The Full English Accompaniment – Gamble your COVID days away

Opinion: We’re in a stock market bubble driven by bored amateur traders (speculators)

The market has come a long way since mid-March.

We’re now almost back to post COVID-crash valuations. Some of my investments are actually higher than they were then. Yet our economic situation, though now clearer, are no less dire.

Why?

COVID-19 is not as terrible for the global economy as the markets thought?

QE and other government/ central bank policies have propped things up?

Tech companies are making bank?

Perhaps some of this.

There’s a lot of news and opinion calling the current climb the ‘FOMO rally’. Driven by people who saw others ‘buying the dip’ and don’t want to miss out. Novice investors testing the ‘buy low- sell high’ off the back of the March fall (1). Some of that is new users of trading apps and platforms. Freetrade hit 100,000 users in February (2). By their latest crowdfunding raise they had reached 150,000 (3). Small fry compared to Robinhood’s 13 million active users (4).

Image Credit: /u/theycallmeryan (5)

I have skin in the game with Freetrade, having invested in their crowdfunding and using them for my ISA. If you would like a free share for signing up, drop me an email.

The number of trades per day is shooting up. Small traders, for the first time since 2000, have made more than 50% of the daily trades (6).

Image Credit: /u/theycallmeryan (5)

Some of that money is going into funny places. As bond yields fall people are investing in riskier corporate bonds, (1, 7). Robinhood users are making interesting plays and swapping more. They piled into Hertz (the car rental company) after it declared bankruptcy, sending the stock market sky high (1, 4, 8). See also JC Penney. These weren’t long term purchases to hold. This was pure speculation on the price rising during bankruptcy proceedings, as many economic authors in classic tomes describe.

Image source: (8)

And as people are sat at home, furloughed or out of work, with no sport to watch or bet on, they’re turning their amateur hands to the markets. The number of searches for ‘how to trade options’ has shot up:

Image Credit: /u/theycallmeryan (5)

And the number of small time traders buying options is climbing (6). As a result of delta hedging the price of the underlying securities of the options traded rises (5).

This has the effect of uncoupling market valuations from underlying stock value; the speculative options are irrelevant of value, and as others buy stocks as a hedge against the risk introduced by the speculation the stocks themselves become separate from the value. To make this picture even more complicated, the Fed’s policy of QE this time has also included corporate bond ETFs right the way down to junk bonds, offering direct loans to risky companies, buying dodgy mortgage-backed securities, and buying the debt of the riskiest companies (5, 9). The QE methods taken by international central banks have basically eliminated risk from the equation by supporting those companies which should have bankrupted, in an effort to stop a depression.

This drops interest rates. It drives people to take more risk for returns. The risk averse pay down debt, which explains the falls in consumer credit debt we’re seeing.

Debt is very cheap, and cashflows are uncertain due to Coronavirus, making the Discounted Cash Flow Model and underlying values difficult to calculate (10).

The Buffett indicator; composite market value of the market compared to GDP, is currently back at dotcom levels. Then they were 71%, now they’re 74%, where >30% is overvalued.

So things are likely to remain rocky for a while.

The sensible course of action remains to ignore the movements, and bet on the gradual returns. Drip feed and dollar-cost average.

We live in interesting times.

Have a great week,

The Shrink

N.B. I aim to keep this blog apolitical. Some issues transcend politics. I share my voice as an ally. Black Lives Matter.

News:

Comment:

References:

  1. https://www.marketwatch.com/story/heres-how-investors-think-fomo-could-power-fresh-gains-in-the-stock-market-2020-06-13
  2. https://blog.freetrade.io/there-are-now-100-000-freetraders-c12a27ee2843
  3. https://freetrade.io/crowdfunding-2020
  4. https://www.techradar.com/news/robinhood-growth-is-floating-the-stock-market-despite-pandemic
  5. https://new.reddit.com/r/wallstreetbets/comments/h0ytcy/the_liquidity_trap_how_qe_and_low_rates_might_be/
  6. https://www.bloomberg.com/news/articles/2020-06-09/speculative-fervor-in-u-s-stocks-surges-to-stunning-levels
  7. https://www.cnbc.com/2020/06/11/treasury-yields-fall-after-gloomy-fed-outlook.html
  8. https://uk.reuters.com/article/uk-global-markets-themes-graphic/take-five-pump-it-up-idUKKBN23J1RC
  9. https://www.theguardian.com/business/2020/jun/10/its-not-capitalism-why-are-global-financial-markets-zooming-up
  10. https://new.reddit.com/r/wallstreetbets/comments/gynyi8/dddd_equity_valuations_and_why_they_no_longer/
  11. https://www.bbc.co.uk/news/science-environment-52973089
  12. https://www.theguardian.com/business/2020/jun/10/uk-economy-likely-to-suffer-worst-covid-19-damage-says-oecd
  13. https://www.bbc.co.uk/news/business-52977098
  14. https://www.bbc.co.uk/news/business-53005454
  15. https://moneyweek.com/economy/inflation/601481/ten-reasons-inflation-could-be-set-to-return
  16. https://www.wsj.com/articles/vanguards-new-robo-service-offers-low-cost-financial-and-retirement-advice-11591873200
  17. https://www.theguardian.com/money/2020/jun/13/ethical-investments-are-outperforming-traditional-funds
  18. https://www.independent.co.uk/life-style/motoring/boris-johnson-driving-electric-car-scrappage-scheme-2020-a9558361.html
  19. https://earlyretirementnow.com/2020/06/10/passive-income-through-option-writing-part-4/
  20. https://www.moneyforthemoderngirl.org/black-lives-matter-power-control-and-money/
  21. https://indeedably.com/complicit/
  22. https://cashflowcop.com/policing-without-consent/
  23. http://quietlysaving.co.uk/2020/06/08/goodbye-dogs-2019/
  24. https://theescapeartist.me/2020/06/09/its-in-the-price-the-stockmarket-has-already-taken-that-stupid-internet-article-into-account/
  25. https://thesavingninja.com/the-fire-movement-wasnt-for-me/
  26. https://gentlemansfamilyfinances.wordpress.com/2020/06/13/were-not-going-on-a-summer-holiday/
  27. https://hustleescape.com/open-plan-offices/
  28. https://monethalia.com/matched-betting-with-multiple-accounts/
  29. https://www.moneymage.net/what-is-a-pension/
  30. https://playingwithfire.uk/how-to-not-lose-friends-and-alienate-people-with-fire/
  31. https://sparklebeeblog.wordpress.com/2020/06/12/the-world-of-work/
  32. https://www.firemusings.org/the-memories-in-photos/
  33. http://fiukmoney.co.uk/21-year-old-net-worth-and-fire-plan-update/
  34. https://www.muchmorewithless.co.uk/grow-your-own-veg/
  35. https://moneygrower.co.uk/using-furlough-to-practice-being-fired/
  36. https://simplelivingsomerset.wordpress.com/2020/06/12/a-walk-on-the-wild-side/
  37. https://www.ukvalueinvestor.com/2020/06/dividend-growth-rate.html/
  38. https://monevator.com/new-account-how-to-make-money-in-shares/
  39. https://southwalesfi.co.uk/2020/06/13/learn-from-my-f-i-r-e-mistakes/
  40. http://diyinvestoruk.blogspot.com/2020/06/nibe-industrier-portfolio-addition.html
  41. http://bankeronfire.com/how-people-get-rich-with-real-estate
  42. http://bankeronfire.com/reach-financial-independence-faster

The Full English Accompaniment – Cold turkey interest rates

A few weeks back I considered the deflationary risk weighing on the global economy. A discussion on the This Is Money podcast, and comments from the BoE have taken me in the other direction this week. Why would we end up with high inflation and high interest rates?

First we need to talk about debt. Consumer debt has actually seen a record fall since the start of Coronavirus, something to do with not being able to spend and no need to keep up with the Jones’ (1). The same can’t be said for Government debt. As I write this The Economist’s Global Debt Clock is rising through $61,594,467,000,000 (2). This was a problem before COVID-19. 2019 saw record global debt to GDP ratios (322%), following slight falls in 2017 and 2018 (3, 4). China’s ballooning debt was of particular concern, with plenty of tenuous business loans supporting growth (4, 5).

The word addiction had been bandied about with reference to debt. Below is a favourite short that I use to explain addiction when doing teaching sessions about the dangers of gambling and drugs. You come to rely on the object of abuse to feel normal. Credit cards and lifestyle anyone?

Credit: Andreas Hykade, Filmbilder & Friends (6)

The reasons for increasing debt woes are country specific. In Europe and the US it’s a combination of household spending, QE and zombie companies. There’s the massive junk bond bubble scare brewing; corporations kept going in 2008/9 through borrowed money now being refinanced, on the verge of reaching junk bond status, at the same time low yields push people to riskier bonds in aid of returns (7, 8, 9). Yet people keep buying bonds (10). China is just straight up building infrastructure projects that are getting abandoned or never used, while Japan can’t get it’s GDP to grow (11). Individual investors continue to seek returns. Interest rates on savings are minimal, with decent returns disappearing (12, 13). Bizarre investment structures, like this Buy-to-Let-Cars scheme, hoover up those desperate for income on their holdings (14).

And then there’s COVID-19. The Government were very happy to deny a massive money tree for the NHS/ social care. Then they’ve opened their metaphorical chequebook and are handing round a whole forest of blank cheques. Which is needed. But the cost could be £298 billion in debt for Apr 2020/21 alone (15). Analysis from the Resolution Foundation suggests that currently £80 billion has been raised with no deterioration in cover ratio (16). Predictions therein suggest a further extension to QE in June (16).

Image Credit: Resolution Foundation (16)

So we’ve got a mounting pile of government debt as we borrow our way out of trouble. Low, or even negative interest rates are helpful for the Gov here. Favourable to continue borrowing. As TA at Monevator covered this week, we’re seeing some negative UK bond yields (17). The noise from the BoE is that proper negative interest rates are unlikely, but not impossible (18). Certainly there’s no push towards an interest rate rise (19).

Why should there be. Inflation sits at 0.8% for April 2020,(20) well below the BoE’s goal 2.0%. We’re worryingly close to stagflation; rising prices due to rising demand with static growth (21). There’s an argument that there’s a lot of pent up demand due to lockdown, with limited supply also thanks to lockdown. The QE money creation rears it’s head.  Deflation is a feedback loop international governments definitely do not want (22). It will only increase their debts.

The magic bullet

So what about inflation. Measures of inflation like the CPI may not have spiked since the 2008/9 financial crisis because Joe Bloggs in his northern terrace has practically seen little inflation of prices. Consumer goods have probably decreased in cost. But the high ticket items like sports car, larger houses in certain postcodes, watches, wine, art and even gold have all risen in price.* The QE wealth got stuck on it’s trickle-down in high net worth owner’s assets. It created a high net worth inflationary micro-environment.

How are we getting out of this mess? A survey of top UK economists suggests that they feel there is no need to tackle public debt soon, and tax increases may the best method in the end (23). We can keep borrowing in the short term. In the long term there is the suggestion that inflation is the only sensible answer (24). QE and other factors are likely to push towards inflation anyway (25). Running inflation higher than 2.0% would reduce that Government debt burden. This method has been used before; after the second world war inflation ran at 4-5% for a good couple of decades (26).

My generation is just not used to that sort of inflation. One of my takeaways from The Intelligent Investor is the change in financial policy/climate. Graham wrote in a period where 4-5% inflation was not unheard of, and savings accounts could yield 5-7%. I vaguely remember those sort of numbers from my childhood building society, but I’ve never been conscious of that financial world. The risk of a 1970s/ Weimar Republic style inflation spike is present (27). The fear of that sort of inflation seems greater than the 1950s 4-5%, maybe due to recency bias, or because those with the most to lose are those who remember the 1970s (28).

Ultimately it seems we’re unlikely to see interest rates or inflation change in the short term. But maybe, in the medium-long term, we’ll see 5% interest rates again. We’re preparing for such eventualities (29). We can tolerate up to 12% on our mortgage with some belt-tightening. I’m sure many can’t. Those zombie companies would go to the wall. The BTLs may struggle. Perhaps a period of 4-5% inflation is the economic reset we need.

Have a great week,

The Shrink

*Gold is slightly more interesting because of just how much the price has rocketed, the argument for it’s use as a hedge, and it generally being the ultimate lesser fool’s gambit (30, 31). No-one wants to be left holding the hottest potato.

N.B. Again, as a more involved speculative post, I would love feedback and opinions on these thoughts.

News:

Comment:

References:

  1. https://www.thisismoney.co.uk/money/cardsloans/article-8380019/Consumer-debt-falls-record-7-4bn-April-borrowing-spend-slumps.html
  2. https://www.economist.com/content/global_debt_clock
  3. https://edition.cnn.com/2020/01/13/economy/global-debt-record/index.html
  4. https://blogs.imf.org/2019/12/17/new-data-on-world-debt-a-dive-into-country-numbers/
  5. https://www.ft.com/content/d93a95d0-2ee9-11e9-80d2-7b637a9e1ba1
  6. https://www.youtube.com/watch?v=HUngLgGRJpo
  7. https://en.wikipedia.org/wiki/Corporate_debt_bubble
  8. https://www.independent.co.uk/voices/coronavirus-economy-wall-street-debt-boeing-shares-junk-a9513176.html#gsc.tab=0
  9. https://www.barrons.com/articles/the-corporate-debt-death-spiral-shows-no-signs-of-stopping-51584023200
  10. https://www.cnbc.com/2020/02/07/junk-bond-scare-is-rising-no-one-cares-people-are-buying-everything.html
  11. https://www.forbes.com/sites/peterpham/2017/11/24/why-are-we-addicted-to-debt/#136e4b2515fd
  12. https://www.thisismoney.co.uk/money/saving/article-8381231/Top-fixed-rates-disappearing-Average-account-pays-just-0-3.html
  13. https://www.theguardian.com/money/2020/jun/05/savers-uk-covid-19-lockdown-cash
  14. https://www.buy2letcars.com/
  15. https://www.bbc.co.uk/news/business-52663523
  16. https://www.resolutionfoundation.org/publications/the-economic-effects-of-coronavirus-in-the-uk/
  17. https://monevator.com/negative-yields-bonds/
  18. https://www.thisismoney.co.uk/money/news/article-8357383/BoE-not-remotely-close-decision-negative-rates-Haldane.html
  19. https://moneytothemasses.com/owning-a-home/interest-rate-forecasts/latest-interest-rate-predictions-when-will-rates-rise
  20. https://tradingeconomics.com/united-kingdom/inflation-cpi
  21. https://www.theguardian.com/business/2020/may/31/for-all-his-woes-at-least-sunak-does-not-need-to-worry-about-stagflation
  22. https://foreignpolicy.com/2020/04/29/federal-reserve-global-economy-coronavirus-pandemic-inflation-terminal-deflation-is-coming/
  23. https://cfmsurvey.org/surveys/covid-19-and-uk-public-finances
  24. https://www.independent.co.uk/news/business/news/coronavirus-recession-bank-england-inflation-mandate-change-jim-o-neill-a9539796.html#gsc.tab=0
  25. https://moneyweek.com/economy/global-economy/601179/heres-why-the-coronavirus-crash-is-likely-to-end-in-inflation
  26. https://www.bloomberg.com/opinion/articles/2020-05-07/inflation-is-the-way-to-pay-off-coronavirus-debt
  27. https://simplelivingsomerset.wordpress.com/2011/03/15/when-money-dies-a-1975-cautionary-tale-from-the-weimar-republic/
  28. https://simplelivingsomerset.wordpress.com/2020/06/03/at-some-point-during-this-bear-market-i-realized-that-i-probably-shouldnt-keep-doing-this/
  29. https://www.moneyadviceservice.org.uk/en/articles/how-to-prepare-for-an-interest-rate-rise
  30. https://fee.org/articles/which-is-the-best-inflation-indicator-gold-oil-or-the-commodity-spot-index/
  31. https://pureadmin.qub.ac.uk/ws/portalfiles/portal/120196463/gold_inflation_s.pdf
  32. https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)31142-9/fulltext
  33. https://www.thisismoney.co.uk/money/news/article-8372271/Homes-face-14-price-slump-says-Nationwide.html
  34. https://firelifestyle.co.uk/2020/06/01/may-2020-financial-update/
  35. https://firevlondon.com/2020/06/02/may-2020-a-sunny-month/
  36. https://thesavingninja.com/savings-report-23-back-to-break-even/
  37. http://earlyretirementinuk.blogspot.com/2020/06/end-of-month-report-1st-of-june.html
  38. https://playingwithfire.uk/may-2020-savings-and-spending-update/
  39. https://obviousinvestor.com/p2p-lending-portfolio-update-for-may-2020/
  40. https://www.foxymonkey.com/property-partner-coronavirus/
  41. http://quietlysaving.co.uk/2020/05/31/may-2020-plus-other-updates/
  42. https://www.moneymage.net/2020-may-savings-report/
  43. https://awaytoless.com/monthly-spending-may-2020/
  44. https://thesquirreler.com/2020/06/06/may-2020-net-worth-update/
  45. https://asimplelifewithsam.com/2020/06/06/may-review/
  46. http://diyinvestoruk.blogspot.com/2020/06/mcphy-energy-portfolio-addition.html
  47. https://www.itinvestor.co.uk/2020/06/20-global-investment-trusts-compared/
  48. https://lifeafterthedailygrind.com/buying-used-electronics-can-earn-you-money/
  49. https://monevator.com/what-is-behind-the-coronavirus-trading-boom/
  50. http://bankeronfire.com/who-is-smarter-than-the-stock-market
  51. http://bankeronfire.com/it-wont-happen-to-you
  52. https://medfiblog.wordpress.com/2020/06/05/chasing-inflation/
  53. https://monevator.com/weekend-reading-boom/
  54. https://igniting-fire.com/2020/06/05/the-joy-of-creation/
  55. https://drfire.co.uk/building-wealth-in-my-20s-successes-and-failures/
  56. https://money-side-up.com/will-coronavirus-infect-the-fire-retire-early-movement/
  57. https://hustleescape.com/hindsight-bias/
  58. https://www.ukvalueinvestor.com/2020/06/dividends-and-dividend-cover.html/

Investment Strategy Statement – Part 3 – Allocations (revisited April 2020)

So here’s the guts of my ISS.

When I first drafted it in late 2018 I painted in broad brush strokes with the optimism and ambition of the naive. This updated version is, I hope, more pragmatic.
Asset Allocation

As a novice investor with relatively little in the market my wealth can essentially be divided five ways:

  • Property equity
  • Cash
  • Alternative assets
  • NHS Pension
  • S&S investments (1)

The first four can be covered in short order:

Property equity

Tied up in my home. Dependent upon the local market, plus our own mortgage repayments schedule and renovation work. The largest portion of my current wealth, and continuing on it’s merry accumulating way whilst we work up to our forever home. I have no interest in BTL until that point is reached.

Cash

Current accounts, savings accounts and premium bonds. My emergency fund, plus any extra money saved for upcoming expensive purchases. Emergency fund of three months personal salary, plus three months held jointly. Holdings target high interest and liquidity, through usage of high interest current and savings accounts with FSCS cover.

Alternative assets

Miscellaneous other physical holdings; cars (including current classic projects), art and books. Not alternative investment assets like currency/ bitcoin, EIS or private equity (2). Just plain old shit I own because I like it, that happens to be worth something.

NHS Pension

Unfunded, with no option to trade-out, my NHS pension is entirely tied up in my working life and retirement date. Subject to the whim of the government and BMA, I don’t include it in most of my net worth calculations as it does not physically exist until I retire.

Stocks and shares investments

The more interesting bit. My timescale is long, my employment is (in theory) secure and my pension scheme is (supposedly) generous. All money going into my portfolio is that which I can afford to lose. My current lifestyle, while not extravagant, is comfortable and by limiting lifestyle inflation I hope to increasingly channel spare cash into investments. I’m happy to take a reasonable amount of risk on this basis.

In choosing my asset allocation split I’ve tried to read widely, including the usual Smarter Investing 3rd edn – Tim Hale, Monevator, etc (3, 4, 5). My holdings are split between a core 80% passive tracker portfolio and 20% active ‘satellite’. The ‘satellite’ includes stocks, funds, trusts, ETFs and some odd crowdfunding investments.

Allocations will be reviewed and re-balanced quarterly. At this stage I’m uninterested in commodities, currencies, and REITs or other property investments. The diversification benefit is not worth the added effort and complexity for my paltry portfolio. Bonds I may revisit in the future, but at this point accumulation with a long timescale is the name of the game.
Fund/Brokerage Allocation

I intend to allocate across ETF/ fund providers. Rules here are loose as I’m still in early stages, but the intention is that no provider will hold more than 34% of my holdings. To minimise risk I’ll also allocate across brokers, with the intention of simultaneously reducing TER and minimising tax burden (6).
World Allocation

Global allocation applies only to my market investments, not my overall wealth.

Testbed Active Portfolio

This section of my portfolio is largely UK-based, but not limited by global allocation targets. Some themes include EIS/ early stage investments, green investment trusts, tech and mining.

Core Passive Portfolio

It would be very simple to put all my money in a LifeStrategy 100 and be done with it, but as my wife will attest I like to make life difficult. As fits a diversified passive-focus portfolio the central core will mirror world markets, using all world tracker funds and ETFs (7).

I understand the broad investment logic behind investing in your own country, and holding trackers to your domestic market. The protection against inflation a home market affords (8). But much of my active investments, cash, property and other assets are in the UK. I’m already UK inflation vulnerable/protected before even looking at passive equities.

I’m therefore largely ex-UK in my passive section. But then how do you slice your pie? Contribution to Gross World Product? Global market capitalisation? If global cap whose data do you use?

Weighting

My goal is passive purist, using a blend from Bloomberg, Credit Suisse’s Yearbook, Star Capital and World Bank reported data covering all countries with contributions >0.01% (9, 10, 11, 12). Getting clear data for free as an amateur investor has proved to be tough. The ex-UK adjusted average forms the basis of my allocation, alongside a further CAPE-adjusted view.
In summary

My allocations are fairly standard, if slightly over-complicated by my own adherence to dogma. I’ll review this yearly with new world data to see what changes need to be made, and in five years for a full review of asset allocation split.

In Part 4 – Funds, Accounts and Rebalancing.

References:

  1. https://monevator.com/asset-classes/
  2. https://en.wikipedia.org/wiki/Alternative_investment
  3. https://amzn.to/2Sthjtv
  4. https://monevator.com/asset-allocation-construct/
  5. https://www.bogleheads.org/wiki/Asset_allocation
  6. https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts
  7. https://monevator.com/investing-for-beginners-the-global-stock-market/
  8. https://www.investopedia.com/articles/basics/10/protect-yourself-from-inflation.asp
  9. https://seekingalpha.com/article/4202768-u-s-percent-world-stock-market-cap-tops-40-percent
  10. https://www.credit-suisse.com/about-us-news/en/articles/news-and-expertise/esg-investing-a-trend-that-is-constantly-evolving-202002.html
  11. https://www.starcapital.de/en/research/stock-market-valuation/
  12. https://data.worldbank.org/indicator/
  13. https://monevator.com/world-stock-markets-data/

The Full English – Why did Buffett sell his airline stocks?

This week, whilst avoiding infection in my daily work, I’ve been thinking macro. I kept coming back to that Buffett selling BH airline stock news (1). Something about it doesn’t hang right.

Market Insider reckons he bought in against his own advice, anticipating that more people would fly and airlines would maintain value and continue stock buybacks (2). He sold out at a $50bn loss (2, 3). Most of the articles reckon this is because Coronavirus has off-the-cage smackdowned flying. They quote Buffett’s “The world has changed” (1). Plenty of airlines are staring into a debt pit and begging governments for handouts. So of course Buffett sold out at a loss, better to lose some rather than all.

So is the Sage of Omaha just a normal investor who called it wrong?

I can’t help but feel someone of Buffett’s experience, who normally play the ultra-long/ value/ invest and hold game, wouldn’t sell out because of profit warnings. There was already talk of government bailouts. Yes those airlines aren’t going to be profitable in the short-medium term, and will probably suck cash at the same rate as oxygen and Jet A-1, but people will still need to fly. Are our choices and habits really going to change that much? Is our society really going to stop the daily business return flights, or the stag weekends in Budapest?

So what’s he seeing?

The market and it’s FOMO rally appears to be convinced of the V-shaped recovery. The NASDAQ has climbed back to where it was pre-COVID (4). Record numbers of investors are buying back in (5). People called January the melt-up, but this feels suspiciously bubbly again (6). Buffett didn’t give much away in this years Berkshire Hathaway AGM (7). Perhaps most intriguing is that $130 billion cash pile.

To try and gain some sense, I went to other unprecedented times; specifically the Great Depression and Stagflation. To be clear, I’m not thinking we’re in a repeat of either, each major crisis is different, but I’m looking to learn.

The Great Depression

Split between Keynesian and monetarist theories. Keynesian’s (demand-driven) believe loss of confidence led to reduction in investment and spending. Holding money becomes profitable as economic deflation sets in. The monetarist theory suggests this was a normal recession that tipped in severity due to scarcity of money supply. These then follow Irving Fishers debt deflation theorem (8).

A third school of thought, the Austrian School of Economics, argues the FED drove the Great Depression. Expansion of money supply in the 1920s (hence the roaring twenties) led to an unsustainable credit boom (9).

To quote Ludwig von Mises:

 “Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not a real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth, i.e. the accumulation of savings made available for productive investment. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later, it must become apparent that this economic situation is built on sand.” (10)

During the period there was massive deflation, falls in GDP, and high unemployment. The CPI began the decade at 17.1, and had fallen to 14.0 by 1939 (9)

CPI and Inflation 1930- 1939

Image Credit: Inflationdata.com

Stagflation

Up until the ’70s it was believed there was a stable inverse relationship between inflation and unemployment. The US economy slowed, in part due to the Arab Oil Crisis. Rapid rises in the price of oil made some companies uneconomic, leading them to sack workers. Rising unemployment was accompanied by rising price inflation. Monetary policy in the late-60s and early-70s period was also expansive, contributing to inflation (11).

The normal response of increasing interest rates to reduce the speed with which money changes hands doesn’t work (12). Annual inflation ran at 7.25%, but in some months touched 13%. The CPI rose from 37.8 to 76.7 (13).

Image Credit: Inflationdata.com

To summarise:

  • Both periods preceded by expansionist monetary policy
  • Both periods have high unemployment
  • Great Depression – economic deflation, low interest rates, fall in aggregate demand
  • Stagflation – price inflation, reactionary interest rates, fall in aggregate supply

Application

Concerns about the future are widely shared. The Bank of England is predicting the sharpest recession on record (14). TI in this weeks Weekend Reading covers a bit of the GDP expectations (15). Iona at Young Money Blog takes it further, covering GDP and drawing comparisons with the Great Depression (16). She goes so far as another event-driven collapse, the Great Frost of 1709. The Ermine has also looked to Buffet and seen bad news (and as an ardent Asimov fan, I particularly like his Trump-Mule comparison) (17).

Plumbing the depths of some thought experiments and potential outcomes, what are the current conditions?

  • This period has been preceded by expansionist monetary policy (QE).

Though bond/gilt yields and limits on futures lending suggests there remains fear in the market (18).

  • We’re about to see high unemployment.

This New York Times front page showing how many jobs were lost due ...

Image Credit: Reddit/ NYT

To some extent the Coronavirus job retention scheme, or whatever name the Government is currently calling it’s buy-itself-out-of-jail card is going by now, has helped. The Gov is footing the bill, and most people will receive an income. This has maintained peoples spending, and therefore aggregate demand in the economy.

This is not infinite. The furlough scheme is due to end in July, at the same time as mortgage holidays (19). It is unlikely we’ll be fully back to normal until autumn at the earliest. Not all companies will start back. Our heavily service-sector dependent economy will probably be the most affected. Services account for 80% of total UK economic output. The purchasing index data for those services is a fifth of what it was pre-Coronavirus (20).

To quote Ermine quoting ZXSpectrum on the Monevator thread (21).

“The high street was obsolete anyway, airlines should go bust, the petroleum industry needs massive downsizing. The FTSE is not coming back because it full of crap companies with obsolete business models. The S&P and Nasdaq are not.

I’m also more relaxed about higher unemployment. The UK made a sort of Faustian bargain: low unemployment for high underemployment and low skill base.

[…]

Machine learning and AI is going to make many middle class people unemployed. We might start getting used to it now and stop stigmatizing those who don’t have jobs. A generation or two from now being unemployed might well be the norm.” (17)

So we’ve got mass unemployment, largely of those working in the service industry, most affecting those on zero-hours, casual contracts, or those with minimal qualifications.

  • Interest rates have been dropped to record lows

Which, coupled with QE, is putting more money into the market. Again helping perk current demand.

Supply or demand?

The great fear when this kicked off was the supply side. All the factories in China were shut, companies going under because they can’t source product etc. Plenty of anecdotal evidence. This led to various fears that Coronavirus would lead to stagflation through flat economic growth and spiking prices from the supply side shock (22). This could still well be the case.

This article on Econlib makes a good argument for it (23). We’ve seen a fall in aggregate supply. We’re seeing a fall in aggregate demand. If there’s more demand then supply we’ll see stagflation.

I think they’ve got it the wrong way round though.

The aggregate supply has returned through global supply chains. Deliveries happen, and the companies that supply are making bank. Looking at you Amazon.

Demand is the question.

The government has kept aggregate demand going through the furlough scheme etc. That is not indefinite. Will, or even can, companies restart with their employees?

If they can’t, and we see mass unemployment, then what happens to demand?

This could coincide with the end of a Kondratiev wave, such as the transition from a supply/ IT/ service predominance to one of green technologies and an internet of things (24). Ably supported by the rise of home-working through improved IT. Goodbye commercial REITs.

We could see mortgage refinancing risk rear it’s ugly head, coinciding with decreased bank lending due to deflationary concerns, as laid out in this masterful piece by Finumus (25). It has me worried about my rate.

If aggregate demand falls but supply doesn’t, then oversupply drives deflation and job losses. Basic economics. Decreasing supply costs have helped maintain standard of living and low inflation for years – all that offshoring. In days of deflation, oversupply and job losses then cash in the bank is king. Is the governments current demand prop enough to see us through?

Or did Buffett just call it wrong on airlines?

Have a great week,

The Shrink

N.B. I would truly appreciate others thoughts in the comments on posts like this. They are my attempts to reason through processes, and balancing counter-argument is most welcome.

COVID – I advise the use of BMJs information hub for evidence-based updates:

News:

Opinion:

References:

  1. https://www.marketwatch.com/story/buffett-dumps-entire-airline-stake-saying-the-world-changed-for-airlines-2020-05-02
  2. https://markets.businessinsider.com/news/stocks/why-warren-buffett-invested-big-4-airlines-sold-them-loss-2020-5-1029167021
  3. https://www.telegraph.co.uk/business/2020/05/03/warren-buffett-sells-shares-major-airlines-amid-50bn-loss/
  4. https://www.theguardian.com/us-news/2020/may/07/us-nasdaq-index-wiped-out-all-of-2020s-losses-triggered-by-covid-19
  5. https://www.theguardian.com/money/2020/may/06/small-investors-poured-back-into-stock-market-in-april-says-data-firm-uk-equity-funds
  6. https://seekingalpha.com/article/4317127-2020-melt-up-and-aftermath
  7. https://compoundyourfreedom.com/2020-berkshire-hathaway-shareholders-meeting/
  8. https://en.wikipedia.org/wiki/Debt_deflation
  9. https://inflationdata.com/articles/inflation-cpi-consumer-price-index-1930-1939/
  10. https://mises.org/library/causes-economic-crisis-and-other-essays-and-after-great-depression
  11. https://www.investopedia.com/articles/economics/08/1970-stagflation.asp
  12. https://inflationdata.com/articles/2008/11/19/stagflation-what-is-it/
  13. https://inflationdata.com/articles/inflation-cpi-consumer-price-index-1970-1979/
  14. https://www.bbc.co.uk/news/business-52566030
  15. https://monevator.com/weekend-reading-get-ready-for-the-drop/#more-50276
  16. https://youngmoneyblog.co.uk/coronavirus-economy/
  17. https://simplelivingsomerset.wordpress.com/2020/05/04/this-is-your-captain-warren-speaking-its-going-be-a-long-night-three-out-of-four-engines-are-on-fire-the-fourth-is-running-rough/
  18. https://www.bloomberg.com/news/articles/2020-05-03/hong-kong-oil-etf-s-broker-refuses-to-let-it-buy-more-futures
  19. https://www.thisismoney.co.uk/money/news/article-8294137/Double-blow-furlough-mortgage-holiday-schemes-come-end.html
  20. https://www.thisismoney.co.uk/money/markets/article-8288563/Services-sector-plummets-customer-facing-businesses-remain-closed.html
  21. https://monevator.com/weekend-reading-under-infected-over-optimistic/comment-page-1/#comment-1198185
  22. https://edition.cnn.com/2020/03/10/investing/stagflation-economy-coronavirus/index.html
  23. https://www.econlib.org/i-fear-stagflation-and-general-price-controls-are-coming/
  24. https://en.wikipedia.org/wiki/Kondratiev_wave
  25. https://www.finumus.com/blog/beds-are-burning
  26. https://www.bmj.com/content/369/bmj.m1861
  27. https://www.bmj.com/content/369/bmj.m1850
  28. https://www.bmj.com/content/369/bmj.m1742
  29. https://www.reuters.com/investigates/special-report/health-coronavirus-britain-elderly/
  30. https://www.bbc.co.uk/news/business-52591262
  31. https://www.euronews.com/living/2020/05/05/musk-and-bezos-feud-goes-electric-with-amazon-s-answer-to-tesla
  32. https://www.theguardian.com/business/2020/jan/29/uk-electric-van-maker-arrival-secures-340m-order-from-ups
  33. https://www.rightmove.co.uk/news/articles/property-news/first-time-buyers-uk-home-guide
  34. https://firevlondon.com/2020/05/03/april-2020-a-mad-bounce/
  35. https://thesquirreler.com/2020/05/03/savings-ninja-thought-experiment-10/
  36. https://pursuefire.com/monthly-update-20-april/
  37. http://diyinvestoruk.blogspot.com/2020/05/personal-assets-trust-portfolio-addition.html
  38. https://www.mouthymoney.co.uk/from-investing-to-account-switching-what-hit-video-game-animal-crossing-can-teach-us-about-money/
  39. https://simplelivingsomerset.wordpress.com/2020/05/06/ive-got-a-sneaking-admiration-for-donald-trump/
  40. http://bankeronfire.com/a-letter-to-my-younger-self-three-key-lessons-for-building-wealth
  41. http://www.retirementinvestingtoday.com/2020/05/obfuscation.html
  42. https://averagemoneymanagement.wordpress.com/2020/05/08/buying-shares-as-a-substitute-for-buying-stuff/
  43. https://theescapeartist.me/2020/05/08/how-game-of-thrones-won-the-culture-war/
  44. https://playingwithfire.uk/i-lost-my-job-what-now/
  45. https://www.onemillionjourney.com/portfolio-update-17-april-2020-97039e/
  46. https://www.moneymage.net/2020-april-savings-report/
  47. https://www.foxymonkey.com/managing-money-with-your-partner/
  48. https://indeedably.com/indefensible/
  49. https://adotium.co.uk/2020/05/09/are-you-not-entertained/
  50. https://awaytoless.com/why-100-equities/
  51. https://thefifox.wordpress.com/2020/05/06/internet-privacy-and-your-data-part-1/
  52. https://igniting-fire.com/2020/05/05/just-20000-to-save-the-world/
  53. http://eaglesfeartoperch.blogspot.com/2020/05/building-raised-beds-six-on-saturday.html
  54. http://www.lifesavvy.com/24712/this-companion-planting-chart-will-help-your-garden-thrive

 

 

The Full English Accompaniment – Dumping Shit

This week the Swedish city of Lund dumped a tonne of chicken manure in one of it’s parks at night to deter visitors to an annual celebration (1). Chicken shit wasn’t the only thing being dumped. Lots of UK bloggers are selling off, and so is the Sage of Omaha.

I try to avoid commentating on transient market flux, but right now I find myself drawn in. What the hell is going on?

Well the talk has been of whether we’ll see a V-shaped or L-shaped recovery from the March sell-off. If you read the headlines you’ll see that the stock market has been going great guns (2):

FT

As TI at Monevator identifies in this weeks Weekend Reading it’s mostly a US market thing; and specifically the S&P500 (3). The FTSE100 is looking very L-shaped. The FTSE100 is heavy in oil and service stocks, which are taking an absolute battering. The S&P500 is tech led, companies who couldn’t ask for a better demand boost. We saw a small sell-off at the end of last week after earnings reports, but not as much as was expected (4).

If you hold a world index tracker like myself, due to sheer capitalisation size, you probably hold a decent portion of the S&P500. Like many bloggers below you might have seen a net worth jump. Tech values have gone up on expected earnings, the market appears convinced that we’ll all be back to work soon, and it’s banking on the ‘Fed put’; that cheap government lending will bolster and boost the market (5, 6).

Meanwhile, on the ground, people are being laid off and things don’t look all that rosy. Retailers with shut shops are having online sales to clear stock, a problem compounded as discount shops like TKMaxx can’t help them clear inventory (7). Manufacturers like Rolls-Royce are cutting jobs (8). Some bloggers like Playing with Fire have been made redundant (9). Others like Fire Lifestyle have lost significant portions of their turnover (10).

Poor darlings who over-extended themselves to buy property to then let on AirBnB, inflating the housing market in the process, are suddenly exposed to a lack of income (11).

The market as a whole feels quite self-contradicting, in my opinion. Tech is going to be doing well in this environment, along with all the rest of those companies raking it in with our lifestyle alterations. Meanwhile huge swathes of the economy are seeing cataclysmic change. Buffett has dumped all his US airline stock (12). He’s also said the range of outcomes from this is massive.

Me, I’m with Ermine (13). I think we have a long way to go yet. I’m still buying – I’m not a big enough man to bet against time in the market by timing the market. Tech offers plenty of potential returns, and I’m sure there are some value investor nuggets out there. I just see the stories coming out of people losing their jobs, companies shutting, and IMF predictions of global recessions and eyebrows are raised (14).

We live in interesting times.

Have a great week,

The Shrink

News:

Opinion:

References:

  1. https://www.theguardian.com/world/2020/apr/29/swedish-city-lund-dump-tonne-chicken-manure-park-deter-visitors-coronavirus-lockdown
  2. https://www.ft.com/content/88e57ec9-42d4-455d-a045-293a6a54837d
  3. https://monevator.com/weekend-reading-under-infected-over-optimistic/
  4. https://seekingalpha.com/article/4340089-big-cap-techs-report-all-in-one-week-and-what-means-for-sell-off-scenario
  5. https://www.thisismoney.co.uk/money/markets/article-8277961/How-come-global-stock-markets-best-month-years.html
  6. https://seekingalpha.com/article/4342416-what-hell-is-stock-market
  7. https://www.businessinsider.com/tj-maxx-ross-shutting-down-makes-inventory-problem-worse-2020-4?r=US&IR=T
  8. https://www.bbc.co.uk/news/uk-england-derbyshire-52514444
  9. https://playingwithfire.uk/well-it-finally-happened/
  10. https://firelifestyle.co.uk/2020/04/18/work-is-getting-tough-recession-looming-small-business-pressure/
  11. https://www.wsj.com/articles/a-bargain-with-the-devilbill-comes-due-for-overextended-airbnb-hosts-11588083336
  12. https://www.theguardian.com/world/2020/may/03/warren-buffett-dumps-us-airline-stocks-saying-world-has-changed-after-covid-19
  13. https://simplelivingsomerset.wordpress.com/2020/05/01/musings-on-misadventure-and-market-madness/
  14. https://www.weforum.org/agenda/2020/04/imf-economy-coronavirus-covid-19-recession/
  15. https://www.thisismoney.co.uk/money/saving/article-8266703/Now-banks-target-LOYAL-savers-rate-cuts.html
  16. https://www.theguardian.com/business/2020/apr/30/covid-19-crisis-demand-fossil-fuels-iea-renewable-electricity
  17. https://www.bbc.co.uk/news/business-52483455
  18. https://www.bbc.co.uk/news/business-52483359
  19. https://www.telegraph.co.uk/business/2020/05/02/tesla-applies-uk-electricity-provider-licence/
  20. https://averagemoneymanagement.wordpress.com/2020/05/01/my-alternative-investments/
  21. https://lifeafterthedailygrind.com/how-identity-theft-happens-and-how-to-stop-it/
  22. http://diyinvestoruk.blogspot.com/2020/04/gresham-house-energy-storage-2019.html
  23. https://www.itinvestor.co.uk/2020/05/combining-fundsmith-equity-and-lindsell-train-global-equity/
  24. https://theescapeartist.me/2020/04/29/light-at-the-end-of-the-tunnel/
  25. https://playingwithfire.uk/april-2020-savings-update/
  26. https://thesquirreler.com/2020/04/26/april-2020-net-worth-update/
  27. https://earlyretirementinuk.blogspot.com/2020/05/end-of-month-report-1st-of-may.html
  28. https://www.moneyforthemoderngirl.org/the-british-woman-who-became-financially-independent-in-her-mid-30s-in-london/
  29. https://www.firemusings.org/invest-in-the-bottoming-market-or-pay-the-mortgage-off/
  30. https://gentlemansfamilyfinances.wordpress.com/2020/04/27/the-lowdown-on-the-lockdown/
  31. http://bankeronfire.com/an-introduction-to-investing-in-bonds
  32. https://drfire.co.uk/lockdown-reflections/
  33. https://igniting-fire.com/2020/04/30/tshe-time-for-a-solar-battery/
  34. https://thesavingninja.com/savings-report-22-i-failed-at-market-timing/
  35. https://www.muchmorewithless.co.uk/aldi-food-parcel-review/
  36. https://firelifestyle.co.uk/2020/05/01/april-2020-financial-update/
  37. http://fiukmoney.co.uk/april-20-net-worth-and-monthly-update-20-534439-32858/
  38. http://quietlysaving.co.uk/2020/05/02/april-2020-plus-other-updates/
  39. https://adotium.co.uk/2020/05/02/april-2020-report/
  40. https://awaytoless.com/monthly-spending-april-2020/
  41. https://pathtolife2.com/2020/05/01/financial-independence-update-april-2020/
  42. https://zerotofreedom.org/investors-on-what-they-wish-they-knew-before-starting/
  43. https://southwalesfi.co.uk/2020/05/02/how-to-invest-avoiding-fossil-fuel-companies/
  44. https://monevator.com/do-us-treasury-bonds-protect-uk-investors-better-than-gilts/

The Full English Accompaniment – Oil’s sticky slide

It’s been a funny old week. The price of oil fell through the floor, getting below a dollar a barrel (1). Makes a good headline.

The measure we’re talking about is a West Texas Intermediate (WTI), although Brent Crude also saw a substantial slide. Why this happened is also fairly straightforward; this is a futures market. These were traded prices of a barrel of oil to be delivered before the end of May. Worldwide demand for oil has slumped due to global lockdown, and the storage facilities are full. Ergo, if you hold a contract for oil to be delivered in May, and there’s nowhere to store it and nobody wants to buy it then what the hell do you do with it? Flog it quick (2, 3, 4). And if you can’t? Well there’s always the probably apocryphal story of the futures trader who took delivery by accident (5).

This had wider knock-on effects. The contract price for June also started to drop (6). Oil specific ETFs re-structured (7). With stock investors banking on the “Fed put” (8), the business front-page looked even more oxymoronic.

Futures markets for oil fall well into the realm of day trading that I consider speculation rather than investing (can you tell I’m reading The Intelligent Investor). Easy to lose money quickly, as Barstool Sports founder Dave Portnoy shows; down $647,000 (9).

Slow and steady wins the race, and oil futures ain’t that. Oil’s a dying business. Renewables are getting dramatically cheaper (10). Frugality, environmentalism and renewable energy sources go hand in hand (11). Big oil companies are moving to other energy sources, pivoting to the wind (12). The DIY Investor UK is evidence the growth of renewable energy can provide financial growth (13).

Leave the speculation and drama to the day-traders and the headlines.

Have a great week,

The Shrink

News:

Opinion:

References:

  1. https://www.economist.com/graphic-detail/2020/04/20/american-crude-oil-has-fallen-to-less-than-nothing
  2. https://moneygrower.co.uk/explaining-the-negative-oil-price/
  3. https://www.foxymonkey.com/gemfinder-q1-2020-free-oil/
  4. https://www.cnbc.com/2020/04/22/billionaire-investor-howard-marks-calls-oil-crash-completely-rational.html
  5. https://thedailywtf.com/articles/Special-Delivery
  6. https://www.bloomberg.com/news/articles/2020-04-21/oil-meltdown-spreads-beyond-expiring-contracts-as-wti-slumps-42
  7. https://www.ft.com/content/11cf8aeb-2d74-4c25-a111-943be6d8bf39
  8. http://bankeronfire.com/doom-gloom-and-negative-oil-prices
  9. https://www.businessinsider.com/barstool-sports-founder-dave-portnoy-tries-day-trading-and-loses-2020-4?r=US&IR=T
  10. https://theescapeartist.me/2018/01/07/is-renewable-energy-now-cheaper-for-you/
  11. https://www.frugalwoods.com/2017/05/26/you-cant-buy-your-way-to-green-how-frugality-is-environmentalism/
  12. https://www.theguardian.com/business/2018/dec/26/shell-says-it-wants-to-double-green-energy-investment
  13. http://diyinvestoruk.blogspot.com/2020/04/portfolio-review-to-end-march-2020.html
  14. https://www.bbc.co.uk/news/business-52371062
  15. https://www.bbc.co.uk/news/business-52390860
  16. https://www.theguardian.com/business/2020/apr/22/cornish-copper-find-metal-mining-industry
  17. https://firevlondon.com/2020/04/19/my-isas-need-a-topup/
  18. https://theescapeartist.me/2020/04/24/how-the-magic-money-tree-works/
  19. https://gettingminted.com/short-term-thinking/
  20. https://averagemoneymanagement.wordpress.com/2020/04/19/prioritising-goals-at-the-beginning-of-your-fire-journey/
  21. https://www.finumus.com/blog/grinding-halt
  22. http://bankeronfire.com/key-reflections-and-takeaways-from-our-most-recent-net-worth-update
  23. https://zerotofreedom.org/simply-investing-report-review/
  24. https://earlyretirementnow.com/2020/04/22/three-equity-investing-styles-that-did-ok-in-2020/
  25. https://sparklebeeblog.wordpress.com/2020/04/22/hows-lockdown-going/
  26. https://indeedably.com/character/
  27. https://pathtolife2.com/2020/04/24/the-thrill-of-a-free-share-starting-my-mini-share-portfolio/
  28. https://medfiblog.wordpress.com/2020/04/24/to-me-to-you/
  29. https://playingwithfire.uk/car-finance-why-it-is-stopping-you-reaching-your-financial-goals/
  30. http://diyinvestoruk.blogspot.com/2020/04/google-portfolio-addition.html
  31. https://monevator.com/the-alchemy-of-turning-uncertainty-into-risk/
  32. https://monevator.com/the-reality-behind-investment-trust-revenue-reserves/
  33. https://monevator.com/how-diversification-worked-during-the-global-financial-crisis/
  34. http://www.moneyforthemoderngirl.org/thought-experiment-covid-19-edition/
  35. http://quietlysaving.co.uk/2020/04/21/thought-experiment-10-covid-19-edition/

 

 

 

Quarterly Returns – Q1 2020

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.

The year started so hopefully, with lots of plans and ideas for activities. Mother nature quickly made a mockery of them. MrsShrink and I are keyworkers, so we retain some order and rhythm to our life. We are reaping the benefit of last years work on the garden in this month of sun and seclusion. So how do the finances fair?

Q1 Returns:

Net worth

  • Cash Savings Accounts £10,300 (+2,700)
  • Investments £3,200 (+£200)
  • Property £41,600 (+£1,100)
  • Cars £2000 (£-500)

Having spent ages getting over the £50k mark actually working out my NHS Pension equivalent led to a huge jump. In absolute terms my cash savings have increased, and the bear market falls have cancelled out my recurring monthly purchases.

Yearly Targets:

Goal 1: Build an emergency fund

My first 2019/20 goal was to build an emergency fund, as per the r/UKpersonalfinance flow chart (1). My goal emergency fund is three months total household expenses (£6k) in my name, plus a further three months (£6k) held jointly.

Still sitting around the £6.5k mark to my own name, and £2k held jointly. I’m looking to put more away, around £10k in my name in preparation for a replacement car/ house renovation later this year (once we’re out of lockdown).

Goal 2: Save 30% of my income

I calculate my savings rate using this formula:

Savings rate as % = ((Income – spend) + Cash savings + Investments + Pension contributions) / (Income + Pension contributions)

Savings rate

Ticking along nicely here, with an average savings rate of 34.7%. Undoubtedly helped by my a lack of pub/ restaurant trips, cross-country visits to friends and general debauchery. I still can’t help myself ordering DIY/ car bits online.

Goal 3: Calculate savings made by growing my own food

I’ve got a little notebook I’m writing down spending on and then crops we’ve eaten from the garden. It’s the hungry gap, so we’ve been eating a small amount of pickled or stored veg from last year. With spending on new seeds I’m currently -£30, but everything is in the ground so this should start to turn around.

Goal 4: Make changes to reduce carbon footprint

Has effectively been done for us this quarter, with no holidays, no going out or long trips, and minimal expenditure on plastic tat. I’ve bought a couple of books, some (cotton) clothes, and that’s about it. We continue to get our food from local butchers and organic growers, loo roll and store cupboard essentials from the ethical superstore (2). Our energy is still via Bulb (email me through the About Me page for a referral code).

The other big household change in the last 3-6 months has been that we get all our toiletries from Splosh (3). They’re a zero waste refillable start-up, and unlike most of the eco washing stuff we’ve tried, their stuff actually works really well. You order a starter pack which includes refillable plastic bottles, and then they send you the concentrated product which you mix in the bottle. When the concentrate is done you send it back to them and they recycle it, or some of them are compostable. At face value I think they appear a bit more expensive, but we’re currently using one pouch of washing up liquid every two months. If you want to give it a go use referral code YQL240THX1 to get 15% off.

Goal 5: Automate investments and savings

I automated my Vanguard and regular savings account payments at the start of the year, so an easy win. I’ll be cancelling the direct debt to Vanguard and moving it to FreeTrade this month. I’ve been more or less ignoring my investments otherwise, not worth worrying about the bear market.

I currently sit at -8.33% return. January and February topped up existing holdings. I opened a small position in Vanguard’s Emerging Markets fund at the start of March, to get a bit of EM exposure. No great excitement, and I take the instant losses across the board given my long timescale. The move to FreeTrade will see some new positions, so I may revisit the EM when it’s back positive.

Commodities Spread

Hope everyone else is seeing some lockdown gains,

The Shrink

References:

  1. https://www.reddit.com/r/UKPersonalFinance/
  2. https://www.ethicalsuperstore.com/
  3. https://www.splosh.com/how-it-works

The Financial Dashboard – March 2020

The goals for March were:

  • Review progress towards long term goals
  • Review emergency fund accounts
  • Plan for 2020s ISA
  • Get the project car back on the road
  • Gardening

Checking the assets and liabilities:

Assets March

Liabilities March

These are taken, as always, from my Beast Budget spreadsheet. Bit of a mammoth change to my net worth this month. As a result of exploring the NHS pension, I fired up my Total Reward Statement. It’s difficult to value an NHS pension ahead of when you actually take it, so I’ve therefore used the NHS estimate of a hypothetical equivalent annuity cost. Based on these new numbers my net worth increased by a lot, and I had a 38% savings rate.
Goals:
Goal achieved: Review progress towards long term goals

I set my first goals in November 2018, and some of them were pretty ambitious and unachievable. Considering my pension made me question my approach. 2038 for a goal retirement date seems a more achievable number, and setting things down on paper which are realistic targets has been more motivating than a pie-in-the-sky number. My asset allocations also need a look at as I’ve learnt and understand more, so that’s a job for next month.
Goal achieved: Review emergency fund accounts

My emergency funds are currently split across three accounts. I hold £2500 in my Starling account, £2500 in a 5% Nationwide FlexDirect account and a further £300/month goes into a Monmouthshire Building Society regular saver at 3%. The Starling account interest is a paltry 0.5%, and I’d prefer to keep a maximum £500 cash float there instead. My Nationwide FlexDirect deal is also coming to it’s end. I’ve exhausted most of the bank accounts with fixed rate deals or regular savers.

In light of this, and following up on my recent post about Premium Bonds, I’ve transferred spare savings from my Starling into a new Premium Bonds account. This will be topped up by the £2500 from Nationwide when it expires. I’ll also be setting up a Marcus account as it remains pretty much the market leader, to be topped up with any leftover cash lying around (1).
Goal achieved: Plan for 2020s ISA

It’s that time of year again! I only put £2700 into my ISA last year. I’m very happy with my Vanguard account as a basic platform, but I’m after access to stocks/ shares and a wider range of ETFs for future active and passive shenanigans. For that reason, and planning ahead for platform risk, I’ve been looking at opening an account with another provider.

Both Monevator and Money to the Masses suggested Cavendish Online was the next cheapest for me after Vanguard from the traditional providers, whilst also offering a wider range of funds, ETFs and shares (2, 3). Interesting to note that Cavendish’s website actually links to Monevator for the price comparison section – if that’s not proof of success I don’t know what is!

When I ran the numbers including trades it turned out FreeTrade’s annual flat £36 ISA fee was cheaper than Cavendish. I’m going to put my money where my mouth is and follow up my small investment into FreeTrade with a new ISA account. FreeTrade does have limits – it’s only ETFs and shares, no funds – but I can work around that.

If you want a free share for opening a new FreeTrade account, send me an email using the link on my About Me page.
Goal failed: Get the project car back on the road

It fought me, and with the help of the COVID-19 shutdown of most garages, won. Parts have been procured, fixes installed, and an MOT awaits.
Goal achieved: Gardening

Did loads of this, and very relaxing it was too. The enforced time at home meant the raised beds have been filled will seeds, shoots are emerging in the greenhouse for radishes, rocket, salad greens, sunflowers, tomatoes, spring onions… the list goes on.
Budgets

  • Groceries – Budget £200, spent £175.55, last month £169.83
  • Entertainment – Budget £100, spent £106.75, last month £143.33
  • Transport – Budget £460, spent £401.48, last month £862.40
  • Holiday – £150, spent £317.33, last month £60 – Squeezed a stag weekend in before lockdown
  • Personal – £100/ £25/ £15.88
  • Loans/ Credit – £0/ £0/ £0
  • Misc – £50/ £15.12/ £94.59
  • Fees – £70 /£267.50/ £648.50 – Further gristle, for now cancelled conferences – refunds pending.

In the garden:

See above.
Goals for next month:

  • Review target asset allocations
  • Get the project car back on the road
  • Tidy the garage, sell anything unnecessary
  • Tidy the loft and begin to clear

Happy April everyone, I hope you’re all keeping well,

The Shrink
References:

  1. https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/
  2. https://monevator.com/compare-uk-cheapest-online-brokers/
  3. https://moneytothemasses.com/saving-for-your-future/investing/compare-cheapest-best-investment-isa-platforms

Investment Strategy Statement – Part 2 – Goals

This post was initially written in November 2018. This is the latest iteration as of April 2020.

When I first started writing this blog I set out a very brief goal:

Financial independence for myself and MrsFireShrink.

But beyond that, the aim is to save a sufficient amount to create a self-sustaining portfolio. The dream goal being to create a portfolio sufficient to support my family in the future and continue to grow (1).

Which is all a bit wishy-washy. As time and this blog has gone on I’ve developed a clearer idea of where I want to get to. I enjoyed indeedably’s goals post, and so I’ve emulated that here (2). So here’s the current goals list with steps already taken and timescale for target/ dream. (Last updated Apr 2020).

  • Complete medical degree. Achieve Royal College Membership. Become a consultant (2028).
  • Find a girl. Get married. Have kids (2028). Have good kids.
  • Publish a paper (2018). Get a fellowship (2019). Get another fellowship (2019). Get a Phd. Get a lectureship. Make Prof.
  • Get a job. Get a job I enjoy. Get a job which doesn’t feel like work (2020). Be in a position to retire in 20 years (2038).
  • Have an emergency fund of three months income (2019). Save £1000/month (2020). Have a net worth of £100k.
  • Own a home. Have £100k in equity (2023). Start overpaying mortgage (2023). Have 180k in equity (2028). Buy our dream home in 10 years (2028). Own a self-sustaining estate.
  • Learn to drive. Own a car. Own a six-cylinder car. Own an eight-cylinder car (2028).
  • Race in a motorsport. Win a race (no timescale).
  • Start a martial art. Start gradeing. Get to sho dan (no timescale).
  • Learn to ride a motor bike.
  • Learn to fly a plane.
  • Do 50 press-ups. Do a pull-up (again) (2019 2020). Get back to 17 stone (2019 2020). Do a hand-stand press-up (again). Do a ring muscle-up.
  • Re-learn languages I once knew. Become fluent in one of them. Learn a fourth language (no timescale).

The Numbers

Most of the maths in this section is rough and dirty. I’m not going to make complex predictions or models. Life itself is too unpredictable (even if the money isn’t), and past predictions have demonstrated the fallacy of trying to predict the future.

  • Be in a position to retire in 15 years (2033).

In the past I have conservatively estimated I will need around £24k a year to maintain our current lifestyle if I didn’t work. Looking back at figures for 2019, my expenses plus half the household running costs comes to £23.5k, excluding mortgage and credit card payments. Good consistency, and also fits nicely with what the fun Standard Life calculator reckons for our current lifestyle (~£23,000) (3).

Plugging that into a simple interest calculator suggests I need to have around £700,000 saved to be able to withdraw £24,500/year at a reasonable 3.5% interest rate with no erosion of capital. This presumes the savings will be tax-sheltered, and does not account for inflation. As inflation works on both denominator and numerator it’s not worth calculating here, but I will recalculate as I go. I’ve selected 3.5% as a conservative blend of cash interest rates (currently ~1%) and the average annual return of the FTSE All-Share over the last 100 years (+7.0%) (4). It’s also conveniently the mythical Perpetual Withdrawal Rate (5, 6).

You say: “Why are you not interested in drawdown? You’d get to retirement a lot quicker.”

The figure above would replace my current salary (7). My NHS pension kicks in from age 68 onwards and would provide career-averaged salary revalued by inflation. If I bridged to 68 with ISAs, say for 15 years, suddenly my required capital savings halves. But that requires capital drawdown, and would also reduce my NHS pension unless I paid for an early retirement buyback. I expect the NHS pension to be the subject of future Government cash raids, and would prefer redundancy in my financial system. For that same reason I haven’t included the State Pension. I also think drawdown is highly personal, and relates among other things to your optimism for your life expectancy, number of dependants and general approach to lifestyle. In future years as my pot grows I may change this attitude and run models, but right now it’s all about accumulation.

  • Save £1000/month (2020). Save £1500/month (2025). Have a net worth of £100k.

Stepping stones on the route to the previous bullet point. Plugging that £700,000 into Money Advice Service’s savings calculator suggests I need to be saving £1835/month at 5% interest to achieve retirement by 2038 (8, 9). Long term readers may notice I’ve pushed the date out, and it’s now a bit more realistic. The amount I’m saving is incrementally increasing, but still a way off required sum. I suspect I’ll miss this target barring spectacular stock returns.

  • Have £100k in equity (2023). Start overpaying mortgage (2023). Have 180k in equity (2028). Buy our dream home in 10 years (2028).

Currently our dream homes cost around £500k. Difficult to say what that will be in 10 years time. Historically the yearly trend has been c2.9% (10). More recently it’s closer to 2%, comparable to the OECD 2.0% long-range inflation forecasts (11, 12). Inflating the £500k at 2% brings us to £610k in 2028. Our feet are on the ladder, which mean we also benefit from that inflation to an extent.

When this was first written in late 2018 we had around £67k in equity. I hoped to reach £100k by 2023. We’re now (Q1 2020) at around £85k, thanks to moderate house price growth and a remortgage knocking down our interest rate. Overpaying our mortgage once we have a decent joint emergency fund will also help. I’ve added a new target constituting a 30% deposit on a potential dream home in 2028.

Summary:

  • Save £1000/month (2020)
  • Be worth £100k (2022)
  • Start overpaying mortgage (2023)
  • Have £100k in equity (2023)
  • Be in a position to retire in 20 years (2038)

In part 3 I cover my asset allocation.

Take care,

The Shrink

References:

    1. https://thefireshrink.wordpress.com/about-me/
    2. https://indeedably.com/i-will/
    3. https://www.standardlife.co.uk/c1/guides-and-calculators/retirement-how-much-may-i-need.page
    4. http://stockmarketalmanac.co.uk/2016/12/100-years-of-the-ftse-all-share-index-since-1917/
    5. https://portfoliocharts.com/2016/12/09/perpetual-withdrawal-rates-are-the-runway-to-a-long-retirement/
    6. https://monevator.com/what-is-a-sustainable-withdrawal-rate-for-a-world-portfolio/ 
    7. http://monevator.com/try-saving-enough-to-replace-your-salary/
    8. https://www.moneyadviceservice.org.uk/en/tools/savings-calculator/
    9. http://candidmoney.com/calculators/investment-target-calculator
    10. http://monevator.com/historical-uk-house-prices/
    11. https://www.bbc.co.uk/news/business-44736472
    12. https://knoema.com/rwbagv/uk-inflation-forecast-2018-2020-and-up-to-2060-data-and-charts

The Full English – The problem(s) with behavioural psychology/ economics

This week an article I was reading on Unherd by Stuart Ritchie, a psychologist colleague and lecturer at KCL I deeply respect (1). It threw into sharp relief why I don’t post about behavioural psychology. When I first took up this blog I expected to get into behavioural economics in a big way. I wanted to post all about the behavioural biases that we, as investors, succumb to.  Rather like the Psy-Fi blog (2). The psychological traps that we fall into, that also branch into my daily working trade. 

In researching these concepts to write about I come against a major problem. The evidence is pretty poor. At face value the biases make a lot of sense (ergo strong face validity), but many suffer from the flaws that Dr Ritchie outlines as reasons why behavioural insights and psychology don’t apply to the current COVID-19 pandemic. Alot of this comes down to the “replication crisis” that has occurred over the past decade. This has shown that many of the best known psychological results couldn’t be repeated in independent experiments. At best these studies were one-offs, they could have been selective, biased or misreported, and at worst they may be fraudulent. 

Dr Ritchie goes on to outline a number of cases where psychologists have given opinions on the current COVID-19. A lot of those opinions are based on studies produced with small numbers of university students in idealised conditions. We’re now accepting they are not generalisable to Jo Bloggs on the street: 

“So how can we be sure that the results of behavioural science experiments — even those that are based on bigger or more representative samples than 156 undergrads — are relevant to our current situation?

The answer is that we can’t. Exploring the human capacity for bias and irrationality can make for quirky, thought-provoking articles and books that make readers feel smarter (and can build towards a tentative scientific understanding of how the mind works). But when a truly dangerous disease comes along, relying on small-scale lab experiments and behavioural-economic studies results in dreadful misfires…” (1)

The problem for behavioural economics, much like COVID-19, is one of data. We have not done enough pragmatic experiments to prove that the biases talked about have the effect we say they do (in most cases). In the absence of that data expert opinion rules. COVID-19 policy is being produced by experts, using what little data they have plus a lifetime of training. Some of it will be wrong. It will be biased by whatever preconceptions those experts have. The effects of those biases are unknown. The snake eats it’s own tail.

Image Credit: Dale Hattis (3)

For COVID-19 most of what those experts have been saying is common sense. Some of it hasn’t been; David Halpern of The Behavioural Insights Team, the “Nudge Unit”, coined the phrase “herd immunity” (4). Look how that turned out. Was he, as a behavioural psychologist, the right person to be speaking as an expert on public health and infectious diseases? See how fast we have backtracked to WHO guidance. Guidance from public health experts and limited data.

In the absence of data we have expert opinion. Experts don’t want to go on record in case they what they say is wrong, and people die (for COVID-19) or lose money (for behavioural economics). In the absence of expert opinion we have a vacuum, filled by all the other opinions the unqualified and slightly informed want to share, air and discuss. 24-hour news and social media have only heightened the problem. They offer platforms for partial truths. They amplify opinion. 

I went through a phase of listening to loads of behavioural psychology talks and podcasts. They just made me angry. The information was sold as true fact. The face validity was there. There was benefit in challenging one’s own preconceptions and points of view. But where was the evidence to back up the fact claim?

I try to keep this blog evidence-based. As a doctor and a scientist I’ll only share information on COVID-19 that I think is responsible, balanced and evidence-based. I’ll only share information on behavioural psychology that I think is responsible, balanced and evidence-based. As with all science, the eternal cop-out, more data is required.

Keep handwashing, stay home and take care!

The Shrink

Thought for the week:

“There is only one way to happiness and that is to cease worrying about things which are beyond the power of our will.” – Epictetus

COVID-19:

This twitter thread from David Oliver is excellent…

 

Life goes on:

Comment/ Opinion:

It’s interesting to note that when I started this blog, the number of UK FIRE bloggers could be counted on fingers and toes. Now we’re up to the hundreds. Where blogs are repeating previous messages I won’t share them, unless they have a particularly eloquent or amusing take. I’m drafting up an RSS feed which I will inset into the website in the future. 

References:

  1. https://unherd.com/2020/03/dont-trust-the-psychologists-on-coronavirus/
  2. http://www.psyfitec.com/p/the-to-z-of-behavioral-bias.html
  3. https://www.researchgate.net/figure/Hierarchy-of-evidence-pyramid-The-pyramidal-shape-qualitatively-integrates-the-amount-of_fig1_311504831
  4. https://www.theguardian.com/world/2020/mar/13/herd-immunity-will-the-uks-coronavirus-strategy-work
  5. https://www.bbc.co.uk/news/science-environment-52113695
  6. https://uk.reuters.com/article/uk-health-coronavirus-emissions/coronavirus-could-trigger-biggest-fall-in-carbon-emissions-since-world-war-two-idUKKBN21L0KC?il=0
  7. http://www.theguardian.com/environment/2020/mar/31/trump-epa-obama-clean-car-rules-climate-change
  8. http://www.theguardian.com/technology/2020/mar/31/zoom-booms-as-demand-for-video-conferencing-tech-grows-in-coronavirus-outbreak
  9. https://www.techradar.com/news/skype-introduces-video-meetings-with-no-sign-up-needed-for-those-wanting-a-zoom-alternative
  10. https://www.theguardian.com/world/2020/apr/01/doubts-over-take-up-of-government-coronavirus-emergency-food-parcels
  11. https://www.telegraph.co.uk/global-health/science-and-disease/number-one-important-covid-19-sweeps-britain/
  12. https://www.private-eye.co.uk/news
  13. http://www.theguardian.com/science/2020/mar/30/scientists-develop-ai-that-can-turn-brain-activity-into-text
  14. https://www.thisismoney.co.uk/money/mortgageshome/article-8070359/New-cashback-scheme-help-knock-thousands-mortgage.html
  15. http://quietlysaving.co.uk/2020/04/01/march-2020-plus-other-updates/
  16. https://monevator.com/what-has-changed-and-what-has-not/
  17. https://www.mrmoneymustache.com/2020/04/02/no-you-didnt-just-lose-half-of-your-retirement-savings/
  18. https://drfire.co.uk/q1-2020-report/
  19. https://awaytoless.com/monthly-spending-march-2020/
  20. https://awaytoless.com/seeing-opportunity-in-adversity/
  21. https://thesavingninja.com/savings-report-21-m-m-m-my-corona/
  22. http://fiukmoney.co.uk/march-20-net-worth-and-monthly-update-19-501581-24317/
  23. https://igniting-fire.com/2020/04/03/2020-q1-update-coronavirus-quarantine-edition/
  24. https://pursuefire.com/monthly-update-19-march/
  25. https://www.onemillionjourney.com/income-expenses-savings-march-2020/
  26. https://obviousinvestor.com/p2p-lending-portfolio-update-for-march-2020/
  27. https://sparklebeeblog.wordpress.com/2020/04/01/monthly-update-mar-2020/
  28. https://firelifestyle.co.uk/2020/04/01/march-2020-financial-update-covid-19/
  29. https://adotium.co.uk/2020/04/01/march-2020-report/
  30. https://thesquirreler.com/2020/03/31/march-2020-net-worth-update-and-mcr-fire-meet-up-change-of-venue-now-online/
  31. https://monethalia.com/monthly-savings-report-march-2020/
  32. http://thefirestarter.co.uk/im-finally-free-sort-of-covid-19-brain-dump/
  33. https://averagemoneymanagement.wordpress.com/2020/03/31/freetrade-diary-3-march/
  34. http://www.psyfitec.com/2020/03/on-dinosaurs-and-dividends.html
  35. https://www.finumus.com/blog/shelter-in-place-your-portfolio
  36. https://www.muchmorewithless.co.uk/robo-adviser-results-nutmeg-and-wealthify-vs-vanguard-year-2/
  37. https://theescapeartist.me/2020/04/03/now-thats-what-i-call-financial-independence-20/
  38. https://simplelivingsomerset.wordpress.com/2020/04/03/developing-a-buying-policy-for-the-bear-market/
  39. https://southwalesfi.co.uk/2020/04/03/lisa-v-sipp/
  40. https://indeedably.com/misadventure/