For a long time - years - I have counselled caution to clients, and thought cash was not a bad place to be. That has been correct for the last decade or so. If you had hopped in and out of the market at just the right times, you might have done very well, but equally you could have lost very heavily. The FTSE still hasn't got near to its peak of 1999, and when you consider inflation, in real terms we are still far below.
But we may be moving on to a new phase. Governments in the USA, the UK and now the European Union have poured quite staggering amounts of cash into the banking systems to prevent their collapse. Some commentators now think that we are heading for an inflationary period that will devalue savers' money (and interest rates on deposits are not matching the official inflation figures).
There is an argument for investing now, not to make a genuine gain, but because over time stocks and shares may not lose as much in real terms as cash at the bank. This is the view of Dr Marc Faber, for example (see excerpts from a recent interview here), even though he believes that the monetary system will eventually collapse (and presumably be replaced by a new currency).
There are other ways to protect against inflation, notably National Savings Index-Linked Certificates, which are backed by the government and will return growth in line with RPI plus 1% per annum or so. We can argue about how exactly inflation is measured - and that is relevant - but their definition of inflation will have to be fairly reasonable, we hope.
More speculative investors may be eyeing gold (which has already quadrupled in price since 2000), silver, oil, agricultural land etc - but commodities are risky and there are already funds investing in these areas with the advantage of borrowing very cheap money, thanks to the state-supported banks.
If you would like personal advice, do please get in touch.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Tuesday, May 18, 2010
Monday, May 17, 2010
Can Osborne do it?
The UK's new Chancellor, George Osborne, is committed to finding £6 billion of cuts by the this weekend. That sounds like a lot, but given the scale of the challenge facing the country I think this target is a tiny sop to the markets that showed such concern on Friday (and which failed to recover today).
An economics professor was brought onto BBC News 24 this lunchtime; he pointed out that UK government spending runs at £700 billion per annum and UK GDP is something like £1,500 billion. £6 billion is peanuts, less than 1% of current spending.
A recent OECD study (this link is to John Mauldin's post on "Business Insider") suggests that we need to do far more to stabilise the economy. Even if we set ourselves a leisurely 20 years to bring debt-to-GDP down to 2007 (pre-crisis) levels, Britain would have to make savings of 3.5% of GDP. So using figures already given, I make that £52.5 billion per year.
Government statistics say that median earnings in the public sector in 2009 were £539 per week, or a shade over £28,000 per year. Let's assume that for every pound in pay you need to allow another pound in overheads. So every job cut saves £56,000 per annum. If we want to save 3.5% of GDP, we need to lose over 936,000 jobs.
Actually, it's worse than that, because there's the loss of tax (and NIC) revenue when you make someone unemployed; plus the additional cost of unemployment benefits, probably higher medical costs because of the health impact of joblessness, and so on. So, make that a target of more like 2 million jobs to lose? Especially if, on average, you cut less-well-paid jobs (teaching assistants and so on). That's out of a total of 6 million public sector employees, if you take John Redwood's figure; or 8 million if you take the first comment on that post, by Mark Wadsworth; i.e. a loss of a quarter to a third of the public workforce.
That's if you do it over 20 years. According to the OECD's report, doing it in 10 years would mean savings of 5.8% of GDP; or 10.6% over 5 years. Unimaginable.
Then there's the fact that we're starting from an annual budget deficit, not a balanced budget. Even before the credit crunch, the UK's deficit was running at 2.7% of GDP. According to the post by John Mauldin above, in 2011 the deficit is expected to be 9%!
So, it's just not to come from public sector layoffs alone. And even there, some of the cuts will impact the private sector, e.g. outsourced IT projects in the NHS, the education system and the widely-hated national ID card system.
The Welfare State is going to be hit hard. But how? State Pension Age raised to 70? Family payments for special needs children cut? Unemployment benefit payable for a limited period only, as in the USA (though even there they're having to extend the benefit period on an emergency basis)?
Or will we, despite desperate and hugely unpopular efforts by this new government, eventually end with default on a massive scale, either straightforward or by hyperinflation? Increasingly, this seems a distinct possibility.
I fear that George Osborne's attempts at reassuring the markets will not succeed for long. And if the Opposition makes maximum political capital out of the disaster, quite possibly the voters will reinstate Labour in five years' time, in the hope of mitigating the pain; which, if the next government plays along, may ignite the final financial crisis.
We must hope for the best and support this coalition in what must be far more serious measures than have been telegraphed to us so far.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
An economics professor was brought onto BBC News 24 this lunchtime; he pointed out that UK government spending runs at £700 billion per annum and UK GDP is something like £1,500 billion. £6 billion is peanuts, less than 1% of current spending.
A recent OECD study (this link is to John Mauldin's post on "Business Insider") suggests that we need to do far more to stabilise the economy. Even if we set ourselves a leisurely 20 years to bring debt-to-GDP down to 2007 (pre-crisis) levels, Britain would have to make savings of 3.5% of GDP. So using figures already given, I make that £52.5 billion per year.
Government statistics say that median earnings in the public sector in 2009 were £539 per week, or a shade over £28,000 per year. Let's assume that for every pound in pay you need to allow another pound in overheads. So every job cut saves £56,000 per annum. If we want to save 3.5% of GDP, we need to lose over 936,000 jobs.
Actually, it's worse than that, because there's the loss of tax (and NIC) revenue when you make someone unemployed; plus the additional cost of unemployment benefits, probably higher medical costs because of the health impact of joblessness, and so on. So, make that a target of more like 2 million jobs to lose? Especially if, on average, you cut less-well-paid jobs (teaching assistants and so on). That's out of a total of 6 million public sector employees, if you take John Redwood's figure; or 8 million if you take the first comment on that post, by Mark Wadsworth; i.e. a loss of a quarter to a third of the public workforce.
That's if you do it over 20 years. According to the OECD's report, doing it in 10 years would mean savings of 5.8% of GDP; or 10.6% over 5 years. Unimaginable.
Then there's the fact that we're starting from an annual budget deficit, not a balanced budget. Even before the credit crunch, the UK's deficit was running at 2.7% of GDP. According to the post by John Mauldin above, in 2011 the deficit is expected to be 9%!
So, it's just not to come from public sector layoffs alone. And even there, some of the cuts will impact the private sector, e.g. outsourced IT projects in the NHS, the education system and the widely-hated national ID card system.
The Welfare State is going to be hit hard. But how? State Pension Age raised to 70? Family payments for special needs children cut? Unemployment benefit payable for a limited period only, as in the USA (though even there they're having to extend the benefit period on an emergency basis)?
Or will we, despite desperate and hugely unpopular efforts by this new government, eventually end with default on a massive scale, either straightforward or by hyperinflation? Increasingly, this seems a distinct possibility.
I fear that George Osborne's attempts at reassuring the markets will not succeed for long. And if the Opposition makes maximum political capital out of the disaster, quite possibly the voters will reinstate Labour in five years' time, in the hope of mitigating the pain; which, if the next government plays along, may ignite the final financial crisis.
We must hope for the best and support this coalition in what must be far more serious measures than have been telegraphed to us so far.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Debt, inflation and the looming currency crisis
This post has been copied from the Broad Oak Blog (see also sidebar on right). I think I'm getting to the point where it's all been said and like Wolfie, maybe I should stop and take care of my own situation as best I can. I shall continue to post from time to time on the Broad Oak Blog, focussing on financial matters for the benefit of clients. Otherwise, I shall read others' blogs and websites - but try to keep quiet, apart from the odd comment.
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The above is a recently-released video from the National Inflation Association in the USA (hat-tip: Tim Iacono). In short, it says that the budget cannot be balanced and the currency will eventually collapse. According to the NIA, perhaps a few wealthy investors will prosper from speculation in gold, silver, agricultural land, but the vast majority of Americans will suffer and the middle class will see their savings wiped out by inflation.
This is not a problem restricted to America. According to page 2 of this study by Citibank, the UK will not bring its government debt under control until 2013/2014, and even that is on assumptions that the author sees as optimistic. The second graph shows that compared to the debt-saddled "PIIGS" group of Western European countries, we will take longer than all of them just to be in a position to begin to reverse direction.
Further, the UK is by far the worst of the G7 countries in terms of the debt owed to foreigners, according to this article by Fraser Nelson of the Spectator magazine (and that was back in December 2008). So our economy is at risk from a reassessment of its creditworthiness by foreign lenders and we are vulnerable to a hike in interest rates - which in turn would make it far harder for us to service our debts. True, foreigners have recently shown themselves willing to continue lending to us, but that is against a background of concern about Greece. The picture could change in the intermediate future.
Finding out the true state of affairs with debt is difficult - it seems to be an embarrassing secret. We are given a confusing array of definitions and much of the discussion we hear on TV and radio is about government debt, rather than the total burden of debt within the economy. Even then, we hear talk of "reducing the deficit", which actually means continuing to get into debt, but not quite so fast - the actual total amount outstanding will increase for years to come.
If you want to get some notion of the overall liability, see the graphic on this post at Naked Capitalism: it shows that all in all, we are not much better off than Greece - and Germany is scarcely better off than the UK. The US is a giant debtor - this graph shows the position at the end of September last year: debt was c. 370% of GDP, or half as much again as Ireland's, relative to national income. To put it another way, the US now has 42% more debt-to-GDP than before the Wall Street Crash in 1929.
Even on this definition of debt, experts disagree about the extent of it. Another source (stockbrokers Charles Schwab) agrees on the US figure, and then says:
"But on this metric, we're in "good" company: The United Kingdom's total debt-to-GDP is a whopping 470%, Japan's is 460%, Spain's and South Korea's are 340%, Switzerland's is 315%, France's and Italy's are about 300%, Germany's is 275% and Canada's is 245%. These are all records.
"The "BRIC" countries (Brazil, Russia, India and China) all have total debt-to-GDP under 160%. However, since this study ended in 2008, we have to add in China's stimulus package, which was three times the size of the US package, not to mention China's banks lending out $1.3 trillion during 2009. Some believe China could now be more leveraged than the United States." (My emphasis.)
Pictorially, Schwab's figures would look like this:
Because of the crisis facing so many nations including the world's wealthiest, there is heavy pressure on their governments to keep interest rates low (or lower than inflation), while they try to shore up their public finances. This means that savers will see the value of their money reduce, even when interest is added to their accounts and not spent. When I worked at an insurance company in the late 80s, we had a sales aid that showed the real (adjusted for inflation) value of cash deposited with the Halifax Building Society for 10 years (from 1974 to 1984, if memory serves). Even with accumulated interest, the sum at the end would only buy half as much as when the cash was first deposited!
Much the same story can be seen with the stockmarket. In December 2008, I made the following graph reinterpreting the Dow Jones Index in the light of inflation:
In "real terms" (and yes, one can argue long about what is an appropriate measure of inflation) the apparent recovery in equities was actually a fall in value from 1974 to 1982 - a loss of about two-thirds in eight years. The picture for the FTSE is something similar (though not as severe as in the USA, which was paying for the Vietnam War on top of other problems): apparent gains, undermined by the fall in the purchasing power of money.
The difference between cash and equities is that the latter did eventually bounce back and turn a "real" profit, thanks (in my view) to very significant inflation in the money supply, not under a Labour government (though they did their fair share both before 1979 and after 1997), but under the Conservatives! I've written to people including Lord Tebbit and the economics editor of the Guardian, pointing out the long-running use of monetary inflation to make the economy seem healthy (while weakening it), but perhaps unsurprisingly, have had no response. However, if recent comment (see link just given) on the dimishing returns of monetary inflation are correct, we now approaching the point where further stimulus will actually reduce gross domestic product (GDP) - pumping more money in will be worse than useless.
The fact is, while some compare our situation to that of the Thirties and others look back at the Seventies, the debt problem is now far greater than in either period. The past is not necessarily going to be a good guide to the future. Respected commentators like Dr Marc Faber are coolly convinced that our currency system will simply break down; in which case the social consequences will be very unpleasant.
The challenge now is for you not to make a profit, but to find some way of hanging on to whatever wealth you have managed to accumulate. I cannot advise you personally here on this blog, but do please contact me if you are a client and would like a review.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
The terrifying truth about debt - and inflation
The above is a recently-released video from the National Inflation Association in the USA (hat-tip: Tim Iacono). In short, it says that the budget cannot be balanced and the currency will eventually collapse. According to the NIA, perhaps a few wealthy investors will prosper from speculation in gold, silver, agricultural land, but the vast majority of Americans will suffer and the middle class will see their savings wiped out by inflation.
This is not a problem restricted to America. According to page 2 of this study by Citibank, the UK will not bring its government debt under control until 2013/2014, and even that is on assumptions that the author sees as optimistic. The second graph shows that compared to the debt-saddled "PIIGS" group of Western European countries, we will take longer than all of them just to be in a position to begin to reverse direction.
Further, the UK is by far the worst of the G7 countries in terms of the debt owed to foreigners, according to this article by Fraser Nelson of the Spectator magazine (and that was back in December 2008). So our economy is at risk from a reassessment of its creditworthiness by foreign lenders and we are vulnerable to a hike in interest rates - which in turn would make it far harder for us to service our debts. True, foreigners have recently shown themselves willing to continue lending to us, but that is against a background of concern about Greece. The picture could change in the intermediate future.
Finding out the true state of affairs with debt is difficult - it seems to be an embarrassing secret. We are given a confusing array of definitions and much of the discussion we hear on TV and radio is about government debt, rather than the total burden of debt within the economy. Even then, we hear talk of "reducing the deficit", which actually means continuing to get into debt, but not quite so fast - the actual total amount outstanding will increase for years to come.
If you want to get some notion of the overall liability, see the graphic on this post at Naked Capitalism: it shows that all in all, we are not much better off than Greece - and Germany is scarcely better off than the UK. The US is a giant debtor - this graph shows the position at the end of September last year: debt was c. 370% of GDP, or half as much again as Ireland's, relative to national income. To put it another way, the US now has 42% more debt-to-GDP than before the Wall Street Crash in 1929.
Even on this definition of debt, experts disagree about the extent of it. Another source (stockbrokers Charles Schwab) agrees on the US figure, and then says:
"But on this metric, we're in "good" company: The United Kingdom's total debt-to-GDP is a whopping 470%, Japan's is 460%, Spain's and South Korea's are 340%, Switzerland's is 315%, France's and Italy's are about 300%, Germany's is 275% and Canada's is 245%. These are all records.
"The "BRIC" countries (Brazil, Russia, India and China) all have total debt-to-GDP under 160%. However, since this study ended in 2008, we have to add in China's stimulus package, which was three times the size of the US package, not to mention China's banks lending out $1.3 trillion during 2009. Some believe China could now be more leveraged than the United States." (My emphasis.)
Pictorially, Schwab's figures would look like this:
Because of the crisis facing so many nations including the world's wealthiest, there is heavy pressure on their governments to keep interest rates low (or lower than inflation), while they try to shore up their public finances. This means that savers will see the value of their money reduce, even when interest is added to their accounts and not spent. When I worked at an insurance company in the late 80s, we had a sales aid that showed the real (adjusted for inflation) value of cash deposited with the Halifax Building Society for 10 years (from 1974 to 1984, if memory serves). Even with accumulated interest, the sum at the end would only buy half as much as when the cash was first deposited!
Much the same story can be seen with the stockmarket. In December 2008, I made the following graph reinterpreting the Dow Jones Index in the light of inflation:
In "real terms" (and yes, one can argue long about what is an appropriate measure of inflation) the apparent recovery in equities was actually a fall in value from 1974 to 1982 - a loss of about two-thirds in eight years. The picture for the FTSE is something similar (though not as severe as in the USA, which was paying for the Vietnam War on top of other problems): apparent gains, undermined by the fall in the purchasing power of money.
The difference between cash and equities is that the latter did eventually bounce back and turn a "real" profit, thanks (in my view) to very significant inflation in the money supply, not under a Labour government (though they did their fair share both before 1979 and after 1997), but under the Conservatives! I've written to people including Lord Tebbit and the economics editor of the Guardian, pointing out the long-running use of monetary inflation to make the economy seem healthy (while weakening it), but perhaps unsurprisingly, have had no response. However, if recent comment (see link just given) on the dimishing returns of monetary inflation are correct, we now approaching the point where further stimulus will actually reduce gross domestic product (GDP) - pumping more money in will be worse than useless.
The fact is, while some compare our situation to that of the Thirties and others look back at the Seventies, the debt problem is now far greater than in either period. The past is not necessarily going to be a good guide to the future. Respected commentators like Dr Marc Faber are coolly convinced that our currency system will simply break down; in which case the social consequences will be very unpleasant.
The challenge now is for you not to make a profit, but to find some way of hanging on to whatever wealth you have managed to accumulate. I cannot advise you personally here on this blog, but do please contact me if you are a client and would like a review.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Wednesday, May 12, 2010
Tuesday, May 11, 2010
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