityam.com/fintech-unicorn-klarna-posts-first-ever-annual-loss/
  32. https://www.vice.com/en_uk/article/qjd3p7/how-to-get-out-of-debt
  33. https://www.morningstar.co.uk/uk/news/199513/fire-means-i-can-retire-at-41.aspx
  34. https://www.bbc.co.uk/bbcthree/article/2b3f3f67-2338-4253-b7f5-a36192885492
  35. https://monevator.com/weekend-reading-bring-me-sunshine/
  36. http://www.retirementinvestingtoday.com/2020/02/perspective.html
  37. http://eaglesfeartoperch.blogspot.com/2020/02/the-end-of-world-as-we-know-it.html
  38. http://quietlysaving.co.uk/2020/02/28/february-2020-plus-other-updates/
  39. http://diyinvestoruk.blogspot.com/2020/02/sse-portfolio-addition.html
  40. https://www.ukvalueinvestor.com/2020/02/diageo-share-price.html/
  41. https://gentlemansfamilyfinances.wordpress.com/2020/02/28/bye-bye-aegon/
  42. http://thefirestarter.co.uk/resigned-to-my-fate/
  43. https://cashflowcop.com/so-near-and-yet-so-fi/
  44. https://theescapeartist.me/2020/02/28/sweat-those-assets/
  45. https://awaytoless.com/delaying-fire-to-enjoy-today/
  46. https://www.thefrugalcottage.com/february-2020-a-month-in-review/
  47. http://fiukmoney.co.uk/february-20-net-worth-and-monthly-update-18-525898-15143/
  48. https://thesavingninja.com/ficalc-ninja-mobile-application/
  49. http://bankeronfire.com/the-real-path-to-wealth?the-real-path-to-wealth
  50. https://www.foxymonkey.com/ir35-contract-market/
  51. https://firevlondon.com/2020/02/23/how-much-is-enough/
  52. https://indeedably.com/shedding-skin/
  53. https://indeedably.com/held-to-account/

Reasons to be fearful and cheerful in 2020

So a new year, a new decade, has arrived. What could lie ahead, and how could it impact your goals? In general I try to avoid the news and speculation on this blog. For ease of digestion I’ve condensed down my thoughts on current risks and boons on the financial horizon into this one post. As one man’s rubbish is another man’s treasure I’ve not separated the positive and negative, and any old hack can predict doom, so in a linked follow-up to this post I’ll also offer some ‘Ninja-style’ thought experiments. I encourage you to play out the options in your head, thoughts and comments welcome.

  • The whole damned B***it saga is nearly over.

Or at least we can see a light at the end of the tunnel. Is that light a rose-tinted halycon glow of coal-fired power stations and a Wolseley in every council-semi car port? Or is it a bright new future of an independent UK driven by strong economic growth and an embrace for emerging technologies? Is it both? Does it matter?

It is re-assuring that following the general election there was a general upswing in economic confidence in the UK, typified by the surge in the pound (1). But since the heady heights of $1.34/5, we’ve seen the pound whipsaw depending on what BoJo is saying, whether Trump is inadvertently warmongering, and the ECB/ BoE’s machinations (2). My top line take is companies hate uncertainty, and at least the current government will provide some certainty, even if it’s distasteful to some quarters. Whether you’re pro-Brexit like the DIY Investor UK, or anti like TI at Monevator, at least we can all agree that it’s time to get the debacle moving (3, 4).

  • World markets continue on an unprecedented bull run

People keep predicting recessions. They’ve not happened. Last year saw gains on the US stock market (S&P 500) of 28% (5, 6). Alright some of that was recouping the losses of the December 2018 ‘correction’, but that’s still massive. In fact it was the best return since 2013, with new record highs.

Help from the US Federal Reserve through cheap cash, and new tech IPOs/ expansion are the fuel for this growth. Trade wars, warnings of global economic slowdowns, Brexit and the inverted yield curve have all been unable to stop this juggernaught. The Stoxx Eurozone 600 also a 23% jump, with the Shanghei Composite close on 22%, and the Nikkei 225 a relative laggard at 18% (6). The FTSE was the only fly in the ointment at 12% (7). Still impressive by most standards. The CBOX Volatility Index (^VIX), a measure of fear in the market where spikes are usually associated with sell-offs, started 2020 well down on 2019. Much of 2019 was spent between 16-22, where fear levels greater than 15 suggest traders think a recession is imminent. 2020 started around 12-14 (8). Traders see people crying wolf about recessions, and are starting to ignore them. Investment through low-cost index funds may have removed the human behavioural volatility from the market, whilst consistent developments in technology and other sectors mean that gains in one area offset slowdowns in others (9, 10). Is the permanent bull charge the new normal?

  • Interest rates remain low meaning cheap credit and mortgages

Interest rates were cut in the wake of the 2008 recession, and they’ve remained there and it looks like they’ll stay low for the forseeable future (11, 12). The BoE base rate is currently 0.75%, and didn’t change at the last vote (12). In the US mortgage rates are also falling, though for different reasons (13). This is crap for cash savings, but fantastic for mortgages which due to the ongoing competition in the market, remain at or around record low rates (14). The house price to earnings multiples are also falling, and the combination of cheap mortgages, a bit of government certainty and (slightly) more affordable prices means the number of mortgage approvals is going up (15, 16). For us on the street this means cheaper mortgages and cheaper credit cards.

  • Monetary policy is limited by current low interest rate

Interest rates have been kept low over the last decade to continue stimulus (along with quantitative easing) to the sluggish economy. Here’s a 7 minute video on how interest rates influence inflation and public spending as the basis of monetary policy (17):

Low interest rates discourage cash savings and encourage spending (18). But the economy remains beset by headwinds, and at this point in the (supposed) economic cycle we should have high interest rates that can be cut again when the next recession comes. Instead quantitative easing and low interest rates have remained. Where can economic policy go to spur further growth? Some countries have started using negative interest rates to promote spending (19). Most notable is Japan, which has had negative interest rates for decades, with minimal effect on growth (20, 21). Has Japan led the way into a brave new world of shackled economic policy and stagnant growth?

  • Flatlining property prices

This could be something to cheerful about, or fearful about, depending on your point of view. Dan at Pursue Fire discussed in this month how house prices appear to have rebounded somewhat since the December 2019 election (22). This is Money also did a useful piece, looking at what different organisations are predicting for the coming months on property prices (23). The general consensus is that house price growth will remain ~2%, roughly in line with inflation. Lots of reasons behind this, which can be broadly summarised as: very high house price to earnings ration (-ve effect on sales due to affordability), low mortgage interest rates (+ve effect on sales due to affordability), government meddling with Help to Buy and LISAs (+ve effect on sales and inflation of prices), government meddling with Buy-to-Let rules (-ve effect on prices through landlords offloading property), changes in immigration including Brexit (-ve effect on house prices in South East due to decreased demand), and the coming of age of interest only mortgages (unknown so far). Bad news for those whose nest egg/ pension is the growth in equity in their property, good news for anyone just starting out or upsizing. All those wannabe property developers better pack up their bags, as the days of 10% year on year growth may well be gone (24).

  • Corporate and private debt is reliant on low interest rates

A monetary policy of low interest rates has not only meant cheap mortgages, but also cheap debt for consumers and industry. Those 0% interest credit cards are tempting. So tempting UK household debt has risen 11% in the last two years (25). One could argue that recent lifestyle inflation/ keeping up with Jones’ has been financed with cheap debt, but these stories are never that simple. If you deep dive Hire Purchase (PCP) and ballooning student loans (not low interest rate) are the majority of the story (26). What happens to all this debt if the interest rates start to rise?

Looking beyond private debt, there was some debate in media channels about the rise of ‘zombie firms’ – companies where turnover and profit were persistently low and with high leverage (27, 28). These firms have hung about because low interest rates enable them to survive, whilst in the good old days a recession would have killed them off. They drag down productivity and GDP, crowd out markets and generally stink up the place like a good zombie but with less bitey action. They haven’t gone away and probably constitute 10-15% of global companies (29). The IMF has spoken of almost 40% of the debt in the eight world leading economies would be too expensive to service in a recession (30). These crappy companies and their dodgy debt remain a sword of Damocles hanging over the market (31).

  • Many financial products offering high returns or underlying current strategies are untested

There’s a whole raft of financial instruments which can be filed under ‘working now’, promising and at times attaining strong returns, which have never seen an economic downturn. That’s either because they’ve gone mainstream since 2008, or they’ve been developed since then. We’ve got no idea what will happen to them. In this bucket of uncertainty I chuck:

  1. P2P lending – Connecting those investing with those borrowing with minimal middle men (32). I’ve spoken before about my concerns of default risk in P2P. There’s analyses that suggest P2P resembles subprime mortgages (32). The default rate at Zopa was 4.52%, and 5% doesn’t look unreasonable. The services take a percentage to cover for these defaults, but what happens when the default rates start to rise in an economic downturn. Zopa has stress-tested again BoE modelling, so here’s hoping they’re doing enough (33, 34).
  2. Buy to let, particularly student flats and hotels – As investors look for returns and the BTL allowances are tightened, those seeking returns have lent on students. Much easier to be a student landlord than a slum landlord. Increasing numbers of students, particularly from overseas, have been seeking better quality accommodation than the traditional damp bedsit. This has driven a property boom, with plenty of agencies helping you to invest in a purpose built flat providing 7-15% returns (35, 36, 37). University cities around the UK have seen massive blocks of flats go up to house students (35, 38).  Problem is students don’t want to live in them as they’re too expensive, and there’s now market oversupply (39, 40). I don’t blame them. I wouldn’t want to spend £600+/month for a studio flat with shared kitchen. My student accommodation was £280/month with an ensuite. That’s £300 for beer! So the companies are going under and investors are losing out (41). Hotel room investment appears to be aimed at a similar target market (42). 10% returns in bricks-and-mortar away from the scary stock market. Investment in this sector is growing despite a string of high profile collapses and vague references to ‘ponzi-schemes’ (43, 44). Frankly I file the whole idea under ‘too good to be genuine’.
  3. PCP car sales My pet hate, I advise everyone to read the FCA findings and tell me how this is not a car crash waiting to happen (45). Default rates remain low, but commission-based salesman are racing to the bottom of the lending pool. Everyone who wants a flash car has one, people aren’t buying but the pressure for sales remains (46). There’s already talk it could be the next PPI, but people are signing themselves up to this wittingly (47). Even when they admit they don’t understand (48). I’ll stick to my ropey old shitbox.
  4. Crypto – I’m not even going to try and speculate on that rollercoaster.

The simple answer here is stick to tried and tested financial mechanisms.

  • China, the engine room of recent growth, has an untested banking sector

Bit of a funny communist state China. The majority of the banks remain state-owned, and there’s a national culture of saving. They therefore rarely share worries about the sector. Beyond the state banks are ‘shadow banks’, which have funded much of the real estate development in recent years (49, 50). The lending those banks were built on was fuelled and funded by China’s hyperbolic growth. Now that growth is slowing, risky business ventures are failing, and there’s been a spate of bank bail-outs (50). Stress tests suggest this is the tip of the iceberg, with the People’s Bank of China’s annual stability report suggesting 586 out of 4,379 banks are at high risk of collapse (51).

  • Green and sustainable technology and funds are going mainstream

The diversification and ease with which individuals can self-invest, coupled with global recognition of the climate emergency, is fuelling a massive growth in green and sustainable funds. Millennials aren’t consulting a financial advisor and then putting cash in an active fund containing oil and tobacco, they’re using Nutmeg or Wealthsimple and selecting green companies (52). It feels like a tipping point has been reached when even companies like Vanguard bow to pressure (53, 54). Growth follows investment, and I hope the pressure will mean a societal industrial shift towards sustainable approaches. Are we seeing the re-invention of our economy, the greatest shift since the industrial revolution?

LATE BREAKING ADDITION:

  • 2019-nCoV, a.k.a Wuhan Virus. 

To be clear, there are lots of coronaviruses, they are a source of the common cold. The novel coronavirus which emerged in Wuhan is a nasty bastard. I’ve been chatting to my friends who work in infectious diseases and they’re worried. To them it is Wuhan virus, and that is how I’ll refer to it. Why is it so bad:

  1. It’s seriously infectious – Conservative modelling suggests a basic reproductive number (R0) of 2.68, i.e. every infected person spreads it to 2.68 others (55, 56). I’ve seen less conservative estimates at 4. Epidemic doubling time is 6.4 days. Growth within the population is exponential. For reference most pandemic and endemic infections have R0s between 2-5, including Spanish Flu (57).
  2. It can be asymptomatic or mild – Control measures such as those used for Ebola, SARS, MERS etc were effective because once someone contracted the infection they became unwell, and they could be separated out and isolated. Their symptoms allowed isolation during the infectious period. Wuhan virus appears to be infectious while asymptomatic, meaning people can spread it without knowing (58).
  3. It hits the mortality sweet spot – It appears to kill around 1-2% of those diagnosed (probably much lower with asymptomatic cases). Ebola, SARS, MERS etc were all more deadly, but this reduces a pathogens ability to spread quickly and reduces the host reservoir. Wuhan virus kills the old and infirm, at a rate that maintains a large host population (59, 60).
  4. China has almost certainly hidden the true numbers – People in Wuhan are having quick burials, others aren’t being tested, and the fact Wuhan virus can be mild and asymptomatic suggests the spread could be significant worse than reported (61, 62).

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People are already speculating on the effects of Wuhan Virus on the stock market (63, 64, 65). My friends suggest this is the next Spanish Flu, and we’ll see tens of thousands of deaths globally amongst the infirm and elderly (66, 67). We live in interesting times.

So that’s it, and I haven’t even touched on Trump or the Middle East (68). Making forecasts is a fools game, the only surety of which is that you’ll smack yourself for what you said (69). We suffer from huge psychological biases when thinking about the future (70). Is a consistent bull run the new normal, or will we see another great depression (71)? Join my in my next post to think through the options.

References

  1. https://www.independent.co.uk/news/uk/politics/general-election-result-pound-dollar-euro-exit-poll-tory-boris-johnson-a9244661.html
  2. https://www.bbc.co.uk/news/business-50821583
  3. http://diyinvestoruk.blogspot.com/2019/12/we-are-leavingat-last.html
  4. https://monevator.com/weekend-reading-brexit-bites/
  5. https://www.cnbc.com/2019/12/31/the-stock-market-boomed-in-2019-heres-how-it-happened.html
  6. https://markets.businessinsider.com/news/stocks/sp-500-2019-annual-return-for-year-best-since-2013-2019-12-1028790061?
  7. https://www.bbc.co.uk/news/business-50955629
  8. https://www.investopedia.com/terms/v/vix.asp
  9. https://www.forbes.com/sites/kenrapoza/2020/01/22/bull-market-without-end-amen/#146f30422637
  10. https://www.wsj.com/articles/global-stocks-mixed-on-last-day-of-exceptional-year-11577787736
  11. https://www.forbes.com/sites/billconerly/2020/02/01/interest-rate-forecast-remaining-low-throughout-2020/#4aa5548b5395
  12. https://www.thisismoney.co.uk/money/markets/article-7947231/Interest-rates-kept-hold-0-75-Mark-Carneys-rate-decision.html
  13. https://www.washingtonpost.com/business/2020/01/30/mortgage-rates-sink-their-second-lowest-levels-three-years/
  14. https://www.thisismoney.co.uk/money/mortgageshome/article-7723941/Ten-year-fixed-mortgage-rates-hit-new-record-low.html
  15. https://www.theguardian.com/business/2020/jan/27/uk-banks-mortgages-interest-rates
  16. https://www.independent.co.uk/news/business/news/housing-market-england-mortgage-approvals-lending-a9311706.html
  17. https://youtu.be/4XYlQ_HbDTw
  18. https://www.economicsonline.co.uk/Managing_the_economy/Monetary-policy.html
  19. https://www.theguardian.com/business/grogonomics/2019/oct/29/negative-interest-rates-mad-economic-science-or-the-logical-next-step
  20. https://www.fxstreet.com/analysis/japan-negative-interest-rates-and-the-death-of-monetary-policy-202001021535
  21. https://foreignpolicy.com/2019/11/13/japan-economy-west-us-economic-future-trump-topsy-turvy/
  22. https://pursuefire.com/monthly-update-16-december/
  23. https://www.thisismoney.co.uk/money/mortgageshome/article-7801417/What-property-prices-Britain-2020-onwards.html
  24. https://www.thisismoney.co.uk/money/mortgageshome/article-7943741/House-prices-174-years-70-year-period-got-cheaper.html
  25. https://www.bbc.co.uk/news/business-50671834
  26. https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddebtingreatbritain/april2016tomarch2018
  27. https://www.theguardian.com/business/2019/may/06/zombie-firms-a-major-drag-on-uk-economy-analysis-shows
  28. https://fortune.com/2019/09/02/why-zombie-companies-are-on-the-rise-and-could-pose-a-threat-to-the-u-s-economy/
  29. https://www.businessinsider.com/zombie-firms-statistics-on-low-interest-rates-and-leveraged-loans-2018-10?r=US&IR=T
  30. https://www.theguardian.com/business/2020/jan/04/debt-will-kill-global-economy-pensions-ageing-population
  31. https://www.telegraph.co.uk/business/2020/01/14/trillion-dollar-corporate-debt-mountain-threatening-worlds-economy/
  32. https://www.investopedia.com/terms/p/peer-to-peer-lending.asp
  33. https://www.moneyobserver.com/how-will-p2p-fare-during-downturn
  34. https://www.economist.com/finance-and-economics/2019/12/05/created-to-democratise-credit-p2p-lenders-are-going-after-big-money
  35. https://www.ft.com/content/770992fc-d3d6-11e9-a0bd-ab8ec6435630
  36. https://www.rw-invest.com/student-property-investments/
  37. https://www.endsleigh.co.uk/blog/post/why-property-investors-are-buying-student-accommodation/
  38. https://www.studyinternational.com/news/student-housing-uk-europe/
  39. https://moneyweek.com/503652/investing-in-student-property-doesnt-stack-up
  40. https://www.thisismoney.co.uk/money/buytolet/article-5620311/How-invest-student-property-buy-let.html
  41. https://www.ft.com/content/1db98d5c-98c5-11e9-9573-ee5cbb98ed36
  42. https://sterlingwoodrow.com/hotel-room-investment/
  43. https://www.savills.co.uk/research_articles/229130/274445-0
  44. https://www.bbc.co.uk/news/uk-wales-50350281
  45. https://www.fca.org.uk/publication/multi-firm-reviews/our-work-on-motor-finance-final-findings.pdf
  46. https://www.bbc.co.uk/news/business-46774053
  47. https://www.telegraph.co.uk/business/2019/10/05/car-financing-loans-could-erupt-next-ppiscandal/
  48. https://www.thisismoney.co.uk/money/cars/article-7546811/Nine-ten-motorists-confused-car-finance-options.html
  49. https://www.greenleft.org.au/content/paper-dragons-will-china-cause-next-financial-crash
  50. https://www.scmp.com/comment/opinion/article/3044148/chinas-banking-debt-crisis-ticking-time-bomb-must-be-defused-urgent
  51. https://www.fxstreet.com/analysis/theres-a-major-banking-crisis-unfolding-in-china-202001080837
  52. https://www.telegraph.co.uk/business/2019/02/16/millennials-push-green-bonds-mainstream/
  53. https://www.ft.com/content/7d64d1d8-91a6-11e9-b7ea-60e35ef678d2
  54. https://www.ft.com/content/5b6caa5e-bd4f-11e9-89e2-41e555e96722
  55. https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)30260-9/fulltext
  56. https://www.ft.com/content/ed3fb63e-41ce-11ea-bdb5-169ba7be433d
  57. https://en.wikipedia.org/wiki/Basic_reproduction_number
  58. https://www.scientificamerican.com/article/study-reports-first-case-of-coronavirus-spread-by-asymptomatic-person/
  59. https://www.nature.com/articles/d41586-020-00236-9
  60. https://www.nytimes.com/2020/01/30/opinion/wuhan-coronavirus-epidemic.html
  61. https://www.telegraph.co.uk/news/2020/01/25/quick-burials-lack-tests-raise-fears-cornavirus-outbreak-much/
  62. https://www.theguardian.com/science/2020/jan/26/coronavirus-could-infect-100000-globally-experts-warn
  63. https://www.bbc.co.uk/news/business-51239745
  64. https://www.bbc.co.uk/news/business-51262450
  65. https://www.ccn.com/chinas-economy-on-the-brink-as-coronavirus-fears-intensify/
  66. https://khn.org/morning-breakout/who-to-reevaluate-global-emergency-designation-as-coronavirus-spreads-at-rate-of-1918-spanish-flu-pandemic/
  67. https://www.weforum.org/agenda/2020/01/coronavirus-flu-healthcare-symptoms/
  68. https://www.fool.com/investing/2020/01/28/these-4-world-events-could-kick-off-a-market-crash.aspx
  69. https://rpseawright.wordpress.com/2020/01/02/forecasting-follies-2020/
  70. https://www.collaborativefund.com/blog/the-psychology-of-prediction/
  71. https://www.theguardian.com/business/2020/jan/17/head-of-imf-says-global-economy-risks-return-of-great-depression

The Full English Accompaniment – Pensions problems show societal flaws

I’ve whinged about the NHS Pension situation before, so this week I’ve been following Dr Kate Lovett’s threads on Twitter with interest. The Dean of the Royal College of Psychiatrists, this year she was the recipient of an incremental increase in salary due to experience and an excellence in practice award. This has resulted in a tax bill 120% of her annual salary. How?

As an unfunded DC scheme that has been raided multiple times by the Government, the whole situation is ludicrously punitive. There is no pot of cash which grows, it is all dependent on the pension scheme remaining the same by the time you retire, plus the calculations for tax being correct (1). If you’ve ever dealt with public sector HR you’ll have your own thoughts about this. The taper cap doesn’t work when applied to DC schemes, and in the medical profession it’s demoralising. There’s a whiff that the intention was to drive people out of the NHS scheme and into SIPPs or similar. A drive for a smaller government.

These pushes towards self-invested pensions are important for the self-employed. Despite continuous suggestions and prompting, most self-employed people are not paying into a pension (2). In previous times, a decent state pension could cover you, however our state pension has fallen to one of the lowest in Europe, again evidence of a smaller government dogma. Couple this with the expectation from some parties that the state pension/ national insurance should operate like a DC pension, not an insurance policy, and we see how people have become more ‘me first’ (3). I can understand the drive for a small government, but there will always be some who slip through the cracks or don’t understand. Encouraging everyone just to think about themselves risks leaving those individuals behind. How long can the state pension last in the face of dogma?

Have a great week,

The Shrink

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading:

Food Of The Gods: The Search for the Original Tree of Knowledge: A Radical History of Plants, Drugs and Human Evolution – Terence McKenna – An ethnobotanist explores humanitys’ fascination with hallucinogenics, and the role of altered states of consciousness on the development of human society.

References:

  1. https://www.hsj.co.uk/workforce/top-doctor-reveals-huge-tax-bill/7026227.article
  2. https://www.thisismoney.co.uk/money/pensions/article-7554943/Self-employed-nudged-save-2-50-day-pensions.html
  3. https://www.thisismoney.co.uk/money/pensions/article-7538347/Im-terminally-ill-60-state-pension-just-lost.html
  4. https://www.independent.co.uk/voices/brexit-pound-sterling-fall-no-deal-boris-johnson-trade-a9145701.html
  5. https://www.bbc.co.uk/news/business-49959237
  6. https://www.theguardian.com/artanddesign/2019/oct/08/stirling-prize-architecture-goldsmith-street-norwich-council-houses
  7. https://www.theguardian.com/environment/2019/oct/09/revealed-20-firms-third-carbon-emissions
  8. https://www.theguardian.com/environment/2019/oct/12/top-three-asset-managers-fossil-fuel-investments
  9. https://www.bbc.co.uk/news/business-49998074
  10. https://www.thisismoney.co.uk/money/saving/article-7558523/Three-quirky-savings-accounts-better-rate.html
  11. https://www.independent.co.uk/life-style/gadgets-and-tech/news/spider-robot-moon-uk-lunar-mission-space-spacebit-nasa-a9150641.html
  12. https://www.bloomberg.com/news/articles/2019-10-12/is-the-world-economy-sliding-into-first-recession-since-2009
  13. https://www.theguardian.com/business/2019/oct/14/renewable-electricity-overtakes-fossil-fuels-in-uk-for-first-time
  14. https://www.theguardian.com/environment/2019/oct/13/firms-ignoring-climate-crisis-bankrupt-mark-carney-bank-england-governor
  15. https://www.theguardian.com/business/2019/oct/13/entrepreneurs-seek-venture-capital-despite-high-profile-tech-flops
  16. https://www.bbc.co.uk/news/business-50052375
  17. https://www.thisismoney.co.uk/money/news/article-7578721/Woodfords-empire-collapses-loses-three-funds-shuts-firm.html
  18. https://www.theguardian.com/business/2019/oct/16/global-economy-faces-19tn-corporate-debt-timebomb-warns-imf
  19. https://www.bbc.co.uk/news/business-50089887
  20. https://www.theguardian.com/technology/2019/oct/23/tesla-q3-earnings-elon-musk
  21. https://www.vanguardinvestor.co.uk/articles/latest-thoughts/investing-success/fee-cuts-show-vanguard-commitment?cmpgn=ET1019UKPALBR0001
  22. https://www.bbc.co.uk/news/business-50094982
  23. https://nypost.com/2019/10/08/inside-the-strange-secretive-lives-of-rich-millennial-cheapskates/
  24. https://www.foxbusiness.com/personal-finance/millennials-fire-saving-retirement
  25. https://www.foxbusiness.com/money/millennial-millionaire-retired-30
  26. https://www.forbes.com/sites/ryanderousseau/2019/10/22/why-happiness-grew-after-abandoned-early-retirement/
  27. https://www.lifehack.org/340263/aware-these-cognitive-biases-and-youll-much-more-successful
  28. https://www.theguardian.com/science/2019/oct/15/diy-drugs-should-hospitals-make-their-own-medicine
  29. https://moneyweek.com/516430/another-october-stockmarket-crash/
  30. https://www.bloomberg.com/news/articles/2019-10-17/a-guy-on-reddit-turns-766-into-107-758-on-two-options-trades
  31. https://www.ft.com/content/6dff9670-cf26-11e9-b018-ca4456540ea6?shareType=nongift
  32. https://www.ukvalueinvestor.com/2019/10/woodford-closure-ftse-100.html/
  33. https://www.ukvalueinvestor.com/2019/10/how-to-measure-your-portfolios-returns.html/
  34. https://monevator.com/10-year-retrospective-commodities-the-lost-asset-class/
  35. https://theescapeartist.me/2019/10/18/the-inestimable-advantages-of-living-a-more-natural-life-part-2/
  36. http://quietlysaving.co.uk/2019/10/24/dogs-nightmare-and-random-shares-update/
  37. https://firevlondon.com/2019/10/24/angel-investing-2-what-happens-next/
  38. https://www.reddit.com/r/FIREUK/comments/dn3opn/weekly_fireuk_blog_posts/
  39. https://lovelygreens.com/spicy-green-tomato-chutney/
  40. https://agentsoffield.com/2019/10/13/an-autumn-special/

 

The Full English Accompaniment – Cognitive biases in crowdfunding

Continuing my current theme looking at crowdfunding, and in advance of some behavioural finance pieces I’m putting together, this week I’m pointing out some of the ways crowdfunding websites use cognitive biases to convince you to invest. For examples, I’ve pulled two pitches from Seedrs and CrowdCube which were at the top of their lists (1, 2).

Seedrs

Crowdcube

Crowdcube rewards

In my opinion, some of the main cognitive methods that these sites use are:

  • Bandwagon effect/ Confirmation bias
  • Overconfidence effect
  • Illusion of scarcity
  • Denomination/ reciprocity effects/ present bias

Bandwagon effect/ Confirmation bias

Confirmation bias is the internal yes-man, that disregards data that contradicts your opinion and suggests that ambiguous information supports your opinion (3). Your search for, remember and interpret information subconsciously to prove you are right. The bandwagon effect refers to the tendency of people to follow others, regardless of whether it’s a good idea (4, 5). It stretches into and is allied with groupthink and herd behaviour. It’s common in politics and consumer economics, and was also seen in the Dotcom bubble. Here confirmation bias and the bandwagon effect work in tandem, people will invest along with others thinking that it is evidence that they are making the right choice.

Crowdcube Bandwagon

Seedrs Confirmation

In the two examples chosen, you can see (circled in orange) that the number of investors and their commitment to a theoretical goal valuation are given pride of place in the ‘pitch’. Both websites aim to convince you that it’s a good idea, as many others are doing the same. Others must have done the research (social loafing), and they’ve committed (sunk cost fallacy), so you should too.

Overconfidence effect

Tied into confirmation bias, the overconfidence effect is the subjective belief that a persons ability is greater than the objective results would suggest (6). This should be well known to anyone who has read Smarter Investing etc, and is the basis of the active investment mindset. It’s also the whole basis of the Crowdfunding system, offering a variety of ‘pitches’ which you then evaluate, thinking ‘I have the edge others do not’. It’s worth noting in this that. Adding to this, optimism bias makes you think you are less likely to have a negative outcome (like a company failing) than others.

To help you on your way in your overconfident selection, the websites use the framing effect (7). Information is presented in a positive manner. These are, after all, advertising pitches. Every page will play-up it’s ongoing good points. Causes of concern are never mentioned (except perhaps in the discussion section). To look at the company financials often requires an investment or access request, inhibiting due diligence.

Illusion of scarcity

Scarcity, in human psychology, boils down to the fact that we as humans place greater value on things which are rare than those which are common (8). The scarcity heuristic is the mental shortcut we do when we say, ‘this thing is rarely available, therefore it must be worth more’. Salespeople employ this to great effect as the basis for mark-down discounts, Black Friday, and the perpetual DFS sale. Scarcity can come from quantity, rarity or time. For quantity, our innate reaction to finding out there is a limited quantity of something is to believe our choice to have that something is threatened, and therefore we want it more. For rarity, we place value on items we perceive to be unique. In companies this is often played on with pro-innovation bias, where we will favour innovation over the status quo and ignore flaws in the innovation (9). Such a pitch could be ‘look at our innovative unique idea, set to change the world’. For time, the scarcity heuristic is simple; time is running out, you don’t have time to do the complex thinking, the short cut answer is to buy, buy, buy.

Crowdcube Scarcity

Seedrs Scarcity

Once again these methods are front and centre of our two chosen pitches. You have limited time left to choose (time scarcity). There’s a limited quantity of available investment (quantity scarcity), at odds with the over-funding concept. Ask yourself why the data is being presented in this way?

Denomination/ reciprocity effects/ present bias

Denomination effect is a cognitive bias in currency where people are more likely to spend an equivalent value in small denominations than in large denominations (10). I see this alot, as MrsShrink will actively avoid spending big sums, but £<10 in Tesco on tat twice a week is not an issue. You are more likely to buy multiple small crowdfunding investments than one large investment, which also fits with diversification bias, the tendency to opt for a selection which gives you options or variety in the future (11).

Crowdcube rewards

Crowdfunding sites pitch your investments in small amounts. They also offer rewards, which works on reciprocity effects and present bias. Reciprocity is responding to a positive action with a positive action, leading to positive regard from both sides (12). If the company rewards you for an investment, you are more likely to see it in a good light. You are also more likely to pick a company which rewards you for an investment due to present bias (13). This incorporates hyperbolic discounting, but essentially can be said that if we are offered £100 tomorrow or £100 in a month, we’re more likely to choose tomorrow. If we’re offered £100 tomorrow or £110 in a month, the choice will depend on the person and how much they discount the worth through time delay. As all crowdfunding investments are essential gambles set for an uncertain future, a present day reward sways our choices.

TL:DR

These are just a few of the methods that crowdfunding websites use to part us from our hard-earned. There are many, many more, and I encourage everyone to read up on behavioural finance and understand when cognitive biases may be at play. The post may come off as harsh, so know that I invested in the last month on one of these crowdfunding platforms. It’s all about doing your homework and looking beyond the sales pitch. If you can be bothered.

Have a great week,

The Shrink

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading (affiliate links):

Food Of The Gods: The Search for the Original Tree of Knowledge: A Radical History of Plants, Drugs and Human Evolution – Terence McKenna – An ethnobotanist explores humanitys’ fascination with hallucinogenics, and the role of altered states of consciousness on the development of human society.

References:

  1. https://www.seedrs.com/anna-money/sections/investors
  2. https://www.crowdcube.com/companies/justpark-1/pitches/bk7Aeb
  3. https://en.wikipedia.org/wiki/Confirmation_bias
  4. https://www.investopedia.com/terms/b/bandwagon-effect.asp
  5. https://en.wikipedia.org/wiki/Bandwagon_effect
  6. https://en.wikipedia.org/wiki/Overconfidence_effect
  7. https://en.wikipedia.org/wiki/Framing_effect_(psychology)
  8. https://en.wikipedia.org/wiki/Scarcity_(social_psychology)
  9. https://en.wikipedia.org/wiki/Pro-innovation_bias
  10. https://en.wikipedia.org/wiki/Denomination_effect
  11. https://humanhow.com/en/list-of-cognitive-biases-with-examples/
  12. https://en.wikipedia.org/wiki/Reciprocity_(social_psychology)
  13. https://en.wikipedia.org/wiki/Dynamic_inconsistency
  14. https://www.bbc.co.uk/news/business-49884247
  15. https://metro.co.uk/2019/09/30/chancellor-sajid-javid-raises-national-living-wage-10-50-10834020/
  16. https://www.bbc.co.uk/news/business-49849484
  17. https://www.bbc.co.uk/news/business-49891141
  18. https://www.bbc.co.uk/news/business-49919189
  19. https://www.thisismoney.co.uk/money/markets/article-7535061/Recession-fears-hang-global-economy.html
  20. https://www.thisismoney.co.uk/money/news/article-7541673/Cautious-Treasury-loses-Sirius-Minerals-millions-failing-company.html
  21. https://www.businessgreen.com/bg/news/3082227/new-gbp120m-low-carbon-greenhouse-project-set-to-deliver-one-in-10-uk-tomatoes
  22. https://www.getrichslowly.org/early-retirement-extreme/
  23. https://www.marketwatch.com/story/why-we-ditched-the-fire-movement-and-couldnt-be-happier-2019-09-30
  24. https://monevator.com/10-year-retrospective-what-a-decade-of-returns-tells-us-about-passive-investing/
  25. https://monevator.com/qa-thursday-with-lars-kroijer-session-1/
  26. https://gentlemansfamilyfinances.wordpress.com/2019/09/30/month-end-accounts-september-2019/
  27. https://drfire.co.uk/september-2019-report/
  28. http://www.thefrugalcottage.com/september-2019-a-month-in-review/
  29. http://www.thefrugalcottage.com/dividend-income-september-2019/
  30. http://eaglesfeartoperch.blogspot.com/2019/10/investment-review-september-2019.html
  31. https://asimplelifewithsam.com/2019/10/01/september-review/
  32. https://asimplelifewithsam.com/2019/10/04/saving-for-the-future/
  33. https://www.msziyou.com/net-worth-updates-september-2019/
  34. https://thesquirreler.com/2019/10/02/september-2019-update/
  35. https://thesavingninja.com/savings-report-15-getting-a-job-at-google/
  36. https://playingwithfire.uk/october-update/
  37. https://monethalia.com/monthly-savings-report-september-2019/
  38. https://awaytoless.com/monthly-spending-september-2019/
  39. https://firevlondon.com/2019/10/05/sep-2019-q3-review/
  40. https://gettingminted.com/reviewing-the-situation/
  41. https://grizgalonfire.com/do-i-need-a-personal-pension/
  42. https://indeedably.com/backwardation/
  43. https://thefifox.wordpress.com/2019/10/01/how-to-successfully-merge-finances-without-breaking-up-over-it/
  44. https://www.ukvalueinvestor.com/2019/10/the-hidden-debt-of-lease-obligations.html/
  45. http://diyinvestoruk.blogspot.com/2019/10/itm-power-finals-key-partnership.html
  46. http://www.retirementinvestingtoday.com/2019/10/human-being-and-2019-q3-review.html
  47. https://www.theguardian.com/food/2019/oct/03/always-cooking-the-same-thing-try-a-weekly-food-box